CHAPTER 21 COST RELATED TO PATIENT CARE Section General

CHAPTER 21

COST RELATED TO PATIENT CARE

Section

General

Principle ...................................................................................................................... 2100

Definitions................................................................................................................... 2102

Reasonable Costs .................................................................................................. 2102.1

Costs Related to Patient Care ................................................................................ 2102.2

Costs Not Related to Patient Care ......................................................................... 2102.3

Donations to a Provider of Produce, Supplies, Space, Etc ................................... 2102.4

Prudent Buyer ............................................................................................................. 2103

Costs Not Allowable

Unallowable Costs Related to Patient Care ................................................................ 2104

Ambulance Service ............................................................................................... 2104.1

Private-Duty Personnel ......................................................................................... 2104.2

Luxury Items or Services ...................................................................................... 2104.3

Dental Services ..................................................................................................... 2104.4

Vocational and Scholastic Training Expense........................................................ 2104.5

Unallowable Costs Not Related to Patient Care ......................................................... 2105

Noncompetition Agreement Costs ........................................................................ 2105.1

Cost of Meals for Other Than Provider Personnel ................................................ 2105.2

Cost of Reserving Beds or Services ...................................................................... 2105.3

Costs of Unsuccessful Beneficiary Appeals ......................................................... 2105.4

Costs of Management Employee Meals ................................................................ 2105.5

Costs of Employee Travel ..................................................................................... 2105.6

Costs of Gifts or Donations................................................................................... 2105.7

Costs of Entertainment .......................................................................................... 2105.8

Costs of Employees’ Personal Use of Motor Vehicles ......................................... 2105.9

Costs of Fines or Penalties .................................................................................... 2105.10

Costs of Spousal or Dependents Education .......................................................... 2105.11

Telephone, Television, and Radio Costs

Costs of Telephone, Television, and Radio ................................................................ 2106

General .................................................................................................................. 2106.1

Combination Purpose Systems ............................................................................. 2106.2

Parking Lot Costs

Parking Lot Costs ........................................................................................................ 2107

General .................................................................................................................. 2107.1

Treatment of Parking Revenue ............................................................................. 2107.2

Provider-Based Physician Services

Reimbursement for Services by Provider-Based Physicians ...................................... 2108

Professional and Provider Components ................................................................ 2108.1

Compensation Arrangements ................................................................................ 2108.2

Methods Used to Determine the Reasonable Charge of Provider-Based

Physicians........................................................................................................... 2108.3

Schedule of Charges.............................................................................................. 2108.4

Rev. 454 21-1

COSTS RELATED TO PATIENT CARE

Section

Effect of Physician's Assumption of Operating Costs (Lease or Concession

Arrangement) ...................................................................................................... 2108.5

Duties and Responsibilities of Provider and Intermediary in the Area of

Provider-Based Physician Reimbursement ........................................................ 2108.6

Retroactive Adjustment of Certain Provider-Based Physician Payments ............. 2108.7

Reimbursement for Provider-Based Physicians' Administrative, Teaching, and

Direct Medical Care Services Where the Physicians Have Changed Their

Compensation Arrangements With the Provider ............................................... 2108.8

Reimbursement for the Services of Provider-Based Physicians Compensated

Through the Provider and the Provider Bills the Program Under Combined

Billing (on Forms SSA-l453 or l483) or on Form SSA-l554 ............................. 2108.9

Treatment of Provider Costs Related to the Provision of Physician Services

to Nonprovider Patients ..................................................................................... 2108.10

Exhibits - Provider-Based Physicians ................................................................... 2108.11

Emergency Department Services

Reimbursement of Hospital Emergency Department Services When Physicians

Receive Compensation For Availability Services.................................................... 2109

General .................................................................................................................. 2109.1

Definitions............................................................................................................. 2109.2

Allowability of Emergency Department Physician Availability Services Costs .. 2109.3

Methodology for Determining Allowable Emergency Physician Availability

Service Costs ...................................................................................................... 2109.4

Billing Costs

Billing Costs................................................................................................................ 2110

Contract Billing Services ...................................................................................... 2110.1

Treatment of Income Derived From Interest, Finance Charges, and

Penalties on Delinquent Accounts Receivable................................................... 2110.2

Treatment of Income Derived From Billing Charges Imposed on Suppliers of

Services Furnished Under Arrangements........................................................... 2110.3

Physician Billing Costs ......................................................................................... 2110.4

Nonphysician Anesthetists' Services

Nonphysician Anesthetists' Services as Hospital Services ......................................... 2112

Home Health Services

Home Health Coordination (or Home Care Intake Coordination) Costs - General .... 2113

Home Health Coordination Activities .................................................................. 2113.1

Patient Solicitation Activities ............................................................................... 2113.2

Discharge Planning-Type Activities ..................................................................... 2113.3

Education and Liaison Activities .......................................................................... 2113.4

Home Health Coordination in the Provider-Based HHA ...................................... 2113.5

Visiting Costs of HHAs .............................................................................................. 2114

Nonowners Compensation .................................................................................... 2114.1

Transportation Costs ............................................................................................. 2114.2

Treatment of Medical Supply Costs in HHAs ............................................................ 2115

Non-Visiting Costs of HHAs ...................................................................................... 2116

Contracted Services Purchased by HHA ..................................................................... 2117

21-1.1 Rev. 454

COSTS RELATED TO PATIENT CARE

Section

Services Furnished under Arrangements

Cost of Services Furnished Under Arrangements ...................................................... 2118

Payment to the Provider ....................................................................................... 2118.1

Services Furnished Under Arrangements for

Medicare Beneficiaries Only ............................................................................. 2118.2

Cost of Drugs and Related Medical Supplies ............................................................ 2119

Services of Interns and Residents

Reimbursement for Costs of Interns and Residents ................................................... 2120

Taxes

Taxes .......................................................................................................................... 2122

General Rule ........................................................................................................ 2122.1

Taxes Not Allowable as Costs ............................................................................. 2122.2

Employment-Related Taxes - Provider-Based

Physicians.......................................................................................................... 2122.3

Franchise Taxes ................................................................................................... 2122.4

Unemployment Compensation Insurance Costs for

Nonprofit Providers Under Public Law 91-373 ................................................ 2122.5

Self-Insurance Program for Unemployment

Compensation and Worker's Compensation

Insurance Using a Reserve for Funding ............................................................ 2122.6

Review of Reasonable Costs, Including Taxes…………………………………… 2122.7

Oxygen

Oxygen ....................................................................................................................... 2124

Blood

Blood .......................................................................................................................... 2125

Utilization Review Costs

Utilization Review ..................................................................................................... 2126

Utilization Review in Hospitals ........................................................................... 2126.1

Utilization Review in Skilled Nursing Facilities ................................................. 2126.2

Community-Based Utilization Review Committee ............................................. 2126.3

Utilization Review Cost; Provider Payment to

Physicians for Rendering Utilization Review Services .................................... 2126.4

HHA Advisory Group

Home Health Agency Advisory Group of Professional Personnel ............................ 2127

Training Costs

Orientation and On-the-Job-Training......................................................................... 2128

Insurance Premiums

Life Insurance Premiums ........................................................................................... 2130

Rev. 448 21-1.2

COST RELATED TO PATIENT CARE

Section

Start-Up Costs

Start-Up Costs ............................................................................................................ 2132

General ................................................................................................................. 2132.1

Applicability......................................................................................................... 2132.2

Cost Treatment for Medicare Reimbursement ..................................................... 2132.3

Sale of Institution ................................................................................................. 2132.4

Withdrawal From Program .................................................................................. 2132.5

Effect on Equity Capital ....................................................................................... 2132.6

Organization Costs

Organization and Other Corporate Costs ................................................................... 2134

Organization Costs - General ............................................................................... 2134.1

Cost Treatment of Organization Costs

Under Medicare................................................................................................. 2134.2

Amortization Period of 60 Months ...................................................................... 2134.3

Amortization Period Less Than 60 Months ......................................................... 2134.4

Amortization Period Greater Than 60 Months .................................................... 2134.5

Sale of Institution ................................................................................................. 2134.6

Withdrawal From Program .................................................................................. 2134.7

Effect on Equity Capital ....................................................................................... 2134.8

Stockholder Servicing Costs ................................................................................ 2134.9

Reorganization Costs ........................................................................................... 2134.10

Transfer of Assets to a Corporation ..................................................................... 2134.11

Purchased Management and Administrative Support Services

Purchased Management and Administrative Support Services ................................. 2135

General ................................................................................................................. 2135.1

Evaluation of the Need for Purchased

Management and Administrative Support

Services ............................................................................................................. 2135.2

Determination of the Reasonable Cost of

Purchased Management and Administrative

Support Services ............................................................................................... 2135.3

Factors to Be Considered in Determining

Reasonable Cost of Purchased Management

and Administrative Support Services ................................................................ 2135.4

Documentation to Support Purchased

Management and Administrative Support Services .......................................... 2135.5

Advertising Costs

Advertising Costs - General ....................................................................................... 2136

Allowable Advertising Costs ............................................................................... 2136.1

Unallowable Advertising Costs ................................................................................. 2136.2

Membership Costs

Membership Costs - General ..................................................................................... 2138

Professional, Technical, or Business Related Organizations ............................... 2138.1

Civic Organizations ............................................................................................. 2138.2

Social, Fraternal, and Other Organizations .......................................................... 2138.3

21-1.3 Rev.448

COST RELATED TO PATIENT CARE

Section

Reasonableness of Provider's Participation in

Approved Membership Activities ..................................................................... 2138.4

Political and Lobbying Activities

Political and Lobbying Activities............................................................................... 2139

Provider Political Activities ................................................................................. 2139.1

Provider Lobbying Activities ............................................................................... 2139.2

Organization Dues Related to Lobbying and Political

Activities ........................................................................................................... 2139.3

Deferred Compensation

Deferred Compensation ............................................................................................. 2140

Definition ............................................................................................................. 2140.1

Foreword .............................................................................................................. 2140.2

Formal Plan .......................................................................................................... 2140.3

Requirements to Fund Plan .................................................................................. 2140.4

Reimbursement of Hospital-Based Physician

Patient Care Services ........................................................................................ 2140.5

Guarantee Arrangements for Physician Emergency Room Services ................... 2140.6

Defined Contribution Deferred Compensation Plans

Defined Contribution Deferred Compensation Plans ................................................ 2141

Definition ............................................................................................................. 2141.1

Foreword .............................................................................................................. 2141.2

Formal Plan .......................................................................................................... 2141.3

Requirements to Fund Plan .................................................................................. 2141.4

Reimbursement of Hospital-Based Physician Patient Care Services ................... 2141.5

Guarantee Arrangements for Physician Emergency Room Services ................... 2141.6

Effective Date ...................................................................................................... 2141.7

Pension Plans

Pension Plans ............................................................................................................. 2142

Definition ............................................................................................................. 2142.1

Section number reserved for future use……………………………………………. .. 2142.2

Section number reserved for future use ............................................................... 2142.3

Section number reserved for future use ............................................................... 2142.4

Pension Costs ....................................................................................................... 2142.5

Allowability of Payments ..................................................................................... 2142.6

Section number reserved for future use ............................................................... 2142.7

Fringe Benefits

Fringe Benefits ........................................................................................................... 2144

Definition ............................................................................................................. 2144.1

Purpose ................................................................................................................. 2144.2

Requirements for Recognition of Fringe Benefits ............................................... 2144.3

Fringe Benefits Includable as Provider's Cost ..................................................... 2144.4

Fringe Benefits Includable in Determining

Provider-Based Physician's Compensation ....................................................... 2144.5

Specific Costs Not Classified as Fringe Benefits……………………………… ...... 2144.6

Rev. 461 21-1.4

COSTS RELATED TO PATIENT CARE

Section

Accounting for Fringe Benefits ............................................................................ 2144.7

Sick Leave ............................................................................................................ 2144.8

All-Inclusive Paid Days Off ................................................................................. 2144.9

Cost of Meals for Provider Personnel ........................................................................ 2145

Vacation Costs

Vacation Costs ........................................................................................................... 2146

Definition ............................................................................................................. 2146.1

Reimbursement for Costs of Vacation ................................................................. 2146.2

Exception to the Requirement to Account for

Vacation Costs on the Accrual Method ............................................................ 2146.3

Conversion from Cash Method to Accrual Method

for Vacation ...................................................................................................... 2146.4

Bilingual Service Costs

Bilingual Services ...................................................................................................... 2147

Cost of Physicians' Services in Teaching Hospitals

Reimbursement for Physicians' Services Rendered

in a Teaching Hospital by Physicians on the

Hospital Staff and Reimbursement for Services Rendered

in a Teaching Hospital by the Faculty of a Medical

School or Organization Related Thereto - General ................................................. 2148

Reasonable Cost of Direct Medical and

Surgical Services Rendered by Physicians

on the Hospital Staff in the Care of

Individual Patients (Including Supervision

of Interns and Residents Rendering Such

Services) ............................................................................................................ 2148.1

Reasonable Costs Incurred by a Teaching

Hospital for the Services Rendered by a

Medical School or Related Organization in the Hospital ................................. 2148.2

"Salary Equivalent" Payments for Direct

Medical and Surgical Services in the Care

of Individual Patients (Including Supervision of

Interns and Residents Rendering Such Care) by

Physicians on the Voluntary Staff of the

Hospital (or Medical School or Organization Related Thereto) ....................... 2148.3

Allocation of Compensation Paid to

Physicians in a Teaching Hospital .................................................................... 2148.4

Election to Receive Medicare Reimbursement

on a Reasonable Cost Basis .............................................................................. 2148.5

Home Office Costs

Home Office Costs - Chain Operations ..................................................................... 2150

General Limitation on Allowability of Costs ....................................................... 2150.1

Determination of Allowable Costs ....................................................................... 2150.2

Allocation of Home Office Costs to Components

in Chain ............................................................................................................. 2150.3

21-2 Rev. 461

COSTS RELATED TO PATIENT CARE

Section

Home Office Equity Capital .............................................................................................. 2152

Computation ................................................................................................................. 2152.1

Exclusions .................................................................................................................... 2152.2

Allocation of Home Office Equity Capital .................................................................. 2152.3

Reporting of Home Office Costs and Equity Capital......................................................... 2153

Planning Costs

Planning Costs ................................................................................................................... 2154

General ......................................................................................................................... 2154.1

Definitions.................................................................................................................... 2154.2

Planning Costs Where Facility is Completed .............................................................. 2154.3

Planning Costs Where Plans are Abandoned ............................................................... 2154.4

Abandonment of Construction

Abandonment of Construction-In-Progress ....................................................................... 2155

Support Services Furnished to Governmental Providers

Allowable Costs of Governmental Support Services to

State and Local Governmental Providers ........................................................................ 2156

Unallowable Central Service Costs ............................................................................. 2156.1

Allocation Bases .......................................................................................................... 2156.2

Reporting Requirements .............................................................................................. 2156.3

Losses (Other Than From Sale of Assets)

Losses Arising from Other Than Sale of Assets ................................................................ 2160

Net Operating Losses ................................................................................................... 2160.1

Liability Losses ............................................................................................................ 2160.2

Theft Losses ................................................................................................................. 2160.3

Minor Losses ................................................................................................................ 2160.4

Casualty Losses - General ............................................................................................ 2160.5

Insurance Costs .................................................................................................................. 2161

Cost of Protection Against Malpractice Liability

Provider Costs for Malpractice and Comprehensive

General Liability Protection, Unemployment

Compensation, Workers' Compensation, and Employee

Health Care Insurance ..................................................................................................... 2162

Insurance with a Deductible or Coinsurance Provision ............................................... 2162.1

Insurance Purchased from a Limited Purpose

Insurance Company ................................................................................................... 2162.2

Self-Insurance .............................................................................................................. 2162.3

Allowability of Actual Losses Related to

Deductibles or Coinsurance ...................................................................................... 2162.5

Losses in Excess of Coverage ...................................................................................... 2162.6

Conditions Applicable to Self-Insurance ..................................................................... 2162.7

Expenses Related to Losses Paid Out of Self-

Insurance Fund .......................................................................................................... 2162.8

Rev. 406 21-2.1

COSTS RELATED TO PATIENT CARE

Section

Reimbursement Principles Where a Provider

Has Self-Insurance .................................................................................................... 2162.9

Treatment of Excess Reserves ..................................................................................... 2162.10

Effective Date and Retroactive Application ................................................................ 2162.11

Buy-Out Cost to Convert From a State- Administered Fund to a Self-Insurance

Fund for Unemployment Compensation or Workers' Compensation Insurance....... 2162.12

Absence of Coverage ................................................................................................... 2162.13

Governmental Providers .............................................................................................. 2162.14

Post-Termination Administrative Costs

Administrative Costs Incurred After Provider Terminates Participation in Program ........ 2176

Allowable Direct Administrative Costs To Be Included in Final Cost Report ............ 2176.1

Allowable Direct Administrative Costs Incurred After Final Cost Report Is Filed ..... 2176.2

Costs Related to Union Activities

Reimbursement for Costs Incurred in Relation to Union Activities .................................. 2180

Labor Union Organizing Activities .............................................................................. 2180.1

Collective Bargaining .................................................................................................. 2180.2

Unallowable or Allowable But Not Reasonable Costs in Relation to

Union Activities ........................................................................................................ 2180.3

Physician Services Furnished in Providers

Services of Physicians in Providers ................................................................................... 2182

General ......................................................................................................................... 2182.2

Allocation of Physician Compensation ........................................................................ 2182.3

Conditions for Reasonable Charge Payment for "Physicians' Services" to

Patients in Providers ................................................................................................. 2182.4

Determining Reasonable Charges for "Physicians' Services" in Providers ................. 2182.5

Conditions of Payment for Costs of Physicians' Services to Providers ....................... 2182.6

Conditions for Payment of Charges - Anesthesiology Services .................................. 2182.7

Determining Reasonable Charges for Anesthesia Services ......................................... 2182.8

Conditions for Payment of Reasonable Charges - Radiology Services ....................... 2182.9

Determining Reasonable Charges for Radiology Services .......................................... 2182.10

Conditions for Payment of Charges - Physician Laboratory Services ......................... 2182.11

Blood Gas Studies ........................................................................................................ 2182.12

Exhibits ........................................................................................................................ 2182.13

Appendix

Maximum Allowable Cost Limitation (MAC) Determinations for Drugs ........................

21-2.2 Rev. 406

09-12 COSTS RELATED TO PATIENT CARE 2102.3

2100. PRINCIPLE

All payments to providers of services must be based on the reasonable cost of services covered

under title XVIII of the Act and related to the care of beneficiaries or, in the case of acute care

hospitals, the prospective payment system (PPS). (See Chapter 28 on PPS.) Reasonable cost

includes all necessary and proper costs incurred in rendering the services, subject to principles

relating to specific items of revenue and cost.

2102. DEFINITIONS

2102.1 Reasonable Costs.--Reasonable costs of any services are determined in accordance with

regulations establishing the method or methods to be used, and the items to be included.

Reasonable cost takes into account both direct and indirect costs of providers of services,

including normal standby costs. The objective is that under the methods of determining costs,

the costs for individuals covered by the program are not borne by others not so covered and the

costs for individuals not so covered are not borne by the program.

Costs may vary from one institution to another because of scope of services, level of care,

geographical location, and utilization. It is the intent of the program that providers are

reimbursed the actual costs of providing high quality care, regardless of how widely they may

vary from provider to provider, except where a particular institution's costs are found to be

substantially out of line with other institutions in the same area which are similar in size, scope of

services, utilization, and other relevant factors. Utilization, for this purpose, refers not to the

provider's occupancy rate but rather to the manner in which the institution is used as determined

by the characteristics of the patients treated (i.e., its patient mix - age of patients, type of illness,

etc.).

Implicit in the intention that actual costs be paid to the extent they are reasonable is the

expectation that the provider seeks to minimize its costs and that its actual costs do not exceed

what a prudent and cost-conscious buyer pays for a given item or service. (See §2103.) If costs

are determined to exceed the level that such buyers incur, in the absence of clear evidence that

the higher costs were unavoidable, the excess costs are not reimbursable under the program.

In the event that a provider undergoes bankruptcy proceedings, the program makes payment to

the provider based on the reasonable or actual cost of services rendered to Medicare beneficiaries

and not on the basis of costs adjusted by bankruptcy arrangements.

2102.2 Costs Related to Patient Care.--These include all necessary and proper costs which are

appropriate and helpful in developing and maintaining the operation of patient care facilities and

activities. Necessary and proper costs related to patient care are usually costs which are common

and accepted occurrences in the field of the provider's activity. They include personnel costs,

administrative costs, costs of employee pension plans, normal standby costs, and others.

Allowability of costs is subject to the regulations prescribing the treatment of specific items

under the Medicare program.

2102.3 Costs Not Related to Patient Care.--Costs not related to patient care are costs which are

not appropriate or necessary and proper in developing and maintaining the operation of patient

care facilities and activities. Costs which are not necessary include costs which usually are not

common or accepted occurrences in the field of the provider's activity.

Such costs are not allowable in computing reimbursable costs and include, for example:

o Cost of meals sold to visitors;

o Cost of drugs sold to other than patients;

o Cost of operation of a gift shop;

Rev. 454 21-2.5

2103 COSTS RELATED TO PATIENT CARE 09-12

o Cost of alcoholic beverages furnished to employees or to others regardless of how

or where furnished, such as cost of alcoholic beverages furnished at a provider picnic or

furnished as a fringe benefit;

o Cost of gifts or donations;

o Cost of entertainment, including tickets to sporting and other entertainment

events;

o Cost of personal use of motor vehicles;

o Cost of fines or penalties resulting from violations of Federal, State, or local laws;

o Cost of educational expenses for spouses or other dependents of providers of

services, their employees or contractors, if they are not active employees of the provider or

contractor;

o Cost of meals served to executives that exceed the cost of meals served to

ordinary employees due to the use of separate executive dining facilities (capital and capital-

related costs), duplicative or additional food service staff (chef, waiters/waitresses, etc.),

upgraded or gourmet menus, etc.; and

o Cost of travel incurred in connection with non-patient care related purposes.

2102.4 Donations to a Provider of Produce, Supplies, Space, Etc.--If a provider receives a

donation of produce, supplies, the use of space owned by another organization, etc., the provider

may not properly impute a cost for the value of the donations and include the imputed cost in

allowable costs. If an imputed cost has been included in the provider's costs, that amount is

deleted in determining allowable costs. If the provider and donor organization are both part of a

larger organizational entity, such as units of a state or county government, costs related to the

donations are includable in the allowable costs of the provider. For example, if a county home

health agency is given space to use in the county office building, costs related to that space may

be included in the agency's costs, e.g., depreciation, costs of janitorial services, maintenance and

repairs.

21-2.6 Rev. 454

09-12 COSTS RELATED TO PATIENT CARE 2103

2103. PRUDENT BUYER

A. General.--The prudent and cost-conscious buyer not only refuses to pay more than the

going price for an item or service, he/she also seeks to economize by minimizing cost. This is

especially so when the buyer is an institution or organization which makes bulk purchases and

can, therefore, often gain discounts because of the size of its purchases. In addition, bulk

purchase of items or services often gives the buyer leverage in bargaining with suppliers for other

items or services. Another way to minimize cost is to obtain free replacements or reduced

charges under warranties for medical devices. Any alert and cost-conscious buyer seeks such

advantages, and it is expected that Medicare providers of services will also seek them.

B. Application of Prudent Buyer Principle.--Intermediaries may employ various means for

detecting and investigating situations in which costs seem excessive. Included may be such

techniques as comparing the prices paid by providers to the prices paid for similar items or

services by comparable purchasers, spot-checking, and querying providers about indirect, as well

as direct, discounts. In addition, where a group of institutions has a joint purchasing arrangement

which seems to result in participating members getting lower prices because of the advantages

gained from bulk purchasing, any potentially eligible providers in the area which do not

participate in the group may be called upon to justify any higher prices paid. Also, when most of

the costs of a service are reimbursed by Medicare (for example, for a home health agency which

treats only Medicare beneficiaries), examine the costs with particular care. In those cases where

an intermediary notes that a provider pays more than the going price for a supply or service or

does not try to realize savings available under warranties for medical devices or other items, in

the absence of clear justification for the premium, the intermediary excludes excess costs in

determining allowable costs under Medicare.

Rev. 454 21-2.7

2102.4 COSTS RELATED TO PATIENT CARE 09-12

C. Examples of Application of Prudent Buyer Principle.--

1. Provider A consistently purchases supplies from supplier R and makes no effort to

obtain the most advantageous price for its supplies.

21-2.8 Rev. 454

07-96 COSTS RELATED TO PATIENT CARE 2104.1

Supplier W sells identical or equivalent supplies at a lower cost and is also convenient to A.

Unless the provider can clearly justify its practice of purchasing supplies from R rather than W,

the intermediary excludes any excess of R's charges over W's charges.

2. Supplier L supplies drugs to skilled nursing facility B and rents space from B to

store the drugs to be used there. The rental paid by L to B for the space would generally

constitute an indirect discount on the cost of drugs and must be reflected as a reduction of the

cost of drugs supplied.

3. Dr. C, a hospital-based radiologist, purchases radiology equipment which he then

leases to the provider where he is a staff member. Costs to the provider in this case are higher

than if the equipment had been leased through competitive bidding from an outside source. The

intermediary reimburses the provider only for those costs which a prudent and cost conscious

buyer would pay. Therefore, those costs which the provider pays for the equipment leased from

the staff radiologist which are in excess of costs for equivalent equipment obtained through

competitive bidding are denied.

4. Provider B purchases cardiac pacemakers or their components for use in replacing

malfunctioning or obsolete equipment, without asking the supplier/manufacturer for full or

partial credits or payments available under the terms of the warranty covering the replaced

equipment. The credits or payments that could have been obtained must be reflected as a

reduction of the cost of the equipment supplied.

2104. UNALLOWABLE COSTS RELATED TO PATIENT CARE

2104.1 Ambulance Service.--Ambulance service is covered under Part B of the Medicare

program. A provider may furnish ambulance service directly or it may furnish the service under

arrangements with a supplier of ambulance services. The cost the provider incurs to furnish am-

bulance service is paid by Medicare on a reasonable cost basis.

If a provider furnishes ambulance services with its own equipment and staff, the cost it incurs

(depreciable cost of equipment, supplies, employee compensation, overhead, etc.) is its cost of

the service for Medicare payment purposes. If it furnishes the service under arrangements, the

charge to the provider by the ambulance company becomes the provider's direct cost of furnish-

ing the service.

Medicare Part B carriers have established reasonable charge screens for a wide range of

ambulance services furnished by suppliers of ambulance services for which claims are billed to

the carriers. Medicare expects that the costs incurred by a provider for ambulance services

furnished under arrangement with a supplier of ambulance services will not exceed the amount a

carrier would pay the ambulance supplier for the same service. Therefore, if a provider furnishes

ambulance service under arrangements, to the extent the provider's total costs of the services,

direct costs and any indirect costs, exceeds what a carrier would pay a supplier of ambulance

services for the same services in the same locality, the costs are unreasonable and cannot be paid

by the provider's intermediary.

The next page is 21-3.2

Rev. 395 21-3

1-76 COSTS RELATED TO PATIENT CARE 2104.3

EXAMPLE:

Facts

A 300-bed hospital provides 50 private luxury room accommodations which are twice the size

per bed as the size per bed of the remaining private accommodations. In addition, the luxury

rooms are equipped with special beds, balconies, ceiling-to-floor length picture windows, color

television sets, stereo equipment, and lavish baths. The hospital also offers special food service

to patients occupying the luxury rooms.

Determination of Allowable Costs

Where a determination has been made that a provider furnishes luxury items or services, a single

nonreimbursable cost center entitled "Luxury Routine Accommodations" must be established and

the excess direct and indirect cost luxury items should be determined and eliminated through cost

finding. However, where the intermediary determines that overhead costs applicable to the

excess costs of luxury routine accommodations would be minimal, the adjustment to eliminate

the excess costs need not be accomplished through cost finding. Also, the total costs of such

items as the color television and stereo would be eliminated from allowable costs since they are

for the sole personal comfort of the patients (§ 2l06.l).

D. Effect on Medicare Program Charges.-- For the purpose of establishing proper interim

reimbursement, program charges should not reflect the excess costs applicable to luxury routine

accommodations. Rather, the portion of charges applicable to these excess costs should be billed

as noncovered charges.

E. Effect on Other Provisions of Law.-- (l972 Amendments - Public Law 92-603, Section

223 and 233.) Where a provider furnishes luxury items or services to all patients in the facility,

the provisions of this section do not apply. Rather, the provision dealing with limitations on

coverage of costs (section 223) must be applied to such a provider. Also, for purposes of

applying the limitation of program reimbursement to the lower of reasonable costs or customary

charges (section 223), reasonable costs do not include the excess costs of luxury items or services

and customary charges do not include the portion of the charges applicable to the excess costs of

luxury items or services.

2l04.4 Dental Services.-- Compensation paid to a dentist for services to or for an individual

patient are not allowable provider costs and are nonreimbursable to the provider. The costs,

however, of consultative services furnished by an advisory dentist to a provider are allowable

costs, subject to the usual rules concerning reasonable costs incurred

21-3.3 Rev. l39

03-85 COSTS RELATED TO PATIENT CARE 2105.3

by providers. Consultative services may include, for example, participating in the staff

development program for nursing and other personnel and recommending policies relating to oral

hygiene or dietary matters. For a detailed explanation of the coverage of inpatient services in

connection with dental procedures, see §2l0.7 of the Hospital Manual (HCFA Pub. 10).

2l04.5 Vocational and Scholastic Training Expense.-- The costs attributable to vocational,

scholastic, or similarly oriented training activities conducted by providers on behalf of patients

are not allowable costs. For example, costs incurred by a psychiatric facility in operating an

elementary or secondary school for patients are unallowable costs.

2l05. UNALLOWABLE COSTS NOT RELATED TO PATIENT CARE

2l05.l Noncompetition Agreement Costs.--Amounts paid to the seller of an ongoing facility

by the purchaser to acquire an agreement not to compete are considered capital expenditures.

Where the agreement covers a stated number of years and the provider amortizes the amount paid

over the agreed number of years, the amortized costs for such agreements are not allowable costs

under the program.

2l05.2 Cost of Meals for Other Than Provider Personnel.--The cost of meals for other than

provider personnel, whether served in a cafeteria, coffee shop, canteen, etc., is unallowable under

the program because it is not related to patient care. (See §2l02.3) Providers must maintain

adequate cost data in order to determine the cost of these meals. (See §2300ff.)

2105.3 Cost of Reserving Beds or Services.--

A. Provider Making Payment to Reserve Beds or Services.--Providers may incur costs

pursuant to a reserved bed agreement with another health care facility under which the provider

receives guaranteed or priority placement for its discharged patients. For example, a hospital

may pay a skilled nursing facility (SNF) to set aside a certain number of beds for the hospital's

discharged patients. The cost incurred by a provider under a reserved bed agreement is not

related to that provider's care of its patients and, therefore, is not an allowable cost.

B. Provider Receiving Payment for Reserving Beds or Services.--The revenue received by

a provider for reserving its beds or services is not considered related to patient care. Therefore,

the payments received are not required to be offset against the provider's operating costs.

C. Payment-In-Kind for Reserving Beds or Services.--If, under the terms of the

agreement, a provider agrees to compensate another facility for reserving its beds by providing

free or discounted services rather than by cash payments, neither the provider furnishing the

services nor the provider receiving the services as payment-in-kind, is entitled to be reimbursed

by Medicare for the cost of the services. (See §2328 F.)

Rev. 322 21-3.4

2105.3(Cont.) COSTS RELATED TO PATIENT CARE 03-85

D. Types of Agreements and Illustrations.--Providers are permitted to enter into reserved

bed agreements, as long as the terms of that agreement do not violate the provisions of the statute

and regulations which govern provider agreements which (1) prohibit a provider from charging

the beneficiary or other party for covered services; (2) prohibit a provider from discriminating

against Medicare beneficiaries, as a class, in admission policies; or (3) prohibit certain types of

payments in connection with referring patients for covered services. A provider may jeopardize

its provider agreement or incur other penalties if it enters into a reserved bed agreement that

violates these requirements.

The following examples illustrate different types of reserved bed agreements and explain how

each would be treated in terms of the provider agreement and reimbursement.

Illustration 1

A SNF reserves 10 beds for the exclusive use of a hospital's discharged patients. The hospital

agrees to pay $75.00 per day per bed for each day a reserved bed is held vacant.

This agreement does not violate the SNF's provider agreement. The hospital cannot include the

cost it incurs to reserve the SNF beds in its allowable costs. The SNF does not reduce its

allowable costs by the payment received from the hospital in determining program

reimbursement.

Illustration 2

A SNF reserves 10 beds for the exclusive use of a hospital's discharged patients. The hospital

agrees to pay $75.00 per day per bed for each day a reserved bed is held vacant. The hospital

further agrees to pay the difference between $75.00 and the Medicare reimbursement rate of

$60.00 to the SNF for each day a reserved bed is occupied by one of the hospital's discharged

Medicare patients.

This agreement violates the SNF's provider agreement. The additional payment of $15.00 per

day paid by the hospital is a prohibited charge imposed by the SNF on another party for services

that are covered by Medicare.

Illustration 3

A SNF agrees to reserve 10 beds for the exclusive use of a hospital's discharges. The hospital

agrees to provide the SNF, without charge, a full-time registered nurse.

The agreement does not violate the SNF's provider agreement since the full-time nurse is

provided for all patients and without regard to whether a Medicare patient is receiving services

from the SNF. The hospital's reimbursement would not be affected except that any costs incurred

by the hospital in providing the nurse should be adjusted out of the hospital's allowable costs for

purposes of determining reimbursement for any services which are reimbursed on a reasonable

cost basis. (See §2328F.) The adjustment is necessary because the nursing cost is not related to

patient care of hospital patients. On

21-3.5 Rev. 322

06-98 COSTS RELATED TO PATIENT CARE 2105.4

the other hand, the value of the nursing service received by the SNF is not considered revenue

that is offset against its allowable costs in determining reimbursement. Similarly, the SNF may

not impute the cost of the nursing services received for inclusion in its costs.

Illustration 4

A SNF agrees to reserve 10 beds for the exclusive use of a hospital's discharges. There is no

charge for holding the beds vacant, although the hospital agrees to provide the SNF, without

charge, a registered nurse for each of the three shifts whenever any of the reserved beds are

occupied by a Medicare covered patient.

This agreement violates the SNF's provider agreement because the nursing services are provided

only when a Medicare patient is in a reserved bed and, therefore, the services of the nurse are

considered to be a payment-in-kind for providing services covered under Medicare.

Illustration 5

A SNF agrees to hold at least 5 beds on a priority basis for a hospital's discharges. The hospital

agrees to provide, under arrangements, pharmacy, laboratory and radiology services for all of the

SNF's patients. The agreement specifies no charge for laboratory and radiology services and

provides a 30 percent discount for pharmacy.

The agreement does not violate the provider agreement of the SNF since free or discounted

services are provided to all patients and without regard to whether a Medicare patient is receiving

services from the SNF. The cost of providing free or discounted services is not an allowable cost

for purposes of determining hospital reimbursement. Therefore, to assure that Medicare hospital

patients do not share in the cost of the free or discounted services, the charges of the ancillary

service centers are to be grossed-up to reflect the services provided to SNF patients. (See

§2314.B.) There is no effect on the reimbursement of the SNF as a result of the free or

discounted services furnished by the hospital. That is, the SNF may not impute any costs for the

free services for inclusion in its cost report; it may only include the discounted charges (if

reasonable) in its allowable costs for the discounted services.

Illustration 6

A SNF agrees to accept a hospital's "complicated care" patients on a priority basis. In return, the

hospital agrees to provide free in-service education to the SNF's staff.

This agreement does not violate the SNF's provider agreement. The hospital's reimbursement is

not affected except that any costs incurred by the hospital for providing the in-service training is

adjusted out of the hospital's allowable costs for purposes of determining reimbursement for any

services which are reimbursed on a reasonable cost basis. (See §2328.F.) The adjustment is

necessary because the training cost is not related to patient care of hospital patients. On the other

hand, the value of in-service training received by the SNF is not considered revenue that is offset

against its allowable costs in determining reimbursement. Similarly, the SNF may not impute the

cost of training received for inclusion in its costs.

2105.4 Costs of Unsuccessful Beneficiary Appeals.--Costs incurred by providers of services on

or after October 21, 1986, representing beneficiaries in unsuccessful appeals are not allowable

costs. Conversely, costs incurred by providers of services representing beneficiaries in

successful appeals are allowable to the extent they are otherwise reasonable.

Rev. 404 21-3.6

2105.5 COSTS RELATED TO PATIENT CARE 06-98

2105.5 Costs of Management Employee Meals.--Costs incurred by providers for meals served

to executives or management employees in excess of the costs of meals served to ordinary

employees are not allowable costs. Excessive costs of executive or management employees'

meals are attributable to the use of separate dining facilities, duplicative or additional food

service staff, and/or upgraded or gourmet menus. Conversely, the unrecovered costs related to

meals served to executives or management employees from common menus in common

employee dining facilities are allowable to the extent that they are otherwise reasonable.

2105.6 Costs of Employee Travel.--Costs incurred by providers in conjunction with employee

travel are generally allowable to the extent that they are patient care related and reasonable.

However, travel costs incurred in conjunction with non-patient care related employee travel are

not allowable. Foreign travel costs are allowable only where the provider can clearly substantiate

the reasonableness and patient care relatedness of the travel costs to the satisfaction of the

Medicare fiscal intermediary.

2105.7 Costs of Gifts or Donations.--Costs incurred by providers for gifts or donations to

charitable, civic, educational, medical or political entities are not allowable.

2105.8 Costs of Entertainment.--Costs incurred by providers for entertainment, including

tickets to sporting or other events, alcoholic beverages, golf outings, ski trips, cruises,

professional musicians or other entertainers, are not allowable. Costs incurred by providers for

purposes of employee morale, specifically, for an annual employee picnic, an annual Christmas

or holiday party, an annual employee award ceremony or for sponsorship of employee athletic

programs (bowling, softball, basketball teams, etc.), are allowable to the extent that they are

reasonable.

2105.9 Costs of Employees’ Personal Use of Motor Vehicles.--Costs incurred by providers

related to the personal use of provider vehicles are not allowable.

2105.10 Costs of Fines or Penalties.--Costs incurred by providers for fines or monetary

penalties imposed for violations of Federal, State, or local laws are not allowable.

2105.11 Costs of Spousal or Dependents Education.--Costs incurred by providers related to the

education of spouses or other dependents of owners or officers of providers of services, provider

employees and provider contractors are not allowable when they are not active employees of the

provider or contractor.

2106. COST OF TELEPHONE, TELEVISION, AND RADIO

2106.1 General.--The full costs of items or services such as telephone, television, and radio

which are located in patient accommodations and which are furnished solely for the personal

comfort of the patients (full costs include costs both directly associated with personal comfort

items or services plus an appropriate share of indirect costs) are not includable in allowable costs

of providers under the Medicare program. To illustrate, the full costs of telephones used solely

for the personal comfort of patients include not only costs directly associated with these

telephones, such as the rates billed by the public utility, but also an appropriate share of indirect

telephone costs, e.g., operators' salaries, equipment, space-related costs of switchboard and other

equipment, etc., as well as any other overhead that may be applicable thereto. The costs of

television and radio services are includable in allowable costs where furnished to the general

patient population in areas of providers other than patient accommodation, e.g., day rooms,

recreation rooms, waiting rooms, etc.

The cost of a nurse-patient communication system that has no capability for other than

communications between patient and nurse (or other facility employees) are includable in

allowable costs. Similarly, cost of closed circuit television monitoring systems used by providers

for surveillance of patients or for security, teaching, or demonstration programs which serve

purposes of patient care or which are otherwise needed for the provider's operations and have no

capability beyond these stated purposes are includable in allowable costs.

21-4 Rev. 404

06-98 COSTS RELATED TO PATIENT CARE 2107.2

The cost of television and radio located in lounges and other areas designated for the use of

provider employees is includable in allowable costs.

2106.2 Combination Purpose Systems.--Some nurse-patient communication systems based on

closed circuit television are used in part for bringing in outside entertainment. Likewise, some

patient communication systems operate through the telephone line and such a system may also be

used, in part, by the patient for making or receiving outside calls.

Where providers use the combined systems, the basic cost of the components designed and used

for patient care communication is an allowable cost. Any incremental costs attributable to the

additional components or capability for providing the patient's entertainment or convenience are

not allowable and must be excluded. Where this distinction cannot be clearly made, particularly

as it applies to maintenance, the intermediary may approve an allocation covering these

incremental costs (usually nominal) based on an equitable sharing.

Occasionally, nurse call systems which do not provide closed circuit television for patient care

services are tied by some adjunct linkage into the audio component of a television set. In such

instances, the cost of the set and maintenance of the equipment providing the television

capability is not an allowable cost, except to the extent the provider can demonstrate and the

intermediary approves an equitable share (usually nominal) attributable directly to costs arising

out of the adjunct linkage and use of the set for nurse call.

2107. PARKING LOT COSTS

2107.1 General.--The cost incurred for provider-owned or rented parking facilities, parking

lots, and/or garages are allowable costs provided the parking facilities are for the use of patients,

visitors, employees, and other provider purposes. Examples of allowable costs for a provider-

owned parking facility include depreciation on the surface and structure (excluding land), interest

on related loans, and other operating expenses. Costs related to the preparation of the land such

as demolition of existing structures, clearing, and grading costs are added to the cost of the land

and are unallowable.

The allowable costs for provider-rented parking facilities are limited to the reasonable rental paid

on which the provider has a legal obligation to pay. Where the rental is paid to a lessor related to

the provider through common ownership or control, the guidelines set forth in Chapter 10, "Cost

to Related Organizations," are applicable.

2107.2 Treatment of Parking Revenue.--Where a provider receives no revenue from parking

lots, the allowable costs recognized under §2107.1 are reimbursed, subject to apportionment.

Where, however, a provider elects to charge a fee for the use of these facilities, such revenue is

treated under Medicare as follows:

A. Parking Revenue from Persons Other Than Employees and Physicians.--Where parking

revenue is received from persons other than employees and physicians, the revenue is offset

against parking lot costs attributable to such persons. If parking revenue exceeds the related

costs, the excess revenue is not used to reduce employee and physician parking costs (or other

provider costs) so long as the provider can demonstrate a reasonable and equitable basis for

allocating parking costs between (1) employees and physicians, and (2) other persons. Where

such an allocation is not determinable, the total allowable cost of provider-owned or rented

parking facilities is reduced by all parking facility revenue.

B. Parking Revenue from Employees or Physicians.--Revenue from employees and

physicians for parking must be used to reduce related allowable parking costs. If employee and

physician parking revenue exceeds related costs (i.e., parking costs for employees and

physicians), any excess revenue is applied against other parking costs, but not against other

allowable costs.

Rev. 404 21-4.1

7-75 COSTS RELATED TO PATIENT CARE 2l08.l

2l08. REIMBURSEMENT FOR SERVICES BY PROVIDER-BASED PHYSICIANS

A. General.-- These instructions apply where physicians perform services in a provider setting

and have a financial arrangement under which they are compensated by or through a hospital (for

both inpatient and outpatient services, or by or through a skilled nursing facility, a home health

agency, clinic, rehabilitation agency, or public health agency. These physicians may also be

receiving compensation from medical schools or other organizations which have arrangements with

the provider for the services they render to provider patients (see § 2l08.2D2).

Further, these instructions apply where modifications of previously existing arrangements between

providers and provider-based physicians permit the provider and physician to bill patients separately

for their respective services. Such modifications may permit the physician to assume all or part of

the departmental operating costs. These instructions do not apply to the services of interns and

residents; their services are reimbursable to the provider on a reasonable cost basis. (See § 2l20.)

B. Noninterference by Federal Government.-- It is not the function of the health insurance

program established under title XVIII of the Act to determine the arrangement into which a provider

and provider-based physicians may enter for the compensation of the physicians, or to specify or

influence the provisions of the contract or arrangement between the provider and provider-based

physicians. The provider and physicians can continue to negotiate all aspects of their arrangement to

their mutual satisfaction.

2l08.l Professional and Provider Components.--

A. Identification of Types of Services for Program Payments.-- Many providers retain

physicians on a full-time basis in, for example, the fields of pathology, physyiatry, anesthesiology,

and radiology, and in many instances (especially in teaching hospitals) in other fields of medical

specialization as well. Any one of these physicians may be engaged in a variety of activities

including teaching, research, administration, supervision of professional or technical personnel,

service on hospital committees, and other hospital-wide activities, as well as direct medical services

to individual patients. The provider's arrangement may be with a single physician or with a group of

physicians who assume joint responsibility for discharging agreed-upon duties.

To make payments under the health insurance program, it is necessary to distinguish between the

medical and surgical services rendered by a physician to an individual patient, which are

reimbursable under Part B on

Rev. l28 2l-5

2l08.l (Cont.) COSTS RELATED TO PATIENT CARE 7-75

a reasonable charge basis, and provider services (including a physician's services for the provider)

which are reimbursable on a reasonable cost basis, generally under Part A. This is necessary because

the payments are made from different trust funds, both fiscal intermediaries and carriers are involved

in handling the claims, and the method of determining the payments for Part A benefits differs

materially from those under Part B.

B. Distinguishing Between Professional and Provider Components.-- The services of

provider-based physicians (e.g., those on a salary, or percentage arrangement, lessors of departments,

etc., whether or not they bill patients directly) include two distinct elements, the professional

component and the provider component.

l. Professional Component.-- The professional component of provider-based physician's

services pertains to that part of the physician's activities which is directly related to the medical care

of the individual patient. It represents remuneration for the identifiable medical services by the

physician which contribute to the diagnosis of the patient's condition or to his treatment.

2. Provider Component.-- The portion of the physician's activities representing services

which are not directly related to an identifiable part of the medical care of the individual patient is

the provider component. Reimbursement for provider component services can be made only to a

provider on the basis of its allowable reasonable costs. Provider services include teaching, research

conducted in conjunction with and as part of patient care (to the extent that such costs are not met by

special research funds), administration, general supervision of professional or technical personnel,

laboratory quality control activities, committee work, performance of autopsies, and attending

conferences as part of the physician's provider service activities. Reimbursement for such services

will always be made on a reasonable cost basis under Part A where they relate to inpatient services.

Reimbursement is under Part B for outpatient services and for certain inpatient ancillary services

where Part A coverage has been exhausted.

3. Allocation of Compensation.-- Ordinarily the compensation paid to the physician is

for all services he performs, in proportion to the time he devotes to each activity. It is a primary

obligation of the provider and provider-based physician to mutually agree upon the allocation of

compensation for the provider-based physician to the time he spends in his various activities, and to

communicate this information with supporting material to the provider's intermediary. The

supporting material should include a written explanation of the basis for the allocation agreement.

Where, however, the agreed-upon allocation is not consistent with similar arrangements between

providers and provider-based physicians, the intermediary will obtain more detailed information, as

necessary. Generally,

21-6 Rev. 128

7-75 COSTS RELATED TO PATIENT CARE 2108.1(Cont.)

the remuneration a physician receives from a provider under an arrangement represents

compensation for his services to the provider as well as for direct patient services.

C. The Provider-Physician Agreement as to Compensation Allocation.- In some institutions a

physician may spend the bulk of his time in duties which benefit the entire patient population and a

relatively small part of his time in performing services for individual patients. In other situations, the

converse may exist. The arrangement between a provider and a provider-based physician does not

generally support a 100 percent allocation of compensation for direct patient services. The allocation

in each instance must be based on the facts of the individual case. Each case must be sufficiently

documented to support the necessary determination, and should include a written agreement signed

by both the provider and physician. (See Exhibit I.) If the allocation does not appear "reasonable"

additional supporting documentation, such as the results of time studies, must accompany the signed

agreement.

D. A Statement of Understanding Between the Provider and Physician.- There may be

instances where a provider and the provider-based physician may be in substantial agreement as to

the allocation of compensation between professional and provider services, but the physician is

reluctant to sign a formal statement containing specific details about his compensation. In such

cases, the provider's administrator may prepare a document outlining his own approximation of the

time and activities of the physician and ask him to sign it as a "statement of understanding" regarding

their mutual relationship. This "statement of understanding" may be accepted in lieu of the usual

"physician agreement," where the Part A intermediary and Part B carrier are satisfied that it would

not differ materially from the agreement itself.

E. Where an Agreement or Understanding Cannot Be Reached.- When a provider and

physician are unable to reach an understanding as to the allocation of compensation between

provider services and direct medical services, the intermediary and carrier will jointly try to resolve

this question be meeting with the parties involved, suggesting methods for determining the allocation

(e.g., time studies), and otherwise assisting the parties in reaching an accord. If the provider and

physician fail to reach agreement within 30 calendar days after this meeting, the intermediary and

carrier will jointly establish the required allocation based on their combined experience in

comparable provider facilities. The parties will then be advised the (1) this allocation will be the

basis for establishing a schedule of charges for the physician's professional services to the provider's

patients for all prior and current billings, and (2) they have 30 calendar days to submit an agreement

which more accurately reflects the required allocation. If an agreement is submitted within that time,

and it is reasonable, it may be used for establishing a schedule of charges for current and prior

billings.

Rev. 128 21-7

2108.2 COSTS RELATED TO PATIENT CARE 7-75

2108.2 Compensation Arrangements.-- There are a variety of arrangements between providers and

provider-based physicians, the more typical being the fixed compensation arrangement and the

variable compensation arrangement. There are also many arrangements under which the physician

assumes all or part of the costs of operating the provider department (e.g., lease or concession).

Under any of these arrangements, the agreement could stipulate that the physician may bill through

the provider for all or part of the services he renders, or that the physician and provider will bill

separately for their respective services. It is necessary, therefore, in order to determine the

appropriate amount of reimbursement for the services of a physician, to choose the appropriate

method to develop the schedule of charges, establish the proper compensation base, and identify

which elements of compensation are reimbursable under Part A and which are reimbursable under

Part B.

A. The Fixed Compensation Arrangement.-- The fixed compensation, usually called a salary

or stipend, consists of a specific dollar amount unrelated to volume. It generally covers the

physician's provider services as well as his direct medical services to patients. When the computation

is carried out, the physician is shown to receive an actual dollar amount which can be determined in

advance.

In some cases, this compensation arrangement may be expressed in terms of a percentage of charges

or collections reduced by a variety of actual or estimated costs of operation or other factors. When

the intermediary and carrier evaluate a contract stated in these terms, they are to treat it as a fixed

compensation contract where, in fact, it spells out a method for arriving at a fixed remuneration for

the physician's services.

Regardless of the method of billing, the schedule of charges should be computed in the same manner

as where the physician receives a fixed salary. Where there is a question as to the amount of

compensation, the intermediary will refer to the provider records to ascertain the actual amount of

compensation paid by the provider to the physician. However, such payment should be related to

total departmental billing, not collections, in establishing program liability.

B. The Variable Compensation Arrangement.-- Under this type of arrangement, the provider

and physician agree that the physician's compensation will be a percentage of departmental gross

charges or of net collections. The actual compensation received by the physician will vary in

proportion to the number of procedures performed and to the total charges made by the provider.

The total compensation cannot be determined until the close of the accounting period. The

percentage of the combined provider's charge represents the provider's reimbursement to the

physician for all services he renders. (Where a physician has a variable income and chooses to use a

uniform optional percentage as his schedule of charges, it is not necessary to translate his correct

percentage amount into a fixed dollar amount before establishing the optional percentage. The

physician's contract percentage multiplied by the professional component allocation will yield the

optional percentage. See Exhibit IIA.)

21-8 Rev. 128

2-78 COSTS RELATED TO PATIENT CARE 2108.2(Cont.)

C. Where Arrangements Are Modified to Permit the Physician to Bill Separately for His

Professional Services.-- The objective in determining reasonable charges where a provider-based

physician modifies his former compensation arrangements to permit him to bill directly is expressed

in the regulations, i.e., ". . . to bring about as little change as possible (in the normal case) in the

compensation the physician receives for his services in the hospital." Therefore, where

modifications are made in an arrangement between a provider and physician, the customary charges

for the physician's professional services should be related to his compensation prior to the

modification. Also, where such contract changes permit the physician to independently bill

Medicare patients only, the Part B carrier will ensure that the reasonable charges determined for the

services rendered to Medicare beneficiaries are no higher than the charges generally made to the

provider's other patients for similar services.

D. Additional Elements of a Provider-Based Physician's Compensation.-- The following are

examples of elements which should be considered in determining the amount of compensation

received by a physician for the purpose of establishing a schedule of charges:

1. Fringe Benefits.-- When fringe benefits inure to the benefit of the physician himself,

they may be included as part of the physician's compensation. For example, group hospitalization

and health insurance premiums paid or incurred by the provider for the benefit of the physician may

be included in computing the physician's total compensation. However, is the provider is self-

insured, the fringe benefit would accrue to the physician only to the extent of the cost incurred by the

provider when health care is furnished. In this case, there would be no fringe benefit inuring to the

physician if he receives no health care services from his self-insured employer. On the other hand,

where a provider establishes a retirement plan for the benefit of its employees and supplements

employee contributions to the fund, if any, with specific amounts that are assignable to individual

employees, such amounts may be included in ascertaining the physician's compensation. (See §§

2122.3 and 2144FF.)

2. Compensation from Other Sources.--Some providers have arrangements with

medical schools or other organizations under which a physician receives compensation from such

organizations for services which the physician renders to the provider patients.

The remuneration of a physician from such sources may be included in determining the total

compensation he receives and in establishing the schedule of charges. This remuneration must be

allocated between the professional and provider activities of the provider in the same manner as the

compensation received from the provider. That portion of remuneration related to teaching or

research activities at the medical school itself is not reimbursable under Medicare.

Rev. 197 21-9

2108.3 COSTS RELATED TO PATIENT CARE 2-78

3. Bad Debts.-- Bad debts are not to be reflected in determining reasonable charges

under the supplementary medical insurance program. The Medicare program reimburses 100 percent

of the reasonable charges for inpatient hospital radiology and pathology services provided by a

physician in the fields of radiology and pathology and 80 percent of the reasonable charges for all

other medical services after the deductible has been met. The coinsurance amount and the deductible

are considered liabilities of the beneficiary for physicians' services and the provider does not incur

bad debts because of its failure to collect these amounts. (See §302.5.) Therefore, where a contract

stipulates that the physician will receive a percentage of collections (charges minus bad debts),

program liability should be determined as described in § 2108.9.

2108.3 Methods Used to Determine the Reasonable Charge of Provider-Based Physicians.-- The

amount of the physician's compensation representing the provider component will be reimbursed to

the provider on the basis of reasonable costs by the Part A intermediary. The Part A intermediary

will also reimburse the provider for medical services to individual patients, i.e., outpatient hospital

services (except psychiatric) and inpatient radiology and pathology services where the physician and

provider agree to use the combined method of billing. In all other situations, where direct physicians'

services to patients are billed on forms SSA-1554 and SSA-1490, the Part B carrier will determine

the amount of reimbursement.

A. Consideration Given to Customary and Prevailing Charges.-- Reasonable charges for the

professional services of provider-based physicians will be determined for other physicians and

suppliers. Consideration will be given to the customary charges of the provider-based physician for

each item of service he renders (see the following sections for an explanation of how such customary

charges should be determined) and the prevailing charge in the locality for similar services rendered

a provider setting.

B. Where Providers Separately Identify Physicians' Charges.-- Where provider has

customarily identified a physician's charges separately from charges for provider services, the

physician's charges so established will be considered the customary charges for his professional

services,

21-10 Rev. 197

7-75 COSTS RELATED TO PATIENT CARE 2108.4

and will afford the basis for determining the reasonable charges for such services. In such cases, the

physician's remuneration will not be a factor in establishing customary charges. It will still be

necessary, however, to allocate the physician's compensation to professional and provider

components so that proper cost payments can be made. (See § 2108.1B.)

C. Where Providers Do Not Separately Identify Physicians' Charges.- Where, under an

existing arrangement between a provider and physician's services and charges for provider services, a

schedule of charges will need to be developed based on the physician's professional component. This

schedule of charges will form the basis for establishing the customary charges for direct medical

services to patients by the provider-based physician.

2108.4 Schedule of Charges.-- The schedule of charges must be designed to yield, in the

aggregate, as nearly as may be possible, an amount equal to the portion of the physician's

compensation represented by the professional component. There are several methods by which a

schedule of charges may be developed based on the provider-based physician's professional

component. Principally, these are the "optional," "item-by-item," and "per diem" methods. A

variation from any of these methods is acceptable as long as it achieves the same results, i.e., it will

yield in the aggregate an amount equal to or approximating the portion of a physician's compensation

attributable to direct medical services to patients. Each provider department may use the method it

finds most applicable (e.g., the use of the item-by-item method by one department does not prevent

the use of the optional method or the per diem method by another department). Where there is more

than one hospital-based physician rendering services in a single department, the schedule of charges

should be developed for the department as a whole on the basis of the aggregate amount of

compensation attributable to the professional components and the aggregate volume of procedures

which all physicians in the department are expected to render. For establishing the professional

component in a given department, see Exhibit II. To develop the schedule of charges, see Exhibits

III, IV, and V.

A. The Optional Method.-- The optional method for establishing the physician's customary

charges is appropriate for provider departments that perform a high volume of low cost procedures,

often rendered by technicians or by automated equipment, and find the item-by-item method neither

feasible nor practical from an administrative viewpoint. Under the optional method, the schedule of

charges for the physician's direct services to patients is determined by applying a uniform percentage

to each charge made by a particular department. Exhibit III shows the development of the uniform

optional percentage. (Where a hospital-based physician has a variable compensation arrangement

and wishes to use the uniform optional percentage, see § 2108.2B and Exhibit IIA.)

Rev. 128 21-11

2108.5 COSTS RELATED TO PATIENT CARE 7-75

B. The Item-by-Item Method.-- This method can be implemented by using an appropriate

relative value schedule and conversion factor assigned to unit values will result in reimbursement not

in excess of the professional component of the physician's compensation arrangement, the first step

in developing the data needed to establish the schedule of charges under the item-by-item method is

to determine the amount of the provider-based physician's compensation attributable to direct patient

services, reimbursable under Part B. (See Exhibit II.) The next step is to determine the total relative

value units representing various procedures by particular provider departments. (See Exhibit IV.)

C. The Alternate Item-by-Item Method.--An alternate means for establishing a schedule of

charges on an item-by-item basis is to assign to each procedure, on the basis of the time spent by the

physician in performing the procedure, a percentage of the total amount of the physician's

compensation on a departmental basis (see Exhibit V).

D. The Per Diem Method.-- The per diem method may be used where providers furnish health

care services at an all-inclusive rate, or where there is no charge structure. It is most frequently, but

not exclusively, applicable in long term or governmental facilities where both institutional and

physician services are furnished at a fixed amount without regard to variations in the number and

type of services the individual patient may receive and without distinction between the provider

services and physician services furnished. Some providers use the per diem or per visit method only

in connection with the services of certain departments (e.g., physyiatry, outpatient) while charging on

a fee-for-services basis in others. Establishing a schedule of charges through the perdiem (or other

units, such as per visit) method is limited to institutions or departments which make an identifiable

uniform charge that constitutes the total expense the patient incurs for both provider and physician

services. For detailed application of the per diem method, see Exhibit VI.

2108.5 Effect of Physician's Assumption of Operating Costs (Lease or Concession Arrangement).-

A. Where the Physician Bills Patients Directly.--

1. Basis of Reimbursement.-- Where a provider initially pays some or all of the

operating expenses of a department (e.g., salaries of nonprofessional personnel, supplies and

equipment), such operating expenses are reimbursable as reasonable costs to the provider even

though the provider is subsequently reimbursed by the physician for the use of those items or

services. Such operating expenses are not to be reflected in the reasonable charges of the physician.

Any payments received by the hospital under an arrangement where the physician leases a

department should be treated as a reduction of allowable costs for purposes of reimbursement

21-11.1 Rev. 128

7-75 COSTS RELATED TO PATIENT CARE 2108.5(Cont.)

under the hospital insurance program. The application of this offset is not limited to the allowable

costs for a single department. If the Medicare portion of the income realized by a hospital exceeds

the Medicare portion of allowable costs of such department, any remaining income should be applied

as a reduction of Medicare reimbursable costs for the other departments of the hospital.

Where a provider-based physician, himself, bears some or all of the costs of operation of a

department, the costs which he bears may be reflected in his customary charges and considered in

determining reasonable charges under supplementary medical insurance. However, these costs will

need to be adjusted upward or downward where the provider has been bearing a cost significantly

more or less than its own share of the proceeds of such charges, and the determination of reasonable

charges should consider such adjustments.

2. Determination of Reasonable Charges.--

a. The customary charges of a physician who enters into a lease or similar

arrangement with a provider, under which the physician assumes the costs of operating a department

and bills patients directly, should be based upon: (1) the remuneration he received for his

professional services to patients immediately prior to the leasing arrangement; and (2) his reasonable

costs of operation, taking into account the provider's cost experience in providing such services.

References to the remuneration formerly received by the physician from the provider are required

because consideration must be given to the customary charges generally made by the physician for

similar services. If, at the time the lease or similar arrangement became effective, the physician had

no pattern of customary charges for his professional services to provider patients other than the

compensation he received from the provider, such compensation serves to establish his customary

charges.

b. Where a provider has been receiving, as its portion of the receipts for services

rendered by a department, significantly more or less than the costs the provider has incurred in

providing these services, this excess or shortage should not be transferred from the provider to the

physician merely because he decided to bill directly. Such transfer would alter the total cost of

patient hospital and medical care, a result which would conflict with the intent of the Medicare

legislation.

c. Prevailing charges in nonprovider laboratories may be taken into account in

determining reasonable charges for the services of a physician who has entered into a lease or

concession arrangement with a provider. However, such charges should not be used as guides for

determining reasonable charges in situations where they would produce an unreasonable result. The

conditions found in a provider setting are frequently unique in that services are performed in large

volume and consequently at low unit cost.

Where the Part A intermediary and the Part B carrier fail to agree as to the acceptability of the data

supplied by the provider and its physicians, they will jointly submit a report to the health insurance

regional office for clarification of outstanding issues.

Rev. 128 21-11.2

2108.6 COSTS RELATED TO PATIENT CARE 7-75

B. Where Billing Is By or Through the Provider.-- Where a physician enters into a lease or

concession arrangement and bills through the provider, the services of nonphysicians aiding the

physician are reimbursable to the provider on a reasonable cost basis. The amount attributable to the

physician's services to the patient is compensable under the supplementary medical insurance

program. When submitting a bill to the provider for services rendered, the physician should

separately identify in the bill the amounts representing the respective provider and physician

components of his services.

2108.6 Duties and Responsibilities of Provider and Intermediary in the Area of Provider-Based

Physician Reimbursement.--

A. Provider Responsibility.-- The effective implementation of provider-based physician

reimbursement requires the closest coordination between the provider and its Part A intermediary.

The provider is responsible for making available on a timely basis data on the financial and billing

arrangements (including contracts, agreements, and other written documentation) it has with its

provider-based physicians. This information is necessary to ensure that: (l) Medicare

reimbursement for the services of these physicians is made form the appropriate trust funds; (2) the

Medicare program does not make duplicate payments for the same service, once as a provider cost

and again as a reasonable charge; and (3) the Part B reasonable charge properly reflects any

deductible and coinsurance liability of the beneficiary. On a regular basis, the provider should

supply the intermediary with any new or revised data which would affect the original reasonable

charge determination.

B. Intermediary Responsibility.--

l. Whether reimbursement policies and guidelines are effectively implemented depends

in large part on detailed information that the Part A intermediary obtains from providers. By signing

section l866 agreements to participate in the program, providers have consented to furnish all

information which the intermediary and carrier require to make proper payments under the Act.

2. The Part A intermediary will obtain from the provider not only all data needed to

determine reimbursable hospital costs, but also the data needed by the Part B carrier for establishing

and reviewing the schedules of charges it will use to make reasonable charge determinations. Both

the Part A intermediary and Part B carrier need to know:

a. The contents of agreements between provider-based physicians and providers.

(Specific responsibilities of intermediaries in obtaining and reviewing these agreements are stated in

§ 2l08.l.)

b. The billing methods selected by the physicians and the detailed items of

information pertaining to the specific method selected, shown in Exhibits I-VI. This information

will need to be obtained in all

2l-ll.3 Rev. l28

7-75 COSTS RELATED TO PATIENT CARE 2l08.6(Cont.)

situations where physicians have a financial arrangement with a provider, whether or not they bill

independently.

c. Where a laboratory director in a provider leases the department or has a

concession arrangement, information will be needed to ascertain the portion of the operating costs to

be reimbursable as provider costs to the provider, and the portion of the costs to be reimbursable as

provider costs to the provider, and the portion of the costs to be reflected in the reasonable charge

determination by the Part B carrier.

d. The circumstances under which physicians' services such as diagnostic and

therapeutic X-rays, EKG's, and laboratory tests are rendered to the provider's patients, especially by a

physician who is not associated with the provider's medical staff, to ensure that the provider is

complying with regulations and policies concerning purchased services "under arrangement," so that

Medicare reimbursement will be made from the appropriate trust fund. (The professional component

of such services, except laboratory services obtained from an independent laboratory or from the

laboratory of a hospital meeting at least the definition of emergency hospital, must be reimbursed

under Part B.)

3. Where a hospital and its provider-based physicians have agreed to use the combined

billing procedure, the Part A intermediary will need to assure that it has obtained all information

necessary to support its reasonable charge determination (§ 2l08.l) and that the provider has on file a

current "Physician's Authorization for Hospital Billing" (see Hospital Manual, § 400.3).

4. When the physician is based in a nonparticipating institution, the carrier will assume

the responsibility for obtaining the data needed to make the determination of the reasonable charge

for the physician's service.

C. Review of Schedules of Charges.-- Charges for physician services in provider departments

(e.g., radiology, pathology, outpatient) can be billed to the program using either the combined billing

procedure or form SSA-l554. Billings under either method are subject to year-end adjustments.

When the combined billing procedure is used, there is no need to schedule a regular review of the

schedule of charges for the provider-based physicians' Part B services. In form SSA-l554 cases there

is no need to schedule a regular review of schedules of charges unless it is considered advantageous

to the Medicare program to do so (e.g., the provider does not file timely cost reports, and Part B

reimbursement for the physicians' services seems to be overstated). Where the provider-based

physician bills the patient directly on form SSA-l490, regular reviews of the estimated factors used to

develop schedules of charges are required whenever compensation-related charges are the basis for

reimbursement. In these cases, the Part A intermediary will obtain from the provider at least

quarterly a report disclosing the actual amount of departmental charges to date, the total

reimbursement the schedule of charges was intended to

Rev. l28 2l-ll.4

2l08.7 COSTS RELATED TO PATIENT CARE 7-75

produce, and information necessary to permit a decision as to the accuracy of the estimates and

projections. This report should provide the appropriate data pertaining to all factors on which the

schedule of charges was based, whether the recording and billing method used is the item-by-item

method, the uniform optional percentage or the per diem method. Copies of this material will be

submitted to the Part B carrier servicing the physicians so that any required adjustments in the charge

schedule can be made during the year.

2l08.7 Retroactive Adjustment of Certain Provider-Based Physician Payments.-- With respect to

cost accounting periods which began after June 30, l97l, and any earlier periods where the need for

adjustment actions was identified, the Part A intermediary will take the action indicated in B below

regarding retroactive adjustments of certain provider-based physician payments.

A. Applicability.-- Where a provider has been overpaid or underpaid for the patient care

services of a provider-based physician, the Part A intermediary will make an appropriate adjustment

as part of the provider's final cost settlement where:

l. The provider billed on form SSA-l554, and

2. The charges were based on the physician's compensation. (Where the combined

billing method is used, Hospital Manual, §§ 400ff. apply.)

B. Procedure.-- Where there has been incorrect Part B reimbursement for the provider-based

physician's services, i.e., carrier payments for patient care services differ from Medicare's

proportionate share of the total costs for such services, the adjustment referred to above will be based

on the Part A intermediary's review of the hospital's cost report, an examination of the factors used in

establishing the professional component charges, and a review of the provider's record of SSA-l554

billings for the cost report period. Overpayments and underpayments will be corrected by the Part A

intermediary by making an adjustment in the cost report in the same manner as it would adjust for

any other incorrect payment. Whenever an overpayment or underpayment adjustment is made, or

where total reimbursement was proper but inaccurately allocated to the trust funds, the Part A

intermediary will prospectively adjust the factors it uses in making payment, and notify the Part B

carrier of the adjustment by forwarding the new data on which the carrier is to base reimbursement (§

2l08.6C).

Each intermediary will furnish worksheets to be used by provider for the purpose of identifying

incorrect payments for provider-based physician's services. Exhibit VII contains a sample format

where the uniform optional percentage methodology is used.

2l-ll.5 Rev. l28

2-78 COSTS RELATED TO PATIENT CARE 2l08.9

2l08.8 Reimbursement for Provider-Based Physicians' Administrative, Teaching, and Direct

Medical Care Services Where the Physicians Have Changed Their Compensation Arrangements with

the Provider.-- Situations may arise where physicians previously employed to perform both

administrative and direct medical care services have terminated their employment relationship with

providers and have organized and entered into arrangements with the providers to render

administrative and teaching services at a greater level of compensation than was formerly received in

the employment relationship for such administrative and teaching services. These organizations bill

directly for the patient care services of their member physicians and such billings may exceed the

estimated portion of the previous salary attributable to such services.

Where a provider which previously employed physicians on a salary basis to render administrative

and/or teaching services as well as direct medical care services changes its arrangement to purchase

only the administrative and/or teaching type services, program reimbursement to the provider would

be limited to the cost previously incurred for such administrative and/or teaching services on a salary

basis. An exception to such limitation could be granted where the provider demonstrates that, due to

extraordinary circumstances, it is no longer able to engage physicians at the previous level of

compensation to render the full range of services. Merely showing that the physicians previously

employed were no longer willing to provide their services on this basis would not demonstrate that

the provider is no longer above to engage physicians at the previous level of compensation. For the

new financial arrangement to be accepted by the intermediary as reasonable costs, the provider would

also have to demonstrate that, due to some new and special circumstances, it was no longer feasible

to recruit replacements at the previous level of compensation.

Reasonable charges for the physicians' direct patient care services should initially be related as

closely as possible to the portion of the compensation they received for such services prior to the

change in the financial arrangement. These charges are subject to any applicable prevailing charge

ceiling and will serve as the basis for program payment until: (l) the physician has established a

pattern of customary charges which are billed to all patients and collected from the majority of his

nonMedicare patients; and (2) the carrier has accumulated at least 3 months of charge data from the

same base year used to establish reasonable charges for other physicians. When these criteria are

met, the physician's reasonable charge will be determined in the same manner as other fee-for-service

physicians. (Where a group of physicians uses a common schedule of charges, reasonable charges

should be determined in this manner for the group.)

2l08.9 Reimbursement for the Services of Provider-Based Physicians Compensated Through the

Provider and the Provider Bills the Program under Combined Billing (on Forms SSA-l453 or l483)

or on Form SSA-l554.-- For the purpose of determining a provider's Medicare reimbursement based

Rev. l97 2l-ll.6

2l08.9(Cont.) COSTS RELATED TO PATIENT CARE 2-78

provider-based physicians' compensation where physicians are compensated through the provider,

the intermediary must look to the actual amount of compensation received and retained by the

physicians, i.e., the amount that the physicians have agreed to accept for their full range of services.

Where a provider-based physician agrees with the provider, whether in writing, orally, or in any way

implied, to receive a reduced compensation or to remit a portion of his gross compensation back to

the provider (other than amounts for the sole benefit of the physician, such as for a pension fund or

health benefits plan), only the net amount received and retained by the physician represents the

aggregate compensation, i.e., for both provider services and professional medical and surgical

services, to be used in computing Medicare reimbursement to the provider. Clearly, the Medicare

program does not intend for a provider to be reimbursed on a basis of gross compensation while

effectively paying out a lesser amount. As an exception, a bona fide, voluntary contribution made by

a physician to the provider is not a reduction of the physician's compensation for the purpose of

computing Medicare reimbursement to the provider. A bona fide, voluntary contribution cannot

exist where it is based on an agreement between the provider and physician whether in writing,

orally, or in any way implied. The bona fide nature of the contribution must be established on the

basis of all circumstances surrounding the contribution.

EXAMPLE: A contract provides that a provider-based pathologist will receive 30 percent of gross

departmental charges less 5 percent of the gross charges for bad debts and courtesy allowances.

During the provider's Medicare cost reporting period, the department had $200,000 in gross charges.

The provider retains $6,000 of the pathologist's compensation for the physicians' pension fund. Of

the amount received from the provider, the pathologist agreed to return $4,000 ($2,000 for the

provider's equipment fund and $2,000 to be used for general purposes). In addition, the intermediary

verified that the pathologist made a bona fide, voluntary contribution of $5,000 to the provider.

Calculation of Physician's Compensation to be Used in Computing Medicare Reimbursement to the

Provider:

$50,000 - Compensation received by the pathologist, including the $6,000 retained by the

provider for the sole benefit of the pathologist ($200,000 in gross departmental

charges x 25 percent 30 percent of gross departmental charges less 5 percent of

the gross charges for bad debts and courtesy1).

- 2,000 - Returned to provider by agreement for restricted fund of provider.

2l-ll.7 Rev. l97

2-78 COSTS RELATED TO PATIENT CARE 2l08.l0

- 2,000 - Returned to provider by agreement for unrestricted use of provider.

$46,000 - Net amount received and retained by the pathologist to be used in computing the

provider's Medicare reimbursement (to the further distinguished as to the amount

representing professional medical and surgical services and the amount representing

provider services).

The amount of the bona fide, voluntary contribution ($5,000) is not deducted from the pathologist's

compensation for the purpose of computing Medicare reimbursement to the provider. However, to

the extent that any of the contribution was designated by the pathologist to pay for specific operating

expenses of the provider, such amount must be deducted from those specific operating expenses.

2l08.l0 Treatment of Provider Costs Related to the Provision of Physician Services to Nonprovider

Patients.-- Where direct medical services are rendered by a physician to nonprovider patients, all

direct and indirect provider costs incurred by the provider in connection with the provision of such

services should be identified and deducted from provider costs in arriving at allowable costs for

Medicare purposes. Where the costs for rendering these services cannot be identified, reasonable

estimates must be made of the costs incurred by the provider. Where the provider receives revenue

that is related to such services, such estimated costs may not be less than such revenue.

Rev. 197 21-11.7A

7-75 COSTS RELATED TO PATIENT CARE 2108.11

2108.11 Exhibits - Provider-Based Physicians.--

Exhibit I - Hospital-Based Physician Allocation Agreement

Exhibit II - Determination of Amount of Provider-Based Physician Compensation

Reimbursable Under Part B

Exhibit IIA - Determination of Uniform Optional Percentage

Exhibit III - The Uniform Optional Percentage

Exhibit IV - Item-by-Item Method - Relative Value Schedule

Exhibit V - Alternate Item-by-Item Method

Exhibit VI - Per Diem or Per Visit Method

Exhibit VII - Calculation of Reimbursement Settlement for Professional Services

Rendered to Medicare Beneficiaries by Provider-Based Physicians Not

Using Combined Billing

Rev. l28 2l-ll.8

EXHIBIT I

HOSPITAL-BASED PHYSICIAN ALLOCATION AGREEMENT

The following schedule represents the distribution of time and activities of the physicians in the

_________________________ department:

l. Activity, other than direct patient services Percent of Time

(a) Teaching 5

(b) Research (including attendance at lectures, etc.) l0

(d) Supervision of technical and other personnel 20

(e) Hospital service (committees, etc.) 5

(f) Services of general benefit to patients

(quality control, etc.) 25

Total 75

2. Activity, direct personnel services to individual patients 25

The allocation of time by activity as shown above was based on

(select one of the following):

l. Time study 2. Estimate 3. Other (attach explanation)

Signed ___ Administrator of Provider

Signed ___ _______ Physician(s)

2l-ll.9 Rev. l28

EXHIBIT II

Determination of Amount of Provider-Based Physician Compensation

Reimbursable Under Part B

Department

Physicians

Compensation

Professional

Component

Allocation

Part B

Amount

Approved

Carrier

Inter-

Mediary

Pathology

SMITH

JONES

GREEN

$22,000

20,000

18,000

20%

25%

30%

Total-

$4,400

5,000

5,400

14,800

The method for determining the Part B component of the physician's compensation is demonstrated

in Exhibit II. The data in each of the columns is as follows:

Column l - DEPARTMENT-- Indicate a single provider department with one or more

provider-based physicians rendering a significant volume of professional

services to Medicare beneficiaries.

Column 2 - PHYSICIANS-- List the name of each physician in this department rendering

direct patient services.

Column 3 - COMPENSATION-- Show the annual remuneration for each physician

receiving a fixed compensation. (Where a physician changed to direct billing

subsequent to June 30, l966, the compensation amount for the year prior to the

change should be obtained and used. See § 2l08.2C.)

Column 4 - PROFESSIONAL COMPONENT ALLOCATION-- List the percentage of

compensation attributable to direct patient services. (See § 2l08.l and Exhibit

I.)

Column 5 - PART B AMOUNT-- Multiply Column 3 (Compensation) by Column 4

(Professional Component Allocation) to obtain the portion of each physician's

salary attributable to Part B services.

Column 6 - APPROVED-- By initialing and dating their action, the intermediary and

carrier show approval of the determination.

Rev. l28 2l-ll.l0

EXHIBIT II A

Determination of Uniform Optional Percentage

(Compensation Arrangement Stipulates Percentage of

Gross Charges or Collections)

Department

Physician

Contract

Percentage

Professional

Component

Allocation

Uniform

Optional

Percentage

Approved

Carrier

Intermediary

Pathology

SMITH

7.0

Where a physician has a variable compensation arrangement (see § 2l08.2B for exception) and

wishes to use the uniform optional percentage, enter the appropriate data in the columns of Exhibit II

A as follows:

Column l - DEPARTMENT-- Indicate a single provider department with one or more

provider-based physicians rendering a significant volume of professional

services to Medicare beneficiaries.

Column 2 - PHYSICIANS-- List the name of each physician in this department rendering

direct patient services.

Column 3 - CONTRACT PERCENTAGE-- Show the contract percentage.

Column 4 - PROFESSIONAL COMPONENT ALLOCATION-- List the percentage of

compensation attributable to direct patient services (see § 2l08.l and Exhibit I).

Column 5 - UNIFORM OPTIONAL PERCENTAGE--Multiply Column 3 (Contract

Percentage) by Column 4 (Professional Component Allocation) for each

physician. This amount (rounded to the nearest one-half percent) is the

uniform optional percentage. The physicians' Part B charge for each service is

derived by applying this uniform optional percentage to the provider's

established charge for each service.

Column 6 - APPROVED-- By initialing and dating their action, the intermediary and

carrier show approval of the determination.

2l-ll.ll Rev. l28

EXHIBIT III

The Uniform Optional Percentage

Departme

Part B

Amount

Contract

Percentage

Estimated

Gross

Department

Charges

Uniform

Optional

Percentage

Approved

Carrier

Intermediary

Pathology

$14,800

$200,000

7.5%

After completing Exhibit II, where a physician has a fixed compensation and desires to use the

uniform optional percentage, enter additional data in the appropriate columns of Exhibit III as

follows:

Column l - DEPARTMENT--Show one provider department with provider-based

physicians who render identifiable direct patient services.

Column 2 - PART B AMOUNT--The Part B amount was derived in Exhibit II, Column 5.

Enter that amount in this column.

Column 3 - ESTIMATED GROSS DEPARTMENT CHARGE--Enter the estimated gross

departmental charges for the year.

Column 4 - UNIFORM OPTIONAL PERCENTAGE--Divide Column 2 (Part B Amount)

by Column 3 (Estimated Gross Department Charges) to obtain the uniform

optional percentage. This percentage is applied to all departmental billings,

and will yield in the aggregate an amount equal to the Part B Amount (Column

2). (This percentage may be rounded where such action will not result in

reimbursement of an amount appreciably different from the amount in Column

2.)

Column 5 - APPROVED-- By initialing and dating their action, the intermediary and

carrier indicate approval of the determination.

Rev. l28 2l-ll.l2

EXHIBIT IV

Item-by-Item Method - Relative Value Schedule

Pathology (Department)

Procedu

Provider

’s

Establish

Charge

Percent

Physicia

n’s

Service

Relative

Numeric

Value

Estimate

Procedu

res

(Annual

)

Total

Unit

Convers

ion

Factor

Part

Charg

Approved

Carri

Inter-

media

$ 5.00

10.00

15.00

20.00

25.00

30.00

50%

2.5

3.0

2.0

20.00

3.0

2,000

1,800

2,500

200

3,500

5,00

5,40

5,00

4,00

10,0

14,800

29,900

1.25

1.50

1.00

10.00

1.50

After completion of Exhibit II, in order to determine the Part B charge for the various procedures

performed in a provider department, enter the appropriate data in the column of Exhibit IV as

follows:

Column l - PROCEDURE--List each procedure with significant physician involvement

performed in the provider department.

Column 2 - PROVIDER'S ESTABLISHED CHARGE--Show the provider's charge for

each procedure shown in Column l.

Column 3 - PERCENT - PHYSICIAN'S SERVICE--For each procedure show the

percentage which represents the extent of physician involvement in rendering

direct patient services. (Examples: For procedure "U" it is estimated that 50

percent of the provider charge represents physician involvement each time the

procedure is performed. For procedure "V" physician involvement is

negligible and the procedure is not used in obtaining the Part B charge.)

2l-ll.l3 Rev. l28

EXHIBIT IV (CONT.)

Column 4 - RELATIVE NUMERICAL VALUE--Multiply Column 2 (Provider's

Established Charge) by Column 3 (Percent - Physician's Service) to obtain the

Relative Numerical Value.

Column 5 - ESTIMATED ANNUAL PROCEDURES--Show the estimated number of

times each procedure will be rendered during the year.

Column 6 - TOTAL UNITS-- The total relative value units for each procedure represent

the estimated aggregate value of the physician component for each procedure

and are obtained by multiplying Column 4 (Relative Numerical Value) by

Column 5 (Estimated Procedures--Annual). The total units for each procedure

are added to obtain the aggregate number of units for the department.

Column 7 - CONVERSION FACTOR-- Divide the Part B Amount (Exhibit II, Column 5)

by the aggregate number of units, Column 6 (Total Units). (Round the answer

to nearest tenth.)

Column 8 - PART B CHARGE-- Multiply Column 7 (Conversion Factor) by Column 4

(Relative Numerical Value) to obtain the Part B component charge for each

procedure.

Column 9 - APPROVED-- By initialing and dating their action, the intermediary and

carrier indicate approval of the determination.

NOTE: If an existing relative value schedule is to be used, complete Column l, and omit

Columns 2 and 3. Enter in Column 4 the appropriate relative numerical value for

each procedure as indicated in the existing relative value schedule. Complete

Columns 5 through 7 as described in the instructions for Exhibit IV.

Rev. l28 2l-ll.l4

EXHIBIT V

Alternate Item-by-Item Method

Pathology (DEPARTMENT)

Procedur

Professional

Component

Percentage

Part B

Compensation

Estimated

Procedures

(Annual)

Part B

Compone

Charges

Approved

Carrier

Intermediary

15%

(100%)

Total =

$ 2,220

1,480

740

2,960

3,700

740

1,480

$14,800

1,100

200

300

1,700

100

150

200

$ 2.00

7.50

13.50

10.00

2.00

7.50

10.00

7.50

After completing Exhibit II, where the physicians in a single provider department elect to use the

alternate item-by-item method, enter the following data in the appropriate columns:

Column l - PROCEDURE-- List each procedure performed in the department with

significant physician involvement.

Column 2 - PROFESSIONAL COMPONENT PERCENTAGE-- Show the percentage of

time which the physicians collectively spend performing each procedure. (The

total time spent should equal l00 percent of the time devoted to direct patient

services.)

Column 3 - PART B COMPENSATION-- Multiply the amount shown in Exhibit II,

Column 5, by each percentage in Column 2.

Column 4 - ESTIMATED ANNUAL PROCEDURES-- Estimate the number of times each

procedure will be performed in the coming year.

Column 5 - PART B COMPONENT CHARGES-- The physician Part B charge is derived

by dividing Column 3 (Part B Compensation) by Column 4 (Estimated

Procedures--Annual) rounded to nearest 50 cents.

Column 6 - APPROVED-- By initialing and dating their action, the intermediary and

carrier indicate approval of the determination.

2l-ll.l5 Rev. l28

EXHIBIT VI

Per Diem or Per Visit Method

THE METHOD - TABLE A

1 2 3 4

Department

Total

Physician

Compensatio

Division of Compensation

Inpatient-Compensation

for

Direct Patient Services

Outpatient

Inpatient

Radiology

Pathology

Anesthesiology

Internal – Med.

Surgery

$ 52,000

40,000

42,000

150,000

155,000

50%

$26,000

14,000

4,200

52,500

46,500

50%

$26,000

26,000

37,800

97,500

108,500

60%

$ 15,600

10,400

32,130

87,750

97,650

Total - $143,200 Total - $243,530

INPATIENT RATE - TABLE B

Direct

Patient

Service

Dept.

Part B

mount

Inpatient

Days

Per Diem Rate

Approved

Carrier

Intermediary

HOSPITAL

RADIOLOG

PATHOLO

$ 26,000

100,000

(26) 25

ALL

OTHER

DEPARTM

ENTS

217,330

100,000

(2 18) 2 20

ALL OTHER

PROVIDER

SETTINGS

ALL

DEPTS.

243,530

100,000

OUTPATIENT RATE - TABLE C

1 2 3 4 5

Direct Patient

Service Dept.

Part B

mount

Inpatient

Days

Per Diem Rate

Approved

Carrier

Intermediary

ALL

PROVIDER

SETTINGS

ALL DEPTS

$143,200

41,000

(3 49) 3 50

Rev. l28 2l-ll.l6

7-75 EXHIBIT VI(Cont.)

In developing the per diem (or per visit) method of reimbursement, enter the pertinent information in

the appropriate columns in Exhibit VI. Separate tables are presented to show the basic data

necessary (Table A) and its utilization in deriving the inpatient rate (Table B) and the outpatient rate

(Table C).

Under this method, only compensation paid to physicians who normally render services to Medicare

patients should be included in the computation. Thus, the compensation of obstetricians,

pediatricians, and other physicians who do not normally render services to Medicare beneficiaries

should not be included. In addition, the patient days attributed to the departments of the institution

which do not usually provide services for Medicare patients should also be excluded from the per

diem computation.

It should also be noted that some physicians who render services to Medicare patients also render

services that are not covered under the program. For example, dentists and podiatrists provide

covered services as well as noncovered services to beneficiaries. In such cases, the physicians'

compensation allocated to those noncovered services should be omitted from the per diem

computation.

Table A The Method

Column l DEPARTMENT-- List each provider department in which a significant

number of services for Medicare patients are rendered.

Column 2 TOTAL PHYSICIAN COMPENSATION--On a departmental basis show the

total physician compensation.

Column 3 DIVISION OF COMPENSATION--On a departmental basis show the

percentage and amount of the total physician compensation (Column l)

attributable to outpatient and inpatient services, and enter the aggregate total

for outpatient services in the space provided in Column 3.

Column 4 INPATIENT - COMPENSATION FOR DIRECT PATIENT SERVICES--Of

the inpatient compensation (Column 3) show the percentage and amount

attributable to direct patient services to inpatients. Enter the aggregate total

compensation attributable to inpatient direct patient services in the space

provided in Column 4.

2l-ll.l7 Rev. l28

EXHIBIT VI (Cont.) 7-75

Table B The Inpatient Rate

Column l DIRECT PATIENT SERVICES - DEPARTMENT--In the hospital setting it is

necessary to separate the radiology and pathology department compensation

from other compensation because the direct patient services of these specialty

departments are reimbursable without application of the coinsurance and

deductible provisions. In other provider settings, all departments are

considered together.

Column 2 PART B AMOUNT--This item corresponds to the total of Table A, Column 4.

In the hospital setting the amount attributable to the radiology and pathology

departments must be shown separately.

Column 3 INPATIENT DAYS--Indicate the estimated total number of inpatient days for

the year.

Column 4 PER DIEM RATE--The rate is obtained by dividing Column 2 (Part B

Amount) by Column 3 (Inpatient Days) and rounding to the nearest multiple of

$.05.

Column 5 APPROVED--The carrier and intermediary will signify their approval of the

determination by initialing and dating their action.

Table C The Outpatient Rate

Column l DIRECT PATIENT SERVICES - DEPARTMENT--No differentiation among

departments is necessary.

Column 2 PART B AMOUNT--This item corresponds to the total of Table A, Column 3

(Outpatient).

Column 3 OUTPATIENT VISITS--Indicate the estimated total number of outpatient

visits for the year.

Column 4 PER VISIT RATE--Divide Column 2 (Part B Amount) by Column 3

(Outpatient Visits) and round to the nearest multiple of $.05.

Column 5 APPROVED--The carrier and intermediary will signify their approval of the

determination by initialing and dating their action.

Rev. l28 2l-ll.l8

RESERVED FOR EXHIBIT VII

2l-ll.l9 Rev. l28

RESERVED FOR EXHIBIT VII (Cont.)

Rev. l28 2l-ll.20

2109 COSTS RELATED TO PATIENT CARE 05-85

2109. REIMBURSEMENT OF HOSPITAL EMERGENCY DEPARTMENT SERVICES

WHEN PHYSICIANS RECEIVE COMPENSATION FOR AVAILABILITY SERVICES

2109.1 General.--Wide variations can occur in the utilization of hospital emergency department

services and hospitals cannot always schedule physician staffing at a level commensurate with the

actual volume of services rendered. As a result, emergency department physicians may spend a

portion of their time in an availability status awaiting the arrival of patients. Alternatively, hospitals

may need to arrange for emergency department physician coverage for evenings, weekends or

holidays, when staff or community physicians are not available. Since these periods frequently

generate inadequate physician revenue through charges for professional services due to lower

utilization, hospitals may have to offer physicians supplemental compensation or minimum

compensation guarantees to secure coverage of emergency departments.

When emergency department physicians are compensated on an hourly or salary basis or under a

minimum guarantee arrangement (§2109.2E) providers may include a reasonable amount in

allowable costs for emergency department physician availability services subject to limitation

through the application of Reasonable Compensation Equivalents (RCEs). Availability costs will be

recognized only in the emergency department of a hospital, and only as described in this section.

2109.2 Definitions.--

A. Physician Availability Services.--Physician availability services consist of the physical

presence of a physician in a hospital under a formal arrangement with the hospital to render

emergency treatment to individual patients as and when needed.

B. Reasonable Compensation Equivalent .--A Reasonable Compensation Equivalent (RCE) is

the limitation on the cost which a provider can claim for compensation of services furnished by

physicians to providers. At present, the RCEs apply only to services which are reimbursable on a

reasonable cost basis. The limitation is expressed as a dollar amount for a full work year of 2080

hours ("work-year hours"), and is published in the Federal Register. It is differentiated by physician

specialty with variations for rural areas, metropolitan areas of less than 1,000,000 population, and

metropolitan areas of greater than 1,000,000 population. Details on the RCE limitation are provided

in §2182.6, Conditions of Payment for Costs of Physicians' Services to Providers.

C. RCE Base.--The RCE base is the physician compensation amount that the program will

recognize for provider services and availability services, whether compensation for availability

services is calculated under an hourly rate or salary arrangement, or based on a minimum guarantee

amount calculated for a specified number of direct patient care service hours under a minimum

guarantee arrangement. The RCE base is determined by applying the RCE limitation to the provider

services, availability services or direct patient care services hours specified in the applicable

provider/physician allocation agreement.

D. Adjusted RCE Base.--The RCE base amount may be adjusted to reflect the addition of

allowances for the costs of physician membership in professional associations,

21-11.21 Rev. 326

05-85 COSTS RELATED TO PATIENT CARE 2109.3

continuing medical education and malpractice insurance. The allowance for membership in

professional associations and continuing medical education is limited to the lesser of actual cost or 5

percent of the applicable RCE base amount. The allowance for malpractice insurance is limited to

the proportionate share of actual reasonable physician malpractice insurance cost attributable to the

provider services, availability services or direct patient care services hours (under a minimum

guarantee arrangement) subject to the RCE limitation.

E. Minimum Guarantee Arrangement.--A minimum guarantee arrangement is a financial

arrangement between a physician or a group of physicians and a provider where the physician(s) is

(are) guaranteed a minimum level of compensation (the minimum guarantee amount) for availability

services. The physician(s) may receive more than the minimum amount guaranteed if they generate

charges for services to individual patients in excess of the minimum guarantee amount. If the

charges fall short of the minimum guarantee amount, the provider is obligated to pay the physician(s)

the difference to make up the guaranteed amount. A minimum guarantee arrangement may also

contain provisions for compensating physicians for performing provider services such as supervision

of the emergency department, administration, etc.

F. Unmet Guarantee Amount.--An unmet guarantee amount is the amount by which the

minimum guarantee amount exceeds total physician charges for services to individual patients during

the cost reporting period. Total physician charges include imputed charges for services performed

but not billed. Total physician charges, not collections, must be included in the computation.

2109.3 Allowability of Emergency Department Physician Availability Services Costs.--Emergency

department physician availability services costs will be allowable only in special circumstances, as

follows:

A. No Feasible Alternative Way to Obtain Physician Coverage is Available.-In order for

physician availability services costs to be allowable, the provider must demonstrate that it explored

alternative methods for obtaining physician coverage but was unable to do so. An alternative might

include negotiating a straight fee-for-service arrangement. Evidence of such an effort could consist

of advertisements for emergency physicians, to be compensated on a fee-for-service basis, placed in

appropriate professional publications. It is not necessary for a provider to demonstrate that it

explored alternative methods for obtaining emergency physician coverage annually. The requirement

is applicable prior to the renegotiation of expiring arrangements or the initiation of new arrangements

for physician coverage of the emergency department.

B. Physicians Provide Immediate Response to Life-Threatening Emergencies.-The physician

must be on the hospital premises in reasonable proximity to the emergency department. The

physician cannot be "on call."

C. Documentation.--A claim for Part B hospital costs or Part A and Part B hospital costs must

be supported by the following data maintained by the hospital:

Rev. 326 21-11.22

2109.4 COSTS RELATED TO PATIENT CARE 05-85

1. A signed copy of the contract between the hospital and the physician(s).

2. A written copy of the allocation agreement and supporting data depicting the

distribution of the physician's time between services to the provider, services to individual patients

and services not reimbursable under Medicare.

3. A permanent record of payments made to the physician(s) under the agreement.

4. A record of the amount of time the physician was physically present on the hospital

premises to attend to emergency patients.

5. A permanent record of all patients (Medicare and non-Medicare) treated by the

physician, copies of all physician bills generated for such services and a record of imputed charges

for services for which no billing was made by the hospital or physician.

6. A schedule of physician charges.

7. Evidence that the provider explored alternative methods for obtaining emergency

physician coverage before agreeing to physician compensation for availability services.

2109.4 Methodology for Determining Allowable Emergency Physician Availability Service Costs

A. General.--When a provider compensates emergency physicians for being available to

render physician services to individual patients in the emergency department, the provider may be

reimbursed Medicare's share of the allowable costs incurred by the provider to the extent that the

costs are determined reasonable. Provider reimbursement will be based on the lesser of the actual

compensation paid to the physician or the reasonable compensation determined through the

application of the RCE limits to the hours of emergency department availability stipulated in the

approved provider/physician allocation agreement. If the required allocation agreement does not

specify the availability services hours for which the provider compensates the physician, availability

services costs will not be allowable unless the conditions of §2109.4 C. are met with respect to

minimum guarantee arrangements.

The limit on allowable cost for a physician's services to the provider is calculated by dividing the

total hours of services to the provider (including both availability and provider services) by 2,080

"work-year hours" and multiplying the result by the applicable RCE limit to determine the RCE base.

The RCE base may be increased by the lesser of actual costs or 5 percent of the RCE base to reflect

costs incurred by the provider for emergency physicians' membership in professional associations

and continuing medical education. Additionally, the RCE base may be increased to reflect an

allowance for the proportionate share of actual reasonable physician malpractice insurance cost

incurred by the provider.

21-11.23 Rev. 326

05-85 COSTS RELATED TO PATIENT CARE 2109.4(Cont.)

Emergency physician availability services costs are reimbursable under Part A if attributable to

inpatient services and Part B if attributable to outpatient services in the emergency department. Both

are processed by the Part A intermediary. The costs should be included in the emergency department

cost center. The portion of the cost attributable to emergency physician services rendered in the

inpatient routine areas should then be reclassified from the emergency department cost center to the

inpatient routine cost center on the cost report. The allocation to the inpatient routine cost center is

accomplished by dividing emergency department physician charges for inpatient routine emergencies

by total emergency department physician charges and applying the result to allowable availability

services cost as follows:

Emergency Department

Physician Charges for

I/P Routine Areas X Allowable Availability Services Cost = Inpatient Availability

Total Emergency Services Costs

Department Physician

Charges (Billed and

Imputed)

When a contract requires the physician to render duties other than direct patient care services, such as

teaching, administrative, supervising technical personnel, which are of general benefit to all patients,

and the hospital incurs allowable physician compensation costs for such activities, these costs will be

allocated between the Part A and Part B programs in the same ratio that the inpatient charges and the

outpatient charges for the emergency department bear to total charges. Where the hospital is

reimbursed under the prospective payment system, the Part A inpatient costs are reimbursed on the

basis of the DRG payment.

B. Allowable Availability Service Costs Under Hourly Rate or Salary Arrangements.--Where

the agreement between a provider and emergency physician specifies that payment for availability

services will be made on an hourly rate or salary basis, the provider will be reimbursed Medicare's

share of incurred physician availability services costs subject to the RCE limitation. The following

illustration demonstrates the methodology for determining allowable emergency physician

compensation costs when the physician is compensated on an hourly rate or salary basis for

availability, supervisory and administrative services.

ILLUSTRATION

Dr. A agrees to work in the emergency department of XYZ Hospital providing general emergency

department physician services on weekends, holidays and evenings. The hospital agrees to

compensate Dr. A at the rate of $20 per hour for emergency physician availability services,

supervisory and administrative duties. The hospital also agrees to pay $250 towards the cost of Dr.

A's membership in professional associations, $1,500 for continuing medical education costs and

$4,000 of Dr. A's annual malpractice insurance cost. Dr. A bills and retains all professional fees. He

has agreed not to bill for services rendered to hospital inpatients and employees. The allocation

agreement developed by XYZ Hospital and Dr. A indicates that Dr. A will expend his time, for

which he is compensated by the hospital, as follows:

Rev. 326 21-11.24

2109.4 (Cont.) COSTS RELATED TO PATIENT CARE 05-85

Percentage

Availability Services 50%

Supervision and Administrative Services 50%

TOTAL l00%

During the year Dr. A renders 300 hours of supervisory, administrative and availability services, bills

$29,000 in professional fees, furnishes the equivalent of $1,000 in emergency services to hospital

inpatients and $2,000 in emergency services to hospital employees, is compensated $3,000 for

supervisory and administrative services, and receives additional compensation of $3,000 for

availability services. The compensated hours worked by Dr. A are allocated as follows:

Hours

Availability Services (50% of 300) 150

Supervisory and Administrative Services (50% of 300) 150

TOTAL 300

The reasonable cost of the supervisory, administrative and availability services time is computed as

follows:

1. Determine the Applicable RCE Base

Total Hours (Supervisory,

Administrative and

Availability Services) RCE = RCE Base

Work Year Hours (2080)

(for illustrative purposes

we selected the 1983 RCE/

Total figure for non-

metropolitan areas)

300 X $87,600 = $12,635

2080

2. Determine the Limit on the Allowance for Membership

in Professional Associations and Continuing Medical Education

RCE Base X .05 = Limit

$12,635 X .05 = $632

21-12 Rev. 326

05-85 COSTS RELATED TO PATIENT CARE 2109.4 (Cont.)

3. Provider Payments for Membership in

Professional Associations and Continuing = $1,750

Medical Education

($250 Membership in Professional Associations + $1,500 Continuing Medical Education)

4. Malpractice Insurance Expense = $4,000

5. Adjusted RCE Base = $17,267

(Sum of #1 ($12,635) + the Lesser of #2 or #3 ($632) + #4 ($4,000))

6. Actual Provider Payments

Supervision and Administration $ 3000

Availability 3000

Membership in Professional Associations 250

Continuing Medical Education 1500

Malpractice 4000

$11,750

7. Amount Includable in Allowable Costs = $11,750

(Lesser of #5 or #6)

8. Allocation of Allowable Costs

Billed Charges (Emergency Department) $29,000

Imputed Employee Charges 2,000

Total Outpatient Charges $31,000

Imputed Inpatient Charges 1,000

Total Charges $32,000

Outpatient Charges X Allowable Provider = Allowable Part B

Total Charges Costs Costs

31,000 X $11,750 = $11,383

32,000

Inpatient Charges X Allowable Provider = Allowable Part A

Total Charges Costs Costs

1,000 X $11,750 = $367

32,000

Rev. 326 21-12.1

2109.4 (Cont.) COSTS RELATED TO PATIENT CARE 05-85

C. Allowable Unmet Guarantee Amounts Under Minimum Guarantee Arrangements.--The

allowable cost of an unmet guarantee amount is determined by subtracting total charges for physician

services to individual patients from the lesser of (1) the minimum guarantee amount specified in the

provider/physician arrangement or (2) the reasonable compensation amount which is arrived at by

applying the RCE limits (as adjusted for any appropriate additional allowances) to the physician's

total hours allocated for individual patient care. The charges billed by or for the physician must be

appropriate to the patient care services rendered and not merely token charges. If the agreement

between the provider and physician restricts the physician from billing charges for designated groups

of patients (e.g., inpatients, provider employees), charges for such services must be imputed, and

included in the total physician charge figure. Total physician charges (billed and/or imputed) must

be used in this computation whether or not collected. When physicians are required to perform

services which are of general benefit to all provider patients, as well as direct patient care services,

under a minimum guarantee arrangement, the RCE limits are applied separately in determining the

allowable costs of the unmet guarantee amount and compensation for provider services such as

administration or supervision. If the provider also incurs costs for physician membership in

professional associations, continuing medical education and malpractice insurance premiums, such

costs are allocated between provider payments for unmet guarantee amounts and provider payments

for physician compensation for provider services on the basis of the respective ratios of allocated

direct patient care service hours and provider service hours to total hours worked. This allocation is

necessary in order to determine the provider's actual payments for unmet guarantee amounts and

physician compensation for provider services. Allowable unmet guarantee costs are reimbursable

under Part A if attributable to inpatient services and Part B if attributable to outpatient services in the

emergency department and are processed by the Part A intermediary. The costs for an unmet

guarantee amount should be allocated between Part A and Part B in the same manner as those for

availability services compensated under hourly rate or salary arrangements. (See §2109.4A.)

ILLUSTRATION

Dr. X contracts to work 1,000 hours during the year in the emergency department of ABC Hospital

providing general emergency department physician services on weekends, holidays and evenings.

ABC Hospital guarantees Dr. X $50,000 in charges for physician services to individual patients and

agrees to compensate Dr. X at the rate of $20 per hour for supervisory and administrative duties.

The hospital also agrees to pay $500 for the cost of Dr. X's membership in professional associations,

$2,500 for continuing medical education and $5,000 of Dr. X's annual malpractice insurance cost.

Dr. X bills and retains all professional fees. He has agreed not to bill for services he renders to

inpatients and employees of the hospital. The allocation agreement developed by ABC Hospital and

Dr. X indicates that Dr. X will expend his time as follows:

Percentage

Professional Services to Individual Patients 90%

(includes inpatients and employees) and Availability

Services

Supervision and Administrative Services 10%

TOTAL l00%

21-12.2 Rev. 326

05-85 COSTS RELATED TO PATIENT CARE 2109.4 (Cont.)

During the year Dr. X bills $29,000 in professional fees, furnishes the equivalent of $1,000 in

professional services to hospital inpatients and $2,000 in professional services to hospital employees.

Dr. X is compensated $2,000 for supervisory and administrative services, and $21,000 for an unmet

guarantee amount. The hours worked by Dr. X are allocated as follows:

Hours

Professional Services to Individual Patients and

Availability Services 900 (90% of 1,000)

Supervision and Administrative Services 100 (10% of 1,000)

TOTAL 1,000

Computation of Reasonable Allowable Cost for Supervisory and Administrative Duties

1. Determine the Applicable RCE Base

Total Hours (Supervisory

and Administrative

Services X RCE = RCE Base

Work Year Hours (2080) (for illustrative purposes

we selected the 1983 RCE/

Total figure for non-

metropolitan areas)

100 X $87,600 = $4,212

2080

2. Determine the Limit on the Allowance for Membership in Professional Associations and

Continuing Medical Education

RCE Base X .05 = Limit

$4,212 X .05 = $211

3. Determine Actual Provider Payment for Membership in Professional

Associations and Continuing Medical Education Applicable

to Supervisory and Administrative Services

Total Hours (Supervisory Total Payments

and Administrative for Membership in

Services) X Professional

Total Hours Worked Associations and

Continuing Medical

Education

100 X $3,000 = $300

1000

Rev. 326 21-12.3

2109.4 (Cont.) COSTS RELATED TO PATIENT CARE 05-85

4. Determine the Allowance for Malpractice Insurance

(Supervision and Administration)

Total

Supervisory and Administrative Hours X Payment for

Total Hours Worked Malpractice

Insurance

100 X $5,000 = $500

1000

5. Adjusted RCE Base for Supervision and Administrative

Services (Sum of #1 ($4,212) + the Lesser of #2 or #3 ($211) + #4 ($500)) $4,923

6. Determine Provider Payments Attributable to Supervision and

Administrative Services $2,800

Supervision and Administration (100 hours X $20) $2,000

Membership in Professional

Associations (100 X $500) 50

1000

Continuing Medical

Education (100 X $2500) 250

1000

Malpractice Insurance

Premiums (100 X $5000) 500

1000 $2,800

7. Amount Includable in Allowable Costs (Lower of #5 or #6) $2,800

Computation of Reasonable Allowable Costs for an Unmet Guarantee Amount

8. Determine the Applicable RCE Base

Total Hours X RCE = RCE Base

(Professional and (for illustrative purposes

Availability Services) we selected the 1983 RCE/

Work-Year Hours (2080) Total figure for non-

metropolitan areas)

900 X $87,600 = $37,904

2080

21-12.4 Rev. 326

05-85 COSTS RELATED TO PATIENT CARE 2109.4 (Cont.)

9. Determine the Limit on the Allowance for Membership in Professional

Associations and Continuing Medical Education

RCE Base X .05 = Limit

$37,904 X .05 = $1,895

10 Determine Actual Provider Payment for Membership in Professional

Associations and Continuing Medical Education Applicable to Professional

and Availability Services

Total Hours (Professional Total Payments

and Availability for Membership in

Services) X Professional

Total Hours Worked Associations and

Continuing Medical

Education

900 X $3,000 = $2,700

1000

11. Determine the Allowance for Malpractice Insurance

(Professional and Availability Services)

Total Hours (Professional

and Availability Total Payment for

Services) X Malpractice

Total Hours Worked Insurance

900 X $5,000 = $4,500

1000

12. Adjusted RCE Base (Sum of #8 ($37,904) + the Lesser of

#9 or #10 ($1,895) + #11 ($4,500)) $44,299

l3. Actual Minimum Guarantee Amount $50,000

l4. Reasonable Minimum Guarantee Amount $44,299

(Lower of #12 or #13)

15. Total Charges $32,000

Billed Charges $ 29,000

Imputed Inpatient Charges 1,000

Imputed Employee Charges 2,000

Rev. 326 21-12.5

2109.4 (Cont.) COSTS RELATED TO PATIENT CARE 05-85

16. Reasonable Unmet Guarantee Amount $12,299

(#14 Less #15)

17. Summary of Allowable Provider Costs *$15,099

Supervisory and Administrative Svcs $ 2,800

Reasonable Unmet Guarantee Amount 12,299

$ 15,099

*Total allowable provider costs of $15,099 are allocated between Part A and Part B in the same

manner as the preceding example.

21-12.6 Rev. 326

07-96 COST RELATED TO PATIENT CARE 2110.4

2110. BILLING COSTS

In the cost finding process, billing costs are generally allocated to the various cost centers as part of

administrative costs. Medicare then reimburses providers for its proportionate share of these costs as

determined in the apportionment of the costs of the various cost centers.

2110.1 Contract Billing Services.--Where a provider contracts for billing services to be performed

by another organization, the contract costs of such services are allowable costs subject, of course, to

the provisions of Chapter 10, Cost to Related Organizations. These costs are administrative costs

and are subject to cost allocation and apportionment even though the billings contracted out are

Medicare billings.

2110.2 Treatment of Income Derived From Interest, Finance Charges, and Penalties on Delinquent

Accounts Receivable.--Where a provider derives income from interest, finance charges, or penalties

on delinquent accounts receivable, the actual cash received must be used as a deduction from

allowable administrative and general costs. The provider may not remove the related costs of

preparing, billing, and collecting all accounts receivable balances, or costs of only those accounts

which generated the income, from allowable costs to avoid this income offset requirement.

2110.3 Treatment of Income Derived From Billing Charges Imposed on Suppliers of Services

Furnished Under Arrangements.--Where a provider imposes a charge for billing or any other

administrative services on a supplier of services furnished under arrangements, the amount of the

charge is treated, for Medicare purposes, as a discount for the services rendered. It may not be

considered as income from billing or other administrative services. Accordingly, the amount of

allowable cost for any service furnished under arrangements is the net amount paid by the provider.

2110.4 Physician Billing Costs.--If you incur costs providing billing services to provider-based

physicians for direct medical and surgical services rendered to individual patients, the physician

billing costs are generally not allowable. Physician billing costs incurred by you billing for direct

medical and surgical services rendered to individual patients by provider-based physicians are

recognized as allowable provider costs only when incurred on behalf of compensated provider-based

physicians for services rendered before January 1, 1992, and where payment for the services is made

to you by the carrier on a compensation related customary charge basis. Unallowable physician

billing costs must be identified by you and offset against your total direct and indirect billing costs.

Reasonable estimates of unallowable physician billing costs, inclusive of direct and indirect costs, as

well as a representative portion of overhead, are acceptable, subject to review and approval by your

servicing Medicare fiscal intermediary. Physician billing costs are best estimated if your billing staff

is segmented into provider and physician billing components. This facilitates the more exact

determination of direct physician billing costs and results in more accurate and, thus, more

acceptable overall estimates of physician billing costs. In situations where it is impractical to

segment the billing staff, estimates of physician billing costs may be based upon ratios of physician

bills processed to total bills processed by the billing staff applied to total billing costs. Acceptable

estimates of physician billing costs may also be based on time studies where the average processing

time for a physician bill is determined and that average time is multiplied by the number of physician

bills processed by the billing staff to determine total direct time expended on physician billing. The

ratio of direct physician billing time to total billing time may then be applied to total billing costs to

determine an acceptable estimate of physician billing costs.

Rev. 395 21-13

2112 COST RELATED TO PATIENT CARE 07-96

2112. NONPHYSICIAN ANESTHETISTS' SERVICES AS HOSPITAL SERVICES

When a nonphysician anesthetist is a salaried member of the staff of a hospital, the services

furnished by such an individual in connection with the administration of anesthetic agents are

covered in the same manner as the services of other nonphysician hospital employees. Such services

to hospital inpatients are covered under Part A as inpatient hospital services. When provided for

outpatients, these services are covered under Part B as hospital services incident to a physician's

services to outpatients. In either situation, reimbursement for the services furnished is made to the

hospital on a reasonable cost basis.

When a nonphysician anesthetist who is not a salaried member of the hospital staff provides services

to the hospital's inpatients on a fee-for-service basis, such services are covered in the same manner as

the services of a salaried nonphysician anesthetist, provided the following conditions are met. The

nonphysician anesthetist must be contractually authorized to furnish such services and the services

are made available under arrangements where payment to the hospital for the services discharges the

liability of the patient or any other individual to pay for the services. While the charges for

equivalent services of the anesthetist must be uniform for Medicare and non-Medicare patients,

billing practices of the nonphysician anesthetist need not be identical for both Medicare and non-

Medicare patients. Where the arrangement under which services are furnished meets the

requirements specified in guidelines published by HCFA, these services may be furnished for

Medicare beneficiaries even if the nonphysician anesthetist bills directly for non-Medicare

beneficiaries. Anesthetist services provided under arrangements by which the hospital bills for the

services will be reimbursed to the hospital on a reasonable cost basis. Services billed directly by a

nonphysician anesthetist to an individual patient are not covered under Medicare.

If a hospital imposes a charge for billing or other administrative services on a nonphysician

anesthetist who is not a salaried member of the hospital staff and who is furnishing services under

arrangements, the amount of such charge is a discount from the cost of the services. It may not be

treated as income by the hospital. Thus, the amount to be recognized as cost by the hospital is the

net amount paid to the non-physician anesthetist.

2113. HOME HEALTH COORDINATION (OR HOME CARE INTAKE COORDINATION)

COSTS - GENERAL

Home health coordination, also known as intake coordination, is intended to manage and facilitate

the transfer of patients from a hospital or skilled nursing facility (SNF) to the care of a home health

agency (HHA). This involves arranging for the uninterrupted continuing medical care of the patient

and assisting in the organization of family resources for the effective care of the patient, reducing the

psychological apprehensions inherent in returning the patient to his/her residence. These duties may

be performed at various locations; e.g., at hospitals or other health care institutions such as SNFs, or

on the HHA's premises. The costs of performing these services are allowable under Medicare as

described in §2113.1.

21-13.1 Rev. 395

07-96 COSTS RELATED TO PATIENT CARE 2113.1

However, the costs of services performed by HHA personnel which constitute patient solicitation

activities or activities duplicative of the institution's discharge planning responsibilities are not

allowable. These activities are described in §§2113.2 and 2113.3.

The following sections define home health coordination and these other activities so that the time

spent by HHA personnel in hospitals and SNFs can be divided among the various activities to

determine allowable costs. The fact that a service is performed in a hospital or SNF, rather than on

HHA premises, does not necessarily make the cost of that service unallowable, but such costs should

be carefully assessed to assure they are related to allowable services. HHAs must be able to produce

supporting records such as time logs to substantiate their statements pertaining to the time spent by

HHA personnel in the various activities.

2113.1 Home Health Coordination Activities.--The cost of coordination activities, which ease the

patient's transition from hospital or SNF to the home under the care of an HHA, are allowable.

Coordination activities take place once the patient's physician has determined that the patient

requires home health services as evidenced by the patient's medical record, and the specific HHA

that is to render the services has been chosen by the patient and/or his family (possibly with hospital

or SNF assistance). The cost of activities performed prior to the determination that home health

services are needed and the selection of one HHA to perform the services is not an allowable home

health cost since an agency cannot coordinate the care of a nonpatient. In some cases, generally

infrequently, a referred patient does not actually become a patient of the agency, either because of a

subsequent decision that home care is not needed or because the agency selected cannot meet the

patient's needs. In such cases, the cost of coordination activities would be allowable as if the patient

had been accepted by the HHA.

Coordination activities may be performed on the premises of the HHA, or in a hospital or SNF.

They may be performed by a nurse, medical social worker, or other health professional. For

example, coordination for a specific patient might be performed by the nurse who will provide

skilled nursing services to the patient once he/she is discharged. Coordination activities are of the

type listed below. They are allowable unless the activities are found to be unnecessary for patient

care or a duplication of services already properly performed by the hospital or SNF. To the extent

that coordination activities can be performed simultaneously with evaluation visit activities, separate

visits to the same patient would be excessive.

Coordination Activities

A. Explaining the agency's policies to patients and responsible family members following

referral.

B. Assisting in establishing a definitive home care plan prior to discharge, including

assessment of the appropriateness of the requested services, medical supplies, and appliances.

C. Assuring that the HHA is ready to meet the patient's needs at the time of discharge. This

entails making arrangements for any special medical supplies or appliances, making arrangements

for training agency personnel regarding unfamiliar procedures or problems pertaining to the patient's

care, and communicating information regarding the patient to agency personnel.

Rev. 395 21-13.1A

2113.2 COST RELATED TO PATIENT CARE 07-96

2113.2 Patient Solicitation Activities.--Costs incurred by a home health agency for personnel

performing duties in the hospital or SNF which are primarily directed toward patient solicitation are

unallowable costs for Medicare reimbursement purposes. (See HCFA Pub. 15-I, §§2136ff.) Visits

made by HHA personnel to patients which have not yet been referred to the HHA (as evidenced by

the patient's medical record) in order to persuade the patient to request the HHA's services are

considered patient solicitation, as would visits to physicians to obtain referrals. Obtaining referrals

by means of a cooperating hospital or SNF employee, or by reviewing patient records to identify

potential patients for the HHA, are also considered patient solicitation. Any costs incurred for these

activities are unallowable. These costs include not only the compensation and transportation costs of

the HHA personnel engaged in the activity, but also any costs the HHA incurs for meals,

entertainment, gifts, etc., given to influence these parties to refer patients to the HHA.

2113.3 Discharge Planning-Type Activities.--A hospital or SNF must perform discharge planning

for its patients as a part of the utilization review plan it is required to have in effect in order to meet

the Medicare conditions of participation. Since implementation of a utilization review plan is the

responsibility of the hospital or SNF, no cost attributable to this activity can be recognized as an

allowable cost of an HHA.

Therefore, the costs an HHA incurs because one or more of its employees performs patient discharge

planning activities cannot be recognized as an allowable cost to the HHA. For example, costs

incurred by an HHA to screen and review hospital files individually or during staffing or discharge

planning, for the purpose of determining the level of care a patient will require upon discharge, are

not allowable costs to the HHA regardless of whether the HHA employee performs this assistance at

the hospital or elsewhere.

Rather than having its own staff perform the required discharge planning activities, a hospital or SNF

could arrange to have these services provided by HHA employees and pay the HHA for these

services. These costs would be allowable to the hospital or SNF as discharge planning costs, and

would be reimbursable to them to the extent they are reasonable in amount and do not duplicate

services already provided by hospital or SNF staff. The HHA must specifically identify and deduct

the costs. However, if the costs cannot be determined, the HHA may deduct the revenue it receives

for these services from its costs.

2113.4 Education and Liaison Activities.--Education and liaison activities permit the HHA to

establish ties with the rest of the health care system. These activities are allowable to the extent that

they are necessary for patient care and do not duplicate services which are or should be performed by

the hospital or SNF. (See §§2136ff.) The activities include:

A. Serving as an educational resource to the hospital or SNF concerning home health services.

This includes conducting training for hospital or SNF staff and serving as a consultant to the hospital

or SNF for establishing home care policies and practices.

B. Educating physicians concerning the range of home care services available.

21-13.1B Rev. 395

08-92 COSTS RELATED TO PATIENT CARE 2114.2

2113.5 Home Health Coordination in the Provider-Based HHA.--In provider-based HHAs the

hospital or SNF and the HHA are part of the same complex, and the reasonable costs of discharge

planning services performed by HHA personnel are allowable when the costs are properly classified

as costs of the hospital or SNF and do not represent a duplication of services performed by other

personnel. Include the costs in the hospital's or SNF's discharge planning costs. Instruct the provider-

based HHA to maintain records to substantiate time spent in various activities.

2114. VISITING COSTS OF HHAS

Costs related to patient care visits are allowable HHA costs. Visiting costs are incurred when a staff

member of the HHA or others under arrangements made by the HHA make a personal contact to

provide a covered home health service to a beneficiary in his/her place of residence.

Costs related to outpatient visits made by a patient to a hospital, SNF, rehabilitation center, or

outpatient department affiliated with a medical school to receive covered HHA services are

allowable costs if:

o The HHA made arrangements for the services; and

o The services involve the use of equipment which cannot be made readily available to the

patient in his/her place of residence.

Visiting costs include all incurred costs related to making the visits, such as preparation for the visits,

telephone calls or conferences about the patients, maintaining the patients' records, travel to the

patients, and treating the patients.

2114.1 Nonowners Compensation.--Compensation paid to a nonowner employee, which is

computed under the procedural guidelines contained in Chapter 9, is included in the allowable costs

of the HHA. Following these procedural guidelines is necessary when applying the substantially out

of line test in §2102.1. This test determines whether the compensation costs are substantially out of

line with other institutions in the same area which are similar in size, scope of services, utilization,

and other relevant factors.

2114.2 Transportation Costs.--Transportation costs incurred by an HHA may be included in the

allowable costs of the HHA if the costs are reasonable (as defined in §2102.1), and necessary (as

defined in §2102.2). Generally, transportation costs are incurred for either the use of an employee's

vehicle or the use of the HHA's vehicle, whether owned or leased.

A. Use of An Employee's Vehicle: Include the amount paid to an employee for necessary

patient care transportation in the allowable costs of the HHA if it does not exceed either the amount

recognized under current IRS guidelines or the amount based on the standard GSA mileage rate (see

§1412.6). Classify any excess amount as a fringe benefit and include in the employee's

compensation.

Rev. 367 21-13.2

2114.2(Cont.) COSTS RELATED TO PATIENT CARE 08-92

B. Use of An HHA's Vehicle, Whether Owned or Leased: Reasonable costs of owned or

leased vehicles incurred by an HHA to render necessary patient care are included in allowable costs

of the HHA. When an HHA vehicle is used for personal and HHA patient care activities, the HHA

must maintain documentation of the number of miles that the vehicle is used for each purpose. Use

of the vehicle for commuting between the employee's place of residence and the HHA is considered

a personal activity. The costs of the vehicle attributed to personal activities (based on the ratio of

personal mileage to total mileage applied to the vehicle's costs) must be included in the employee's

compensation as a fringe benefit to the extent that the employee does not reimburse the HHA for the

costs.

2115. TREATMENT OF MEDICAL SUPPLY COSTS IN HHAs

All HHAs are expected to separately identify in their records the cost of medical supplies that are not

routinely furnished in conjunction with patient care visits and which are directly identifiable services

to an individual patient. Exclude the cost of medical supplies for which a separate charge is made, in

addition to the per visit charge, from the per visit costs if:

o The common and established practice of comparable HHAs in the area is to charge

separately for the item;

o The HHA follows a consistent charging practice for Medicare and non-Medicare patients

receiving the item;

o Generally, the item is not frequently furnished to patients;

o The item is directly identifiable to an individual patient and its cost can be identified and

accumulated in a separate cost center; and

o The item is furnished at the direction of the patient's physician and is specifically identified

in the plan of treatment.

Do not separately classify the cost of those minor medical and surgical supplies which are not

expected to be specifically identified in the physician's plan of treatment, or for which a separate

charge is not made. It must be included in the per visit cost. These supplies (e.g., cotton balls,

alcohol prep) are items which are frequently furnished to patients or utilized individually in small

quantities (even though these items in certain situations may be used in greater quantity). For proper

cost report treatment of medical supply costs in HHAs, see PRM-II, §404.

21-13.3 Rev. 367

108-92 COSTS RELATED TO PATIENT CARE 2116

2116. NON-VISITING COSTS OF HHAs

Non-visiting costs are not allowable costs under Medicare. Non-visiting costs are costs related to

activities of the HHA other than home visiting or visits by the patients as an outpatient to a hospital,

skilled nursing facility, rehabilitation center, or outpatient department affiliated with a medical

school for covered home health services. (See §2ll4.) These costs include costs incurred for the

operation of school visit programs, meals-on-wheels programs, well-baby clinics, etc.

2117. CONTRACTED SERVICES PURCHASED BY HHA

A. Applicable Contracts.--The contracts for services referred to in these instructions include

administrative services such as purchased management services and patient care services such as

purchased therapy services. They do not include contracts to purchase products such as medical

supplies or rental space even if a coincidental service (e.g., maintenance and repairs) is provided

under the contract.

B. Contracts Exceeding Five Years.--The total costs incurred by a HHA pursuant to a contract

entered into after December 5, 1980 for any services furnished on or after April 1, 1982 for, or on

behalf of, the agency are unallowable where the contract is entered into for a period exceeding 5

years. Included in this category are the following:

o Contracts with a stipulated term exceeding 5 years;

o Contracts with an initial term of 5 years or less, but which, in the absence of specific action

by the parties to the contract, are automatically renewable for a period(s) which together with the

initial term exceeds 5 years.

The following are not included in the category of contracts exceeding 5 years:

o Contracts with terms exceeding 5 years or potentially exceeding 5 years through automatic

renewals and which are subject to termination at any time by either party.

o Contracts which could exceed 5 years only through renewals requiring a specific election

by the HHA.

o Contracts of indefinite duration which, under applicable State law, are subject to

termination.

o Contracts which provide for an unspecific change in the amount of consideration at an

interval of 5 years or less, and which, under applicable State law, are construed as having a tenure

not exceeding the point in time when the change occurs.

Penalty or other fees incurred by a HHA to terminate a contract with a stipulated term exceeding 5

years (as explained), which was entered into after December 5, 1980 for any services furnished on or

after April 1, 1982 for, or on behalf of the agency, are unallowable.

Costs of a contract for services entered into after December 5, 1980 for services furnished prior to

April 1, 1982 are reimbursable to the extent that the costs are otherwise allowable and reasonable in

amount.

Rev. 367 21-13.4

08-92 COSTS RELATED TO PATIENT CARE 2118

C. Contracts Where Payment is on a Percentage Basis.--The total costs incurred by a HHA

pursuant to a contract entered into after December 5, 1980 for any services furnished on or after

April 1, 1982 and prior to September 3, 1982 for, or on behalf of, the agency where the amount

payable by the HHA under a contract is based on a percentage of the agency's reimbursement or

claim for reimbursement are unallowable. Included in this category are contracts where payment or

any portion of the payment by a HHA is based on a percentage of the agency's revenue or profit, a

percentage of the agency's Medicare, Medicaid or other third-party reimbursement, a percentage of

billed charges, or other similar arrangements. Costs of a contract for services entered into after

December 5, 1980 for services furnished prior to April 1, 1982 and on or after September 3, 1982 are

reimbursable to the extent that the costs are otherwise allowable and reasonable in amount.

D. Contracts Entered Into On or Before December 5, 1980.--Costs which are incurred by a

HHA pursuant to a contract for services entered into on or before December 5, 1980 may be

reimbursed to the extent that the costs are otherwise allowable and reasonable in amount. However,

a contract entered into on or before December 5, 1980 that is renewed subsequent to December 5,

1980 at the specific election of a HHA is subject to the provisions of §§2117 A, B and C.

E. Applicable HHAs.--These instructions apply to all free-standing HHAs. Provider-based

HHAs are also subject to these instructions where the contract applies only to the HHA component

of the health care complex. In this circumstance, the costs applicable to the HHA component must

be appropriately identified and disallowed by reason of the above stated conditions.

2118. COST OF SERVICES FURNISHED UNDER ARRANGEMENTS

The term under arrangements refers to a manner of furnishing services by a provider in which

payment to the provider for the services with respect to which the individual is entitled to have

payment made by the program discharges the individual's liability to pay for the services. Providers

may furnish services under arrangements with outside suppliers, including other providers. The

amount charged by the supplying organization and paid by the provider for the services rendered then

becomes a cost to the provider. This amount is includable in the provider's allowable cost for

Medicare purposes to the extent that the costs of such purchased services are determined to be

reasonable, subject to the provisions of Chapter l0, Cost to Related Organizations. The

reasonableness of the amount is determined by the going rate charged to others for such services

within the general community. The services are treated as though they were furnished directly to the

provider.

21-13.5 Rev. 367

01-82 COST RELATED TO PATIENT CARE 2119

2118.l Payment to the Provider.--Where services are provided "under arrangements," the supplier

bills, and is paid by, the provider for the services actually rendered. Under these circumstances, the

Medicare program cannot directly reimburse the supplier of services. Payment for such services is

made as a part of provider costs. Provider cost in this instance is limited to the net amount actually

paid the supplier. If the provider imposes a charge for billing services or other administrative

services on the supplier, such amount must be treated as a discount to the provider. It may not be

treated as income by the provider.

A. Routine Services.--(See §§ 2202.6, 2202.7, and 2203.1.) The costs of items purchased

under arrangements that are considered as a part of covered routine inpatient services are includable

in the provider's overall allowable cost for routine services. The costs of routine services will then

be apportioned over all patients in accordance with the apportionment method selected. The

provider should not bill the program for these purchased services on an individual patient basis, even

though the service is actually secured for a specific patient.

B. Ancillary Services.--(See §§ 2202.8 and 2203.2.) The supplier should bill the provider for

the services purchased under arrangements which are actually rendered, itemizing such services by

individual patient, the date of service, and, where appropriate, the related charge for each service and

the quantity of service provided. This bill then provides the supporting documentation for the cost to

be included in the provider's allowable cost. The detailed information is then used by the provider to

bill the Medicare program for the services provided to each Medicare patient.

2ll8.2 Services Furnished Under Arrangements for Medicare Beneficiaries Only.--While charges

for equivalent services of a supplier of services "under arrangements" must be uniform for Medicare

and non-Medicare patients, billing practices of such a supplier need not be identical for both

Medicare and non-Medicare patients. Where the arrangement under which services are furnished

meets the requirements specified in guidelines published by HCFA, these services may be furnished

for Medicare beneficiaries even if the supplier bills directly for non-Medicare beneficiaries.

Where a supplier furnishes services "under arrangements" only for Medicare beneficiaries and bills

directly for non-Medicare beneficiaries, the costs of such services should not be commingled with

other provider costs. Rather, the cost of such services should be included in total Medicare costs after

cost finding and apportionment. (See Part II, §§ 240.l and 340.l)

2119. COST OF DRUGS AND RELATED MEDICAL SUPPLIES

A. Reasonable Cost and Maximum Allowable Cost Limitation (MAC).--The cost of drugs and

related medical supplies furnished by providers to Medicare beneficiaries are reimbursed by the

program on a reasonable cost basis. To meet the test of reasonableness, the cost of the drug or

related medical supply may not exceed the amount a prudent and cost-conscious buyer would pay for

the same item.

Rev. 260 21-14.1

2119 (Cont.) COST RELATED TO PATIENT CARE 01-82

A reasonable cost limitation will be set on certain multiple-source drugs that involve the

expenditures of significant amounts of Federal funds and are purchased at significantly different

prices. This maximum allowable cost limitation, called the "MAC" for a particular drug, will be

based on the lowest unit price at which the drug is widely and consistently available to pharmacists

from any formulator or labeler, and the most frequently purchased package size. Final MAC

determinations will be published in the Federal Register. These MAC determinations are also

published as an appendix to this chapter. This appendix includes the MAC limitation and its

effective date, the generic name of the drug, and a listing of the most frequently purchased brand

names of the drug.

For purchases made on or after the effective date of the final MAC determinations, the allowable

cost for any multiple-source drug for which a MAC has been established may not exceed the lowest

of:

(l) the actual cost,

(2) the amount which would be paid by a prudent and cost-conscious buyer for the drug if

obtained from the lowest-priced

21-14.2 Rev. 260

7-78 COSTS RELATED TO PATIENT CARE 2119(Cont.)

source that is widely and consistently available within a provider's service area, whether sold by

generic or brand name, or

(3) the MAC.

B. Prescription Drugs

l. Drug Purchases.--Providers have their own pharmacy are expected to purchase drugs

in bulk, where possible, from manufacturers or recognized wholesale outlets to gain economies from

quantity purchasing.

Providers not having their own pharmacies generally purchase drugs under arrangements with local

pharmacies rather than from manufacturers or wholesalers. Where the drugs are purchased under

arrangements, the charges to the provider by the supplier become the provider's pharmacy costs. In

such cases, these providers should pay no more than the going rate for prescription drugs and, in

addition, should seek to minimize their pharmacy costs by obtaining discounts, either direct or

indirect, from the supplier. It is not expected that a provider will utilize the services of a higher

charge pharmacy for its normal prescription needs merely because the pharmacy provides 24-hour

emergency services. Of course, the Medicare program will recognize the costs of services when a

prescription is required at a time when the provider's normal source of prescription is not available,

even though this pharmacy may have higher charges than and may not be the same as the one with

which the regular prescription orders are placed.

2. Consultant Services.--A pharmacist's fee for consultant services should not be

included in the price of the prescriptions. If the extent of the consultant services is such that the

pharmacist believes it necessary to make a charge for these services, then it would be appropriate for

the pharmacist to make a separate charge to the provider. The charge for the consultant services may

be included in the provider's administrative costs, to the extent reasonable. The provider should

document the extent of these services received so that any payment for them may be evaluated under

the prudent buyer policy.

C. Exception to the MAC Limit.--The MAC limit for a particular drug will not apply where a

physician certifies that in his medical judgment a specific brand name drug is medically necessary for

a particular patient. The individual patient's name and the particular drug prescribed must be clearly

identifiable. This certification must be in the physician's own handwriting. Merely checking a box

on a form or stamping a prescription will not be considered an acceptable certification. Written

certifications must be retained in the provider's records.

Example of physician certification statement:

"This brand is medically necessary--dispense as written."

Rev. 205 21-14.3

2119(Cont.) COSTS RELATED TO PATIENT CARE 7-78

It is not necessary to forward the certification statement to the pharmacist. Written certifications may

be made on patient charts with the pharmacist receiving some form of notification on the drug order

that a properly executed physician certification is on file. This exception, however, does not waive

the requirement that the cost of the drug may not exceed the amount a prudent and cost-conscious

buyer would pay for the drug prescribed.

D. Charges to Beneficiaries.--If the amount determined to be allowable in accordance with

paragraph A is less than the amount charged the provider by an outside supplier, the beneficiary

cannot be charged for the excess. The provider's agreement with the Secretary prohibits charging the

Medicare patient for covered items and services (Section l866(a)(l)(A) of the Social Security Act).

E. Provider Record keeping Requirements.--In addition to maintaining the physician

certifications described in paragraph C, the provider, as part of its financial record keeping

responsibility under the program, must have on supplier invoices all needed cost verification

information--i.e., name, brand, quantity, form and strength of the drugs supplied and the provider's

actual cost. Otherwise, the intermediary, in accordance with section l8l5 of the Social Security Act

and section 405.453 of the regulations, will be required to deny charges for unlabled drugs because

of inadequate records. Any cost reductions received on drug purchases, such as discounts (cash,

trade, purchase and quantity), rebates, etc., must also be clearly reflected on the individual invoices

or related documentation.

F. Nonprescription Drugs and Medical Supplies.--Wherever feasible and to the extent

permitted by State law, providers should also purchase their nonprescription drugs and medical

supplies in bulk to get more reasonable prices and take advantage of quantity and other discounts.

(See § 2203.l concerning routine drugs in SNF's.)

G. Survey Results to Determine Scope of Audit.--The results of intermediary surveys for

evaluating the cost of drugs and other related medical supplies will be one of the factors considered

in the scope of audit determinations.

H. Audit Adjustments.--

l. Drugs Purchases from Manufacturers or Recognized Wholesale Outlets.--If a MAC

has been established for a drug that appears on an invoice reviewed by the intermediary, a

comparison will be made between the cost incurred by the provider in purchasing the drug and the

allowable cost based on the MAC limit. (See example.)

Adjustments to allowable costs will be made based on this comparison where the cost of one or more

drugs exceeds the applicable MAC limitation. Make such adjustments even if the provider has

purchased other drugs at costs below the

2l-l4.4 Rev. 205

7-78 COSTS RELATED TO PATIENT CARE 2ll9(Cont.)

limitation. An adjustment will also be made where the cost of a drug is below the applicable MAC

limitation yet exceeds the amount that would be paid by a prudent and cost-conscious buyer for the

drug if obtained from the lowest-priced source that is widely and consistently available, whether sold

by generic or brand name. If the provider has a substantial number of physician certifications (see

paragraph C) on file to justify the purchase of drug products priced above the MAC limit and above

the "lowest-priced source" limit, the audit adjustments described above may be waived. The

allowable cost for the higher-priced products may not, however, exceed the amount that would be

paid by a prudent and cost-conscious buyer for the same items.

Example:

Invoice shows the provider purchased from a recognized wholesale outlet a widely distributed brand-

name version of drug X as follows:

Assume the MAC for drug X, 250 mg. capsules, is set at 2.2 cents/capsule. 100 bottles, 100 capsule

size @$3.90 per bottle.

Total invoice price $390

Deduct:

Total maximum allowable cost

(2.2 cents x 100 x 100) -220

Excess = $170

The $170 excess above the MAC amount will be deducted from the provider's total allowable drug

costs.

2. Drugs Purchased under Arrangements with Local Pharmacies.--Drug surveys will be

conducted by the intermediary based on a sample review of Medicare billings (forms HCFA-l453)

and the supporting invoices. Where the total costs incurred by the provider for the sampled drugs

(which may include drugs for which a MAC has been established) are substantially in excess of the

"going price" for the drugs, as determined by the intermediary, and adjustment to reimbursable drug

costs will be made initially. If subsequent drug surveys indicate a pattern of substantially out-of-line

drug costs, adjustments to total allowable drug costs will be made based on the survey results. Initial

adjustments are made to reimbursable cost, rather than total allowable cost, because in the absence of

a pattern of substantially out-of-line drugs costs, it cannot be assumed that the results of a single drug

survey adequately reflect the provider's overall purchasing practices with regard to prescriptions

obtained from local pharmacies.

I. Appeals.--A provider may appeal the amount of program reimbursement made for drugs in

accordance with the requirements and procedures described in §§ 2425ff. However, the provisions of

§§ 2425ff do not apply to disputes concerning the inclusion of a specific drug on the published MAC

list or the MAC limitation established for a specific drug. For disputes involving these issues,

provisions of the Department's MAC regulations shall apply (45 CFR 19.6).

Rev. 205 21-14.5

2120 COSTS RELATED TO PATIENT CARE 7-78

2120. REIMBURSEMENT FOR COSTS OF INTERNS AND RESIDENTS

For information on coverage of services performed by interns and residents, refer to the appropriate

manuals listed below:

Hospital Manual - §§ 210.6, 237

Skilled Nursing Facility Manual - § 212.7

Home Health Agency Manual - § 206.4

A. Reimbursement under Part A.--The cost of services of interns and residents provided an

inpatient of a hospital with an approved teaching program or a skilled nursing facility with a hospital

approved program and a transfer agreement with the hospital are includable in allowable costs under

Part A. (See §§ 404 and 404.1 for an explanation of approved programs.)

Where home health services are furnished by residents or interns under approved teaching programs

of the hospital with which the home health agency is affiliated of under common control, the visiting

costs incurred by the interns or residents of the hospital for visits to home health beneficiaries are

included in the allowable costs of the home health agency.

B. Reimbursement Under Part B.--The following types of services performed by interns or

residents are reimbursable under Part B on a reasonable cost basis:

l. Services rendered to inpatients of hospitals by interns and residents not in approved

training programs,

2. Services performed for hospital outpatients,

3. Services which would otherwise be covered under Part A, but for which the patient

is not eligible under Part A (e.g., inpatient hospital benefit eligibility is exhausted),

4. Services performed for SNF patients which are not covered under Part A, and

5. Services performed for home health patients which are not covered under Part a

home health plan.

The cost of Part B residents' and interns' services to inpatients should be calculated on a per diem

basis by the hospital in consultation with the intermediary. The total cost of such services (including

fringe benefits, etc.) should be apportioned between inpatient and outpatient services on the basis of

the time spent on each. The inpatient per diem figure is then obtained by dividing the total annual

inpatient cost for these services by the estimated annual number of inpatient days for all patients.

21-14.6 Rev. 205

12-11 COSTS RELATED TO PATIENT CARE 2l22.l

For patients who are enrolled under Part B, as indicated by the Reply to the Notice of Admission, the

provider will be reimbursed for 80 percent of the cost of providing these services. The provider

should collect 20 percent of the per diem rate for the services of residents and interns covered under

Part B times the number of inpatient days provided. As long as the patient is entitled to Part A

benefits, no determination of the patient's deductible liability need be made for inpatient Part B

interns' and residents' services.

Patients not enrolled under Part B will be liable for the entire cost of Part B interns' and residents'

services. The provider must maintain a record of the inpatient days of these individuals so that this

cost may be excluded from the amount of program obligation at the time of retroactive cost

adjustment.

2l22. TAXES

2l22.l General Rule.--The general rule is that taxes assessed against the provider, in accordance

with the levying enactments of the several States and lower levels of government and for which the

provider is liable for payment, are allowable costs. Tax expense should not include fines and

penalties. Taxes are allowable costs to the extent they are actually incurred and related to the care of

beneficiaries.

Rev. 448 2l-l4.7

12-11 COSTS RELATED TO PATIENT CARE 2122.4

Whenever exemptions to taxes are legally available, the provider is expected to take advantage of

them. If the provider does not take advantage of available exemptions, the expenses incurred for

such taxes are not recognized as allowable costs under the program.

2122.2 Taxes Not Allowable as Costs.--Certain taxes which are levied on providers are not

allowable costs. These taxes include:

A. Federal income and excess profit taxes, including any interest or penalties paid thereon

(see § 1217).

B. State or local income and excess profit taxes (see § 1217).

C. Taxes in connection with financing, refinancing, or refunding operations, such as taxes on

the issuance of bonds, property transfers, issuance or transfer of stocks, etc. Generally, these costs are

either amortized over the life of the securities or depreciated over the life of the asset. They are not,

however, recognized as tax expense.

D. Taxes from which exemptions are available to the provider.

E. Special assessments on land which represent capital improvements such as sewers, water,

and pavements should be capitalized and depreciated over their estimated useful lives.

F. Taxes on property which is not used in the rendition of covered services.

G. Taxes, such as sales taxes, levied against the patient and collected and remitted by the

provider.

H. Self-employment (FICA) taxes applicable to individual proprietors, partners, members of a

joint venture, etc.

2l22.3 Employment-Related Taxes--Provider-Based Physicians.--Employment-related taxes, i.e.,

FICA, Workers' Compensation and Unemployment Compensation, which are paid by a provider on

behalf of a provider-based physician, are considered business expenses of the employer and not

fringe benefits (§ 2l08.3Cl). Hence, they are includable in their entirety as part of the administrative

cost of the provider, without allocation to the physician's professional component, and reimbursable

to the provider on a reasonable cost basis.

2l22.4 Franchise Taxes.--A franchise tax is a periodic assessment levied by a State or local taxing

authority on the operation of a business within the borders of that governmental entity. The basis

used to compute the amount of the franchise tax varies among taxing authorities. Where the amount

of the franchise tax is based upon the net income of the provider,

Rev. 448 2l-l5

2122.5 COSTS RELATED TO PATIENT CARE 12-11

with a minimum amount stated, the following criteria will be used to determine whether and in what

amount a franchise tax is an allowable cost:

A. Where a provider has no net income but is required to pay a minimum franchise tax, the

franchise tax is an allowable cost.

B. Where a provider realized net income which is not sufficient to incur a tax in excess of the

minimum tax and the minimum tax is levied, then only the difference between the minimum

franchise tax and the tax computed on net income is allowable cost. For example, if the minimum

tax is $500 and the tax computed on the net income is $400, then the $400 is an income tax and only

the excess ($500 - $400) or $100 is an allowable cost.

C. Where a provider has net income sufficient to incur a tax greater than the minimum

franchise tax, the entire tax is considered and income tax and no part of the tax is an allowable cost.

For example, if the minimum tax is $500 and the tax computed on income is $600, then the entire

$600 is a nonallowable cost.

D. Where the amount of the franchise tax is based upon several criteria, one of which is net

income, the amount of the franchise tax computed on net income is not an allowable cost. For

example, if the minimum tax is $500, the tax computed on net income is $400, and the tax levy on

capital stock is $600, then $400 remains an income tax and only the excess ($600 - $400) or $200 is

an allowable cost.

2122.5 Unemployment Compensation Insurance Costs for Nonprofit Providers Under Public Law

91-373.--

A. General.--Under PL 91-373, most nonprofit providers and State hospitals are required to

cover certain employees under their respective State unemployment compensation laws.

This Federal law also provides that each nonprofit provider must be permitted by State law the

option of (1) paying regular State unemployment compensation taxes, or (2) reimbursing the State

direct, on a dollar-for-dollar basis, for unemployment compensation benefits paid to former

employees attributable to service with the provider--a form of self-insurance. Those providers which

elect to pay benefits direct by self-insuring must also be allowed to participate in a joint program

with other nonprofit organizations to establish a pool for reimbursing the State. See § 2162ff for

provisions governing pool arrangements for unemployment compensation and workers'

compensation insurance coverage.

B. Payment of the State Tax.--Where a nonprofit provider elects to pay regular State

unemployment compensation taxes, such payments are recognized as an allowable cost.

21-15.1 Rev.448

12-11 COSTS RELATED TO PATIENT CARE 2122.7

C. Self-Insurance Program.--Where a nonprofit provider chooses to self-assure by establishing

its own reserve account, contributions to this reserve account are not allowable costs under the

Medicare program. Where a nonprofit chain organization (or related organization) centrally operates

an unemployment insurance reserve fund for some or all of its member (related) providers, the fund

is considered a self-insurance program and payments made to it by the participating providers are not

allowable costs under the Medicare program. This is because such a fund is simply an arrangement

among related providers with the chain maintaining control over the fund. Thus, payments to the

fund are not actually incurred costs, but rather a provision for establishing a central reserve from

which unemployment costs are met as they are incurred. Moreover, any income earned from

investment of the funds of the reserve account must be used to offset a provider's allowable interest

expense under the Medicare program.

Certain costs associated with a self-insurance program are allowable, whether paid from the fund or

directly by the provider. They are:

1. Any amounts paid to reimburse the State for unemployment compensation payments

actually made by the State to the former employees of the provider.

2. Any premium costs for the purchase of commercial insurance which protects against

catastrophic loss, provided the type, extent, and cost of coverage are not substantially out of line with

those of other similar institutions in the same area.

3. The fees paid to an outside individual or firm (if any) to administer the program, to

the extent such fees are considered reasonable for the services rendered. Such administration may

consist of completing the claims forms from the State unemployment office, representing the

provider at the appeals level, etc.

4. Any other reasonable administrative costs incurred by the provider in establishing

and administering the program.

These costs are allowable for a chain organization program to the extent the costs are properly

allocated among the providers which incurred them, e.g., unemployment compensation payments

should be directly allocated to the provider whose unemployed employees were paid. (See § 2l62ff

for other self-insurance provisions.)

2122.6 Self-Insurance Program for Unemployment Compensation and Workers' Compensation

Insurance Using a Reserve for Funding.--Where a provider or a group of providers, whether

proprietary or nonprofit and whether related or not, chooses to self-insure against unemployment

compensation and/or workers' compensation risks by establishing its own reserve account, the

provisions of preceding §2122.5C apply. See §2162.7, which explains the self-insurance

requirements that must be met before payments made into a trust can be included in allowable costs.

2122.7 Review of Reasonable Costs, Including Taxes. -- In general, reasonable costs claimed by a

provider, including taxes, must be actually incurred. While a tax may fall under a category that is

generally accepted as an allowable Medicare cost, the provider may only treat the net tax expense as

the reasonable cost actually incurred for Medicare payment purposes. The net tax expense is the tax

paid by the provider, reduced by payments the provider received that are associated with the assessed

tax. Contractors will continue to determine whether taxes and other expenses are allowable based on

reasonable cost principles set forth in the Medicare statute and regulations.

Rev. 448 21-15.2

10-80 COSTS RELATED TO PATIENT CARE 2125

2124. OXYGEN

Oxygen is classified as a medical supply under both Part A and Part B of the Medicare program, and

providers are reimbursed for it on the basis of reasonable cost. When oxygen is furnished to a

Medicare inpatient by a participating hospital or skilled nursing facility, or by another under

arrangements with such a provider, the cost of oxygen is an allowable Part A cost. Oxygen furnished

by a participating hospital is incident to physicians' services to outpatients is an allowable Part B

cost. For cost finding purposes, oxygen is classified as a medical supply, part of the ancillary

services furnished to inpatients under Part A.

The cost of oxygen furnished by a home health agency is covered under Part A or Part B as a home

health service. Under the provisions for rental or purchase of durable medical equipment this cost is

allowable only if oxygen is essential to the effective use of the durable medical equipment, it has

been prescribed by the beneficiary's physician, and the equipment, it has been prescribed by the

beneficiary's physician, and the equipment has been determined to be medically necessary for the

treatment of the patient's condition.

Oxygen is covered under Part B when administered in connection with ambulance services. When

the ambulance services are furnished by a provider, payment is made on a reasonable costs basis for

the costs of the oxygen in addition to the cost of the ambulance service.

2125. BLOOD

Blood Replacement Practices.--Implicit in the determination of the reasonable cost of blood is that

providers must afford Medicare patients the same opportunity as non-Medicare patients for reducing

or eliminating blood fees. In situations where the provider deals with an independent blood supplier,

the provider must assure itself that the blood supplier does not similarly discriminate by affording

non-Medicare patients greater opportunities to reduce or eliminate their blood fees than is possible

for Medicare beneficiaries. Thus, for example, providers (or their blood suppliers) must not limit the

number of replacement credits accepted for Medicare patients to an amount equal to the Medicare

blood deductible requirement while imposing no limitation on the number of replacement credits

accepted for non-Medicare patients. This nondiscrimination rule also applies in situations where the

provider (or its blood supplier) allows blood replacement credits to reduce or eliminate blood

derivative fees and blood processing fees.

There is an exception to this general rule, however. In situations where allowing full blood

replacement opportunity would diminish a beneficiary's blood reserve available for meeting future

blood deductible requirements, full replacement (i.e., replacement beyond the Medicare blood

deductible requirement) is not required. This occurs

Rev. 241 21-15.4

2125 COSTS RELATED TO PATIENT CARE 10-80

most often with beneficiaries who are members of blood plans that limit the number of replacement

credits available to the number of units deposited by (or on behalf of) the member. Because

providers typically deal with only one or two blood suppliers on a regular basis, providers are

expected to be familiar with the replacement credit policies (i.e., limited vs. unlimited) of the

suppliers with which they deal.

A refusal by providers (or their blood suppliers) to accept replacement blood from Medicare patient

not only increases the overall cost of blood to providers (because replacement blood must be

obtained elsewhere) but also disproportionately increases Medicare's share of the cost of blood.

Similarly, failure of a provider to accept medically sound replacement blood on behalf of Medicare

patients to reduce blood processing costs or blood derivative costs to the Medicare program is neither

a consistent nor a cost conscious practice. Therefore, if these discriminatory replacement practices

exist, the consequent excess provider costs for blood, blood derivatives, or blood processing must be

disallowed in the determination of Medicare reimbursement. The costs that are considered excess

are those costs that could have been reduced or eliminated had the provider sought and accepted all

available replacement credits. In addition to the cost adjustment, the provider must make

corresponding reductions in the charges billed for replacement blood which was rejected by the

provider or its blood bank.

B. Adjustments to Provider Charges for Blood Replaced and Blood Not Used.-Often, a

provider's blood supplier will not notify the provider of a patient's total blood replacement credits

until after the provider bills that patient's charges. This occurs, for example, when the patient

arranges for a donor(s) to replace blood at some time after the provider has already billed the charges

for blood unreplaced at the time of billing. In situations such as this, the provider must adjust its

charges to reflect credits for the blood replacement. Providers should follow current manual

instructions (Hospital Manual (HIM-10), $460 and Skilled Nursing Facility Manual (HIM-12), §417)

in submitting corrected bills to the Medicare program.

Another situation requiring blood credits occurs when a provider bills a patient's account for blood

prepared for transfusion but, for whatever medical reason, all or part of the blood is not transfused.

This occurs, for example, when a surgeon anticipates the need for five units of blood, which are

prepared for transfusion, and the patient's account is charged for the blood. The patient's medical

condition requires that only three units be transfused and the unused blood is returned to storage. In

situations such as this, the patient's account must be credited for the amount of unused blood,

because the blood was not furnished to the patient. However, any necessary crossmatch or

preparation fees may be charged to the patient's account even though the blood was not used. Blood

which cannot be returned to storage due to the addition of medication or thawing in preparation for

transfusion should not be charged to the patient's account. Rather, the cost of such blood should be

transferred to a blood processing, storing, and administration account to be shared proportionately by

all patients.

21-15.5 Rev. 241

10-80 COSTS RELATED TO PATIENT CARE 2125

Moreover, if the provider's blood supplier gives a larger credit for blood replaced by nonbeneficiaries

than it gives for blood replaced by beneficiaries, the larger credit will be applied to reduce provider

charges and costs for all patients. Of course, provider charges for blood must be uniformly applied

to beneficiaries and nonbeneficiaries.

C. Application of the Prudent Buyer Principle to Blood Procurement and Replacement

Policies.--Blood is unique among provider furnished items, because unlike other items, it can be

replaced by patients or by persons acting on the patients' behalf. The development of organizations

supplying blood to providers has been such that the charging practices of these organizations vary

not only nationwide, but also within limited geographical areas. For example, within a local

geographical area, one blood supplier may charge a provider both a processing fee and a charge for

the flood, while another supplier may charge only a processing fee. These circumstances require

careful application of the prudent buyer principle.

In applying the prudent buyer principle under these circumstances, the provider must look to the net

charge for the blood. For example, assume the following facts. A provider has a choice between

obtaining blood from Supplier A for a processing fee only of $30 per unit, or obtaining blood from

Supplier B for a processing fee of $10 and a charge for the blood itself of $25, a combined charge of

$35 per unit. Supplier A allows no credit for blood replaced; whereas, Supplier B allows a credit of

$25 for blood replaced on a unit-for-unit basis. The provider anticipates a usage of 2100 units of

blood for the upcoming contract period. Experience of local blood suppliers has shown an average

of one-third to be the prevailing replacement rate in the locality (i.e., on the average, one out of every

three units used is replaced). Putting all these facts together, the provider's anticipated blood costs

for the upcoming contract period would be $63,000 (2100 x $30) if obtained from Supplier A.

However, the provider's anticipated blood costs would be $56,000 (2100 x $10) plus (1400 x $25)1

if obtained from Supplier B. The provider, in seeking to minimize its costs under the prudent buyer

principle, would obtain the blood from Supplier B.

Moreover, if a provider enters into an arrangement with a blood supplier which precludes obtaining

blood from other sources at a lower charge, the provider could be found to be acting in violation of

the prudent buyer principle within the meaning of §2103, Prudent Buyer. However, such a

contractual arrangement would not necessarily violate the prudent buyer principle if the provider can

demonstrate to the satisfaction of the intermediary that the arrangement is absolutely compelling to

assure an adequate, reliable source of blood supply.

Rev. 241 21-15.6

2126.1 COSTS RELATED TO PATIENT CARE 10-80

Although the cost of whole blood is used in the above example, it would be appropriate for a

provider to consider the totality of its blood product needs in evaluating a purchase decision for

prudence. In addition, it is appropriate for a provider to consider nonfiscal (service) components,

such as physician consultation or 24-hour service, in evaluating the costs of blood from alternative

sources. Of course, for an occasional purchase, allowable blood cost may be higher than normally

incurred to meet an immediate medical need.

2126. UTILIZATION REVIEW

Utilization review is a provider function and reimbursement for utilization review can be made only

as a part of the provider's reasonable costs. No payment for utilization review can be made by the

program directly to physicians or to utilization review committees. (Section 2l26.3). Costs incurred

by the provider in connection with utilization review are includable in reasonable costs as set forth in

the following sections.

2126.l Utilization Review in Hospitals.--

A. Physicians' Services.--Where utilization review covers the entire patient population of a

hospital, payments made to physicians for their services on utilization review committees are

allowable as costs. Allowable costs are limited to payment of a reasonable compensation to the

physician. Such costs are then apportioned among all of the users of the hospital as part of

administrative costs. However, where utilization review covers only Medicare beneficiaries,

payments made to physicians for their services on utilization review committees are not allowable as

costs.

B. Costs Other Than for Physicians' Services.--All reasonable costs of utilization review other

than for physicians' services are allowable costs and are apportioned among all of the users of the

facility. Included in these costs are costs related to the services of professional personnel other than

physicians, report writing, etc. Utilization review costs other than for physicians' services are

allowable whether or not the utilization review covers the entire patient population.

21-16 Rev. 241

12-85 COSTS RELATED TO PATIENT CARE 2126.4

2126.2 Utilization Review in Skilled Nursing Facilities.--

A. Physicians' Services.--Payments made to physicians for their services on utilization review

committees are allowable as costs, whether or not the utilization review covers the entire patient

population of the skilled nursing facility. Allowable costs are limited to the payment of a reasonable

compensation to the physician.

Where utilization review covers only Medicare beneficiaries, compensation to physicians for their

utilization review services is reimbursable 100 percent by the Medicare program.

If the scope of a SNF utilization review committee's activity does not include all patients but does

extend to services furnished to patients under other health care programs--such as Medicaid--the

SNF's (or committee's) records of activities and compensation paid to the physician members of such

a committee should be sufficient to serve as the basis for a proper apportionment of these costs

between programs. Where, in the judgment of the intermediary, these costs are apportioned

correctly, Medicare should reimburse 100 percent of the portion allocated to the Medicare program.

However, where the utilization review committee activities apply to more than Medicare covered

services but a valid allocation between Medicare and the other programs is not supported by

documentation, all utilization review costs should be apportioned among all users of the skilled

nursing facility.

B. Costs Other Than for Physicians' Services.--Administrative costs related to utilization

review and costs of professional personnel other than physicians are allowable costs allocated as a

part of the administrative costs of the facility. Generally, these costs are apportioned among all the

users of the SNF, whether or not utilization review covers the entire patient population.

However, if the SNF is a distinct part of a larger facility (as defined in HCFA Pub. 12 §201.1) and

the utilization review is performed only for patients in the distinct part, the costs may be totally

charged to the distinct part if they are specifically identifiable (in accordance with §§2126.4 ff) to the

distinct part. The costs would then be apportioned among the users of the distinct part SNF.

2126.3 Community-Based Utilization Review Committee.--Community-based utilization review

committees are those which operate external to the SNF. They are formed primarily by local medical

societies or by the intermediary and furnish utilization review services to more than one SNF.

Where this is the case, the organization furnishing the services must bill the SNF for the services.

The SNF pays the committee and includes the payment to the committee in its allowable costs under

the program. The billing from the committee must be separated into two parts for services furnished.

One part should indicate the payment made to physicians for their services on the utilization review

committee; this part would be treated in accordance with §2l26.2A. The second part should cover all

other services and would be treated in accordance with §2l26.2B.

2l26.4 Utilization Review Cost; Provider Payment to Physicians for Rendering Utilization

Review Services.--Experience has indicated that many physicians rendering utilization review

services do not charge providers for such services. These physicians

Rev. 333 21-16.1

2l26.4 (Cont.) COSTS RELATED TO PATIENT CARE 12-85

view this activity as a community service, as part of a professional education responsibility, or as a

responsibility flowing from staff membership. However, where a charge is made by a physician,

providers utilize a variety of methods for compensating for these services. A substantial plurality of

providers use an hourly scale as the basis for such payment. Because of the statutory mandate to pay

reasonable cost (§l8l4(b) of the Act) it is necessary to have sufficient information to determine the

reasonable cost of utilization review in all cases where reimbursement is sought from Medicare.

A. Utilization Review Records Necessary to Establish Allowable Cost of Compensation.--

Section l8l5 of the Act states that a provider must maintain adequate records for reasonable cost

determination purposes. Consequently, for utilization review compensation received by physicians

or other persons to be recognized as an allowable cost, a provider must keep adequate records to

determine the reasonableness of its payments for services identified as being exclusively related to

utilization review activities. Only the actual time spent in rendering utilization review services

should be recorded. Time spent in travel to and from the point of review should be excluded from

the time calculation for reimbursement. The record-keeping requirement may be met in either of the

following ways:

l. Hourly Rate.--Where payment to a physician or other person by a provider for

utilization review services is based on an hourly rate, the provider should regularly record the name,

hourly rate, and number of hours of services rendered by the individual; or

2. Other Payment Base.--Where payment to a physician or other person by a provider is

based on some measure other than an hourly rate, the provider should prepare a schedule of

payments for each cost period for which reimbursement is claimed showing: the name, number of

hours of utilization review services rendered, and total payments made to each individual in the cost

period. The total payment should then be converted into an hourly rate for each individual. The

supporting data for this schedule should be available for verification by the intermediary.

B. Records of Provider Using Community-Utilization Review Group.--Where a community-

based group functions as the utilization review committee for more than one institution, each

provider must have in its records: (1) a description of the services furnished on its behalf, (2) an

explanation of the rationale for apportioning any costs among the various institutions using the same

community-based utilization review group, and (3) for each cost period for which such costs are

claimed by a provider, the total hours and cost for each significant category of service (e.g., physician

service, secretarial service, etc.), rendered to the provider by the utilization review committee so the

intermediary may determine whether the share of the community-based group's costs apportioned to

the provider is reasonable.

C. Retainer Fees.--Payments by a provider to a physician or other person to be available for

participation on a utilization review committee, such as retainer fees, are not allowable costs.

21-16.2 Rev. 333

12-85 COSTS RELATED TO PATIENT CARE 2126.4(Cont.)

D. Administrative Costs.--In hospitals and SNFs, the reasonable costs of administrative

services necessary for utilization review are allowable costs. These costs are apportioned among all

users of the institution (they are classified as administrative and general expenses on the cost report)

without regard to whether the plan applies only to Medicare beneficiaries. Examples of such

allowable costs are:

1. Expenses incurred for the purchase of data from organizations that compile statistics

and make profiles and studies of utilization of health care facilities and services.

2. Expenses incurred for clerical and other administrative services including the services

of nonphysician personnel.

3. Expenses incurred in traveling outside the individual's normal commuting area or in

traveling from institution to institution because of necessary and proper activities related to

utilization review, such as transportation expenses incurred by a physician in traveling to a provider

outside his local area to participate in utilization review activities.

E. Administrative Costs Related to Community-Based Utilization Review Committee.--

Payments for services obtained from a community-based utilization review group for administrative

duties pertinent to utilization review in such facilities (such as scheduling meetings, providing

coordination between the committee and providers, supervising maintenance of records, as well as

clerical, record keeping and associated activities described in D above) are allowable costs. The

measure of the reasonableness of such costs is the remuneration that would be paid an employee

performing comparable services in the area.

F. Studies.--Costs incurred by a provider in the purchase of data and statistics concerning

health care utilization that are necessary for the purpose of comparing them with other data related to

patients for whom the utilization committee is responsible are allowable costs.

The reimbursement mechanism under title XVIII of the Social Security Act, however, is not meant to

support studies in health care utilization beyond the requirements of §1861(k) of the Act or the

conditions of participation as set forth in §405.1035 and §405.1137 of Regulations No. 5 of the

Social Security Administration. Thus, costs related to evaluation by the committee of care furnished

patients under the purview of the committee are allowable costs. (Examples of such care are length

of stay, patterns of stay, patterns of care by diagnostic categories, and medical services or practices,

such as drug prescribing.) However, if a provider agrees to participate in studies extending beyond

the care furnished patients under the committee's purview, any costs incurred are not allowable.

Rev. 333 21-16.3

04-83 COSTS RELATED TO PATIENT CARE 2128

2127. HOME HEALTH AGENCY ADVISORY GROUP OF PROFESSIONAL PERSONNEL

A. General.--A home health agency participating in the Medicare program is required to have

a group of professional personnel to serve in an advisory capacity to the agency or organization. The

function of this advisory group is to approve and review on a regular basis the agency's policies

governing skilled nursing and other health care services.

Generally, the costs incurred by the home health agency in connection with advisory group services

are includeable in allowable costs and must be apportioned among all the users of the facility in

determining program reimbursement. Payments to physicians for their direct medical services to

individual patients are not allowable home health agency costs. No payment for advisory group

services may be made by an intermediary directly to any physician or other member of the advisory

group.

B. Costs for Services of Professional Personnel.--Where compensation is paid to a member of

the advisory group, including nonemployee professional personnel, the reasonable compensation is

includable in the allowable costs of the home health agency.

However, where a member of the advisory group is also an owner of the agency, any separate

compensation paid for participation in the advisory group meetings should be considered in

evaluating the reasonableness of his total compensation. For a determination to be made on the

reasonableness of the compensation paid to a physician or other professional person, the home health

agency must maintain adequate records. These records must contain the following minimum

information for each meeting of the advisory group: the date of the meeting, the name and

occupation of each participant to whom compensation is paid, the hourly rate or other payment base

for each of these individuals, and the number of hours of services rendered by each participant.

C. Administrative Costs.--The reasonable cost of administrative services incurred in

connection with the activities of the advisory group are also allowable costs. Examples of such

allowable costs are expenses for supportive clerical and other administrative services, and expenses

for purchase of necessary data and statistics on health care facilities and services.

2128. ORIENTATION AND ON-THE-JOB TRAINING

The costs of orientation and on-the-job training are recognized as normal operating costs and are

allowable. Ordinarily, such training would be imparted within the provider setting. If, however, the

training requires outside instructions, costs of such training are allowable.

Rev. 287 21-16.5

2130 COSTS RELATED TO PATIENT CARE 04-83

2130. LIFE INSURANCE PREMIUMS

In general, premiums related to insurance on the lives of owner(s), officer(s), key employee(s) and

provider-based physician(s) where the provider is a direct or indirect beneficiary are not allowable

costs. A provider is a direct beneficiary where, upon the death of the insured individual, the

insurance proceeds are payable directly to the provider. A provider is an indirect beneficiary when

another party receives the proceeds of a policy through an assignment by the provider to the party or

other legal mechanism but the provider benefits from the payment of the proceeds to the third party.

An exception to these requirements is permitted where (1) a provider as a requirement of a lending

institution must purchase insurance on the life of an owner(s), officer(s), key employee(s) or

provider-based physician(s) to guarantee the outstanding loan balance (2) the lending institution must

be designated as the beneficiary of the insurance policy, and (3) upon the death of the insured, the

proceeds will be used to pay off the balance of the loan. The insurance premiums allowable are

limited to premiums equivalent to that of a decreasing term life insurance policy needed to pay off

the outstanding loan balance. In addition, the loan must be related to patient care and meet the

necessary and proper requirements of section 200ff, Interest Expense. Where other than decreasing

term policies are purchased (e.g., whole life, or convertible term), only that portion of the premium

which can be equated to the premium for a similar face amount of a decreasing term life policy may

be included in allowable costs.

The life insurance premiums allowable are reimbursable for cost reporting periods beginning on or

after April 15, 1983.

Premiums related to insurance on the lives of owner(s), key employee(s) and provider-based

physician(s) where the individual relative(s) or his/her estate is the beneficiary are considered to be

compensation to the individual and are allowable costs to the extent such total compensation is

reasonable.

2132. START-UP COSTS

2l32.l General.--In the period of developing a provider's ability to furnish patient care services,

certain costs are incurred. The costs incurred during this time of preparation are referred to as start-

up costs. Since these costs are related to patient care services rendered after the time of preparation,

they must be capitalized as deferred charges and amortized over a number of benefiting periods.

Start-up costs include, for example, administrative and nursing salaries; heat, gas, and electricity;

taxes; insurance; mortgage and other interest; employee training costs; repairs and maintenance;

housekeeping; and any other allowable costs incident to the start-up period. However, any costs that

are properly identifiable as organization costs or capitalizable as construction costs must be

appropriately classified as such and excluded from start-up costs.

21-16.6 Rev. 287

04-83 COSTS RELATED TO PATIENT CARE 2132.2

Amortized start-up costs may be charged only to the "Administrative and General" cost center unless

these costs can be specifically identified with a cost center or component of a provider, in which case

the amortized costs must be directly assigned to the applicable cost center or component.

Unless otherwise specified herein, the provisions of this section are effective for providers after June

30, l976.

2132.2 Applicability--Start-up costs are incurred from the time preparation begins on a newly

constructed or purchased building, wing, floor, unit, or expansion thereof to the time the first patient,

whether Medicare or non-Medicare, is admitted for treatment, or, where the start-up costs apply only

to nonrevenue-producing patient care functions or non-allowable functions, to the time the areas are

used for their intended purposes. If a provider intends to prepare all portions of its entire facility at

the same time, start-up costs for all portions of the facility should be accumulated in a single deferred

charge account and should be amortized when the first patient is admitted for treatment. However, if

a provider intends to prepare portions of its facility on a piecemeal basis (i.e., preparation of a floor

or wing of a provider's facility is delayed), start-up costs should be capitalized and amortized

separately for the portion(s) of the provider's facility prepared during different time periods.

Moreover, if a provider expands its facility by constructing or purchasing additional buildings or

wings, start-up costs should be capitalized and amortized separately for these areas.

Start-up costs that are incurred immediately before a provider enters the program and that are

determined to be immaterial by the intermediary need not be capitalized, but rather, may be charged

to operations in the first cost reporting period. In the case where a provider incurs start-up costs

while in the program and these costs are determined to be immaterial by the intermediary, these costs

need not be capitalized, but may be charged to operations in the periods incurred.

For program reimbursement purposes, costs of the provider's facility and building equipment should

be depreciated over the lives of these assets starting with the month the first patient is admitted for

treatment, subject to the provider's method of determining depreciation in the year of acquisition or

construction (see §118). Where portions of the provider's facility are prepared for patient care

services after the initial start-up period, these asset costs applicable to each portion should be

depreciated over the remaining lives of the applicable assets. If the portion of the facility is a patient

care area, depreciation should start with the month the first patient is admitted for treatment. If the

portion of the facility is a nonrevenue-producing patient care area or nonallowable area, depreciation

should begin when the area is opened for its intended purpose. Costs of major movable equipment,

however, should be depreciated over the useful life of each item starting with the month the item is

placed into operation, subject to §118.

Rev. 287 21-17

2132.3 COSTS RELATED TO PATIENT CARE 04-83

2132.3 Cost Treatment for Medicare Reimbursement.--

A. Operations Begin Upon Entrance into the Program (Providers Entering Program After June

30, 1976).--

1. Where a provider prepares all portions of its facility for patient care services at the

same time and has capitalized start-up costs, the start-up costs must be amortized ratably over a

period of 60 consecutive months beginning with the month in which the first patient is admitted for

treatment.

2. Where a provider prepares portions of its facility for patient care services on a

piecemeal basis, start-up costs must be capitalized and amortized separately for the portions of the

provider's facility that are prepared for patient care services during different periods of time.

EXAMPLE:

Facts: On July 1, 1976, the provider entered the program with a new three-floor facility. The first

two floors of the facility were prepared and available for patient care services at the time the provider

entered the program; however, preparation of the third floor for patient care services was deferred

until July 1, 1977. The first patient was admitted to the first two floors on July 5, 1976, while the

first patient was admitted to the third floor on October 15, 1977. Start-up costs of $60,000 were

capitalized for the first two floors from the time preparation began on these floors for the rendition of

patient care services to July 5, 1976. Start-up costs of $25,000 were also capitalized for the third

floor from July 1, 1977 to October 15, 1977.

With the above facts, the provider would accumulate the start-up costs of $60,000 attributable to the

first two floors separately from the start-up costs of $25,000 attributable to the third floor. The start-

up costs of $60,000 would be amortized at the rate of $1,000 per month beginning in July 1976 and

ending 1981. The start-up costs of $25,000 attributable to the third floor would be amortized at the

rate of $417 per month from October 1977 to September 1982.

B. Operations Begin Prior to Entrance into the Program (Providers Entering Program After

June 30, 1976).--Where a provider enters the program more than 60 months after its first patient is

admitted for treatment, start-up costs unamortized at the time the provider enters the program will

not be allowable. However, where a provider enters the program within 60 months after its first

patient is admitted for treatment and has capitalized start-up costs, the portion of start-up costs

unamortized at the time the provider enters the program may be included in allowable costs using a

60-month amortization period starting with the month the provider admitted its first patient for

treatment. In these situations, if a provider chooses to include amortized start-up costs in its

allowable costs, the costs must be recomputed as follows:

EXAMPLE 1:

Facts: A provider enters the program on July 1, 1976, 30 months after it admitted its first patient;

start-up costs were capitalized in the amount of $30,000; and amortization is based on a 120-month

period.

21-18 Rev. 287

04-83 COSTS RELATED TO PATIENT CARE 2132.3(Cont.)

Per Books Medicare

Original amount of start-up costs to

be amortized $30,000 $30,000

Amount amortized as of July 1, 1976

( 30 x $30,000)

l20 $ 7,500

Unamortized start-up costs as of

July 1, l976 $22,500

Amount which would have been amortized

over 60 months

(30 x 30,000)

60 $15,000

Amount to be amortized under the

program over a 30-month period $15,000

EXAMPLE 2:

Facts: A provider enters the program on July 1, l976, 24 months after it admitted its first patient;

start-up costs were capitalized in the amount of $36,000; and amortization is based on a 36-month

period.

Original amount of start-up costs to

be amortized $36,000 $36,000

Amount amortized as of July 1, 1976

(24 x 36,000)

36 $24,000

Unamortized start-up costs as of

July 1, 1976 $12,000

Amount which would have been

amortized over 60 months

(24 x 36,000)

60 $14,400

Amount to be amortized under the

program over a 36-month period $21,600

Rev. 287 21-19

2132.3(Cont.) COSTS RELATED TO PATIENT CARE 04-83

If a provider enters the program within 60 months after admitting its first patient for treatment, start-

up costs may be capitalized retroactively (reduced for any periods already elapsed from the time the

first patient was admitted for treatment) where the provider did not initially capitalize start-up costs

(or has written off such costs in the period(s) incurred) before entering the program and the provider

can establish these costs to the satisfaction of the intermediary.

C. Providers Entering Program Before July 1, 1976.--Where a provider enters the program

before July l, l976, and capitalizes start-up costs incurred before July 1, l976, the provider may

continue to amortize the start-up costs ratably over a period of up to 60 consecutive months, but not

less than 36 consecutive months, beginning with the month the first patient is admitted for treatment

or, in the case of a nonrevenue-producing patient care area or nonallowable area, beginning with the

month the area is opened for its intended purpose. Where a provider enters the program before July

1, l976, and incurs start-up costs after June 30, l976, start-up costs must be treated in the manner

described in §2132.3A. Start-up costs that are considered to be immaterial by the intermediary may

be included in allowable costs in the cost reporting period(s) incurred.

2132.4 Sale of Institution.--Where a provider institution is sold before the expiration of the

amortization period, the portion of start-up costs amortizable through the month of sale is includable

in allowable costs. If the unamortized balance of start-up costs at the time of sale represents a value

reflected in the selling price to the purchaser and contained in the sales agreement, this value will be

limited to the lesser of the sales price attributed to the start-up costs or the unamortized balance of

start-up costs on the books of the seller. If the purchaser becomes a provider, the unamortized start-

up costs subject to the above limitation (reduced for any period in which the purchaser operates the

facility before becoming a provider, unless this period is represented by a delay in certification

caused by the program) transferred in the sale may be amortized and included in allowable costs over

the remaining portion of the period established for amortization by the seller-provider. If the

unamortized balance of the start-up costs at the time of sale is not identified in the sales price (the

sales agreement does not allocate a portion of the sales price to this unamortized balance), the seller-

provider may include the unamortized costs in its allowable costs for the last cost report submitted to

the program.

2132.5 Withdrawal from Program.--Where a provider withdraws from the program, start-up costs

amortizable through the month of withdrawal are includable in allowable costs. Unamortized start-up

costs adjusted through the month of withdrawal are applicable to services provided after the month

of withdrawal and, therefore, are not includable in allowable costs. However, where the provider

ceases to provide health care services on withdrawal from the program, the unamortized costs at

termination may be included in the provider's allowable costs for the last cost report submitted to the

program.

2132.6 Effect on Equity Capital.--Unamortized start-up costs allowable for program purposes are

includable in the equity capital of a provider.

21-20 Rev. 287

6-76 COSTS RELATED TO PATIENT CARE 2l34.2

2l34. ORGANIZATION AND OTHER CORPORATE COSTS

2l34.l Organization Costs--General.--Organization costs are those costs directly incident to the

creation of a corporation or other form of business. These costs are an intangible asset in that they

represent expenditures for rights and privileges which have a value to the enterprise. The services

inherent in organization costs extend over more than one accounting period and thus affect the cost

of future periods of operation.

A. Allowable Organization Costs.--Allowable organization costs include, but are not limited

to, legal fees incurred in establishing the corporation or other organization (such as drafting the

corporate charter and by-laws, legal agreements, minutes of organizational meeting, terms of original

stock certificates), necessary accounting fees, expenses of temporary directors and organizational

meetings of directors and stockholders, and fees paid to States for incorporation.

B. Unallowable Organization Costs.--The following types of costs are not considered

allowable organization costs: costs relating to the issuance and sale of shares of capital stock or other

securities, such as underwriters' fees and commissions, accountant's or lawyer's fees, cost of

qualifying the issues with the appropriate State or Federal Authorities, stamp taxes, etc.

Unless specified otherwise herein, the provisions of this section are effective for providers after June

30, l976.

2l34.2 Cost Treatment of Organization Costs under Medicare--.

A. Providers Entering Program After June 30, l976.--Allowable organization costs should

generally be capitalized by the organization. However, if in the opinion of the intermediary, these

costs are not material when compared to total allowable costs, they may be included in allowable

costs for the initial cost reporting period. Otherwise, allowable organization costs are amortized

ratably over a period of 60 months starting with the month the first patient is admitted for treatment.

If the provider enters the program after 60 months, starting with the month the first patient is

admitted for treatment, no organization costs are recognized. Organization costs can be capitalized

retroactively (reduced for any periods already elapsed from the time the first patient was admitted for

treatment) where a provider (l) did not initially capitalize organization costs (or has written off such

costs in the period(s) incurred) before entering the program; (2) can establish these costs to the

satisfaction of the intermediary; and (3) enters the program within 60 months after the first patient

was admitted for treatment.

Rev. l58 2l-20.5

2l34.3 COSTS RELATED TO PATIENT CARE 6-76

B. Providers Entering Program Before July l, l976.--Where a provider enters the program

before July l, l976, and capitalizes organization costs, the provider may continue to amortize the

organization costs ratably over a period of 60 consecutive months beginning with the date of

organization. However, if the organization costs were considered to be immaterial by the

intermediary, the costs may be included in the provider's allowable costs in the cost reporting

period(s) incurred.

2l34.3 Amortization Period of 60 Months.--Where a provider is newly organized upon entering

the program and has capitalized organization costs, these costs must be amortized ratably over a 60-

month period starting with the month the first patient is admitted for treatment. Where a provider

admitted its first patient for treatment within a 60-month period prior to entry into the program and

has capitalized organization costs using a 60-month amortization period, no change in the rate of

amortization is permitted. In this instance, the unamortized portion of organization costs is allowable

under the program and is amortized over the remaining part of the 60-month period.

2l34.4 Amortization Period Less Than 60 Months.--Where a provider has entered the program

within 60 months after the first patient is admitted for treatment, has capitalized organization costs,

but has used an amortization period of less than 60 months, an adjustment will be necessary if the

provider chooses to include amortized organization costs in its allowable costs. The unamortized

amount of organization costs must be recomputed using a 60-month period starting with the month

the first patient is admitted for treatment. The recomputed unamortized portion of organization costs

as of the month the provider enters the program is recognized as an asset under the program and may

be amortized over the remaining months of the 60-month period.

EXAMPLE: A provider enters the program 24 months after the first patient is admitted for

treatment; organization costs were capitalized in the amount of $l2,000; amortization is based on a

36-month period.

Per Books Medicare

Organization costs to be amortized

$l2,000 $l2,000

Amount amortized to date

(24 x $l2,000)

36 8,000

Book balance unamortized as of date

of entry into program

4,000

2l-20.6 Rev. l58

6-76 COSTS RELATED TO PATIENT CARE 2l34.5

Per Books Medicare

Amount which would have been

amortized on a 60-month basis

(24 x $l2,000)

60 4,800

Total amount to be amortized under

the program $ 7,200

2l34.5 Amortization Period Greater Than 60 Months.--Where a provider has entered the program

within 60 months after the month the first patient is admitted for treatment, has capitalized

organization costs, but used an amortization period longer than 60 months, an adjustment will be

necessary if the provider chooses to include amortized organization costs in its allowable costs. The

unamortized amount of organization costs must be recomputed as of the date of entry into the

program using a 60-month period starting with the month the first patient was admitted for treatment.

The unamortized amount so computed will be recognized for program purposes and may be

amortized over the remaining part of the 60-month period.

EXAMPLE: A provider enters the program 36 months after the first patient is admitted for

treatment; organization costs were capitalized in the amount of $l0,000; amortization is based on a

l20-month period.

Per Books Medicare

Organization costs to be amortized $l0,000 $l0,000

Amount amortized to date

( 36 x $l0,000)

l20 3,000

Book balance unamortized as of date

of entry into program

$ 7,000

Amount which would have been amortized

on a 60-month basis

(36 x $l0,000)

60 6,000

Total amount to be amortized under

the program $ 4,000

Rev. 158 21-20.7

2l34.6 COSTS RELATED TO PATIENT CARE 6-76

2134.6 Sale of Institution.--Where a provider institution is sold before the expiration of the

amortization period, the portion of organization costs amortizable through the month of sale is

includable in allowable costs. If the unamortized balance of organization costs at the time of sale

represents a value reflected in the selling price to the purchaser and contained in the sales agreement,

this value will be limited to the lesser of the sales price attributed to the organization costs or the

unamortized balance of organization costs on the books of the seller. If the purchaser becomes a

provider, the unamoritzed organization costs subject to the above limitation (reduced for any period

in which the purchaser operates the facility before becoming a provider, unless this period is

represented by a delay in certification caused by the program) transferred in the sale may be

amortized and included in allowable costs over the remaining portion of the 60-month period

established for amortization by the seller-provider. If the unamortized balance of organization costs

at the time of sale is not identified in the sales price (the sales agreement does not allocate a portion

of the sales price to the unamortized balance), the seller-provider may include the unamortized costs

in its allowable costs for the last cost report submitted to the program.

2l34.7 Withdrawal from Program.--Where a provider withdraws from the program, the portion of

organization costs amortizable through the month of withdrawal is includable in allowable costs. The

unamortized balance of organization costs is not allowable under the Medicare program but is

considered applicable to services provided after the month of withdrawal. However, where the

provider ceases to provide health care services on withdrawal from the program, the unamortized

costs at termination may be included in the provider's allowable costs for the last cost report

submitted to the program.

2l34.8 Effect on Equity Capital.--The unamortized portion of organization costs determined to be

allowable for program purposes is includable in the equity capital of the provider. Those

expenditures not considered allowable organization costs as described in §2l34.lB are excluded from

the computation of the return on equity capital.

2l34.9 Stockholder Servicing Costs.--The following types of costs relevant to proprietary and

equity interests of the stockholders, but not related to patient care, are excluded from allowable costs:

costs incurred primarily for the benefit of stockholders or other investors, including, but not limited

to, the costs of stockholders' annual reports and newsletters, annual meetings, mailing of proxies,

stock transfer agent fees, stock exchange registration fees, stockbroker and investment analysis, and

accounting and legal fees for consolidating statements for SEC purposes.

21-20.8 Rev. l58

12-95 COSTS RELATED TO PATIENT CARE 2134.11

2134.10 Reorganization Costs.--Within the scope of this section, reorganization costs are the types

of costs addressed in §2134.1A (impacting on, but not limited to ownership/equity, tax status,

financial structure, debt, assets, or asset valuation) with regard to recreating, reestablishing, or

otherwise rearranging an entity.

Reorganization costs are unallowable because they duplicate an entity's original organization costs.

Therefore, any costs of studies, surveys, etc., associated with or leading to a reorganization are also

unallowable. It is not the intent of the Medicare program to reimburse an entity, i.e., a provider or

provider component, more than once for its organization costs.

Costs not within the scope of this section include:

1. Costs associated with improving the efficiency of an entity by rearranging or reconfiguring

the management hierarchy (sometimes referred to as reengineering), but having no impact on

ownership/equity, tax status, financial structure, debt, assets, or asset valuation. These types of costs

are allowable. (See §§506 and 2102.2.) Therefore, to the extent that the provider can identify costs

of activities aimed at improving and making provider administration and operation more efficient

(see §506), i.e., costs outside the scope of this section, those costs are allowable.

2. Costs related to or associated with the initial organization of an entity, as covered in

§2134.1A.

2134.11 Transfer of Assets to a Corporation.--Costs connected with the transfer of assets to a

corporation must be capitalized as part of the cost of the asset. (See §104.10.) The acquisition of

capital stock of a provider does not constitute a transfer of assets to a corporation and, therefore,

costs associated with such a transaction are not allowable.

Rev. 388 21-21

11-82 COSTS RELATED TO PATIENT CARE 2135.2

2135. PURCHASED MANAGEMENT AND ADMINISTRATIVE SUPPORT SERVICES

2135.1 General.--Providers often purchase from other organizations various services which are

necessary for proper management and administrative operations. These services, depending on the

individual needs of the provider, may be used in lieu of, or support of, in-house staff in performing

their duties. Services may be purchased in a package from a single contractor or separately from

different contractors. One method of purchasing the services is through a full service management

contract in which the management contractor provides a complete package of services, has overall

day-to-day management responsibility for the operation of the provider, and is accountable only to

the governing board (or delegated representative) of the provider. Another method is through a

limited service management or administrative service contract in which a contractor provides certain

specific services to a provider and is responsible for only those specific services.

While these guidelines are primarily directed toward determining the reasonableness of the cost of

full service contracts, they are applicable to any contracted service. Their application must be

tempered by the circumstances and by the type of service purchased. For example, intermediaries

should not expect providers to routinely obtain competitive bids or maintain the level of

documentation contemplated in these instructions for all limited service contracts, particularly those

that are nominal in amount.

These guidelines are not intended to dissuade providers from seeking or utilizing alternatives to in-

house services. Rather, providers should always consider the most appropriate means for obtaining

services needed for the ongoing rendition of patient care. This requires an initial determination of

whether the services the provider needs can be obtained more effectively using in-house staff or

through outside contractors. After evaluating all factors, a provider should choose the most prudent

manner of performing the services. If the determination is made to purchase management and

administrative support services, the following sections provide guidelines for evaluating the

reasonableness of the costs incurred in purchasing these services. Other sections of the manual

provide general and specific guidance in evaluating the reasonableness of the cost of services

performed in-house.

2135.2 Evaluation of the Need for Purchased Management and Administrative Support Services.--

In claiming reimbursement for purchased management and administrative support services, a

provider must demonstrate its operational need and the cost effectiveness of its expenditures vis-a-

vis available alternatives for obtaining the necessary services. Factors to be considered include the

types and ranges of purchased services being offered; the need for improved quality of services; the

qualifications, experience and reputation for efficiency of available contractors; and the cost of

comparable services among contractors. Generally, a provider is prudent to solicit competitive bids.

Therefore, in the absence of competitive bidding which would otherwise be appropriate in the

circumstances, the provider must be able to demonstrate the manner in which it searched the

marketplace for the most appropriate and effective means of obtaining the services. (For general

guidance in evaluating comparable costs generated by in-house operations see §§2102 and 2103 or

the manual section pertaining to the cost in question, e.g., §2144 for fringe benefits or Chapter 9 for

evaluating compensation of owners.)

Rev. 270 21-21.2

2135.3 COSTS RELATED TO PATIENT CARE 11-82

A. Terms of a Contract.--A provider should be careful that it does not enter into a contract

containing any provision(s) which in any way prevents it from fulfilling its ongoing responsibilities

as a prudent buyer. While such provision(s) may have no immediate effect upon the provider's

reimbursement, it may subsequently affect reimbursement; e.g., a contract may have an extremely

punitive termination penalty which would result in nonreimbursable expenses.

The responsibilities and authority delegated to the contractor, and the parameters and limitations to

this authority, should be specified. Where control of the provider's policies and operations is not

retained by the provider, the contractor and provider may be found to be related organizations. (See

Chapter 10.)

The duration of the relationship between provider and contractor should be carefully considered.

Reimbursement is allowable only so long as the services are both necessary and effective for

provider operations. Although the duration of the relationship is determined by the provider based

on its particular needs, a provider should carefully consider the advantage of short term contracts to

allow it opportunity to renegotiate based on its most current requirements. A contract might include

a mutually protective termination clause to permit both provider and supplier to dissolve the

relationship upon specified conditions. However, the provider should bear in mind that if it is found

to be imprudent in continuing to incur a cost for services for which a need no longer exists, neither

the costs for such services nor excessive penalties can be included in allowable costs.

A contract should contain a detailed listing of services to be received and those which are available

on an as-needed or standby basis. The amount of the fee and the base upon which the fee is

computed should be specified and, for the services to be reimbursable, the intermediary must be

satisfied that the computation yields a reasonable fee for the services actually furnished by the

supplier.

B. Operations Under the Contract.--During the operational periods, the provider should

maintain records showing the services actually received and should document the continuing need

and cost effectiveness of the services. This documentation should include the assessment of the

provider's governing body or its delegated representative(s) on an annual or more frequent basis, as

incorporated into the Board minutes or other records.

2135.3 Determination of the Reasonable Cost of Purchased Management and Administrative

Support Services.--Generally, purchased management and administrative support service costs are

reasonable if the costs incurred are comparable with marketplace prices for similar services, or

provide for a total guaranteed cost equal to or less than the provider's current cost for such

department or service.

21-21.3 Rev. 270

09-95 COSTS RELATED TO PATIENT CARE 2135.3 (Cont.)

Factors which will be considered by the intermediary in its evaluation of the reasonable cost of

purchased management and administrative support services include:

A. Whether the contract results from competitive bids that are reasonable within industry norms

for similar services; and

B. Whether the contract is between unrelated parties (chapter 10); and

C. Whether the contract provides for services that are designed to accomplish within a

prescribed time frame clearly stated goals and objectives based on needs identified by the provider

(see §2135.2); and

D. Whether the provider maintains adequate documentation of the services rendered and the

status of the accomplishment of the stated goals and objectives.

Where the supporting evidence does not permit a presumption of reasonableness, the intermediary

will consider any factors, including those discussed below, and request any supporting

documentation (see §2135.5) to the extent it believes necessary to satisfy itself of the reasonableness

of the costs. In its evaluation, the intermediary will consider the circumstances and the needs of the

provider at the time the services were purchased.

1. Evaluation of Services Purchased.--The number and type of services furnished under a

contract will influence the manner in which the services are evaluated. The cost of contracts

providing for a package of services, such as a full service management contract, will be compared if

possible against a comparable package of services, including those which might have submitted

competitive bids. Where that is not feasible, or where the intermediary finds that this unilateral

approach is insufficient to determine whether the costs incurred were, in fact, reasonable, it may be

necessary to divide a package of services into separate components so that they can be evaluated with

comparable services provided in the marketplace.

Alternatively, where a package of services is essentially comparable among contractors bidding to

furnish the services, only those components which vary may need to be individually evaluated. A

unique or highly specialized service which does not lend itself to comparability in the marketplace

may be evaluated based on whether the service is at least as cost effective as could be furnished by

the provider in-house. The intermediary may, for example, encounter situations in which all bids

actually made seem to be very costly, given the nature of the actual services rendered. The objective

of evaluating individual components of a package is to provide the same assurance as can be

provided in other situations by a comparison of services in the aggregate, that the total cost of the

necessary services is not substantially out of line with services which can be purchased elsewhere.

Therefore, if certain individual components are more expensive than could be purchased elsewhere,

the unreasonable cost of these components will not be disallowed if the cost of the aggregate services

is not substantially out of line with a comparable package of services available in the marketplace.

Rev. 385 21-21.4

2135.3 (Cont.) COSTS RELATED TO PATIENT CARE 09-95

2. Standby Services.--A contract fee may provide for the availability of services on an as

needed or standby basis (e.g., access to national purchasing programs) which may or may not be

utilized. Ordinarily, costs for standby services will be recognized if reasonable in amount and related

to patient care.

3. Computation of Fee.--A supplier's fee may be computed in a number of ways, e.g., a

fixed periodic payment for a group of specific services or a separate fee for each service rendered, or

some other basis. Regardless of the computation method, the fees should be evaluated in relation to

the services furnished.

4. Evaluation of Fees Over More Than One Cost Reporting Period.--Reasonableness of

fees may in some cases be evaluated over more than one cost reporting period. For example, where a

provider is receiving purchased management and administrative support services under a contract

covering more than one cost reporting period, the provider's incurred costs based on the contractor's

fees during one period may be less than the value of the services actually received during the same

period. In this situation, where the provider can demonstrate that the costs incurred and the services

received are reasonable in total, the reasonable costs for such services can be recognized in a

subsequent cost-reporting period(s).

2135.4 Factors To Be Considered in Determining Reasonable Cost of Purchased Management and

Administrative Support Services.--Whether or not the presumption of reasonableness can be made,

intermediaries will consider the following factors in their reasonable cost determinations.

A. Preopening Services.--When a provider has purchased startup or preopening services such

as those related to establishing a provider and its facilities, the cost associated with these services

will be reviewed and treated separately from the cost associated with services for ongoing operations.

The reasonable cost is determined through comparison with marketplace prices for similar services

and will be capitalized and amortized in accordance with the Medicare principles of reimbursement.

B. Unallowable Costs.--Rights to a logo, noncompetition clauses or exclusive franchise rights

to a particular territory, promotion or sale of a franchise, etc., are not related to a provider's patient

care activities and, therefore, are not allowable. Non-covered Medicare services furnished under a

contract represent an unallowable cost to a provider. The cost of purchased management and

administrative support services which constitute duplication of services also furnished in-house is

not allowable. (This does not refer to situations where the purchased services augment, rather than

duplicate, the provider's activity.)

C. Costs of Terminating a Contract.--Where a contract is terminated prematurely, the provider

would normally incur expenses which are not directly related to the services or supplies received

under the contract. These costs generally include penalties, interest or lump sum payments to the

contractor. If the termination is disputed, the provider could also incur legal fees,

21-21.5 Rev. 385

09-95 COSTS RELATED TO PATIENT CARE 2135.5

accounting fees, court costs, and out-of-court settlement costs related to the arbitration of the dispute

between the provider and contractor. Those costs incurred to terminate a contract would be included

in allowable costs where they are reasonable in amount and incurred in an attempt to comply with the

prudent buyer guidelines. In assessing the reasonableness of the costs allowed, the intermediary will

consider the extent that the termination costs could have been avoided if the provider had been more

prudent in entering into the contract.

D. Recognition of the Fee as a Liability.--After a determination is made as to the

reasonableness of the fee for these services, Medicare's share of the fee is reimbursable, provided it

has been paid or, if an accrued liability, can reasonably be expected to be paid. Where a provider has

contested its liability and the intermediary therefore cannot be assured that accrued fees will actually

be paid, no amount can be included in the cost report for that cost reporting period. If only part of

the liability is contested, the uncontested amount may be included in the cost report. When the fee is

actually paid or the liability is no longer contested, the amount will be recognized as allowable. This

amount will be included in the appropriate cost centers of the current period cost report.

2135.5 Documentation to Support Purchased Management and Administrative Support Services.--

Records must be available which will support the cost of purchased management and administrative

support services. Such support could include some or all of the following, depending upon the scope

and type of contract:

A. A copy of the contract(s) and any amendments;

B. Periodic progress reports submitted by the management organization;

C. An analysis showing the efforts of the provider to comply with the prudent buyer principle

guidelines in assessing its needs, establishing the goals to be attained, evaluation of the available

alternatives, and choosing the terms of the contract (see §2135.2);

D. Board minutes or other documentation to show continued reassessment of the effectiveness

of the services (see §2135.2);

E. Detailed identification of the services actually received during the period (see §2135.2);

and

F. Any other documentation available such as visit or contact reports, minutes of committee

meetings, evaluations, cost/benefit analyses, etc., which would support the receipt of services and

substantiate the attainment of the goals and objectives which are desired and the reasonableness of

the fees paid.

Rev. 385 21-21.6

09-82 COSTS RELATED TO PATIENT CARE 2136.1

2136. ADVERTISING COSTS--GENERAL

The allowability of advertising costs depends on whether they are appropriate and helpful in

developing, maintaining, and furnishing covered services to Medicare beneficiaries by providers of

services. In determining the allowability of these costs, the intermediary should consider the facts

and circumstances of each provider situation as well as the amounts which would ordinarily be paid

for comparable services by comparable institutions. To be allowable, such costs must be common

and accepted occurrences in the field of the provider's activity.

2l36.l Allowable Advertising Costs.--Advertising costs incurred in connection with the provider's

public relations activities are allowable if the advertising is primarily concerned with the presentation

of a good public image and directly or indirectly related to patient care. Examples are: visiting hours

information, conduct of management-employee relations, etc. Costs connected with fund-raising are

not included in this category (see § 2l36.2).

Costs of advertising for the purpose of recruiting medical, paramedical, administrative and clerical

personnel are allowable if the personnel would be involved in patient care activities or in the

development and maintenance of the facility.

Costs of advertising for procurement of items or services related to patient care, and for sale or

disposition of surplus or scrap material are treated as adjustments of the purchase or selling price.

Costs of advertising incurred in connection with obtaining bids for construction or renovation of the

provider's facilities should be included in the capitalized cost of the asset (see Chapter I, §l04.l0).

Costs of advertising incurred in connection with bond issues for which the proceeds are designated

for purposes related to patient care, i.e., construction of new facilities or improvements to existing

facilities, should be included in "bond expenses" and prorated over the life of the bonds.

Costs of activities involving professional contacts with physicians, hospitals, public health agencies,

nurses' associations, State and county medical societies, and similar groups and institutions, to

apprise them of the availability of the provider's covered services are allowable. Such contacts make

known what facilities are available to persons who require such information in providing for patient

care, and serve other purposes related to patient care, e.g., exchange of medical information on

patients in the provider's facility, administrative and medical policy, utilization review, etc.

Similarly, reasonable production and distribution costs of informational materials to professional

groups and associations, such as those listed above, are allowable if the materials primarily refer to

the provider's operations or contain data on the number and types of patients served. Such materials

should contribute to an understanding of the role and function of the facility as a provider of covered

health care in the community.

Rev. 267 21-23

2136.1 (CONT) COSTS RELATED TO PATIENT CARE 09-82

Costs of informational listings of providers in a telephone directory, including the "yellow pages," or

in a directory of similar facilities in a given area are allowable if the listings are consistent with

practices that are common and accepted in the industry.

Costs of advertising for any purpose not specified above or not excluded below may be allowable if

they are related to patient care and are reasonable.

2l36.2 Unallowable Advertising Costs.--

Costs of fund-raising, including advertising, promotional, or publicity costs incurred for such a

purpose, are not allowable.

Costs of advertising of a general nature designed to invite physicians to utilize a provider's facilities

in their capacity as independent practitioners are not allowable. See section 2136.1 for allowability

of professional contact costs and costs of advertising for the purpose of recruiting physicians as

members of the provider's salaried staff.

Costs of advertising incurred in connection with the issuance of a provider's own stock, or the sale of

stock held by the provider in another corporation, are considered as reductions in the proceeds from

the sale and, therefore, are not allowable.

Costs of advertising to the general public which seeks to increase patient utilization of the provider's

facilities are not allowable. Situations may occur where advertising which appears to be in the nature

of the provider's public relations activity is, in fact, an effort to attract more patients. An analysis by

the intermediary of the advertising copy and its distribution may then be necessary to determine the

specific objective. While it is the policy of the Health Care Financing Administration and other

Federal agencies to promote the growth and expansion of needed provider facilities, general

advertising to promote an increase in the patient utilization of services is not properly related to the

care of patients.

2l38. MEMBERSHIP COSTS--GENERAL

Providers customarily maintain memberships in a variety of organizations and consider the costs

incurred as a result of these memberships to be ordinary provider operating costs.

2l-24 Rev. 267

12-95 COSTS RELATED TO PATIENT CARE 2138.4

Some of those organizations promote objectives in the provider's field of health care activities.

Others have purposes or functions which bear little or no relationship to this activity. In order to

determine for Medicare purposes the allowability of costs incurred as a result of membership in

various organizations, memberships have been categorized into three basic groups: (1) professional,

technical or business related; (2) civic; and (3) social, fraternal, and other.

2138.1 Professional, Technical, or Business Related Organizations.--The Medicare program

classifies organizations in this category if their functions and purposes can be reasonably related to

the development and operation of patient care facilities and programs, or the rendering of patient care

services. Memberships in these organizations, while not restricted to providers, are generally

comprised of provider, provider personnel, or others who are involved or interested in patient care

activities.

Costs of memberships in such organizations are allowable for purposes of program reimbursement.

These costs include initiation fees, dues, special assessments, and subscriptions to professional,

technical or business related periodicals. (See §2139.3 regarding lobbying activities.) Also included

are costs related to meetings and conferences, such as meals, transportation, registration fees and

other costs incidental to those functions, when the primary purpose of such meetings and conferences

is the dissemination of information for the advancement of patient care or efficient operation of the

facility.

2138.2 Civic Organizations.--These organizations function for the purpose of implementing civic

objectives. Reasonable costs of initiation fees, dues, special assessments, and subscriptions to

periodicals of civic organizations are allowable. (See §2139.3 regarding lobbying activities.) Also

allowable are those reasonable costs related to meetings and conferences, such as meals,

transportation, registration fees, and other costs incidental to these functions when the primary

purpose of such meetings and conferences is the promotion of civic objectives.

2138.3 Social, Fraternal, and Other Organizations.--Generally, these organizations concern

themselves with activities unrelated to their members' professional or business activities. Their

objectives and functions cannot be considered reasonably related to the care of beneficiaries.

Consequently, provider costs incurred in connection with memberships in social, fraternal, and other

organizations are not allowable.

2138.4 Reasonableness of Provider's Participation in Approved Membership Activities.--The

program looks to comparable providers, as well as to the justification by the individual provider, in

determining the reasonableness of the number of organizations in which the provider maintains

memberships and the claimed costs of such memberships.

Rev. 387 21-24.1

2139 COSTS RELATED TO PATIENT CARE 12-95

2139. POLITICAL AND LOBBYING ACTIVITIES

Provider political and lobbying activities are not related to the care of patients. Therefore, costs

incurred for such activities are unallowable.

2139.1 Provider Political Activities.--Costs of political activities are unallowable. These activities

include, but are not limited to, provider involvement with political parties, candidates/incumbents of

political parties, and political action committees or similar committees or associations. Likewise,

contributions made directly to political parties or candidates or contributions made indirectly, e.g.,

through other individuals, committees, or associations, are unallowable. (See §2139.3 regarding

dues to trade or other organizations related to such organizations' lobbying or political activities.)

2139.2 Provider Lobbying Activities.--

A. Lobbying Activities.--Lobbying is any activity whereby a directed effort is made to

influence legislation. Costs of lobbying activities are unallowable. The policy applies whether the

lobbying involves Medicare activities or activities unrelated to Medicare and whether the provider

lobbies with its own employees or engages others, directly or indirectly, to lobby on its behalf.

Government agencies other than HCFA have developed specific policies regarding lobbying. While

other agencies may apply their policies and procedures differently or use different nomenclature than

HCFA, e.g., in the case of the Internal Revenue Service (IRS), by means of nondeductible business

expenses rather than unallowable costs, the general intent behind policies of those agencies and of

HCFA is the same. Costs of lobbying are costs in which the government does not participate.

HCFA does not intend providers to be subject to varying rules on lobbying costs among government

agencies, resulting in nonuniform treatment of the costs and additional provider recordkeeping.

Therefore, if a non-HCFA agency, e.g., the IRS, has developed policies and procedures defining

lobbying activities and addressing the costs, HCFA does not expect providers to follow different

rules in determining Medicare payment. Rather, providers subject to rules of non-HCFA agencies on

lobbying can follow those rules in determining payment under Medicare to the extent such rules are

in accordance with Medicare policy which disallows any costs of lobbying activities.

B. Activities Which Are Not Lobbying.--Contacts by a provider with HCFA or other

government agencies with which it has business dealings is not lobbying unless the contacts are

determined to be directed toward influencing legislation. For example, if a provider, group of

providers, or provider trade organization comments on a HCFA proposal, that activity is not

lobbying. Or, if a provider disputes a point of Medicare policy or its application or has a suggestion

regarding policy, contact with HCFA or an intermediary by the provider or an organization to discuss

such issues is not lobbying.

2139.3 Organization Dues Related to Lobbying and Political Activities.--Trade or other

organizations and associations often engage in lobbying and political activities as part of their

activities. Therefore, in accordance with the policy in §§2139.1 and 2139.2, the portion of an

organization's dues or other payments related to these activities, including special assessments, is an

unallowable cost.

21-24.2 Rev. 387

03-08 COSTS RELATED TO PATIENT CARE 2140.2

For cost reporting periods beginning on or after January 1, 1996, this policy requires identification

and disallowance of the portion of dues related to lobbying and political activities. For prior periods,

the policy does not require identification but requires disallowance of any identified portion.

The policy in §2139.2 permitting providers to follow the rules of other government agencies on

lobbying activities in determining unallowable lobbying costs under Medicare applies also to dues.

In particular, for Federal income tax purposes, §13222 of the Omnibus Budget Reconciliation Act of

1993 generally requires tax-exempt organizations to report to their members the nondeductible

portion of dues related to an organization's lobbying and political activities. The reporting required

under that provision satisfies Medicare's requirement for identification of the portion of an

organization's dues related to lobbying and political activities. If an organization is not required to

report to its members for tax purposes, for Medicare purposes, the portion of dues for lobbying and

political activities remains unallowable as if the organization were required to report. In such cases,

a provider will need to request the information from the organization in order to report for Medicare

purposes only the portion not related to lobbying and political activities.

In light of policy by CMS and other agencies requiring identification of the lobbying and political

activities portion of an organization's dues, CMS believes it unlikely a provider will be unable to, or

choose not to, identify such portion. However, if a portion is not identified for Medicare payment

purposes and the intermediary is aware of the organization's ongoing lobbying or political activities,

all costs associated with the provider's dues to the organization are unallowable unless the provider

can document the unallowable portion for lobbying and political activities.

This policy is not limited to dues incurred by a provider on its own behalf. It applies also to dues a

provider pays, as a business or fringe benefit expense, on behalf of its employees and officers in

professional, trade, or other organizations to which they belong, e.g., associations of nurses,

therapists, administrators, or accountants. Only the portion of the dues not related to lobbying or

political activities of the organizations is an allowable cost.

2140. DEFERRED COMPENSATION

2140.1 Definition.--Deferred compensation is remuneration currently earned by an employee but

which is not received until a subsequent period, usually after retirement. Accordingly, a deferred

compensation plan defers the receipt of income beyond the year in which it is earned. The type of

deferred compensation plan considered herein is not considered a qualified plan under Internal

Revenue Service requirements. (See subchapter D, Internal Revenue Code of 1986, as amended, and

regulations thereunder.) Qualified deferred compensation plans that meet the definition of a defined

benefit pension plan are treated under §2142ff. Qualified deferred compensation plans that meet the

definition of a qualified defined contribution deferred compensation plan are treated under §2141ff.

2140.2 Foreword.--Provider contributions for the benefit of employees under a deferred

compensation plan are reimbursable when, and to the extent that, such costs are actually incurred by

the provider. Such costs are found to have been incurred only if the requirements of §2140ff. are

met. The requirements of this section are applicable not only to provider costs but also to direct

patient care services furnished by hospital-based physicians who receive their remuneration from the

hospital. (See §2140.5.) As a condition for provider reimbursement, deferred compensation plans

must be funded. Provider payments

Rev. 436 21-25

2140.3 COSTS RELATED TO PATIENT CARE 03-08

under unfunded deferred compensation plans are considered an allowable cost only when actually

paid to the participating employees, or their beneficiaries, and only to the extent considered

reasonable. Also, only where deferred compensation is funded is the deferred portion of the hospital-

based physician's total compensation included in determining a Part B reasonable charge for the

physician's services to patients.

2140.3 Formal Plan.--In order to establish a formal deferred compensation plan, the provider is

required to adequately communicate the proposed plan to all eligible employees, enabling them to

make an informed decision on whether to participate in the plan. A formal plan is one that is

provided for in a written agreement executed between the provider and the participating employees.

It is a permanent plan which:

o Prescribes the method for calculating all contributions to the fund established under the

plan;

o Is funded in accordance with the provisions of §2140.3B;

o Provides for the protection of the plan's assets;

o Designates the requirements for vested benefits;

o Provides the basis for the computation of the amount of benefits to be paid; and

o Is expected to continue despite normal fluctuations in the provider's economic experience.

A. Contributions.--Contributions to the plan may be made by the provider only, or by the

provider and the employee. The provider's contribution is established by the terms of the deferred

compensation agreement and made for the sole benefit of participating employees. An employee's

contribution is generally a voluntary contribution to the fund established under the plan in addition to

the provider's required contribution. For example, an employee may agree to a division of his

$15,000 salary so that $12,000 is received as immediate remuneration, $1,000 is designated as a

voluntary employee contribution, and the provider also contributes $2,000 to the deferred

compensation plan on behalf of the employee. Of course, the employee's total compensation

($15,000 in the example) must be reasonable in relation to the services rendered by the employee to

be allowable. Also, contributions by a provider to a deferred compensation plan on behalf of an

employee-owner of a provider are considered to be a part of the owner's compensation and are

subject to the test of reasonableness. (See §902.3.)

B. Funding of Deferred Compensation Plans.--

1. Provider Reimbursement for Deferred Compensation Plans.--A funded plan is one in which

contributions are systematically made as a specific provision of the plan to a funding agency for the

purpose of meeting retirement benefits. For Medicare purposes, a funding agency is a trustee, an

insurance company, or a custodial bank account which provides for the accumulation of assets to be

used for the payment of benefits under the deferred compensation plan. Accordingly, both provider

and employee contributions to the deferred compensation plan must be used either to purchase an

insured plan with a commercial insurance company, to establish a custodial bank account, or to

establish a trust fund administered by a trustee. Past service costs are allowed in accordance with the

provisions of §2142.5.

21-25.1 Rev. 436

07-96 COSTS RELATED TO PATIENT CARE 2140.3 (Cont.)

Regardless of the funding mechanism utilized, all provider and employee contributions to the fund

established under the deferred compensation plan and income therefrom must be used for the sole

benefit of the participating employees.

a. Commercial Insurance as a Funding Mechanism.--A provider's cost for a funded deferred

compensation plan is recognized when there is an actual expenditure of funds by the provider to a

commercial insurance company for the sole benefit of the participating employees. (See §2140.4.)

There are various types of insurance policies which are recognized as a funding medium for deferred

compensation plans. However, the purchase of an ordinary life insurance contract is not a deferral of

compensation and will not be recognized as a funding mechanism. Ordinary life insurance contracts

include whole life, straight life, and other permanent life insurance policies that provide life

insurance protection for the life of an employee and some accumulation of cash value in return for

regular premium payments. Nor will such a contract be recognized even though it is convertible at

the normal retirement date specified in the policy to an annuity payable over the remaining life of the

employee, because this arrangement is essentially a variation of life insurance rather than deferred

compensation.

(1) Retirement Annuity Contract.--A retirement annuity contract (which insurance

companies have given various names) is recognized as a funding medium for deferred compensation

plans. A retirement annuity contract generally provides for an accumulation of premiums and

interest less expenses to a predetermined date, usually the annuitant's retirement age. The amount

accumulated is used to purchase a contract in which annuity payments are made to the retired

employee or his survivor.

(2) Retirement Income Policy.--A retirement income policy (which insurance companies

have also given various names) is recognized as a funding medium for deferred compensation plans.

A retirement income policy usually combines the features of ordinary life and endowment policies.

Upon reaching a stipulated age (usually retirement age), the insured receives a pension for a period

of years consisting of periodic payments varying in amount dependent upon the principal sum of

insurance. This contract provides, as a secondary feature, a designated amount of insurance

protection during the lifetime of the insured.

(3) Deferred Group Annuity Contract.--A deferred group annuity contract is also

recognized as a funding medium for deferred compensation plans. Under this plan, a paid-up unit of

annual income at normal retirement age is purchased for each employee at the end of each year of

employment. The unit purchased is expressed as a percentage of the earnings of the employee in that

year. For example, an employee who has worked 30 years for a provider under a 1 1/2 percent

benefit plan receives an annual pension at retirement of 45 percent (i.e., 30 times 1 1/2 percent) of

his/her average annual salary.

b. Trust Fund as a Funding Mechanism.--When a provider establishes a trust fund for a

deferred compensation plan, the trustee(s) are appointed by the executive board or a committee of the

provider to protect the fund's assets and its distribution to the beneficiaries under the plan. The

trustee may be either a member of the provider's organization or a third party trustee.

c. Custodial Bank Account as a Funding Mechanism.--Generally, a custodial bank account

results from an administrative and custodial arrangement between a provider and a bank under which

the provider transfers deferred compensation amounts to the bank. As custodian of the deferred

compensation funds, the bank is responsible for the safekeeping of the funds. A custodial

Rev. 395 21-25.2

2140.3 (Cont.) COSTS RELATED TO PATIENT CARE 07-96

bank account may be an acceptable funding mechanism for deferred compensation plans provided

that: (1) all assets in the custodial account, including any annuity, endowment, and other insurance

policies, are registered and held in the name of the custodian until distributed to the participants

pursuant to the terms of the deferred compensation agreements, and (2) the terms of the custodial

contract specify that no part of the funds in the custodial account may be used for or diverted to

purposes other than for the exclusive benefit of the participating employees or their beneficiaries as

required by the deferred compensation agreement.

d. Trustee and Custodial Fees.--Reasonable trustee or custodial fees paid by the provider are

allowed as an administrative cost. However, the cost of such fees is not allowed to the provider

when the deferred compensation plan provides that they are paid out of the corpus or earnings of the

fund.

C. Plan's Assets.--

1. Transactions.--All transactions involving the deferred compensation fund must be

made under conditions comparable to arm's length transactions. The provider cannot transfer, either

by sale or exchange, its securities and other property to the deferred compensation fund at more than

adequate consideration. Likewise, a deferred compensation fund cannot sell its assets either to a

provider or a third party at less than adequate consideration. All assets accumulated by the plan must

be distributed exclusively to the participating employees or their beneficiaries.

2. Earnings.--The plan must specify that the interest, capital gains and losses, and

dividends earned from the investment of the fund's assets will be added to or deducted, as applicable,

from the corpus of the deferred compensation fund. Actuarial gains and losses, which are

adjustments need to reflect actual experience and to revise at intervals the actuarial assumptions to be

used in the future, should be utilized in a rational and consistent manner to adjust a provider's cost

for a deferred compensation plan.

3. Loans Made from the Deferred Compensation Fund.--The deferred compensation

fund may make a loan out of either corpus or income to a provider on the conditions that the fund

receive adequate security and a reasonable rate of interest on the loan. Adequate security means

something of value in addition to, and supporting, a promise to pay, which is so pledged to the

deferred compensation fund that it may be sold, subject to foreclosure, or otherwise disposed of in

default of repayment of the loan. It also requires that the asset pledged as security for the loan must

not be subject to prior and/or superior liens of other creditors in an amount which would negate the

value and liquidity of such security for the loan from the fund. Therefore a provider's evidence of

indebtedness, regardless of what the document is called, is, by itself, not security for a loan. Interest

paid by the provider on loan from the deferred compensation fund would be an allowable cost if the

necessary and proper requisites were met. (See §§202.2 and 202.3.) Whether a rate of interest is

reasonable would be determined by comparing it with the rates that would be charged by a bank or

other lending institution in the same community on a similar loan. To be similar, the loans should be

alike with respect to such factors as amount, duration, and security.

Since income earned on loans to the general fund of the deferred compensation fund is not income to

the provider, it will not be offset against a provider's allowable interest expense. (See §224.2.)

However, before such loans are made, the reasons for such loans should be carefully reviewed to

assure that the

21-25.3 Rev. 395

07-96 COSTS RELATED TO PATIENT CARE 2140.3 (Cont.)

deferred compensation plan is not serving any purpose other than that for which it was intended; i.e.,

for the exclusive benefit of participating employees. In addition, a loan from the deferred

compensation fund to a provider to meet a funding requirement (deferred compensation, pension, or

depreciation) would not be deemed proper under this section.

D. Vested Benefits.--The deferred compensation plan must specify the time and the manner in

which the benefits are to become vested; e.g., after a predetermined number of years of employment,

or after a specific age is attained, or some combination of the two. The schedule of benefits which

accrue to an employee or his survivors upon the employee's retirement, termination of services

because of disability, death, or other reasons, must be incorporated into the plan.

The immediate vesting of benefits is not required. However, the deferred compensation plan must

provide that vesting of provider contributions occur on or before the normal retirement age

established by the provider and defined in the plan.

The unconditional vesting of benefits will not be required. Unconditional vesting of benefits means

that once a participant's benefits are vested in accordance with the normal vesting schedule, there are

no conditions incorporated in the plan which would deprive the participant of such benefits.

Accordingly, the forfeiture of an employee's benefits for cause (as defined in the deferred

compensation plan) will be recognized provided that such forfeited amounts are used to reduce the

provider's subsequent contributions to the deferred compensation plan. However, employee

contributions to the deferred compensation fund are always nonforfeitable. If no subsequent

provider contribution are to be made to the plan, then other provider costs must be offset to the

extent of such forfeitures.

Employee benefits must become fully vested upon any of these occurrences: (a) the normal

retirement age established by the provider, (b) termination of the deferred compensation plan, (c)

complete discontinuance of contributions under the deferred compensation plan, (d) the termination

of the provider's participation in the Medicare program, or (e) change of ownership of the provider

where the successor provider is unwilling or unable to continue the deferred compensation plan or

alters the existing plan in any way. Should the provider decline to vest the provider contributions

upon the occurrence of any of these events, then the funds must be used to reduce the provider's

allowable costs.

Excess funds arising from the termination of a deferred compensation plan are to be recouped in the

year of the plan termination (or the year in which the actuarial surplus is determined, if later) only

against the cost center(s) in which the provider reported its deferred compensation plan

contributions, usually administrative and general (A&G). The recoupment of the excess funds is

treated on the cost report in the same manner for both cost reimbursed providers and prospective

payment providers, although the payment impact upon prospective payment providers is limited to

cost reimbursed activities. Excess funds exceeding the amount in the A&G (or other) cost center are

not further offset in the current or subsequent years. The date of the official notice to the provider

that the terminated plan has generated an actuarial surplus, e.g., notice by the Pension Benefit

Guaranty Corporation (PBGC), or similar entity, of the surplus amount, represents the year in which

the actuarial surplus is determined. The Medicare share of the reversion is based on the Medicare

utilization rate in the year the reversion occurs (or the year the actuarial surplus is determined), and

not Medicare's utilization in the years the

Rev. 395 21-25.4

2140.4 COSTS RELATED TO PATIENT CARE 07-96

contributions to the plan were made. Investment income earned on a fund after its termination but

prior to liquidation of the fund's assets and distribution to the provider is offset against the provider's

allowable interest expense, as provided in §202.2.

E. Benefits to be Paid.--If an employee terminates his participation in the deferred

compensation plan before his rights are vested, the applicable nonvested funds cannot be applied to

increase the benefits of the surviving participants, but must be applied to reduce the provider's

subsequent contributions to the plan. If subsequent provider contributions to the plan are not made,

then provider costs will be reduced to the extent of such nonvested funds. The plan may provide that

a refund of a terminated employee's contributions include interest. If an employee terminates his

participation after his rights are vested, then the final payment to the employee will be made

according to the terms of the plan.

2140.4 Requirements to Fund Plan.--A provider must make payment of its liability to the fund

established for the deferred compensation plan in accordance with the provisions covering

liquidation of liabilities established in §2305. This section requires full liquidation of the liability

within 1 year after the end of the cost reporting period in which the liability is incurred. An

extension, not to exceed 3 years beyond the end of the cost reporting period in which the liability was

incurred, may be granted by the intermediary for good cause if the provider, within the 1-year time

limit, furnishes to the intermediary sufficient written justification (based upon documented evidence)

for non-payment of the liability.

Payment to the deferred compensation fund in excess of the provider's incurred liability is not

includable in allowable costs, but may be carried forward and considered as payment against the

liability of a future period.

Payment must be made by check or other negotiable instrument, cash, or legal transfer of assets such

as stocks, bonds, real property, etc. Where payment 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 limit specified in this section. The valuation of stocks, bonds, real property, etc., transferred

to the deferred compensation fund would be determined as of the date of transfer by the provider.

2140.5 Reimbursement of Hospital-Based Physician Patient Care Services.--Contracts or

agreements between hospital-based physicians and hospitals involve a variety of arrangements under

which the physician is compensated by the hospital for the full range of his services within the

institution. The allocation of the hospital-based physician's compensation (including any portion

subject to deferment) between services benefiting the institution and direct patient care is subject to

the review and approval of the hospital's intermediary and the Part B carrier. (See §§2108.2C and

2108.2D.) Medicare will not, however, accept an allocation which attributes the physician's deferred

compensation entirely to one type of service and his current compensation to the other. The amount

deferred must be allocated in the same ratio that physician's total compensation is allocated between

the two types of service.

Where the arrangement between the physician and provider results in the provider reimbursing the

physician from its own funds, then a deferred compensation arrangement can occur which will be

recognized by Medicare. Recognition will require that all the provisions of §2140ff be met.

21-26 Rev. 395

03-08 COSTS RELATED TO PATIENT CARE 2140.6

Recognition of a deferred compensation arrangement does not mean that a provider will incur a cost,

which is allowable. For example, payments to a fund for a physician's direct patient care services are

not an allowable provider cost. However, where the arrangement is recognized by the program, and

the physician's compensation is determined to be reasonable in terms of the prudent buyer principles,

then deferred compensation can be included in the physician's total compensation in determining his

reasonable charge. However, if the deferred compensation is not recognized because it fails to meet

all provisions of §2140ff, e.g., it is not funded, then deferred compensation cannot be included in the

physician's compensation in determining his reasonable charge.

The Medicare program will not recognize an arrangement between the physician and the provider in

which the physician is reimbursed from patient charges, but the provider does the billing, as a

deferred compensation arrangement. For example, where the employment relationship between the

provider and the provider-based physician is such that the provider is merely acting as the billing

agent for the physician whose remuneration is derived from billing for his patient care services, the

Medicare program will not recognize a deferred compensation plan for such remuneration. In order

to be recognized as a deferred compensation plan, the compensation costs must be initially borne by

the provider, i.e., the funds must not be dependent upon patient billings. As an example, if the

hospital has agreed to pay a physician $30,000 for his services in the emergency room, the program

would recognize a deferred compensation plan which defers a portion of the $30,000. The difference

in recognition is that in the first example, the hospital is merely the conduit for a physician's billings

for patient care; whereas, in the second example, the hospital has to pay the physician $30,000

regardless of the number of patients he treats.

In all matters affecting provider-based physician reimbursement, close coordination between the

provider, the intermediary and the Part B carrier is necessary. The intermediary is responsible for

insuring that the provider complies with the overall requirements of this section and for providing the

carrier with data needed in determining reasonable charges.

2140.6 Guarantee Arrangements for Physician Emergency Room Services.--A provider may

agree to guarantee a physician a specified amount of compensation for rendering emergency room

services. Under the guarantee, the provider makes up any difference between the amount guaranteed

and the total amount of physician's charges to all patients for services actually rendered. (See

§2109.) Only the amount the provider pays to satisfy the guarantee is recognized as a provider cost.

Deferred compensation arrangements which are included in such guarantee arrangements are

recognized by Medicare when (1) the terms of both the guarantee arrangements and the deferred

compensation plan establish the amounts to be included at the beginning of the provider's accounting

period, (2) the amount of deferred compensation is included in the guaranteed amount, and (3) the

provider contributes to the fund established under the deferred compensation plan from its own

funds.

The amount of deferred compensation, which the program recognizes, however, is limited to the

amount by which the guarantee, including deferred compensation, exceeds the total billed by the

provider to all patients for the physician's patient care services. The amount recognized may not

exceed the amount of deferred compensation specified in the agreement. When the physician's

charges to all patients equal or exceed the amount guaranteed by the provider, the

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2141 COSTS RELATED TO PATIENT CARE 03-08

program does not recognize a deferred compensation payment because the funds are not provider

generated. (It is the physician's charges to all patients, not the collections, which measure the

guarantee.)

The following example illustrates how the amount of deferred compensation the program recognizes

under guarantee arrangements can be determined in the three situations presented.

Provider A has an arrangement with Dr. X guaranteeing him/her $25,000 per year for emergency

room patient care services. Under a deferred compensation agreement, up to $5,000 of the amount

paid to meet the guarantee is considered deferred compensation.

Situation A Situation B Situation C

Guaranteed Amount $25,000 $25,000 $25,000

Total Services Billed (by

physician or by provider) $20,000 $23,000 $30,000

Amount Recognized by Program

as Deferred Compensation $ 5,000 $ 2,000 ---

If the guarantee arrangements require the physician to render administrative services which are

recognized as provider costs under Medicare, then the deferred compensation must be apportioned

between Part A and Part B in the proportion that each bears to the total guarantee.

2141. DEFINED CONTRIBUTION DEFERRED COMPENSATION PLANS

2141.1 Definition.--Defined contribution deferred compensation plans include profit sharing,

stock bonus, and other such defined contribution deferred compensation plans that meet Internal

Revenue Service (IRS) or Employee Retirement Income Security Act (ERISA) requirements as

qualified plans and have been so approved by the IRS. The plans provide for an individual account

for each participant and for benefits based solely upon the amount contributed to the participant's

account and any income, expenses, gains and losses, and any forfeitures of accounts of other

participants which may be allocated to the participant's account. These deferred compensation plans,

as well as the non-qualified deferred compensation plans described in §§2140ff, provide for the

deferral of remuneration currently earned by an employee until a subsequent period (usually after

retirement).

2141.2 Foreword.--Provider contributions for the benefit of employees under a defined

contribution deferred compensation plan are allowable when, and to the extent that, such costs are

actually incurred by the provider. Such costs may be found to have been incurred only if the

requirements of this section are met.

2141.3 Formal Plan.--In order to establish a formal deferred compensation plan, the provider is

required to adequately communicate the proposed plan to all eligible employees, enabling them to

make an informed decision on whether to participate in the plan. No provision of the plan may

discriminate in favor of certain employees, e.g., employees who are stockholders, supervisors, or

highly paid personnel. A formal plan is one that is maintained by the provider and is provided for in

a written agreement executed between the provider and the participating employees. It is a

permanent plan which:

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01-14 COSTS RELATED TO PATIENT CARE 2141.3

o Prescribes the method for calculating all contributions to the fund established under the plan;

o Is funded in accordance with the provisions of §2140.3B;

o Provides for the protection of the plan's assets;

o Designates the requirements for vested benefits;

o Provides the methods and procedures for payment to the employee of the amount in the

employee's account; and

o Is expected to continue despite normal fluctuations in the provider's economic experience.

A. Contributions.--The provisions of §2140.3A must be met.

B. Funding of Deferred Compensation Plans.--The provisions of §2140.3B must be met.

C. Plan's Assets.--

1. Transactions.--The provisions of §2140.3.C.1 must be met.

2. Individual Participant's Account.--The plan must provide for an individual account for

each participant and for benefits based solely upon the amount contributed to the participant's

account. This includes any income, expenses, gains and losses, and any forfeitures of accounts of

other participants which may be allocated to each participant's account.

3. Loans Made From Deferred Compensation Fund.--The provisions of §2140.3.C.3

must be met.

D. Vested Benefits.--The deferred compensation plan must specify the time and the manner in

which the benefits are to become vested, e.g., after a predetermined number of years of employment,

after a specific age is attained, or some combination of the two. The benefits that accrue to an

employee upon retirement, termination of services due to disability, or other reasons (or that accrue

to the employee's survivor in case of death) must be incorporated into the plan.

The immediate vesting of benefits is not required. However, the deferred compensation plan must

provide that vesting of provider contributions occurs on or before the normal retirement age

established by the provider and as defined in the plan.

The unconditional vesting of benefits is not required. Unconditional vesting of benefits means that

once a participant's benefits are vested in accordance with the normal vesting schedule, there are no

conditions incorporated in the plan which deprives the participant of such benefits.

Employee benefits must become fully vested upon any of these occurrences:

o The normal retirement age established by the provider;

o Termination of the deferred compensation plan;

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2141.4 COSTS RELATED TO PATIENT CARE 01-14

o Complete discontinuance of contributions under the deferred compensation plan;

o Termination of the provider's participation in the Medicare program; or

o Change of ownership of the provider when the successor provider is unwilling or unable to

continue the deferred compensation plan or alters the existing plan in any way.

Excess funds arising from the termination of a deferred compensation plan are subject to the

provisions of §2140.3.D.

2141.4 Requirements to Fund Plan.--The provisions of §2140.4 must be met.

2141.5 Reimbursement of Hospital-Based Physician Patient Care Services.-- Contracts or

agreements between hospital-based physicians and hospitals involve a variety of arrangements under

which the physician is compensated by the hospital for the full range of services within the

institution. The allocation of the hospital-based physician's compensation (including any portion

subject to deferment) between services benefiting the institution and direct patient care is subject to

the review and approval of the hospital's intermediary. Medicare does not accept an allocation,

which attributes the physician's deferred compensation entirely to one type of service and the current

compensation to the other. The amount deferred must be allocated in the same ratio that physician's

total compensation is allocated between the two types of service.

Arrangements between the physician and the provider in which the physician is compensated solely

from patient charges, although the provider, serving merely as a billing agent, does the billing,

cannot include a deferred compensation arrangement, which will be recognized by the program. In

order to be recognized as a deferred compensation plan, the compensation costs must be initially

borne by the provider.

2141.6 Guarantee Arrangements for Physician Emergency Room Services.--The provisions of

§2140.6 must be met.

2141.7 Effective Date.--The provisions of this section are effective for defined contribution

deferred compensation plans established in cost reporting periods beginning on or after March 1,

1976.

2142. DEFINED BENEFIT PENSION PLANS

2142.1 Definition.--A defined benefit pension plan is a type of deferred compensation plan, which

is established and maintained by the employer primarily to provide definitely determinable benefits

to its employees usually over a period of years, or for life, after retirement. Pension plan benefits are

generally measured by, and based on, such factors as age of employees, years of service, and

compensation received by the employees. This section applies only to defined benefit pension plans

which are qualified pension plans under Section 401 (a) of the Internal Revenue Code. A qualified

pension plan is for the exclusive benefit of employees or their beneficiaries and qualifies for special

tax benefits, such as tax deferral for employer contributions. Defined benefit pension plans which

are not qualified plans are treated as deferred compensation plans under §2140.

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01-14 COSTS RELATED TO PATIENT CARE 2142.5

2142.2 Removed and Reserved - Section content deleted and the section number is reserved for

future use.

2142.3 Removed and Reserved - Section content deleted and the section number is reserved for

future use.

2142.4 Removed and Reserved - Section content deleted and the section number is reserved for

future use.

2142.5 Pension Costs.—

A. Current Period Pension Cost.--The current period pension cost is the sum of the provider

contribution payments made to a defined benefit pension plan during the current cost reporting

period in accordance with §2142.6(A) plus any carry forward contributions determined in

accordance with §2142.5(E), such total for the current year may not exceed the pension cost

limitation described in §2142.5(B).

B. Pension Cost Limitation.--Except as provided in §2142.5(D), the current period pension cost

may not exceed 150% of the provider’s average contribution payments made to the plan during the

three (3) consecutive cost reporting periods out of the last five (5) consecutive cost reporting

periods (ending with the current reporting period) which produce the highest average.

(1) For purposes of determining the pension cost limitation, provider contribution payments

for each applicable cost reporting period shall be determined on a cash basis in accordance with

§2142.6(A), without regard to any pension cost limitation determined under §2142.5(B) for the

period during which the contributions were made, and excluding any contributions deposited in a

prior period and treated as carry forward contributions under §2142.5(E).

(2) The averaging period used to determine the pension cost limitation shall be determined

without regard to a provider’s period of participation in the Medicare program. Periods which are

not Medicare cost reporting periods (e.g. periods prior to the hospital’s participation in the

Medicare program) shall be defined as consecutive twelve month periods ending immediately prior

to the provider’s initial Medicare cost reporting period.

(3) The averaging period used to determine the pension cost limitation shall exclude all periods

ending prior to the initial effective date of the pension plan (or a predecessor pension plan in the

case of a merger as explained in 2142.5(C)).

C. Multiple Pension Plans and Successor Plans.--In general, the current period pension cost

and pension cost limitation shall be computed and applied separately for each defined benefit

pension plan offered by a provider. In the case of a plan merger, the contribution payments made by

a provider to a predecessor pension plan and reflected in the assets subsequently transferred to a

successor plan shall be treated as contribution payments made to the successor plan.

D. Request for Adjustment to Pension Cost Limitation.--A provider may request an adjustment

to the pension cost limitation otherwise determined under section §2142.5(B) for the current period

by submitting documentation, prior to the filing deadline for its current period cost report, to show

that all or a portion of the contributions in excess of the pension cost limitation are reasonable and

necessary to satisfy a current period’s actuarially determined pension liability. Examples of

situations when an adjustment to the pension cost limitation may be justified would include, but are

not limited to, excess contributions required by law or to avoid benefit restrictions under ERISA.

Requests for a limitation adjustment and any documentation should be sent to [email protected]

with a copy to the Medicare contractor. The CMS central office will approve or disapprove these

requests.

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2142.5 COSTS RELATED TO PATIENT CARE 01-14

(1) For purposes of determining the pension cost limitation, provider contribution payments for

each applicable cost reporting period shall be determined on a cash basis in accordance with