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)


                                         'UNITED STATES GE&?+                            AKOUNT~NG
                                              _~         WASHINGTON,                    DC.     20545

                                                                         ,                                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

                               --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

                               HEW Medicare         reimbursement                 regulations             (20 CFR 405.427(a))         provide
                                 . ..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             '
                                 . ..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
                                                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.

                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'
                       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
                                                                                                            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:-<
                                                                                                         --. 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.
             We therefore         recommend that SSA evaluate               the facts in ;he cases                   :   I::
     discussed abov*: and advise us as to whether the relationships                                between
     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

          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,

                                                              Philip   Ch ram
                                                              Associate Director

     Mr. Robert M. gall
     Commissioner of Social Security
     Departme@of   Health, Education,
       and Welfare