Allegheny Valley School v. Dept. of Public Welfare, PICS Case No. 14-0018 (Pa Commw Jan. 8, 2014) Friedman, J. (7 pages).

Where an intermediate care facility that receives Medicare payments used funds from a funded depreciation account for an executive pension, a purpose inconsistent with the regulatory-approved uses, a denial of transfer was proper. Affirmed.

Allegheny Valley School (AVS) was a non-profit intermediate care facility that received 82% of its revenue from the Pennsylvania Medical Assistance Program in accordance with the Department of Public Welfare’s (DPW) regulations. Upon AVS being acquired, the Board of Directors authorized the transfer of money held in a funded depreciation account to provide its CEO with a retirement benefit comparable to that of CEOs of similar non-profit healthcare organizations. AVS transferred all of the money, a portion of which represented investment income that had been earned on the account, to a deferred compensation plan and closed the depreciation account.

DPW found that the interest income of funded depreciation account should be subject to offset in accordance with § 226.4B of HIM-15, and rejected AVS’s plan to place the full amount of the investment income, plus interest, into a restricted capital development account, because such action was not expressly provided for in the regulations. DPW later issued a decision directing AVS to use the investment income to reduce AVS’s allowable interest expense.

AVS appealed the decision to the Bureau of Hearings and Appeals (BHA). BHA found that the use of the funded depreciation account to fund the retirement package did not fall within any of the exceptions to the investment income offset requirement in § 226.4B of HIM-15, and that nothing in HIM-15 or any other applicable laws or regulations permitted AVS to avoid the offset requirement by making a subsequent deposit into another restricted account.

On appeal to the Commonwealth Court, AVS argued that DPW misinterpreted and misapplied the applicable regulations and acted arbitrarily in refusing to allow AVS to cure its error, as its plan to transfer the investment income to a restricted capital account would not cause DPW any demonstrable harm. AVS also asserted that HIM-15 was not controlling because Ch. 6211 of DPW’s regulations authorized the transfer of investment income to a restricted capital account.

The court rejected AVS’s arguments, noting that HIM-15 did in fact govern in this case. AVS’s use of the funds was not one of the recognized exemptions, and nothing in HIM-15 permitted a provider to avoid the investment income offset requirement, as § 6211.79(q) of DPW’s regulations required that funded depreciation accounts be maintained in accordance with the provisions of HIM-15, and AVS had clearly marked the funds at issue as “funded depreciation.