08-86 ADEQUATE COST DATA AND COST FINDING 2302.7
2300. PRINCIPLE
Providers receiving payment on
the basis of reimbursable cost must provide adequate cost data based on
financial and statistical records which can be verified by qualified auditors.
The cost data must be based on an approved method of cost finding and on the
accrual basis of accounting. However,
where governmental institutions operate on a cash basis of accounting, cost
data on this basis will be acceptable subject to appropriate treatment of
capital expenditures.
2302. DEFINITIONS
2302.1 Accrual Basis of Accounting.--Under the accrual basis of
accounting, revenue is recorded in the period when it is earned, regardless of
when it is collected, and expenditures for expense and asset items are recorded
in the period in which they are incurred, regardless of when they are
paid. Section
2305ff sets forth special rules regarding recognition of expenses under the
Medicare program relating to liquidation of liabilities.
2302.2 Cash Basis of Accounting.--Under the
cash basis of accounting, revenues are recognized only
when cash is received and expenditures for expense and asset items are not
recorded until cash is disbursed for them.
2302.3 Governmental Institution.-A provider
of services owned and operated by a Federal, State, or local governmental
agency.
2302.4 Allocable Costs.--An item or group
of items of cost chargeable to one or more objects, processes, or operations in
accordance with cost responsibilities, benefits received, or other identifiable
measure of application or consumption (also known as
general service costs).
A. Directly Allocable Costs--Directly
allocable costs are chargeable based on actual usage (e.g., metered
electricity) rather than a statistical surrogate.
B. Indirectly Allocable Costs--Indirectly
allocable costs are not chargeable based on actual usage, and thus, must be
allocated on the basis of a statistical surrogate (e.g., square feet).
2302.5 Applicable Credits.--Those receipts
or types of transactions which offset or reduce expense items that are
allocable to cost centers as direct or indirect costs. Typical examples of such
transactions are: purchase discounts,
rebates, or allowances; recoveries or indemnities on losses; sales of scrap or
incidental services; adjustments of overpayments or erroneous charges; and
other income items which serve to reduce costs.
2302.6 Charges.--The regular rates
established by the provider for services rendered beneficiaries and to other
paying patients. Charges should be
related consistently to the cost of the services and uniformly applied to all
patients whether inpatient or outpatient.
2302.7 Cost Finding.--A determination of the cost of services by
the use of informal procedures, i.e., without employing the regular processes
of cost accounting on a continuous or formal basis. It is the determination of the cost of an
operation by the assignment of direct costs and the allocation
of indirect costs.
Rev. 336 23-3
2302.8 ADEQUATE COST DATA AND COST FINDING 08-86
2302.8 Cost Center.--An organizational
unit, generally a department or its subunit, having a common functional purpose
for which direct and indirect costs are accumulated, allocated and
apportioned. In addition, those natural
expense classifications (e.g., depreciation) and nonallowable cost centers
(e.g., research) specifically required by the instructions to be shown on the
cost report fall under this definition.
See §§2302.9 and 2302.10 for the proper classification of a cost center
as general service or special service. See also §§2202.6, 2202.7, 2202.8, and
2203ff, for the proper classification of costs as either general routine,
special care, or ancillary. (See also
§§2302.4 and 2313.2.)
2302.9 General Service Cost Centers.--Those organizational units which
are operated for the benefit of the institution as a whole.
Each of these may render services to other general service areas as well
as to special or patient care departments.
Examples of these are: housekeeping, laundry, dietary, operation of plant and maintenance of plant.
Costs incurred for these cost centers are allocated to other cost centers on
the basis of services rendered.
2302.10 Special Service Cost Centers.--Commonly
referred to as Ancillary Cost Centers. Such centers usually provide direct
identifiable services to individual patients, and include departments such as
the operating room, radiology, laboratory, etc.
2302.11 Outpatient Occasions of Service.--Each
examination, consultation or treatment received by an outpatient in any service
department of a hospital. Such occasions
of service should be recorded by individual department and classified as to
emergency room, clinics or private ambulatory.
2302.12 Private Ambulatory.--Patients referred
to the provider by their private physicians to receive treatment or diagnostic
tests in one or more of the ancillary cost centers (special service cost
centers) and who do not receive any services in the clinic or the emergency
room. Such patients are sometimes
referred to as Private Referred Outpatients or Private Outpatients.
2302.13 RCCAC.--A
ratio that may be expressed as follows:
o the ratio of total beneficiary charges to total charges applied
to total costs on a departmental basis; or
o for cost reporting purposes, the ratio of total cost to total
charges applied to total beneficiary charges on a departmental basis.
2302.14 Home Health Discipline.--One of the
six visiting services covered under the Medicare home health benefit. The six services are skilled nursing,
physical therapy, speech pathology, occupational therapy, medical social
services, and home health aide. In cost
finding for home health agencies, separate per visit costs must be developed
for each of the disciplines provided.
2302.15 Home Health Visit.--A personal contact
in the place of residence of a patient made for the purpose of providing a
covered service by a health worker on the staff of the home health agency or by
others under contract or arrangement with the home health agency; or a visit by
a homebound patient on an outpatient basis to a hospital, skilled nursing
facility, rehabilitation center, or outpatient department affiliated with a
medical school when arrangements have been made by the home health agency for
the furnishing of a covered service on an outpatient basis because it requires
the use of equipment which cannot be made readily available in the home.
23-4 Rev.
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11-95 ADEQUATE COST DATA AND COST FINDING 2305
2302.16 Hospital-based Skilled Nursing Facility
Cost Centers.--Cost centers established to accumulate the routine costs
applicable to the care and treatment of those patients receiving skilled
nursing services.
2302.17 Hospital- or SNF-based Home Health Agency
Cost Centers.--Cost centers established to accumulate costs applicable to
the care and treatment of those patients receiving home health agency services.
2304. ADEQUACY OF COST INFORMATION
Cost information as developed by
the provider must be current, accurate, and in sufficient detail to support
payments made for services rendered to beneficiaries. This includes all ledgers, books, records and
original evidences of cost (purchase requisitions, purchase orders, vouchers,
requisitions for materials, inventories, labor time cards, payrolls, bases for
apportioning costs, etc.), which pertain to the determination of reasonable
cost, capable of being audited.
Financial and statistical records
should be maintained in a consistent manner from one period to another. However, a proper regard for consistency need
not preclude a desirable change in accounting procedures, provided that full
disclosure of significant change is made to the intermediary.
2304.1 Availability of Records of Providers.--A
participating provider of services must make available to its intermediary its
fiscal and other records for the purpose of determining its ongoing record
keeping capability. The intermediary's
examination of such records and documents are necessary to ascertain information
pertinent to the determination of the proper amount of program payments due the
provider. (See §2404ff.)
2305. LIQUIDATION OF LIABILITIES
A. General.--A short term liability must be liquidated within
1 year after the end of the cost reporting period in which the liability is
incurred, subject to the exceptions specified in §§2305.1 and 2305.2. Liquidation must be made by check or other
negotiable instrument, cash or legal transfer of assets such as stocks, bonds,
real property, etc. Where liquidation is made by check or other negotiable instrument,
these forms of payment must be redeemed through an actual transfer of the
provider's assets within the time limits specified in this section. Where the liability (1) is not liquidated
within the 1-year time limit, or (2) does not qualify under the exceptions
specified in §§2305.1 and 2305.2, the cost incurred for the related goods and
services is not allowable in the cost reporting period when the liability is
incurred, but is allowable in the cost reporting period when the liquidation of
the liability occurs.
B. Effective Date.--The policy for liquidation of short term
liabilities as specified in §§2305-2305.2 is effective for costs incurred
during cost reporting periods beginning on or after April 1, 1978. Any short term liabilities for costs that
exist before this effective date must be liquidated by the end of the
provider's first effective cost reporting period under this policy.
Rev. 387 23-5
2305.1 ADEQUATE COST DATA AND COST FINDING 11-95
2305.1 Exception to 1-Year Time Limit.--If,
within 1 year following the end of a provider's cost reporting period, the
provider furnishes to the intermediary sufficient written justification (based
upon documented evidence) for nonpayment of the liability, the intermediary may
grant an extension for good cause. This
extension must not extend beyond 3 years after the end of the cost reporting
period in which the liability was incurred.
Examples of valid justification, i.e., good cause, would include, but
are not limited to, insufficient cash flow, or accounting error in the receipt and processing
of bills for the cost of goods and services.
2305.2 Application and Exceptions.--The
policy for liquidation of liabilities as specified in §2305ff applies to all
costs except those described in the PRM sections listed below:
A. Section 220 - Interest paid to The Mother House or other
governing body of a religious order;
B. Section 704.5 - Members of organizations having arrangements with
provider;
C. Section 2146.2 - Reimbursement for costs of vacation;
D. Sections which mandate liquidation within 75 days after the end
of the cost reporting period in which the liability was incurred.
2306. COST FINDING METHODS
Departments within a provider are
usually divided into two types: 1) Those that produce patient care revenue
(e.g., routine services, radiology), and 2) Those that do not directly generate
patient care revenue but are utilized as a service by other departments (e.g.,
laundry and linen, dietary). The two
types of departments are commonly referred to as "revenue-producing cost
centers" and "nonrevenue-producing cost centers," respectively.
Although nonrevenue-producing
cost centers do not directly produce patient care revenue, they contribute
indirectly to patient care revenue generated by "serving" as a
service to the revenue-producing centers and also to other nonrevenue-producing
centers. Therefore, for the purpose of proper matching of revenue and expenses,
the cost of the revenue-producing centers should include both its direct expenses
and its proportionate share of the costs of each nonrevenue-producing center
(indirect costs) based on the amount of services received. The process of allocating the cost of a
particular nonrevenue-producing center to other nonrevenue-producing centers
and revenue-producing centers is performed by utilizing a set of statistics
(e.g., pounds of laundry for allocating "laundry and linen" costs,
square feet for allocating "depreciation building" costs).
Every nonrevenue-producing cost
center has the potential of being allocated to every other nonrevenue-producing
cost center in addition to the revenue-producing cost centers. This precludes a
simple allocation of the direct expense of the nonrevenue-producing cost center
because the indirect costs derived from allocation of other
nonrevenue-producing cost centers must be computed in determining the
"full cost" (direct and indirect costs) of the nonrevenue-producing
cost center being allocated. All cost finding
methods employ this computation in determining the full costs of departments.
23-6 Rev.
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08-86 ADEQUATE COST DATA AND COST FINDING 2306.2
One of the methods of cost
finding described in §§2306 or 2310 must be used to determine the actual costs
of services rendered during the provider's initial Medicare cost reporting
period. (See
§2312 for conditions under which a provider may change cost finding
methods.) However, free-standing home
health agencies must use the step-down method, and may not change methods. (See §2308.)
2306.1 Step-Down Method.--This method
recognizes that services rendered by certain nonrevenue-producing departments
or centers are utilized by certain other nonrevenue-producing centers, as well
as by the revenue-producing centers. All
costs of nonrevenue-producing centers are allocated to all centers which they
serve, regardless of whether these centers produce revenue. The cost of the nonrevenue-producing center
serving the greatest number of other centers is allocated first. Following the allocation of the cost of the
nonrevenue-producing center, that center will be considered "closed"
and no further costs are allocated to that center. This applies even though it may have received
some services from a center whose cost is allocated later. Generally, when two centers render service to
an equal number of centers while receiving benefits from an equal number, that
center which has the greatest amount of expense should be allocated first.
2306.2 Double-Apportionment Methods.--The
double-apportionment method
may be used by a provider (other than a
free-standing home health agency - see §2308) upon approval of the
intermediary. This approval pertains to
the use of the methodology, not to the use of a substitute cost report (see
HCFA Pub. 15-II, §108ff) generated through a computer system.
This method also recognizes that
services rendered by certain nonrevenue-producing departments or centers are
utilized by certain other nonrevenue-producing centers, as well as by the
revenue-producing centers. The first
allocation of the costs of the nonrevenue-producing centers is made to all cost
centers serviced by these centers. These centers are not "closed"
after the first allocation. They remain
"open" accumulating their portion of the costs of all other
nonrevenue-producing centers from which service is received. The first allocation is followed by a second
allocation of costs involving the allocation of all costs remaining in the
nonrevenue-producing centers. The second
allocation equates to the step-down method of cost allocation.
A. Double-Apportionment - Accumulative.--This method of
double-apportionment cost finding allocates the direct and indirect costs of
the nonrevenue-producing centers during the first allocation. The cost of the nonrevenue-producing center
is allocated to all cost centers which receive service from that center
(including itself if it provides service to itself) during the first
allocation. The second allocation
allocates the costs received during the first allocation in the same manner as
the step-down cost finding method. The
statistics used in the second allocation are the same as the statistics used in
the first allocation except for (a) accumulated cost which is used as the
recommended basis for allocating the cost of the administrative and general
cost center, and (b) elimination of the statistics of the "closed"
cost centers.
B. Double-Apportionment - Nonaccumulative.--This
method of double-apportionment cost finding allocates only the direct cost of
the nonrevenue-producing centers during the first allocation. The direct costs are allocated to all
centers receiving service
Rev. 336 23-7
2306.3 ADEQUATE COST DATA AND COST FINDING 08-86
(including
itself if it provides service to itself) during the first allocation. The second allocation allocates the indirect
costs received during the first allocation in the same manner as step-down cost
finding. The statistics used in the
second allocation are the same as the statistics used in the first allocation
except for (a) accumulated cost which is used as the recommended basis for
allocating the administrative and general cost center, and (b) the elimination
of the statistics for "closed" cost centers.
2306.3 Multiple-Apportionment.--The
multiple-apportionment method may be used by a provider (other than a
free-standing home health agency - see §2308) upon approval of the
intermediary. This approval pertains to
the use of the methodology, not to the use of the substitute cost report (see
HCFA Pub. 15-II, §108ff) generated through a computer system. The approval also pertains to the number
of allocations when the multiple apportionment method of cost finding is
selected.
This method of cost finding
allocates the cost of the nonrevenue-producing centers in the same manner as
the double-apportionment methods described in §2306.2, except that the number
of allocations is determined by the user.
For example: A user elects five allocations under multiple-apportionment
method of cost finding. Allocations one
through four are identical to the first allocation described in the
double-apportionment methodologies in §2306.2.
The fifth allocation is identical to the second allocation described in
the double-apportionment methodologies.
A. Multiple-Apportionment-Accumulative.--See §2306.2A.
B. Multiple-Apportionment-Nonaccumulative.--See §2306.2B.
2307. DIRECT ASSIGNMENT
OF GENERAL SERVICE COSTS
The costs of a general
service cost center need to be allocated to the cost centers receiving service
from that cost center. This allocation
process is usually made, for Medicare cost reporting purposes, through cost
finding using a statistical basis that measures the benefit received by each
cost center. Alternatives to cost
finding as described below may be used where appropriate after obtaining
intermediary approval. The provider must make a written request to its
intermediary and submit reasonable justification for approval of the change no
later than 90 days prior to the beginning of the cost reporting period for
which the change is to apply. The
intermediary must respond in writing to the provider's request, whether
approving or denying the request, prior to the beginning of the cost reporting
period to which the change is to apply.
When the request is
approved, the change must be applied to the cost reporting period for which the
request was made, and to all subsequent cost reporting periods unless the
intermediary approves a subsequent request for a change by the provider. The effective date of the change will be the
beginning of the cost reporting period for which the request has been made.
A. Direct Assignment of Cost.--Direct
assignment of cost is the process of assigning directly allocable costs of a
general service cost center (see §2302.9) to all cost centers receiving service
from that cost center based upon actual auditable usage. Hours worked by hourly wage or metered
utility consumption are examples of measures of actual usage. Estimates, including a statistical surrogate
such as square feet, are not acceptable.
Time studies are considered statistical surrogates and, thus, may not be
used
23-8 Rev.
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08-86 ADEQUATE COST DATA AND COST FINDING 2307 (Cont.)
as a basis for direct
assignment of costs. Indirectly
allocable supervision costs, other
indirectly allocable costs (hereinafter, residual costs) and costs allocated
from previously allocated general service cost centers (hereinafter, overhead
costs) must not be directly assigned to the using cost centers, but must be
allocated through cost finding.
Note: This subsection describes direct
assignment of general service costs on the provider's accounting records and is
distinguished from the allocation of direct salary and wage costs as described
in §2313.2E.
The direct assignment
of costs must be made as part of the provider's accounting system with costs
recorded in the ongoing normal accounting process. This means costs are to be recorded on a
regular basis throughout the accounting period, not only as period ending
adjusting entries. For example, if the
costs being directly assigned are an element of payroll costs, the direct
assignment should be recorded as often as all payroll costs are recorded
(usually each pay period). If a provider
fails to maintain the records as specified in its request and as a basis for
the intermediary's approval, no direct assignment of cost is allowed for the
cost reporting period and a new request must be initiated for any future direct
assignment of cost.
Examples of acceptable
direct assignment of cost to benefiting cost centers are salaries paid to
housekeeping staff directly assigned, based on time records of housekeeping
maintained throughout the cost reporting period; purchased laundry and linen
costs directly assigned, based on invoices which identify the cost for each
benefiting cost center; and depreciation on movable equipment physically
present or used in each of the cost centers.
The following
conditions must be met before Medicare will accept direct assignment for cost
reporting purposes:
1. All costs within the general service cost
center which can be directly allocated must be assigned to the benefiting cost
centers as part of the provider's routine accounting process.
2. Any indirect supervision and residual costs
remaining in the cost center together with any previously allocated overhead
must be allocated through cost finding to all remaining benefiting cost
centers.
3. The basis for assigning directly allocable
costs of a general service cost center to the benefiting cost centers must be
on a factual and auditable basis. This
precludes the use of averages, estimates or statistical surrogates such as
square feet. For example, the assignment
of actual housekeeping salaries by each employee based on actual hours worked
in the benefiting cost centers is acceptable, whereas the use of the surrogate,
square feet, is inappropriate for direct assignment.
4. The basis of allocation for cost finding
any indirect supervisory costs, residual costs and allocated overhead must be
an appropriate measure of the benefits provided to the remaining cost
centers. Any deviation from the
allocation basis prescribed for cost finding must be reviewed and approved by
the intermediary in advance as part of the provider's request for direct
assignment of costs.
Rev. 336 23-9
2307 (Cont.) ADEQUATE COST DATA AND COST
FINDING 08-86
B. Direct Assignment of Costs to Provider
Components.--In some cases, providers may only be able to directly assign
costs of a general service cost center by subdividing existing cost centers
and, in turn, allocating costs via cost finding for the benefiting cost centers
within each of the specific general service cost centers.
For example, a provider
may have two buildings of differing ages and
depreciation related to each can be factually ascertained. Each building would become a general service
cost center and the allocation to the cost centers within each would be
separately accomplished using an appropriate statistical basis such as square
feet. Another example could be the
separate metering of utilities for each building within a health care complex:
separate general service cost centers for each building would be established
and utility cost would be directly assigned to the using building based on
actual bills incurred during the reporting period. Statistical allocations to benefiting cost
centers within each building would be required.
To accommodate
additional general service cost centers, the provider must add additional
columns to the allocation worksheets, or attach a supporting worksheet with
similar information, to document the step-down of costs to those cost centers
benefiting from the general service cost centers. Any modifications necessary to worksheets
after the cost allocation must also be approved by the intermediary as part of
the request for direct assignment of costs.
For determining nonallowable costs applicable to the nonpaid workers cost
center, the analysis set forth at §707.2 would still be required.
23-10 Rev.
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08-86 ADEQUATE COST DATA AND COST FINDING
2307 (Cont.)
Example of Component
Allocation: Building Depreciation
There are two buildings
housing the hospital and the SNF, built in 1950 and 1975, respectively. Annual depreciation is $100,000 for the
hospital and $50,000 for the SNF. (The cost centers are not all-inclusive and
are shown to illustrate the principle.)
Hospital SNF Total
Statistic Cost Statistic Cost Cost
(Sq. Feet) (Sq. Feet)
Admin. & Gen. 25,000 10,000 10,000
Operation of Plant 75,000 30,000 30,000
Dietary 10,000
4,000 4,000
Radiology 20,000
8,000 8,000
Laboratory 12,500
5,000 5,000
Adult & Ped. 100,000 40,000 40,000
Special Care 7,000 2,800 2,800
SNF-Certified*
70,000 35,000 35,000
SNF-Noncertified*
30,000 15,000 15,000
Gift Shop 500 200 200
250,000 100,000 100,000 50,000 150,000
Unit Cost Multipliers .400 .500
*Routine Only
Rev. 336 23-11
2307
(Cont.)
ADEQUATE COST DATA AND COST
FINDING 08-86
Example of Component
Allocation: Utilities
In addition to the
facts in the prior example, the provider has established, in accordance with
§§2302.8 and 2313.1, a unique cost center called "Utilities." The cost center is used to accumulate the
cost of all utilities. The cost center
includes electricity costs of $200,000 ($45,000 is separately metered and
applies to the SNF). In addition, other
utilities, not separately metered, total $400,000. Overhead allocated from other cost centers
totals $100,000. There are no
supervisory costs in this cost center.
Electricity Other
Utilities Overhead
Hospital SNF
Stat. Cost Stat. Cost Stat. Cost Stat. Cost
(Sq.Ft.) (Sq.Ft.) (Sq.Ft.) (Cost) Total
A&G 25,000 15,500 25,000 28,571 44,071 7,345 51,416
Operation of Plant 75,000 46,500 75,000 85,714 132,214 22,036 154,250
Dietary 10,000 6,200 10,000 11,429 17,629 2,938 20,567
Radiology 20,000 12,400 20,000 22,857 35,257 5,876 41,133
Laboratory 12,500 7,750 12,500 14,286 22,036 3,673 25,709
Adult & Ped. 100,000 62,000 100,000 114,286 176,286 29,381 205,667
Special Care 7,000 4,340 7,000 8,000 12,340 2,057 14,397
SNF-Certified * 70,000 31,500 70,000 80,000 111,500 18,583 130,083
SNF-Noncertified * 30,000 13,500 30,000 34,286 47,786 7,964 55,750
Gift Shop
500 310
500 571 881 147 1,028
250,000 155,000 100,000 45,000 350,000 400,000 600,000 100,000 700,000
Unit Cost Multipliers .62 .45 1.142857 .166667
*Routine Only
3-12 Rev.
336