CMS Issues Revised FAQ Affecting EHR Incentives for Critical Access Hospitals

by King & Spalding

In response to an effort led by the American Hospital Association, along with King & Spalding and the accounting firm BKD, CMS posted a revised answer to a frequently asked question (FAQ) governing payment of Medicare EHR incentives for critical access hospitals (CAHs).  The revised FAQ now permits CAHs to receive incentives under the HITECH Act for the reasonable costs of certified EHR technology obtained through a capital lease or “virtual-purchase agreement.”  Previously, CMS only permitted incentives for CAHs that purchased EHRs outright.  That policy would have prevented many CAHs from receiving incentives, even if they qualified as meaningful users. 

Because CAHs are otherwise reimbursed on a reasonable cost basis and not pursuant to a prospective payment system (PPS), the HITECH Act provides for a different incentive payment methodology for CAHs than for PPS hospitals.  The statute states that CAHs that qualify as meaningful users of certified EHR technology will be reimbursed for the acquisition costs of such EHR systems.

CMS’s prior FAQ prohibited incentive payments to CAHs that had entered into lease agreements for their EHR systems, rather than having purchased the EHRs outright.  The revised FAQ now will treat capital leases the same as purchase agreements, enabling CAHs that qualify as meaningful users to claim capital lease payments as reasonable costs eligible for incentives.

A capital lease differs from an operating lease in which the CAH simply pays a rental fee for use of an asset that is at all times owned and depreciated by the lessor.  A capital lease, by contrast, is treated as if the CAH purchased the EHR (a “virtual purchase”), and CMS will treat rental payments as allowable costs of ownership so long as total payments do not exceed the costs the CAH would have incurred to purchase the EHR outright.  According to the FAQ, an agreement will qualify as a capital lease if it contains one of the following terms:

  • The lease transfers title of the EHR to the CAH 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.

This revision is consistent with prior CMS policy that treats capital leases or virtual-purchase agreements as purchases.  See 42 C.F.R. § 413.130(b)(8); see also Medicare Provider Reimbursement Manual (CMS Pub. 15-1), § 110.B.1.b.

The new FAQ is available by clicking here.

Reporters, Dennis Barry, Washington D.C., + 1 202 626 2959, and Christopher Kenny, Washington D.C., + 1 202 626 9253,

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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