Accelerating Depreciation Expense for CAHs

Consulting meeting

When critical access hospitals (CAH) build a new facility or improve an existing one, they make a huge capital investment. Fortunately, tools are available to enhance the return on this investment—one of which is to accelerate Medicare cost reimbursement. This is accomplished by splitting the newly constructed assets into components that are assigned shorter asset lives than could be used if viewed as one asset.

Assets subject to depreciation for Medicare purposes include land improvements, buildings and equipment (fixed and major movable). Each of these categories includes identifiable components with substantially different useful lives that can be separately identified and depreciated over their respective useful lives, some longer and some shorter than the composite average life. The suggested estimated useful lives for hospital assets are detailed in the American Hospital Association’s (AHA) Estimated Useful Lives of Depreciable Hospital Assets Data Tables. If the hospital is diligent, it can refer to the tables and easily assign lives to all major movable equipment without help from outside advisors. However, assigning lives for constructed items included in the land improvements, buildings, building components, fixed equipment and building services equipment categories can present a significant challenge. Health care providers typically have no internal means of segregating the components and subcomponents eligible for shorter depreciable lives and are therefore limited to longer composite life building depreciation.

While institutions may be doing some degree of construction componentization, they’re likely losing out on significant reimbursement opportunities. The most comprehensive way to accelerate the depreciation of these capital assets eligible for Medicare reimbursement is to perform an engineering-based componentization analysis.

This practice requires a clear understanding of accounting, Medicare reimbursement, AHA estimated useful lives and engineering issues and should be performed by a qualified professional employing engineering and cost-estimating techniques to provide a fully documented professional study.

The componentization analysis methodology should include an analysis of the construction cost (hard and soft), plans and specifications to evaluate the building construction and its component parts and identify the building service systems and interior finishes eligible for reclass to shorter depreciable lives; engineering estimation of the various components and subcomponents; allocation of indirect cost; and reconciliation to the total project capitalized cost. The approach to componentizing construction costs complies with the AHA’s useful life guidelines and is accepted by CMS.

A componentization analysis helps provide accuracy in determining components’ useful lives, with substantiation for all costs identified. It also helps reduce the asset life as a whole by as much as 50 percent and establishes the asset’s recovery period for reimbursement purposes, financial reporting and inclusion in the Medicare cost report.

The deliverable report includes supporting detail that assists the institution in managing capital assets on a go-forward basis. Engineering-based studies also allow for flexibility when customizing the deliverable report based on the health care provider’s needs. Whether used to help identify construction costs relating to reimbursable versus nonreimbursable cost centers or for purposes of future capital asset dispositions, this type of study provides the necessary detail and can substantiate identified costs.

An engineering-based analysis can result in an accelerated depreciation expense, which can greatly enhance cost-based reimbursement. Therefore, any CAH that has constructed a replacement hospital or made improvements costing more than $1 million to its existing building in the current year may see a benefit.

New subsection (d) prospective payment system hospitals eligible for Medicare cost-based capital reimbursement also may want to consider this opportunity. The opportunity for cost-based reimbursement is available to subsection (d) hospitals only for cost report periods beginning within two years of the hospital seeing its first patient. Timing is important to take full advantage of this rule.

For-profit hospitals interested in accelerating tax depreciation can benefit from a similar type of study called an engineering-based cost segregation study, accomplishing the same result as an engineering-based componentization study but driven by MACRS tax lives versus AHA useful lives.

For more information about a componentization analysis, reach out to your BKD trusted advisor or use the Contact Us form below.

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