Capital Lease meets CMS Guidelines for Reimbursement

In the past, a capital lease was not sufficient for the Center for Medicare & Medicaid Services (CMS) standard of reimbursement for Meaningful Use funds. This rule was recently updated to allow these types of purchasing vehicles to be used. See more info below.

https://questions.cms.gov/faq.php?id=5005&faqId=3387

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). Similar to 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.

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