.- . 'UNITED STATES GE&?+ AKOUNT~NG _~ WASHINGTON, DC. 20545 Illlllllllllllllllllllllllllllllll LM089413 CIVIL DIVISION , December 22, 1971 . . Dear Mr. Ball: We have made a review of the reasonableness of selected c Medicare cost reimbursements to extended care facilities in the State of New York3 During the review we examined into the extent that ECFs rent their facilities from organizations in which their owners or administrators have a financial or other interest. We also examined into the adequacy of the intermediary's application of the Medicare reimbursement principle pertaining to related organizations. We noted that: --some degree of relationship existed between the ECFs and the lessors of four of eight facilities included in our test, and --the Social Security Administration's guidelines for determining whether a relationship exists between a provider and a seller or renter of goods or services did not appear to be sufficiently definitive to assure uniform treatment of situations involving apparent affiliated relationships. MEDICARE REIMBiiRSE~NT PRIKCIPLE PERTAINING TO RELATED ORGANIZATIONS HEW Medicare reimbursement regulations (20 CFR 405.427(a)) provide that: ll . ..Costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are includible in the allowable costs of the provider at the cost to the related organization..." The regulations go on to define "related to the provider" as ' meaning: II . ..that the provider to a significant extent is associated or-affiliated with or has control of or is controlled by the organization furnishing-the services,-facilities or supplies. ’ .-Q .* * *- * --’ ._ I . ..~ontrol II exists where an individual or an organization has the power, directly or indirectly, significantly to influence or direct the-actions or policies of an organization or 4 . -7 Beyond the case examples contained in Chapter 10 of the Provider Reimbursement Manual, we were unable to locate any HEW or SSA instructions which defined "significantly" as used in the above quoted regulations. As discussed later in this report, one intermediary did not consider the guidelines interpreting the HEW regulaticns on related organizations to be sufficiently definitive. Reports issued by the Bureau of Health Insurance Program Validation Staff indicate that other intermediaries were having difficulty in applying these regulations to other ECFs. RELATED ORGANIZATIONS IDENTIFIED IN h-W YORK SAMPLE Our examination into the less.or/lessee relationships of eight providers which claimed rent as an allowable Medicare cost showed that four of the providers were to some degree related to the lessor. The :) relationship of one of the providers --College Nursing Home (Provider No. 33-5154)--was being investigated by the Bureau of Health Insurance Program Validation'Staff. The following summarizes our findings at the other three providers. _ . ‘, ! 4 Belair Nursing Home (Provider No. 33-5140) and- Montclair Nursing Home (Provider No. 33-5141' i Momed Associates owned the facilities hcusing two ECFs--Belair Nursing Home and Montclair Nursing Home. Beiair paid an annual rent of $85,000 plus property taxes. Montclair's annual rent was $120,000 plus property taxes. The fiscal intermediary (Travelers) allowed, as a reasonable cost, the rents paid by the ECFs for reporting periods ending on December 31, 1967, even though the paid executive administrator of the two ECFs was a partner in Momed Associates, the owner of the facilities. The other two partners were his brothers. No settlement for reporting periods after 1967 had been made at these ECFs. At one time, Belair Nursing Home, Montclair Nursing Home, and Momed Associates were three separate partnerships owned by the same ' principals consisting of three brothers and a group of doctors, Momed Associates' sole business was that of leasing the premises housing the two nursing homes. On August 1, 1966, the brothers sold their interest ._ in the ECFs to the doctors and the doctors sold their interest in _: Momed Associates to the brothers. The doctors retained one of the -.- - , brothers as the executive administrator for-both homes. -.- : In our opinion, such a situation seems to constitute a relationship -.y as envisioned by the Medicare reimbursement principles pertaining to -. i-. _' related organizations requiring that reimbursement be limited to the -&*- cost of the lessor. The intermediary initially had the same opinion. ' z-y ‘.yg- 1 -.; . Yi .---__ However, after some correspondence with the executive administrator of the ECFs, the intermediary changed its position on the basis that a significant relationship between the lessor and lessee could not be presumed to exist in view of the executive administrator‘s assurances . ::Y to the intermediary that he had no control over the procurement practices or policies of-the lessee ECFs. Also, Travelers informed us that at . the time this decision was made, SSA's guidelines were not'definitive .-l-.r-.L.,: as to what constituted a related organization. We noted that the only .:; ' ;:_--. . change in the guidelines since that time was to add some illustrative examples. - 4 .:- 1z:-< -. .z. --. f ; It should also be noted here that the ECFs also purchased house- -'- '---- keeping and dietary services from business enterprises owned by the ; .--y'. three brothers. Woodbury Nursirp Home (Provider No. 33-5231) . The Woodbury Nursing Home was a participating Medicare ECF and was owned equally by three partners. One partner (partner A) was also a. general partner of The Peartree Company which owns the building occupied by the ECF. The rent paid to Peartree amounted to $120,000 a. year plus property taxes. Prior to Koodbury's commencing operations in the newly constructed facility, partner A executed a document dated July 31, 1967, divesting himself--retro&ctive to May 1, 1967--as a general partner in The Pear- tree Company. May 1, 1967, was the date used as the beginning of the first Medicare cost reporting period which ended on December 31, 1967. The ECF did noi begin to take patients until July 25, 1967. A descrip- tion of partne; A's duties relating to administration of Woodbury stated that he was responsible for negotiating and signing contracts for services, equipment, and supplies. Because of (1) partner A's former ownership interest in the lessor organization;(2) the proximity of the dates of his divesture of that interest and the beginning of ECF operations, and (3) his responsibility of negotiating contracts for the ECF, it appears likely that partner A was in a positj.on to "significantly" influence the amount of rentals . under the lease. In this regard we noted that the State of New York, under the Medicaid program, considers that a related organization exists if the provider has any interest whatsoever --by common ownership or control-- in organizatiors providing services, facilities or supplies to a medical . facility. The State regulations provide that costs applicable to such .y services, facilities, and supplies are includible in the Medicaid reim- ‘.; bursable rate computation at the cost to the related organization. In -;--.--J.;; :- applying this regulation to rents paid to related organizations, New York-::....::. '-- considers an interest of 10 percent or more to constitute a non-arm's ;.' ;;:- length transaction. _ _ -:_.- -._. - I. ! A We therefore recommend that SSA evaluate the facts in ;he cases : I:: discussed abov*: and advise us as to whether the relationships between I the lessors and lessees were significant enough for the intermediary to have disallowed the claimed rental expenses as reimbursable Medicare items and to have limited reimbursement to the costs of the related . lessor organizations. We recommend also that SSA more clearly define the ingredients of a "significant" relationship between a provider and a seller or renter of goods or services as set forth in the regulations and related instructions. We would appreciate being advised of any action taken by SSA or the intermediary regarding the matters discussed in this report. If we can be of arjsistance, please let us know. Sincerely yours, (g??!utL Philip Ch ram Associate Director Mr. Robert M. gall Commissioner of Social Security Departme@of Health, Education, and Welfare ,
Medicare Cost Reimbursements to Extended Care Facilities in the State of New York
Published by the Government Accountability Office on 1971-12-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)