Current through Reg. 49, No. 38; September 20, 2024
(a) Allowable and unallowable costs.
Allowable and unallowable costs, both direct and indirect, are defined to
identify expenses that are reasonable and necessary to provide contracted
client care and are consistent with federal and state laws and regulations.
When a particular type of expense is classified as unallowable, the
classification means only that the expense will not be included in the database
for reimbursement determination purposes because the expense is not considered
reasonable and/or necessary. The classification does not mean that individual
contracted providers may not make the expenditure. The description of allowable
and unallowable costs is designed to be a general guide and to clarify certain
key expense areas. This description is not comprehensive, and the failure to
identify a particular cost does not necessarily mean that the cost is an
allowable or unallowable cost.
(b)
Cost-reporting process. The primary objective of the cost-reporting process is
to provide a basis for determining appropriate reimbursement to contracted
providers. To achieve this objective, the reimbursement determination process
uses allowable cost information reported on cost reports or other surveys. The
cost report collects actual allowable costs and other financial and statistical
information, as required. Costs may not be imputed and reported on the cost
report when no costs were actually incurred (except as stated in §
355.103(b)(19)(A)(i)
of this title (relating to Specifications for Allowable and Unallowable Costs)
or when documentation does not exist for costs even if they were actually
incurred during the reporting period).
(c) Accurate cost reporting. Accurate cost
reporting is the responsibility of the contracted provider. The contracted
provider is responsible for including in the cost report all costs incurred,
based on an accrual method of accounting, which are reasonable and necessary,
in accordance with allowable and unallowable cost guidelines in this section
and in §
355.103 of this title, revenue
reporting guidelines in §
355.104 of this title (relating to
Revenues), cost report instructions, and applicable program rules. Reporting
all allowable costs on the cost report is the responsibility of the contracted
provider. The Texas Health and Human Services Commission (HHSC) is not
responsible for the contracted provider's failure to report allowable costs;
however, in an effort to collect reliable, accurate, and verifiable financial
and statistical data, HHSC is responsible for providing cost report training,
general and/or specific cost report instructions, and technical assistance to
providers. Furthermore, if unreported and/or understated allowable costs are
discovered during the course of an audit desk review or field audit, those
allowable costs will be included on the cost report or brought to the attention
of the provider to correct by submitting an amended cost report.
(d) Cost and accountability report training.
It is the responsibility of the provider to ensure that each cost or
accountability report preparer has completed the required state-sponsored
training. Preparers may be employees of the provider or persons who have been
contracted by the provider for the purpose of cost or accountability report
preparation. Preparers must complete training for each program for which a cost
or accountability report is submitted, as applicable. Contracted preparer's
fees to complete training are considered allowable expenses for cost reporting
purposes. Preparers that participate in training may be assessed a convenience
fee, which will be determined by HHSC. Convenience fees assessed for training
are allowable costs. Applicable federal and state accessibility standards apply
to training. Beginning with the 2018 cost reports and 2019 accountability
reports, reporting schedules per program are determined by HHSC and are
published on the HHSC website.
(1) Training
schedules.
(A) For programs with odd-year and
even-year cost reports. Preparers must complete state-sponsored cost report
training every other year in order to be eligible to complete both that
odd-year cost report and the following even-year cost report. If a new preparer
wishes to complete an even-year cost report and has not completed the previous
odd-year cost report training, the preparer must complete an even-year cost
report training.
(B) For programs
with odd-year and even-year accountability reports. Preparers must complete
state-sponsored accountability report training every other year in order to be
eligible to complete both that odd-year accountability report and the following
even-year accountability report. If a new preparer wishes to complete an
even-year accountability report and has not completed the previous odd-year
accountability report training, the preparer must complete an even-year
accountability report training.
(C)
For all other programs. Preparers must complete the state-sponsored training
for each program for which a cost or accountability report is submitted.
Beginning with the 2018 cost reports, new preparers must complete cost report
training every other year for each program cost or accountability report being
prepared in order to be eligible to complete both that year's cost report and
the following year's accountability report, if applicable. If a new preparer
wishes to complete an accountability report and has not completed the previous
year's cost report training, the preparer must complete an accountability
report training for that program for that year.
(2) Failure to complete the required cost or
accountability report training.
(A) For
nursing facilities, failure to file a completed cost or accountability report
signed by preparers who have completed the required cost report training may
result in vendor hold as specified in §
355.403 of this title (relating to
Vendor Hold).
(B) For School Health
and Related Services (SHARS) providers, failure to complete the required cost
report training may result in an administrative contract violation as specified
in §
355.8443 of this title.
(C) For all other programs, failure to file a
completed cost or accountability report signed by preparers who have completed
the required cost report training constitutes an administrative contract
violation. In the case of an administrative contract violation, procedural
guidelines and informal reconsideration and/or appeal processes are specified
in §
355.111 of this title (relating to
Administrative Contract Violations).
(e) Generally accepted accounting principles.
Except as otherwise specified by the cost determination process rules of this
chapter, cost report instructions, or policy clarifications, cost reports
should be prepared consistent with generally accepted accounting principles
(GAAP), which are those principles approved by the American Institute of
Certified Public Accountants (AICPA). Internal Revenue Service (IRS) laws and
regulations do not necessarily apply in the preparation of the cost report. In
cases where cost reporting rules differ from GAAP, IRS, or other authorities,
HHSC rules take precedence for provider cost-reporting purposes.
(f) Allowable costs. Allowable costs are
expenses, both direct and indirect, that are reasonable and necessary, as
defined in paragraphs (1) and (2) of this subsection, and which meet the
requirements as specified in subsections (i), (j), and (k) of this section, in
the normal conduct of operations to provide contracted client services meeting
all pertinent state and federal requirements. Only allowable costs are included
in the reimbursement determination process.
(1) "Reasonable" refers to the amount
expended. The test of reasonableness includes the expectation that the provider
seeks to minimize costs and that the amount expended does not exceed what a
prudent and cost-conscious buyer pays for a given item or service. In
determining the reasonableness of a given cost, the following are considered:
(A) the restraints or requirements imposed by
arm's-length bargaining, i.e., transactions with nonowners or other unrelated
parties, federal and state laws and regulations, and contract terms and
specifications; and
(B) the action
that a prudent person would take in similar circumstances, considering his
responsibilities to the public, the government, his employees, clients,
shareholders, and members, and the fulfillment of the purpose for which the
business was organized.
(2) "Necessary" refers to the relationship of
the cost, direct or indirect, incurred by a provider to the provision of
contracted client care. Necessary costs are direct and indirect costs that are
appropriate in developing and maintaining the required standard of operation
for providing client care in accordance with the contract and state and federal
regulations. In addition, to qualify as a necessary expense, a direct or
indirect cost must meet all of the following requirements:
(A) the expenditure was not for personal or
other activities not directly or indirectly related to the provision of
contracted services;
(B) the cost
does not appear as a specific unallowable cost in §
355.103 of this title;
(C) if a direct cost, it bears a significant
relationship to contracted client care. To qualify as significant, the
elimination of the expenditure would have an adverse impact on client health,
safety, or general well-being;
(D)
the direct or indirect expense was incurred in the purchase of materials,
supplies, or services provided to clients or staff in the normal conduct of
operations to provide contracted client care;
(E) the direct or indirect costs are not
allocable to or included as a cost of any other program in either the current,
a prior, or a future cost-reporting period;
(F) the costs are net of all applicable
credits;
(G) allocated costs of
each program are adequately substantiated; and
(H) the costs are not prohibited under other
pertinent federal, state, or local laws or regulations.
(3) Direct costs are those costs incurred by
a provider that are definitely attributable to the operation of providing
contracted client services. Direct costs include, but are not limited to,
salaries and nonlabor costs necessary for the provision of contracted client
care. Whether or not a cost is considered a direct cost depends upon the
specific contracted client services covered by the program. In programs in
which client meals are covered program services, the salaries of cooks and
other food service personnel are direct costs, as are food, nonfood supplies,
and other such dietary costs. In programs in which client transportation is a
covered program service, the salaries of drivers are direct costs, as are
vehicle repairs and maintenance, vehicle insurance and depreciation, and other
such client transportation costs.
(4) Indirect costs are those costs that
benefit, or contribute to, the operation of providing contracted services,
other business components, or the overall contracted entity. These costs could
include, but are not limited to, administration salaries and nonlabor costs,
building costs, insurance expense, and interest expense. Central office or home
office administrative expenses are considered indirect costs. As specified in
§
355.8443 of this title, SHARS
providers use an unrestricted indirect cost rate to determine indirect
costs.
(g) Unallowable
costs. Unallowable costs are expenses that are not reasonable or necessary,
according to the criteria specified in subsection (f)(1) - (2) of this section
and which do not meet the requirements as specified in subsections (i), (j),
and (k) of this section or which are specifically enumerated in §
355.103 of this title or
program-specific reimbursement methodology. Providers must not report as an
allowable cost on a cost report a cost that has been determined to be
unallowable. Such reporting may constitute fraud. (Refer to §
355.106(a) of this
title (relating to Basic Objectives and Criteria for Audit and Desk Review of
Cost Reports)).
(1) For nursing facilities,
placement as an allowable cost on a cost report of a cost which has been
determined to be unallowable may result in vendor hold as specified in §
355.403 of this title.
(2) For Intermediate Care Facilities for
Individuals with an Intellectual Disability or Related Conditions (ICF/IID),
Home and Community-based Services (HCS), Service Coordination/Targeted Case
Management, Rehabilitative Services, and Texas Home Living (TxHmL) programs,
placement as an allowable cost on a cost report a cost, which has been
determined to be unallowable, constitutes an administrative contract violation.
In the case of an administrative contract violation, procedural guidelines and
informal reconsideration and/or appeal processes are specified in §
355.111 of this title.
(3) For SHARS providers, submission of a cost
that has been determined to be unallowable may result in an administrative
contract violation as specified in §
355.8443 of this title.
(4) For all other programs, submission of a
cost, which has been determined to be unallowable, constitutes an
administrative contract violation. In the case of an administrative contract
violation, procedural guidelines and informal reconsideration and/or appeal
processes are specified in §
355.111 of this title.
(h) Other financial and
statistical data. The primary purpose of the cost report is to collect
allowable costs to be used as a basis for reimbursement determination. In
addition, providers may be required on cost reports to provide information in
addition to allowable costs to support allowable costs, such as wage surveys,
workers' compensation surveys, or other statistical and financial information.
Additional data requested may include, when specified and in the appropriate
section or line number specified, costs incurred by the provider which are
unallowable costs. All information, including other financial and statistical
data, shown on a cost report is subject to the documentation and verification
procedures required for an audit desk review and/or field audit.
(1) For nursing facilities, inaccuracy in
providing, or failure to provide, required financial and statistical data may
result in vendor hold as specified in §
355.403 of this title.
(2) For ICF/IID, HCS, Service
Coordination/Targeted Case Management, Rehabilitative Services, and TxHmL
programs, inaccuracy in providing, or failure to provide, required financial
and statistical data constitutes an administrative contract violation. In the
case of an administrative contract violation, procedural guidelines and
informal reconsideration and/or appeal processes are specified in §
355.111 of this title.
(3) For SHARS, inaccuracy in providing, or
failure to provide, required financial and statistical data may result in an
administrative contract violation as specified in §
355.8443 of this title.
(4) For all other programs, inaccuracy in
providing, or failure to provide, required financial and statistical data
constitutes an administrative contract violation. In the case of an
administrative contract violation, procedural guidelines and informal
reconsideration and/or appeal processes are specified in §
355.111 of this title.
(i) Related party transactions.
(1) In determining whether a contracted
provider organization is related to a supplying organization, the tests of
common ownership and control are to be applied separately. Related to a
contracted provider means that the contracted provider to a significant extent
is associated or affiliated with, has control of, or is controlled by the
organization furnishing the services, equipment, facilities, leases, or
supplies. Common ownership exists if an individual or individuals possess any
ownership or equity in the contracted provider and the institution or
organization serving the contracted provider. Control exists if an individual
or an organization has the power, directly or indirectly, to significantly
influence or direct the actions or policies of an organization or institution.
If the elements of common ownership or control are not present in both
organizations, then the organizations are deemed not to be related to each
other. The existence of an immediate family relationship will create an
irrefutable presumption of relatedness through control or attribution of
ownership or equity interests where the significance tests are met. The
following persons are considered immediate family for cost-reporting purposes:
(A) husband and wife;
(B) natural parent, child, and
sibling;
(C) adopted child and
adoptive parent;
(D) stepparent,
stepchild, stepsister, and stepbrother;
(E) father-in-law, mother-in-law,
sister-in-law, brother-in-law, son-in-law, and daughter-in-law;
(F) grandparent and grandchild;
(G) uncles and aunts by blood or
marriage;
(H) nephews and nieces by
blood or marriage; and
(I) first
cousins.
(2) A
determination as to whether an individual (or individuals) or organization
possesses ownership or equity in the contracted provider organization and the
supplying organization, so as to consider the organizations related by common
ownership, will be made on the basis of the facts and circumstances in each
case. This rule applies whether the contracted provider organization or
supplying organization is a sole proprietorship, partnership, corporation,
trust or estate, or any other form of business organization, proprietary or
nonprofit. In the case of a nonprofit organization, ownership or equity
interest will be determined by reference to the interest in the assets of the
organization, e.g., a reversionary interest provided for in the articles of
incorporation of a nonprofit corporation.
(3) The term control includes any kind of
control, whether or not it is legally enforceable and however it is exercisable
or exercised. It is the reality of the control which is decisive, not its form
or the mode of its exercise. The facts and circumstances in each case must be
examined to ascertain whether legal or effective control exists. Since a
determination made in a specific case represents a conclusion based on the
entire body of facts and circumstances involved, such determination should not
be used as a precedent in other cases unless the facts and circumstances are
substantially the same. Organizations, whether proprietary or nonprofit, are
considered to be related through control to their directors in
common.
(4) Costs applicable to
services, equipment, facilities, leases, or supplies furnished to the
contracted provider by organizations related to the provider by common
ownership or control are includable in the allowable cost of the provider at
the cost to the related organization. However, the cost must not exceed the
price of comparable services, equipment, facilities, leases, or supplies that
could be purchased or leased elsewhere. The purpose of this principle is
twofold: to avoid the payment of a profit factor to the contracted provider
through the related organization (whether related by common ownership or
control), and to avoid payment of artificially inflated costs which may be
generated from less than arm's-length bargaining. The related organization's
costs include all actual reasonable costs, direct and indirect, incurred in the
furnishing of services, equipment, facilities, leases, or supplies to the
provider. The intent is to treat the costs incurred by the supplier as if they
were incurred by the contracted provider itself. Therefore, if a cost would be
unallowable if incurred by the contracted provider itself, it would be
similarly unallowable to the related organization. The principles of
reimbursement of contracted provider costs described throughout this title will
generally be followed in determining the reasonableness and allowability of the
related organization's costs, where application of a principle in a nonprovider
entity would be clearly inappropriate.
(5) An exception is provided to the general
rule applicable to related organizations. The exception applies if the
contracted provider demonstrates by convincing evidence to the satisfaction of
HHSC that certain criteria have been met. If all of the conditions of this
exception are met, then the charges by the supplier to the contracted provider
for such services, equipment, facilities, leases, or supplies are allowable
costs. If Medicare has made a determination that a related party situation does
not exist or that an exception to the related party definition was granted,
HHSC will review the determination made by Medicare to determine if it is
applicable to the current situation of the contracted provider and in
compliance with this subsection (relating to related party transactions). In
order to have the Medicare determination considered for approval by HHSC, a
copy of the applicable Medicare determination must accompany each written
exception request submitted to HHSC, along with evidence supporting the
Medicare determination for the current cost-reporting period. If the exception
granted by Medicare no longer is applicable due to changes in circumstances of
the contracted provider or because the circumstances do not apply to the
contracted provider, HHSC may choose not to consider the Medicare
determination. Written requests for an exception to the general rule applicable
to related organizations must be submitted for approval to the HHSC Provider
Finance Department no later than 45 days prior to the due date of the cost
report in order to be considered for that year's cost report. Each request must
include documentation supporting that the contracted provider meets each of the
four criteria listed in subparagraphs (A) - (D) of this paragraph. Requests
that do not include the required documentation for each criteria will not be
considered for that year's cost report.
(A)
The supplying organization is a bona fide separate organization. This means
that the supplier is a separate sole proprietorship, partnership, joint
venture, association or corporation and not merely an operating division of the
contracted provider organization.
(B) A majority of the supplying
organization's business activity of the type carried on with the contracted
provider is transacted with other organizations not related to the contracted
provider and the supplier by common ownership or control and there is an open,
competitive market for the type of services, equipment, facilities, leases, or
supplies furnished by the organization. In determining whether the activities
are of similar type, it is important also to consider the scope of the
activity. The requirement that there be an open, competitive market is merely
intended to assure that the item supplied has a readily discernible price that
is established through arm's-length bargaining by well-informed buyers and
sellers.
(C) The services,
equipment, facilities, leases, or supplies are those which commonly are
obtained by entities such as the contracted provider from other organizations
and are not a basic element of contracted client care ordinarily furnished
directly to clients by such entities. This requirement means that entities such
as the contracted provider typically obtain the services, equipment,
facilities, leases, or supplies from outside sources, rather than producing
them internally.
(D) The charge to
the contracted provider is in line with the charge of such services, equipment,
facilities, leases, or supplies in the open, competitive market and no more
than the charge made under comparable circumstances to others by the
organization for such services, equipment, facilities, leases, or
supplies.
(6) Disclosure
of all related-party information on the cost report is required for all costs
reported by the contracted provider, including related-party transactions
occurring at any level in the provider's organization, (e.g., the central
office level, and the individual contracted provider level). The contracted
provider must make available, upon request, adequate documentation to support
the costs incurred by the related party. Such documentation must include an
identification of the related person's or organization's total costs, the basis
of allocation of direct and indirect costs to the contracted provider, and
other business entities served. If a contracted provider fails to provide
adequate documentation to substantiate the cost to the related person or
organization, then the reported cost is unallowable. For further guidelines
regarding adequate documentation, refer to §
355.105(b)(2) of
this title (relating to General Reporting and Documentation Requirements,
Methods, and Procedures).
(7) When
calculating the cost to the related organization, the cost-determination
guidelines specified in this section and in §
355.103 of this title
apply.
(j) Cost
allocation. Direct costing must be used whenever reasonably possible. Direct
costing means that allowable costs, direct or indirect, (as defined in
subsection (f)(3) - (4) of this section) incurred for the benefit of, or
directly attributable to, a specific business component must be directly
charged to that particular business component. For example, the payroll costs
of a direct care employee who works across cost areas within one contracted
program would be directly charged to each cost area of that program based upon
that employee's continuous daily time sheets and the costs of a direct care
employee who works across more than one service delivery area would also be
directly charged to each service delivery area based upon that employee's
continuous daily time sheets. Health insurance premiums, life insurance
premiums, and other employee benefits must be direct costed.
(1) If cost allocation is necessary for
cost-reporting purposes, contracted providers must use reasonable methods of
allocation and must be consistent in their use of allocation methods for
cost-reporting purposes across all program areas and business entities.
(A) The allocation method should be a
reasonable reflection of the actual business operations. Allocation methods
that do not reasonably reflect the actual business operations and resources
expended toward each unique business entity are not acceptable. Allocated costs
are adjusted if HHSC considers the allocation method to be unreasonable. An
indirect allocation method approved by some other department, program, or
governmental entity is not automatically approved by HHSC for cost-reporting
purposes.
(B) HHSC reviews each
cost-reporting allocation method on a case-by-case basis in order to ensure
that the reported costs fairly and reasonably represent the operations of the
contracted provider. If in the course of an audit it is determined that an
existing or approved allocation method does not fairly and reasonably represent
the operations of the contracted provider, then an adjustment to the allocation
method will be made consistent with subsection (f)(3) - (4) of this section. A
contracted provider may request an informal review, and subsequently an appeal,
of a decision concerning its allocation methods in accordance with §
355.110 of this title (relating to
Informal Reviews and Formal Appeals).
(C) Any allocation method used for
cost-reporting purposes must be consistently applied across all contracted
programs and business entities in which the contracted provider has an
interest.
(D) Providers must use an
allocation method approved or required by HHSC. Any change in cost-reporting
allocation methods from one year to the next must be fully disclosed by the
contracted provider on its cost report and must be accompanied by a written
explanation of the reasons and justification for such change. If the provider
wishes to use an allocation method that is not in compliance with the
cost-reporting allocation methods in paragraphs (3) - (4) of this subsection,
the contracted provider must obtain written prior approval from HHSC's Provider
Finance Department.
(i) Requests for approval
to use an allocation method other than those identified in paragraphs (3) - (4)
of this subsection or for approval of a provider's change in cost-reporting
allocation method other than those identified in paragraphs (3) - (4) of this
subsection must be received by HHSC's Provider Finance Department prior to the
end of the contracted provider's fiscal year. Requests for approval of
allocation methods will not be acceptable as a basis for the extension of the
cost report due date.
(ii) The HHSC
Provider Finance Department will forward its written decision to the contracted
provider within 45 days of its receipt of the provider's original written
request. If sufficient documentation is not provided by the provider to verify
the acceptability of the allocation method, then HHSC may extend the decision
time frame. However, an extension of the due date of the cost report will not
be granted. Written decisions made on or after the due date of the cost report
will apply to the next year's cost report. A contracted provider may request an
informal review, and subsequently an appeal, of a decision concerning its
allocation methods in accordance with §
355.110 of this title.
(iii) Failure to use an allocation method
approved or required by HHSC or to disclose a change in an allocation to HHSC
will result in the following.
(I) For nursing
facilities, failure to disclose a change in an allocation method or failure to
use the allocation method approved or required by HHSC may result in vendor
hold as specified in §
355.403 of this title.
(II) For ICF/IID, HCS, Service
Coordination/Targeted Case Management, Rehabilitative Services, and TxHmL
programs, failure to use the allocation method approved or required by HHSC
constitutes an administrative contract violation. In the case of an
administrative contract violation, procedural guidelines and informal
reconsideration and/or appeal processes are specified in §
355.111 of this title.
(III) For SHARS, failure to use the
allocation method approved or required by HHSC constitutes an administrative
contract violation. In the case of an administrative contract violation,
procedural guidelines and informal reconsideration and/or appeal processes are
specified in §
355.8443 of this title.
(IV) For all other programs, failure to
disclose a change in an allocation method or failure to use the allocation
method approved or required by HHSC constitutes an administrative contract
violation. In the case of an administrative contract violation, procedural
guidelines and informal reconsideration and/or appeal processes are specified
in §
355.111 of this title.
(E) For small and large
state-operated ICF/IID, designated as Bond Homes and State Supported Living
Centers for cost reporting purposes, these facility types may use an allocation
method other than those identified in paragraphs (3) - (4) of this subsection
in order to represent indirect costs that are a reasonable reflection of the
actual business operations. If an allocation method other than those identified
in paragraphs (3) - (4) of this subsection is used for indirect costs, the
allocation method must adhere to Generally Accepted Accounting
Principles.
(2)
Cost-reporting methods for allocating costs must be clearly and completely
documented in the contracted provider's workpapers, with details as to how
pooled costs are allocated to each segment of the business entity, for both
contracted and noncontracted programs.
(A) If
a contracted provider has questions regarding the reasonableness of an
allocation method, that contracted provider should request written approval
from the HHSC Provider Finance Department prior to submitting a cost report
utilizing the allocation method in question. Requests for approval must be
received by the HHSC Provider Finance Department prior to the end of the
contracted provider's fiscal year. Requests for approval of allocation methods
will not be acceptable as a basis for the extension of the cost report due
date.
(B) The HHSC Provider Finance
Department will forward its written decision to the contracted provider within
45 days of its receipt of the original written request. If sufficient
documentation is not provided by the provider to verify the acceptability of
the allocation method, HHSC may extend the decision time frame. However, an
extension of the due date of the cost report will not be granted. Written
decisions made on or after the due date of the cost report will apply to the
next year's cost report. A contracted provider may request an informal review,
and subsequently an appeal, of a decision concerning its allocation methods in
accordance with §
355.110 of this title.
(3) When a building is shared and
the building usage is separate and distinct for each entity using the building,
the building costs, identified as building and facility cost categories on the
cost report, should be allocated based upon square footage and may not be
allocated with other indirect costs as a pool of costs. When the same building
space is shared by various entities, the shared building costs, identified as
building and facility cost categories on the cost report, should be allocated
using a reasonable method which reflects the actual usage, such as an
allocation based on time in shared activity areas or a functional study of
shared dietary costs related to shared dining and kitchen areas.
(4) Where costs are shared, are not directly
chargeable and are allocated as a pool of costs, the following allocation
methods are acceptable for cost-reporting purposes.
(A) If all the business components of a
contracted provider have equivalent units of equivalent service, indirect costs
must be allocated based upon each business component's units of service. For
example, if a provider had two nursing facilities, indirect costs requiring
allocation as a pool of costs must be allocated based upon each nursing
facility's units of service, since the units of service are equivalent units
and the services are equivalent services. If a provider had a nursing facility
and a residential care program, indirect costs requiring allocation as a pool
of costs could not be allocated based upon units of service because even though
the units of service for a nursing facility and a residential care facility are
equivalent units, the services are not equivalent services. If a home health
agency has indirect costs requiring allocation as a pool of costs across its
Medicare home health services and its Medicaid primary home care services, it
could not use units of service to allocate those costs, since neither the units
of service nor the services are equivalent.
(B) If all of a contracted provider's
business components are labor-intensive without programmatic residential
facility or residential building costs, the contracted provider must allocate
its indirect costs requiring allocation as a pool of costs based either on each
business component's pro rata share of salaries or labor costs or on a
cost-to-cost basis.
(i) For cost-reporting
cost allocation purposes, the term "salaries" includes wages paid to employees
directly charged to the specific business component. The term "salaries" also
includes fees paid to contracted individuals, excluding consultants, who
perform services routinely performed by employees, which are directly charged
to the specific business component. The term "salaries" does not include
payroll taxes and employee benefits associated with the wages of
employees.
(ii) For cost-reporting
cost-allocation purposes, the term "labor costs" includes salaries as defined
in clause (i) of this subparagraph, plus the payroll taxes and employee
benefits associated with the wages of the employees.
(iii) The cost-to-cost method allocates costs
based upon the percentage of each business component's directly-charged costs
to the total directly-charged costs of all business components.
(C) If a contracted provider's
business components are mixed, with some being labor-intensive and others
having a programmatic residential or institutional component, the contracted
provider must allocate its indirect costs requiring allocation as a pool of
costs either:
(i) based upon the ratio of each
business component's total costs less that business component's facility or
building costs, as related to the contracted provider's total business
component costs less facility or building costs for all the contracted
provider's business components, with "facility or building costs" referring to
those cost categories as identified on the cost report; or
(ii) based upon the labor costs method stated
in subparagraph (B)(ii) of this paragraph.
(D) In order to achieve a more accurate and
representative reporting of costs than results from allocating shared indirect
costs as a pool of costs, a provider may choose to allocate its indirect shared
expenses on an appropriate and reasonable functional basis. If allocating
shared direct client care costs, a provider may use an appropriate and
reasonable functional method. For example, costs of a central payroll operation
could be allocated to all business components based on the number of checks
issued; the costs of a central purchasing function could be allocated based on
the number of purchases made or requisitions handled; payroll costs for an
administrative employee working across business components could be directly
charged based upon that employee's time sheets and/or allocated based upon a
documented time study; food costs could be allocated based upon a functional
study of shared dietary costs; transportation equipment costs could be
allocated based upon mileage logs; and shared laundry costs could be allocated
based upon a functional study of the number of pounds/loads of laundry
processed. Providers choosing to allocate allowable employee-related
self-insurance paid claims in accordance with §
355.103(b)(13)(B)(ii)
of this title should base the allocation on percentage of salaries of employees
benefiting from the coverage for fully self-insured situations or on percentage
of premiums of covered employees for partially self-insured situations since
purchased premiums must be directly charged.
(E) Because the determination of
reimbursement is based on cost data, allocation methods based upon revenue
streams are inappropriate and unallowable.
(k) Net expenses. Net expenses are gross
expenses less any purchase discounts or returns and allowances. Purchase
discounts are cash discounts reducing the purchase price as a result of prompt
payment, quantity purchases, or for other reasons. Purchase returns and
allowances are reductions in expenses resulting from returned merchandise or
merchandise which is damaged, lost, or incorrectly billed. Only net expenses
may be reported on the cost report. Expenses reported on the cost report must
be adjusted for all such purchase discounts or returns and
allowances.
