Frequently Asked Questions

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Can a Critical Access Hospital (CAH) include costs to lease/rent certified EHR technology in the Medicare EHR incentive payment?

Under the statute and the regulations, the CAHs EHR incentive payment shall only include reasonable costs for the purchase of certified EHR technology to which purchase depreciation (excluding interest) would apply. There are two types of lease agreements that a CAH may enter into to administer their EHR system… an operating lease or a capital lease. OPERATING LEASE An operating lease is merely a lease that involves an asset that is purchased, owned, and depreciated by the lessor and the lessee (the CAH) signs the lease agreement with the lessor to use the asset by paying a lease/rental fee for the term of the lease.The asset is returned to the lessor at the end of the lease without further obligation. Generally, the CAH can claim the entire lease/rental payment under an operating lease as an operating expense, unrelated to depreciation expenses. With an operating lease, the CAH does not purchase, own, or depreciate the asset, and the lease/rental expense does not meet the intent of the statute and regulations.Therefore, operating lease/rental expenses are not included in the CAH incentive payment.The CAH may, however, continue to include the operating lease expenses on its cost report, subject to reasonable cost principles. CAPITAL LEASE A capital lease agreement is essentially the same as a virtual purchase agreement, as defined in 42 CFR 413.130(b)(8) of the regulations and the Medicare Provider Reimbursement Manual (PRM), (CMS Pub. 15-1) section 110.B.1.b. A capital lease is treated as though the CAH (lessee) purchased the asset and the capital-related costs may not exceed the amount that the lessee would have included in capital-related costs if it had legal title to the asset (the cost of ownership). The cost of ownership includes straight-line depreciation, insurance and interest for computing the limitation.To be a capital lease, the agreement must satisfy at least one of the four conditions established by the Federal Accounting Standards Board (FASB). The FASB conditions, under CMS Pub. 15-1, section 110.B.1.b., a lease that meets any one of the following four conditions establishes a virtual purchase (otherwise the lease is considered an operating lease). The lease transfers title of the facilities or equipment to the lessee during the lease term, The lease contains a bargain purchase option, The lease term is 75 percent or more of the useful life of the facilities or equipment. This provision is not applicable if the lease begins in the last 25 percent of the useful life of the facilities or equipment, or The present value of the minimum lease payments (that is, payments to be made during the lease term, including bargain purchase option, guaranteed residual value, or penalties for failure to renew) equal 90 percent or more of the fair market value of the leased property. This provision is not applicable if the lease begins in the last 25 percent of the useful life of the facilities or equipment. The present value is computed using the lessee's incremental borrowing rate, unless the interest rate implicit in the lease is known and is less than the lessee's incremental borrowing rate, in which case, the interest rate implicit in the lease is used. Based on these criteria, a capital lease or virtual purchase meets the intent of the statute and regulation to qualify the leased asset as a purchased asset. Therefore, the CAHs’ incentive payment may include the “cost” of such leased asset which must be based on the fair market value of the asset (see 42 CFR 413.134(b)(2) at the date the lease was initiated. Other costs of ownership such as interest and insurance related to the virtual purchase lease shall not be included in the asset’s cost for the purpose of the EHR incentive payment. However, the portion of the rental expense which relates to the interest and insurance portion of the cost of ownership of such virtual purchase asset (see CMS Pub. 15-1, section 110.B.1.b.) may continue to be included on the cost report as reimbursable cost subject to the limitation on rental charges which are allowed under a virtual purchase lease (see CMS Pub. 15-1, section 110.B.1.b.2.). (See also the instructions for Form CMS-2552-10, W/S A-8, Line 32 describing the computation of the limitation.) In order to include the reasonable cost of the leased asset in its incentive payment, the CAH will be required to provide its Medicare Administrative Contractor (MAC) with sufficient, appropriate documentation to establish that the lease meets the criteria of a virtual purchase lease as described above and that the “cost” of the asset was determined using the fair market value at the date the lease was initiated. For more information about the Medicare and Medicaid EHR Incentive Program, please visit FAQ10722

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