Trends in Long-Term Care - U.S. Senate Special Committee on Aging

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cause they are illogical, it is very difficult to expla<strong>in</strong> them and have
anybody make any sense out of them. It is simply the way the system
is operated.
There are two rentals that we found. There is the imputed rent, and
there is the maximum rent.
The imputed rent is used <strong>in</strong> a non-armi's-length agreement. That is
where you owned the nurs<strong>in</strong>g home, and you rented it to yourself. Let
us say you have a corporation, and you rent the nurs<strong>in</strong>g home to yourself,
and you run it as a bus<strong>in</strong>ess.
That would be the non-arm's-length agreement, and that would be
the imputed rental.
The maximum rental is what is known as the arm's-length agreement,
which is an agreement supposedly between strangers; however,
accord<strong>in</strong>g to the State department of health def<strong>in</strong>ition of a non-arm'slength
agreement, it says if you own up to 10 percent <strong>in</strong>terest <strong>in</strong> the
landlord, you have a non-arm's-length agreement.
That would mean, <strong>in</strong> simple terms, if your wife owned the nurs<strong>in</strong>g
home, and rented it to you, that would be an arn's-length agreement.
If your brother owned the nurs<strong>in</strong>g home, and rented it to you, that
would be an arm's-length agreement, but what is not an arm's-length
agreement is when your wife and you jo<strong>in</strong>tly own it-you have 50
percent and she has 50 percent-and you rent it to yourself, that is not
an arm's-length agreement.
So clearly the terms "arm's-length" and "non-arm's-length" are
not used <strong>in</strong> a bus<strong>in</strong>ess sense, but are specialized terms, and they clearly
do not necessarily mean two strangers do<strong>in</strong>g bus<strong>in</strong>ess together.
The basis for the rentals, as I will show later <strong>in</strong> the real estate portion
of my delivery, is the rental formula based on an historic rent
that was charged <strong>in</strong> either 1966, 1968, or based upon the cost of the
construction.
In New York City, where you have a lot of nurs<strong>in</strong>g homes that
were old, and were run as nurs<strong>in</strong>g homes for a long time, most of the
rents are the maximum rental, the arm's-length agreement, and most
of those rents that were charged <strong>in</strong> 1966 and 1968, so those rents, if
they were non-arm's-length, they were not actual economic rents, <strong>in</strong>
that period of time, they will rema<strong>in</strong> that way.
Now, for new <strong>in</strong>stitutions which are built. the exist<strong>in</strong>g rents <strong>in</strong> 1966
are used as the basis for calculat<strong>in</strong>g what is a fair rent.
For example, if you have an <strong>in</strong>stitution which would conta<strong>in</strong> 100
beds, and the rents, the average rents for that category of hous<strong>in</strong>g <strong>in</strong>
New York City, or <strong>in</strong> any county of New York was $100,000, then a
new <strong>in</strong>stitution was built, and was on an arm's-length basis, that would
also have the $100,000 maximum rental, so not merely do the 1966
rents affect those <strong>in</strong>stitutions which were rented <strong>in</strong> that period of time,
but they affect all of the other <strong>in</strong>stitutions <strong>in</strong> New York, because they
are used as a basis of fair comparison, so that we have to look very
closely at what happened to those <strong>in</strong>stitutions, and how those rentals
were calculated. and what the cost basis of those <strong>in</strong>stitutions were,
before the medicaid reimbursement formula started to work.
Now, equity, as Mr. Lee will describe, is a cost component, which
is not <strong>in</strong>creased by <strong>in</strong>flation.
It is <strong>in</strong>creased only by an actual determ<strong>in</strong>ation of how much money
is left <strong>in</strong> the bus<strong>in</strong>ess, of what is done.