42 CFR Ch. IV (10–1–20 Edition)

Pt. 413 42 CFR Ch. IV (10–1–20 Edition)

documentation demonstrating compli- PART 413—PRINCIPLES OF REA- ance. This documentation must be sub- SONABLE COST REIMBURSEMENT; mitted electronically as an attachment PAYMENT FOR END–STAGE to the reconsideration request email. Any request for reconsideration that RENAL DISEASE SERVICES; PRO- does not contain sufficient evidence of SPECTIVELY DETERMINED PAY- compliance with the IRF QRP require- MENT RATES FOR SKILLED NURS- ments will be denied. ING FACILITIES; PAYMENT FOR (4) Email is the only form of submis- ACUTE KIDNEY INJURY DIALYSIS sion that will be accepted. Any reconsideration requests received through Subpart A—Introduction and General Rules another channel will not be considered Sec. as a valid exception or extension re- 413.1 Introduction. quest. 413.5 Cost reimbursement: General. (5) CMS will notify IRFs, in writing, 413.9 Cost related to patient care. of its final decision regarding any re- 413.13 Amount of payment if customary consideration request through at least charges for services furnished are less one of the following methods: CMS des- than reasonable costs. ignated data submission system, the 413.17 Cost to related organizations. United States Postal Service, or via an Subpart B—Accounting Records and email from the Medicare Administra- Reports tive Contractor (MAC). (e) Appeals. (1) An IRF may appeal 413.20 Financial data and reports. the decision made by CMS on its recon- 413.24 Adequate cost data and cost finding. sideration request by filing with the Provider Reimbursement Review Board Subpart C—Limits on Cost Reimbursement (PRRB) under 42 CFR part 405, subpart 413.30 Limitations on payable costs. R. 413.35 Limitations on coverage of costs: (2) [Reserved] Charges to beneficiaries if cost limits are (f) Data Completion Thresholds. (1) applied to services. IRFs must meet or exceed two separate 413.40 Ceiling on the rate of increase in hos- data completeness thresholds: One pital inpatient costs. threshold set at 95 percent for comple- Subpart D—Apportionment tion of required quality measures data and standardized patient assessment 413.50 Apportionment of allowable costs. data collected using the IRF–PAI sub- 413.53 Determination of cost of services to mitted through the CMS designated beneficiaries. 413.56 [Reserved] data submission system; and a second threshold set at 100 percent for meas- Subpart E—Payments to Providers ures data collected and submitted using the CDC NHSN. 413.60 Payments to providers: General. (2) These thresholds (95 percent for 413.64 Payments to providers: Specific rules. 413.65 Requirements for a determination completion of required quality meas- that a facility or an organization has ures data and standardized patient as- provider-based status. sessment data on the IRF–PAI; 100 per- 413.70 Payment for services of a CAH. cent for CDC NHSN data) will apply to 413.74 Payment to a foreign hospital. all measures and standardized patient assessment data requirements adopted Subpart F—Specific Categories of Costs into the IRF QRP. 413.75 Direct GME payments: General re- (3) An IRF must meet or exceed both quirements. thresholds to avoid receiving a 2 per- 413.76 Direct GME payments: Calculation of centage point reduction to their annual payments for GME costs. payment update for a given fiscal year, 413.77 Direct GME payments: Determina- beginning with FY 2016 and for all sub- tion of per resident amounts. sequent payment updates. 413.78 Direct GME payments: Determina- tion of the total number of FTE resi- [80 FR 47138, Aug. 6, 2015, as amended at 81 dents. FR 52140, Aug. 5, 2016; 82 FR 36305, Aug. 3, 413.79 Direct GME payments: Determina- 2017; 83 FR 38573, Aug. 6, 2018; 84 FR 39172, tion of the weighted number of FTE resi- Aug. 8, 2019] dents.

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413.80 Direct GME payments: Determina- 413.157 Return on equity capital of propri- tion of weighting factors for foreign med- etary providers. ical graduates. 413.81 Direct GME payments: Application of Subpart H—Payment for End-Stage Renal community support and redistribution of Disease (ESRD) Services and Organ costs in determining FTE resident Procurement Costs counts. 413.82 Direct GME payments: Special rules 413.170 Scope. for States that formerly had a waiver 413.171 Definitions. from Medicare reimbursement principles. 413.172 Principles of prospective payment. 413.83 Direct GME payments: Adjustment of a hospital’s target amount or prospective 413.174 Prospective rates for hospital-based payment hospital-specific rate. and independent ESRD facilities. 413.85 Cost of approved nursing and allied 413.176 Amount of payments. health education activities. 413.177 Quality incentive program payment. 413.87 Payments for Medicare + Choice 413.178 ESRD quality incentive program. nursing and allied health education pro- 413.180 Procedures for requesting exceptions grams. to payment rates. 413.88 Incentive payments under plans for 413.182 Criteria for approval of exception re- voluntary reduction in number of med- quests. ical residents. 413.184 Payment exception: Pediatric pa- 413.89 Bad debts, charity, and courtesy al- tient mix. lowances. 413.186 Payment exception: Self-dialysis 413.90 Research costs. training costs. 413.92 Costs of surety bonds. 413.194 Appeals. 413.94 Value of services of nonpaid workers. 413.98 Purchase discounts and allowances, 413.195 Limitation on review. and refunds of expenses. 413.196 Notification of changes in rate-set- 413.100 Special treatment of certain accrued ting methodologies and payment rates. costs. 413.198 Recordkeeping and cost reporting re- 413.102 Compensation of owners. quirements for outpatient maintenance 413.106 Reasonable cost of physical and dialysis. other therapy services furnished under 413.200 Payment of independent organ pro- arrangements. curement organizations and 413.114 Payment for posthospital SNF care histocompatibility laboratories. furnished by a swing-bed hospital. 413.202 Organ procurement organization 413.118 Payment for facility services related (OPO) cost for kidneys sent to foreign to covered ASC surgical procedures per- countries or transplanted in patients formed in hospitals on an outpatient other than Medicare beneficiaries. basis. 413.203 Transplant center costs for organs 413.122 Payment for hospital outpatient ra- sent to foreign countries or transplanted diology services and other diagnostic in patients other than Medicare bene- procedures. ficiaries. 413.123 Payment for screening mammog- 413.210 Conditions for payment under the raphy performed by hospitals on an out- end-stage renal disease (ESRD) prospec- patient basis. tive payment system. 413.124 Reduction to hospital outpatient op- 413.215 Basis of payment. erating costs. 413.125 Payment for home health agency 413.217 Items and services included in the services. ESRD prospective payment system. 413.220 Methodology for calculating the per- Subpart G—Capital-Related Costs treatment base rate under the ESRD prospective payment system effective Janu- 413.130 Introduction to capital-related ary 1, 2011. costs. 413.230 Determining the per treatment pay- 413.134 Depreciation: Allowance for depre- ment amount. ciation based on asset costs. 413.231 Adjustment for wages. 413.139 Depreciation: Optional allowance for 413.232 Low-volume adjustment. depreciation based on a percentage of op- 413.233 Rural facility adjustment. erating costs. 413.144 Depreciation: Allowance for depre- 413.234 Drug designation process. ciation on fully depreciated or partially 413.235 Patient-level adjustments. depreciated assets. 413.236 Transitional add-on payment adjust- 413.149 Depreciation: Allowance for depre- ment for new and innovative equipment ciation on assets financed with Federal and supplies. or public funds. 413.237 Outliers. 413.153 Interest expense. 413.239 Transition period.

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413.241 Pharmacy arrangements. SOURCE: 51 FR 34793, Sept. 30, 1986, unless otherwise noted. Subpart I—Prospectively Determined Pay- EDITORIAL NOTE: Nomenclature changes to ment Rates for Low-Volume Skilled part 413 appear at 76 FR 50537, August 22, Nursing Facilities, for Cost Reporting 2014. Periods Beginning Prior to July 1, 1998 413.300 Basis and scope. Subpart A—Introduction and 413.302 Definitions. General Rules 413.304 Eligibility for prospectively determined payment rates. § 413.1 Introduction. 413.308 Rules governing election of prospec- (a) Basis, scope, and applicability—(1) tively determined payment rates. Statutory basis—(i) Basic provisions. (A) 413.310 Basis of payment. Section 1815 of the Act requires that 413.312 Methodology for calculating rates. 413.314 Determining payment amounts: the Secretary make interim payments Routine per diem rate. to providers and periodically determine 413.316 Determining payment amounts: An- the amount that should be paid under cillary services. Part A of Medicare to each provider for 413.320 Publication of prospectively deter- the services it furnishes. mined payment rates or amounts. (B) Section 1814(b) of the Act (for 413.321 Simplified cost reports for SNFs. Part A) and section 1833(a) (for Part B) provide for payment on the basis of the Subpart J—Prospective Payment for Skilled lesser of a provider’s reasonable costs Nursing Facilities or customary charges. 413.330 Basis and scope. (C) Section 1861(v) of the Act defines 413.333 Definitions. ‘‘reasonable cost’’. 413.335 Basis of payment. (ii) Additional provisions. (A) Section 413.337 Methodology for calculating the pro- 1138(b) of the Act specifies the condi- spective payment rates. tions for Medicare payment for organ 413.338 Skilled nursing facility value-based procurement costs. purchasing program. (B) Section 1814(j) of the Act provides 413.340 Transition period. for exceptions to the ‘‘lower of costs or 413.343 Resident assessment data. charges’’ provisions. 413.345 Publication of Federal prospective (C) Sections 1815(a) and 1833(e) of the payment rates. 413.348 Limitation on review. Act provide the Secretary with author- 413.350 Periodic interim payments for ity to request information from pro- skilled nursing facilities receiving pay- viders to determine the amount of ment under the skilled nursing facility Medicare payment due providers. prospective payment system for Part A (D) Section 1833(a)(4) and (i)(3) of the services. Act provide for payment of a blended 413.355 Additional payment: QIO reimburse- amount for certain surgical services ment for cost of sending records elec- furnished in a hospital’s outpatient de- tronically or by photocopy and mailing. partment. 413.360 Requirements under the Skilled Nursing Facility (SNF) Quality Report- (E) Section 1833(n) of the Act pro- ing Program (QRP). vides for payment of a blended amount for outpatient hospital diagnostic pro- Subpart K—Payment for Acute Kidney cedures such as radiology. Injury (AKI) Dialysis (F) Section 1834(c)(1)(C) of the Act establishes the method for determining 413.370 Scope. Medicare payment for screening mam- 413.371 Definition. mograms performed by hospitals. 413.372 AKI dialysis payment rate. 413.373 Other adjustments to the AKI dialy- (G) Section 1834(g) of the Act pro- sis payment rate vides that payment for critical access 413.374 Renal dialysis services included in hospital (CAH) outpatient services is the AKI dialysis payment rate the reasonable costs of the CAH in pro- 413.375 Notification of changes in rate-set- viding these services, as determined in ting methodologies and payment rates. accordance with section 1861(v)(1)(A) of AUTHORITY: 42 U.S.C. 1302, 1395d(d), 1395f(b), the Act and the applicable principles of 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, cost reimbursement in this part and in 1395rr, 1395tt, and 1395ww. part 415 of this chapter.

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(H) Section 1881 of the Act authorizes plies both to hospital-based and inde- payment for services furnished to pendent ESRD facilities, and under ESRD patients. which Medicare pays for both home and (I) Section 1883 of the Act provides infacility dialysis services furnished on for payment for post-hospital SNF care or after August 1, 1983. furnished by a rural hospital that has (d) Payment for inpatient hospital serv- swing-bed approval. ices. (1) For cost reporting periods be- (J) Sections 1886(a) and (b) of the Act ginning before October 1, 1983, the impose a ceiling on the rate of increase amount paid for inpatient hospital in hospital inpatient costs. services is determined on a reasonable (K) Section 1886(h) of the Act pro- cost basis. vides for payment to a hospital for the (2) Payment to short-term general services of interns and residents in ap- hospitals located in the 50 States and proved teaching programs on the basis the District of Columbia for the oper- of a ‘‘per resident’’ amount. ating costs of hospital inpatient serv- (2) Scope. This part sets forth regula- ices for cost reporting periods begin- tions governing Medicare payment for ning on or after October 1, 1983, and for services furnished to beneficiaries by— the capital-related costs of inpatient (i) Hospitals and critical access hos- services for cost reporting periods be- pitals (CAHs); ginning on or after October 1, 1991, are (ii) Skilled nursing facilities (SNFs); determined prospectively on a per dis- (iii) Home health agencies (HHAs); charge basis under part 412 of this (iv) End-stage renal disease (ESRD) chapter except as follows: facilities; (i) Payment for capital-related costs (v) Organ procurement agencies for cost reporting periods beginning be- (OPAs) and histocompatibility labora- fore October 1, 1991, medical education tories. costs, kidney acquisition costs, and the (3) Applicability. The payment prin- costs of certain anesthesia services, is ciples and related policies set forth in described in § 412.113 of this chapter. this part are binding on CMS and its fiscal contractors, on the Provider Re- (ii) Payment to children’s hospitals imbursement Review Board, and on the that are excluded from the prospective entities listed in paragraph (a)(2) of payment systems under subpart B of this section. part 412 of this chapter, and hospitals (b) Reasonable cost reimbursement. Ex- outside the 50 States and the District cept as provided under paragraphs (c) of Columbia is on a reasonable cost through (h) of this section, Medicare is basis, subject to the provisions of generally required, under section § 413.40. 1814(b) of the Act (for services covered (iii) Payment to hospitals subject to under Part A) and under section a State reimbursement control system 1833(a)(2) of the Act (for services cov- is described in paragraph (e) of this sec- ered under Part B) to pay for services tion. furnished by providers on the basis of (iv) For cost reporting periods begin- reasonable costs as defined in section ning before January 1, 2005, payment to 1861(v) of the Act, or the provider’s cus- psychiatric hospitals (as well as sepa- tomary charges for those services, if rate psychiatric units (distinct parts) lower. Regulations implementing sec- of short-term general hospitals) that tion 1861(v) are found generally in this are excluded under subpart B of part part beginning at § 413.5. 412 of this chapter from the prospective (c) Outpatient maintenance dialysis payment system is on a reasonable cost and related services. Section 1881 of the basis, subject to the provisions of Act authorizes special rules for the § 413.40. coverage of and payment for services (v) For cost reporting periods begin- furnished to ESRD patients. Sections ning on or after January 1, 2005, pay- 413.170 and 413.174 implement various ment to inpatient psychiatric facilities provisions of section 1881. In par- that meet the conditions of § 412.404 of ticular, § 413.170 establishes a prospec- this chapter, is made under the pro- tive payment method for outpatient spective payment system described in maintenance dialysis services that ap- subpart N of part 412 of this chapter.

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(vi) For cost reporting periods begin- (g) Payment for services furnished in ning before January 1, 2002, payment to SNFs. (1) Except as specified in para- rehabilitation hospitals (as well as sep- graph (g)(2)(ii) of this section, the arate rehabilitation units (distinct amount paid for services furnished in parts) of short-term general hospitals), cost reporting periods beginning before that are excluded under subpart B of July 1, 1998, is determined on a reason- part 412 of this subchapter from the able cost basis or, where applicable, in prospective payment systems is made accordance with the prospectively de- on a reasonable cost basis, subject to termined payment rates for low-vol- the provisions of § 413.40. ume SNFs established under section (vii) For cost reporting periods begin- 1888(d) of the Act, as set forth in sub- ning on or after January 1, 2002, pay- part I of this part. ment to rehabilitation hospitals (as (2) The amount paid for services well as separate rehabilitation units (other than those described in (distinct parts) of short-term general § 411.15(p)(2) of this chapter)— hospitals) that meet the conditions of (i) That are furnished in cost reporting periods beginning on or after July § 412.604 of this chapter is based on pro- 1, 1998, to a resident who is in a covered spectively determined rates under sub- Part A stay, is determined in accord- part P of part 412 of this subchapter. ance with the prospectively determined (viii) For cost reporting periods be- payment rates for SNFs established ginning before October 1, 2002, payment under section 1888(e) of the Act, as set to long-term care hospitals that are ex- forth in subpart J of this part. cluded under subpart B of Part 412 of (ii) That are furnished on or after this subchapter from the prospective July 1, 1998, to a resident who is not in payment systems is on a reasonable a covered Part A stay, is determined in cost basis, subject to the provisions of accordance with any applicable Part B § 413.40. fee schedule or, for a particular item or (ix) For cost reporting periods begin- service to which no fee schedule ap- ning on or after October 1, 2002, pay- plies, by using the existing payment ment to the long-term hospitals that methodology utilized under Part B for meet the condition for payment of such item or service. §§ 412.505 through 412.511 of this sub- (h) Payment for services furnished by chapter is based on prospectively deter- HHAs. The amount paid for home mined rates under subpart O of Part 412 health services as defined in section of this subchapter. 1861(m) of the Act (except durable med- (e) State reimbursement control systems. ical equipment and the covered Beginning October 1, 1983, Medicare re- osteoporosis drug as provided for in imbursement for inpatient hospital that section) that are furnished begin- services may be made in accordance ning on or after October 1, 2000 to an el- with a State reimbursement control igible beneficiary under a home health system rather than under the Medicare plan of care is determined according to reimbursement principles set forth in the prospectively determined payment this part, if the State system is ap- rates for HHAs set forth in part 484, proved by CMS. Regulations imple- subpart E of this chapter. menting this alternative reimburse- [51 FR 34793, Sept. 30, 1986] ment authority are set forth in subpart C of part 403 of this chapter. EDITORIAL NOTE: For FEDERAL REGISTER ci- tations affecting § 413.1, see the List of CFR (f) Services of qualified nonphysician Sections Affected, which appears in the anesthetists. For cost reporting periods, Finding Aids section of the printed volume or any part of a cost reporting period, and at www.govinfo.gov. beginning on or after January 1, 1989, costs incurred for the services of quali- § 413.5 Cost reimbursement: General. fied nonphysician anesthetists are not (a) In formulating methods for mak- paid on a reasonable cost basis unless ing fair and equitable reimbursement the provisions of § 412.113(c)(2) of this for services rendered beneficiaries of chapter apply. These services are paid the program, payment is to be made on under the special rules set forth in the basis of current costs of the indi- § 405.553 of this chapter. vidual provider, rather than costs of a

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past period or a fixed negotiated rate. (6) That there should be a recognition All necessary and proper expenses of an of the need of hospitals and other pro- institution in the production of serv- viders to keep pace with growing needs ices, including normal standby costs, and to make improvements. are recognized. Furthermore, the share (c) As formulated herein, the prin- of the total institutional cost that is ciples given recognition to such factors borne by the program is related to the as depreciation, interest, bad debts, care furnished beneficiaries so that no educational costs, compensation of part of their cost would need to be owners, and an allowance for a reason- borne by other patients. Conversely, able return on equity capital (in the costs attributable to other patients of case of certain proprietary providers). the institution are not to be borne by With respect to allowable costs some the program. Thus, the application of this approach, with appropriate ac- items of inclusion and exclusion are: counting support, will result in meet- (1) An appropriate part of the net ing actual costs of services to bene- cost of approved educational activities ficiaries as such costs vary from insti- will be included. tution to institution. However, pay- (2) Costs incurred for research pur- ments to providers of services for serv- poses, over and above usual patient ices furnished Medicare beneficiaries care, will not be included. are subject to the provisions of §§ 413.13 (3) [Reserved] and 413.30. (4) The value of services provided by (b) Putting these several points to- nonpaid workers, as members of an or- gether, certain tests have been evolved ganization (including services of mem- for the principles of reimbursement bers of religious orders) having an and certain goals have been established agreement with the provider to furnish that they should be designed to accom- such services, is includable in the plish. In general terms, these are the amount that would be paid others for tests or objectives: similar work. (1) That the methods of reimburse- (5) Discounts and allowances received ment should result in current payment on the purchase of goods or services are so that institutions will not be dis- advantaged, as they sometimes are reductions of the cost to which they re- under other arrangements, by having late. to put up money for the purchase of (6) Bad debts growing out of the fail- goods and services well before they re- ure of a beneficiary to pay the deduct- ceive reimbursement. ible, or the coinsurance, will be reim- (2) That, in addition to current pay- bursed (after bona fide efforts at collec- ment, there should be retroactive ad- tion). justment so that increases in costs are (7) Charity and courtesy allowances taken fully into account as they actu- are not includable, although ‘‘fringe ally occurred, not just prospectively. benefit’’ allowances for employees (3) That there be a division of the al- under a formal plan will be includable lowable costs between the beneficiaries as part of their compensation. of this program and the other patients (8) A reasonable allowance of com- of the provider that takes account of pensation for the services of owners in the actual use of services by the bene- profitmaking organizations will be al- ficiaries of this program and that is lowed providing their services are actu- fair to each provider individually. ally performed in a necessary function. (4) That there be sufficient flexibility (9) Reasonable cost of physicians’ di- in the methods of reimbursement to be used, particularly at the beginning of rect medical and surgical services (in- the program, to take account of the cluding supervision of interns and resi- great differences in the present state of dents in the care of individual patients) development of recordkeeping. furnished in a teaching hospital may be (5) That the principles should result reimbursed as a provider cost (as de- in the equitable treatment of both non- scribed in § 415.162 of this chapter) if profit organizations and profit-making elected as provided for in § 415.160 of organizations. this chapter.

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(d) In developing these principles of cific items of revenue and cost. How- reimbursement for the Medicare pro- ever, for cost reporting periods begin- gram, all of the considerations inher- ning after December 31, 1973, payments ent in allowances for depreciation were to providers of services are based on studied. The principles, as presented, the lesser of the reasonable cost of provide options to meet varied situa- services covered under Medicare and tions. Depreciation will essentially be furnished to program beneficiaries or on an historical cost basis but since the customary charges to the general many institutions do not have ade- public for such services, as provided for quate records of old assets, the prin- in § 413.13. ciples provide an optional allowance in (b) Definitions—(1) Reasonable cost. lieu of such depreciation for assets ac- Reasonable cost of any services must quired before 1966. For assets acquired be determined in accordance with regu- after 1965, the historical cost basis lations establishing the method or must be used. All assets actually in use methods to be used, and the items to be for production of services for Medicare included. The regulations in this part beneficiaries will be recognized even take into account both direct and indi- though they may have been fully or rect costs of providers of services. The partially depreciated for other pur- objective is that under the methods of poses. Assets financed with public determining costs, the costs with refunds may be depreciated. Although spect to individuals covered by the pro- funding of depreciation is not required, gram will not be borne by individuals there is an incentive for it since in- not so covered, and the costs with re- come from funded depreciation is not spect to individuals not so covered will considered as an offset which must be not be borne by the program. These taken to reduce the interest expense regulations also provide for the making that is allowable as a program cost. of suitable retroactive adjustments (e) A return on the equity capital of after the provider has submitted fiscal proprietary facilities, as described in and statistical reports. The retroactive § 413.157, is an allowance in addition to adjustment will represent the dif- the reasonable cost of covered services ference between the amount received furnished to beneficiaries. by the provider during the year for cov- (f) Renal dialysis items and services ered services from both Medicare and furnished under the ESRD provision the beneficiaries and the amount deter- are reimbursed and reported under mined in accordance with an accepted §§ 413.170 and 413.174 respectively. For method of cost apportionment to be special rules concerning health mainte- the actual cost of services furnished to nance organizations (HMOs), and pro- beneficiaries during the year. viders of services and other health care (2) Necessary and proper costs. Nec- facilities that are owned or operated by essary and proper costs are costs that an HMO, or related to an HMO by com- are appropriate and helpful in devel- mon ownership or control, see oping and maintaining the operation of §§ 417.242(b)(14) and 417.250(c) of this patient care facilities and activities. chapter. They are usually costs that are com- [51 FR 34793, Sept. 30, 1986; 51 FR 37398, Oct. mon and accepted occurrences in the 22, 1986, as amended at 52 FR 21225, June 4, field of the provider’s activity. 1987; 52 FR 23398, June 19, 1987; 57 FR 39829, (c) Application. (1) It is the intent of Sept. 1, 1992; 60 FR 63189, Dec. 8, 1995; 61 FR Medicare that payments to providers of 63748, Dec. 2, 1996] services should be fair to the providers, to the contributors to the Medicare § 413.9 Cost related to patient care. trust funds, and to other patients. (a) Principle. All payments to pro- (2) The costs of providers’ services viders of services must be based on the vary from one provider to another and reasonable cost of services covered the variations generally reflect dif- under Medicare and related to the care ferences in scope of services and inten- of beneficiaries. Reasonable cost in- sity of care. The provision in Medicare cludes all necessary and proper costs for payment of reasonable cost of serv- incurred in furnishing the services, ices is intended to meet the actual subject to principles relating to spe- costs, however widely they may vary

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from one institution to another. This is Reasonable cost means cost actually subject to a limitation if a particular incurred, to the extent that cost is nec- institution’s costs are found to be sub- essary for the efficient delivery of the stantially out of line with other insti- service, and subject to the exclusions tutions in the same area that are simi- specified in paragraph (d) of this sec- lar in size, scope of services, utilization. tion, and other relevant factors. (b) Application of the lesser of costs or (3) The determination of reasonable charges (LCC) principle—(1) General rule. cost of services must be based on cost Except as provided in paragraph (c) of related to the care of Medicare bene- this section, CMS pays providers the ficiaries. Reasonable cost includes all lesser of the reasonable cost or the cus- necessary and proper expenses incurred tomary charges for services furnished in furnishing services, such as adminis- to Medicare beneficiaries. Reasonable trative costs, maintenance costs, and cost and customary charges are com- premium payments for employee pared separately for Part A services health and pension plans. It includes and Part B services. both direct and indirect costs and nor- (2) Example. (i) A provider’s reason- mal standby costs. However, if the pro- able cost for covered services furnished vider’s operating costs include to Medicare beneficiaries during a cost amounts not related to patient care, reporting period is $125,000. specifically not reimbursable under the (ii) The provider’s customary charges program, or flowing from the provision for those services is $110,000. of luxury items or services (that is, (iii) CMS pays the provider $110,000 those items or services substantially in less the deductible and coinsurance excess of or more expensive than those amounts for which the beneficiaries are generally considered necessary for the responsible. provision of needed health services), (c) Exceptions to the LCC principle—(1) such amounts will not be allowable. Providers not subject to the LCC prin- The reasonable cost basis of reimburse- ciple. CMS pays the following providers ment contemplates that the providers the fair compensation for the services of services would be reimbursed the ac- they furnish: tual costs of providing quality care (i) CORFs. however widely the actual costs may (ii) Public providers that furnish vary from provider to provider and services free of charge or at a nominal from time to time for the same pro- charge. vider. (iii) Any provider that requests pay- [51 FR 34795, Sept. 30, 1986; 51 FR 37398, Oct. ment of fair compensation and can 22, 1986] demonstrate to its contractor that a significant portion of its patients are § 413.13 Amount of payment if cus- low income and that its charges are tomary charges for services fur- less than costs because its customary nished are less than reasonable practice is to charge patients on the costs. basis of their ability to pay. (a) Definitions. As used in this sec- (2) Services not subject to the LCC prin- tion— ciple. The following services are not Customary charges means the regular subject to the LCC principle: rates that providers charge both bene- (i) Part A inpatient hospital services. ficiaries and other paying patients for Inpatient hospital services are not sub- the services furnished to them. ject to the LCC principle if they are Fair compensation means the reason- subject to either of the following: able cost of covered services. (A) The prospective payment system Nominal charge means a charge equal under part 412 of this chapter. to 60 percent or less of the reasonable (B) The rate of increase limits set cost of a service. forth in § 413.40. Public provider means a provider oper- (ii) Facility services related to ambula- ated by a Federal, State, county, city, tory surgical procedures performed in out- or other local government agency or patient hospital departments. Facility instrumentality. services related to ambulatory surgical

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procedures performed in hospital out- (1) Did not actually impose charges patient departments are subject to the on most of the patients liable for pay- payment methodology set forth in ment for its services on a charge basis; § 413.118. or (iii) Services furnished by a critical ac- (2) Failed to make a reasonable effort cess hospital (CAH). Inpatient and out- to collect those charges. patient services furnished by a CAH are (f) Nominal charge determinations. In subject to the payment methodology determining whether a provider’s cus- set forth in § 413.70. tomary charges equal 60 percent or less (iv) Hospital outpatient radiology serv- of its reasonable costs, the following ices. Hospital outpatient radiology rules apply: services are subject to the payment (1) General rule. The determination is methodology set forth in § 413.122. based on charges actually billed to charge-paying, non-Medicare patients, (v) Other diagnostic procedures per- and (except for clinical diagnostic lab- formed by a hospital on an outpatient oratory tests that are paid under sec- basis. Other outpatient diagnostic pro- tion 1833(h) of the Act) is made sepa- cedures are subject to the payment rately for Part A services and Part B methodology set forth in § 413.122. services. (vi) Skilled nursing facility services. (2) Determination in special situations. Skilled nursing facility services sub- (i) Charges based on ability to pay. For ject to the payment methodology set providers that have a sliding scale or forth in §§ 413.330 et seq. discounted charges based on patients’ (d) Exclusions from reasonable cost. For ability to pay, the determination— purposes of comparison with cus- (A) Is based on charges billed to all tomary charges under this section, rea- charge-paying patients; sonable cost does not include the fol- (B) Uses the ratio of the sliding scale lowing: charges to the provider’s full cus- (1) Payments made to a provider as tomary charges; and reimbursement for bad debts arising (C) Applies the ratio to the dis- from noncollection of Medicare deduct- counted charges to equate those ible and coinsurance amounts, as pro- charges to customary charges. vided in § 413.89. (ii) HHA services. In determining (2) Amounts that represent the recov- nominal charges for HHAs, all Part A ery of excess depreciation resulting and Part B services, with the exception from termination from the Medicare of DME, are considered together. program or a decrease in Medicare uti- (iii) Graduate medical education. When lization applicable to prior cost report- making the nominal charge determina- ing periods, as provided in § 413.134. tion, graduate medical education pay- (3) Amounts that result from disposi- ments (or the provider’s reasonable tion of depreciable assets, applicable to costs for that education, if supported prior cost reporting periods, as pro- by appropriate data) are included in vided in § 413.134. reasonable costs. (4) Payments to funds for the donated [65 FR 8661, Feb. 22, 2000, as amended at 70 services of teaching physicians, as pro- FR 47487, Aug. 12, 2005] vided in § 413.85. (5) Except as provided in paragraph § 413.17 Cost to related organizations. (f)(2)(iii) of this section for making (a) Principle. Except as provided in nominal charge determinations in spe- paragraph (d) of this section, costs ap- cial situations, graduate medical edu- plicable to services, facilities, and sup- cation costs. plies furnished to the provider by orga- (e) Reductions in customary charges. nizations related to the provider by Customary charges are reduced in pro- common ownership or control are in- portion to the ratio of the aggregate cludable in the allowable cost of the amount actually collected from provider at the cost to the related or- charge-paying non-Medicare patients ganization. However, such cost must to the amount that would have been re- not exceed the price of comparable alized had customary charges been services, facilities, or supplies that paid, if the provider— could be purchased elsewhere.

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(b) Definitions—(1) Related to the pro- provider is transacted with others than vider. Related to the provider means the provider and organizations related that the provider to a significant ex- to the supplier by common ownership tent is associated or affiliated with or or control and there is an open, com- has control of or is controlled by the petitive market for the type of serv- organization furnishing the services, ices, facilities, or supplies furnished by facilities, or supplies. the organization; (2) Common ownership. Common own- (iii) The services, facilities, or sup- ership exists if an individual or individ- plies are those that commonly are ob- uals possess significant ownership or tained by institutions such as the pro- equity in the provider and the institu- vider from other organizations and are tion or organization serving the pro- not a basic element of patient care or- vider. dinarily furnished directly to patients (3) Control. Control exists if an indi- by such institutions; and vidual or an organization has the power, directly or indirectly, signifi- (iv) The charge to the provider is in cantly to influence or direct the ac- line with the charge for such services, tions or policies of an organization or facilities, or supplies in the open mar- institution. ket and no more than the charge made (c) Application. (1) Individuals and or- under comparable circumstances to ganizations associate with others for others by the organization for such various reasons and by various means. services, facilities, or supplies. Some deem it appropriate to do so to (2) In such cases, the charge by the assure a steady flow of supplies or serv- supplier to the provider for such services, to reduce competition, to gain a ices, facilities, or supplies is allowable tax advantage, to extend influence, and as cost. for other reasons. These goals may be [51 FR 34793, Sept. 30, 1986, as amended at 81 accomplished by means of ownership or FR 57270, Aug. 22, 2016] control, by financial assistance, by management assistance, and other ways. Subpart B—Accounting Records (2) If the provider obtains items of and Reports services, facilities, or supplies from an organization, even though it is a sepa- § 413.20 Financial data and reports. rate legal entity, and the organization (a) General. The principles of cost re- is owned or controlled by the owner(s) imbursement require that providers of the provider, in effect the items are maintain sufficient financial records obtained from itself. An example would and statistical data for proper deter- be a corporation building a hospital or mination of costs payable under the a nursing home and then leasing it to program. Standardized definitions, ac- another corporation controlled by the counting, statistics, and reporting owner. Therefore, reimbursable cost practices that are widely accepted in should include the costs for these items the hospital and related fields are fol- at the cost to the supplying organiza- lowed. Changes in these practices and tion. However, if the price in the open systems will not be required in order to market for comparable services, facili- determine costs payable under the ties, or supplies is lower than the cost to the supplier, the allowable cost to principles of reimbursement. Essen- the provider may not exceed the mar- tially the methods of determining costs ket price. payable under Medicare involve mak- (d) Exception. (1) An exception is pro- ing use of data available from the insti- vided to this general principle if the tution’s basis accounts, as usually provider demonstrates by convincing maintained, to arrive at equitable and evidence to the satisfaction of the con- proper payment for services to bene- tractor, that— ficiaries. (i) The supplying organization is a (b) Frequency of cost reports. Cost re- bona fide separate organization; ports are required from providers on an (ii) A substantial part of its business annual basis with reporting periods activity of the type carried on with the based on the provider’s accounting

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year. In the interpretation and applica- include, but are not limited to, matters tion of the principles of reimburse- pertaining to— ment, the fiscal contractors will be an (i) Provider ownership, organization, important source of consultative as- and operation; sistance to providers and will be avail- (ii) Fiscal, medical, and other record- able to deal with questions and prob- keeping systems; lems on a day-to-day basis. (iii) Federal income tax status; (c) Recordkeeping requirements for new (iv) Asset acquisition, lease, sale, or providers. A newly participating pro- other action; vider of services (as defined in § 400.202 (v) Franchise or management ar- of this chapter) must make available to rangements; its selected contractor for examination (vi) Patient service charge schedules; its fiscal and other records for the purpose of determining such provider’s on- (vii) Costs of operation; going recordkeeping capability and in- (viii) Amounts of income received by form the contractor of the date its ini- source and purpose; and tial Medicare cost reporting period (ix) Flow of funds and working cap- ends. This examination is intended to ital. assure that— (3)(i) The provider must furnish the (1) The provider has an adequate on- contractor— going system for furnishing the records (A) Upon request, copies of patient needed to provide accurate cost data service charge schedules and changes and other information capable of thereto as they are put into effect; and verification by qualified auditors and (B) Its median payer-specific nego- adequate for cost reporting purposes tiated charge by MS–DRG for payers under section 1815 of the Act; and that are Medicare Advantage (MA) or- (2) No financial arrangements exist ganizations, as applicable, and changes that will thwart the commitment of thereto as they are put into effect. the Medicare program to reimburse (ii) The contractor evaluates the providers the reasonable cost of serv- charge schedules as specified in para- ices furnished beneficiaries. The data graph (d)(3)(i) of this section to deter- and information to be examined in- mine the extent to which they may be clude cost, revenue, statistical, and used for determining program pay- other information pertinent to reim- ment. bursement including, but not limited (e) Suspension of program payments to to, that described in paragraph (d) of this section and in § 413.24. a provider. If an contractor determines that a provider does not maintain or no (d) Continuing provider recordkeeping requirements. (1) The provider must fur- longer maintains adequate records for nish such information to the con- the determination of reasonable cost tractor as may be necessary to— under the Medicare program, payments (i) Assure proper payment by the pro- to such provider will be suspended gram, including the extent to which until the contractor is assured that there is any common ownership or con- adequate records are maintained. Be- trol (as described in § 413.17(b)(2) and fore suspending payments to a pro- (3)) between providers or other organi- vider, the contractor will, in accord- zations, and as may be needed to iden- ance with the provisions in § 405.372(a) tify the parties responsible for submit- of this chapter, send written notice to ting program cost reports; such provider of its intent to suspend (ii) Receive program payments; and payments. The notice will explain the (iii) Satisfy program overpayment basis for the contractor’s determina- determinations. tion with respect to the provider’s (2) The provider must permit the con- records and will identify the provider’s tractor to examine such records and recordkeeping deficiencies. The pro- documents as are necessary to ascer- vider must be given the opportunity, in tain information pertinent to the de- accordance with § 405.372(b) of this termination of the proper amount of chapter, to submit a statement (includ- program payments due. These records ing any pertinent evidence) as to why

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the suspension must not be put into ef- pable of being audited is consistent fect. with good business concepts and effec- [51 FR 34793, Sept. 30, 1986, as amended at 61 tive and efficient management of any FR 63749, Dec. 2, 1996; 85 FR 59023, Sept. 18, organization, whether it is operated for 2020] profit or on a nonprofit basis. It is a reasonable expectation on the part of § 413.24 Adequate cost data and cost any agency paying for services on a finding. cost-reimbursement basis. In order to (a) Principle. Providers receiving pay- provide the required cost data and not ment on the basis of reimbursable cost impair comparability, financial and must provide adequate cost data. This statistical records should be main- must be based on their financial and tained in a manner consistent from one statistical records which must be capa- period to another. However, a proper ble of verification by qualified audi- regard for consistency need not pre- tors. The cost data must be based on an clude a desirable change in accounting approved method of cost finding and on procedures if there is reason to effect the accrual basis of accounting, except for— such change. (1) Governmental institutions which (d) Cost finding methods. After the operate on a cash basis method of ac- close of the accounting period, pro- counting. Cost data based on such basis viders must use one of the following of accounting will be acceptable, sub- methods of cost finding to determine ject to appropriate treatment of cap- the actual costs of services furnished ital expenditures. during that period. (These provisions (2) Costs of qualified defined benefit do not apply to SNFs that elect and pension plans shall be reported on a qualify for prospectively determined cash basis method of accounting, as de- payment rates under subpart I of this scribed at § 413.100(c)(2)(vii)(D) for cost part for cost reporting periods begin- reporting periods beginning on or after ning on or after October 1, 1986. For the October 1, 2011. special rules that are applicable to (b) Definitions—(1) Cost finding. Cost those SNFs, see § 413.321.) For cost re- finding is the process of recasting the porting periods beginning after Decem- data derived from the accounts ordi- ber 31, 1971, providers using the depart- narily kept by a provider to ascertain mental method of cost apportionment costs of the various types of services must use the step-down method de- furnished. It is the determination of scribed in paragraph (d)(1) of this sec- these costs by the allocation of direct tion or an ‘‘other method’’ described in costs and proration of indirect costs. (2) Accrual basis of accounting. As used paragraph (d)(2) of this section. For in this part, the term accrual basis of cost reporting periods beginning after accounting means that revenue is re- December 31, 1971, providers using the ported in the period in which it is combination method of cost apportion- earned, regardless of when it is col- ment must use the modified cost find- lected; and an expense is reported in ing method described in paragraph the period in which it is incurred, re- (d)(3) of this section. Effective for cost gardless of when it is paid. (See § 413.100 reporting periods beginning on or after regarding limitations on allowable ac- October 1, 1980, HHAs not based in hos- crued costs in situations in which the pitals or SNFs must use the step-down related liabilities are not liquidated method described in paragraph (d)(1) of timely.) this section. (HHAs based in hospitals (c) Adequacy of cost information. Ade- or SNFs must use the method applica- quate cost information must be ob- ble to the parent institution.) However, tained from the provider’s records to an HHA not based in a hospital or SNF support payments made for services that received less than $35,000 in Medi- furnished to beneficiaries. The require- care payment for the immediately pre- ment of adequacy of data implies that ceding cost reporting period, and for the data be accurate and in sufficient whom this payment represented less detail to accomplish the purposes for than 50 percent of the total operating which it is intended. Adequate data ca-

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cost of the agency, may use a sim- (ii) More sophisticated methods. A plified version of the step-down meth- more sophisticated method designed to od, as specified in instructions for the allocate costs more accurately may be cost report issued by CMS. used by the provider upon approval of (1) Step-down method. This method the contractor. However, having elect- recognizes that services furnished by ed to use the double-apportionment certain nonrevenue-producing depart- method, the provider may not there- ments or centers are utilized by certain after use the step-down method with- other nonrevenue-producing centers as out approval of the contractor. Written well as by the revenue-producing cen- request for the approval must be made ters. All costs of nonrevenue-producing on a prospective basis and must be sub- centers are allocated to all centers mitted before the end of the fourth that they serve, regardless of whether month of the prospective reporting pe- or not these centers produce revenue. riod. Likewise, once having elected to The cost of the nonrevenue-producing use a more sophisticated method, the center serving the greatest number of provider may not thereafter use either other centers, while receiving benefits the double-apportionment or step-down from the least number of centers, is ap- methods without similar request and approval. portioned first. Following the appor- (3) Modified cost finding for providers tionment of the cost of the nonrev- using the Combination Method for report- enue-producing center, that center will ing periods beginning after December 31, be considered ‘‘closed’’ and no further 1971. This method differs from the step- costs are apportioned to that center. down method in that services furnished This applies even though it may have by nonrevenue-producing departments received some service from a center or centers are allocated directly to rev- whose cost is apportioned later. Gen- enue-producing departments or centers erally, if two centers furnish services even though these services may be uti- to an equal number of centers while re- lized by other nonrevenue-producing ceiving benefits from an equal number, departments or centers. In the applica- that center which has the greatest tion of this method the cost of nonrev- amount of expense should be allocated enue-producing centers having a com- first. mon basis of allocation are combined (2) Other methods—(i) The double-ap- and the total distributed to revenue- portionment method. The double-appor- producing centers. All nonrevenue-pro- tionment method may be used by a ducing centers having significant per- provider upon approval of the con- centages of cost in relation to total tractor. This method also recognizes costs will be allocated this way. The that the nonrevenue-producing depart- combined total costs of remaining non- ments or centers furnish services to revenue-producing costs centers will be other nonrevenue-producing centers as allocated to revenue-producing cost well as to revenue-producing centers. A centers in the proportion that each preliminary allocation of the costs of bears to total costs, direct and indi- non-revenue-producing centers is rect, already allocated. The bases made. These centers or departments which are to be used and the centers are not ‘‘closed’’ after this preliminary which are to be combined for alloca- allocation. Instead, they remain tion are not optional but are identified ‘‘open,’’ accumulating a portion of the and incorporated in the cost report costs of all other centers from which forms developed for this method. Pro- services are received. Thus, after the viders using this method must use the first or preliminary allocation, some program cost report forms devised for costs will remain in each center rep- it. Alternative forms may not be used resenting services received from other without prior approval by CMS based centers. The first or preliminary allo- upon a written request by the provider cation is followed by a second or final submitted through the contractor. apportionment of expenses involving (4) Temporary method for initial period. the allocation of all costs remaining in If the provider is unable to use either the nonrevenue-producing functions di- cost-finding method when it first par- rectly to revenue-producing centers. ticipates in the program, it may apply

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to the contractor for permission to use (6) Provider-based entities and depart- some other acceptable method that ments: Preventing duplication of cost. In would accurately identify costs by de- some situations, the main provider in a partment or center, and appropriately provider-based complex may purchase segregate inpatient and outpatient services for a provider-based entity or costs. Such other method may be used for a department of the provider for cost reports covering periods ending through a contract for services (for ex- before January 1, 1968. ample, a management contract), di- (5) Simplified optional reimbursement rectly assigning the costs to the pro- method for small, rural hospitals with dis- vider-based entity or department and tinct parts for cost reporting periods be- reporting the costs directly in the cost ginning on or after July 20, 1982. (i) A center for that entity or department. rural hospital with a Medicare-cer- In any situation in which costs are di- tified distinct part SNF may elect to rectly assigned to a cost center, there be reimbursed for services furnished in is a risk of excess cost in that cost cen- its hospital general routine service ter resulting from the directly assigned area and distinct part SNF using the costs plus a share of overhead improperly allocated to the cost center which reimbursement method specified in duplicates the directly assigned costs. § 413.53 for swing-bed hospitals, if it This duplication could result in im- meets the following conditions: proper Medicare payment to the pro- (A) The institution is located in a vider. Where a provider has purchased rural area as defined in § 482.58 of this services for a provider-based entity or chapter. for a provider department, like general (B) On the first day of the cost re- service costs of the provider (for exam- porting period, the hospital and dis- ple, like costs in the administrative tinct part SNF have fewer than 50 beds and general cost center) must be sepa- in total (with the exception of beds for rately identified to ensure that they newborns and beds in intensive care are not improperly allocated to the en- type inpatient units). tity or the department. If the like (ii) In applying the optional reim- costs of the main provider cannot be bursement method, only those beds lo- separately identified, the costs of the cated in the hospital general routine services purchased through a contract service area and in the distinct part must be reclassified to the main pro- SNF certified by Medicare are com- vider and allocated among the main bined into a single cost center for pur- provider’s benefiting cost centers. poses of cost finding. Example: A provider-based complex is com- (iii) The reasonable cost of the rou- posed of a hospital and a hospital-based rural tine extended care services is deter- health clinic (RHC). The hospital furnishes mined in accordance with § 413.114(c). the entirety of its own administrative and The reasonable cost of the hospital general costs internally. The RHC, however, general routine services is determined is managed by an independent contractor through a management contract. The man- in accordance with § 413.53(a)(2). agement contract provides a full array of ad- (iv) The hospital must make its elec- ministrative and general services, with the tion to use the optional swing-bed re- exception of patient billing. The hospital di- imbursement method in writing to the rectly assigns the costs of the RHC’s man- contractor before the beginning of the agement contract to the RHC cost center hospital’s cost reporting year. The hos- (for example, Form CMS 2552–96, Worksheet pital must make any request to revoke A, Line 71). A full allocation of the hospital’s administrative and general costs to the RHC the election in writing before the be- cost center would duplicate most of the ginning of the affected cost reporting RHC’s administrative and general costs. period. However, an allocation of the hospital’s cost (v) The contractor must approve re- (included in hospital administrative and gen- quests to terminate use of the optional eral costs) of its patient billing function to swing-bed reimbursement method. If a the RHC would be appropriate. Therefore, the hospital must include the costs of the pa- hospital terminates use of this optional tient billing function in a separate cost cen- method, no further elections may be ter to be allocated to the benefiting cost cen- made by the facility to use the op- ters, including the RHC cost center. The re- tional method. maining hospital administrative and general

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costs would be allocated to all cost centers, ning with the first day not included in excluding the RHC cost center. If the hos- a previous cost reporting period and pital is unable to isolate the costs of the pa- ending with the effective date of termi- tient billing function, the costs of the RHC’s management contract must be reclassified to nation of its provider agreement or the hospital administrative and general cost change of ownership. center to be allocated among all cost cen- (2) Due dates for cost reports. (i) Cost ters, as appropriate. reports are due on or before the last day of the fifth month following the (7) Costs of services furnished to free- close of the period covered by the re- standing entities. The costs that a provider incurs to furnish services to free- port. For cost reports ending on a day standing entities with which it is asso- other than the last day of the month, ciated are not allowable costs of that cost reports are due 150 days after the provider. Any costs of services fur- last day of the cost reporting period. nished to a free-standing entity must (ii) Extensions of the due date for fil- be identified and eliminated from the ing a cost report may be granted by the allowable costs of the servicing pro- contractor only when a provider’s oper- vider, to prevent Medicare payment to ations are significantly adversely af- that provider for those costs. This may fected due to extraordinary cir- be done by including the free-standing cumstances over which the provider entity on the cost report as a nonreim- has no control, such as flood or fire. bursable cost center for the purpose of (3) Changes in cost reporting periods. A allocating overhead costs to that enti- provider may change its cost reporting ty. If this method would not result in period if a change in ownership is expe- an accurate allocation of costs to the rienced or if the— entity, the provider must develop de- (i) Provider requests the change in tailed work papers showing how the writing from its contractor; cost of services furnished by the pro- (ii) Contractor receives the request vider to the entity were determined. at least 120 days before the close of the These costs are removed from the ap- new reporting period requested by the plicable cost centers of the servicing provider; and provider. (iii) Contractor determines that good (e) Accounting basis. The cost data cause for the change exists. Good cause submitted must be based on the ac- would not be found to exist if the effect crual basis of accounting which is rec- is to change the initial date that a hos- ognized as the most accurate basis for pital would be affected by the rate of determining costs. However, govern- increase ceiling (see § 413.40), or be paid mental institutions that operate on a under the prospective payment systems cash basis of accounting may submit (see part 412 of this chapter). cost data on the cash basis subject to (4) Electronic submission of cost reports. appropriate treatment of capital ex- (i) As used in this paragraph, ‘‘pro- penditures. vider’’ means a hospital, skilled nurs- (f) Cost reports. For cost reporting ing facility, home health agency, hos- purposes, the Medicare program re- pice, organ procurement organization, quires each provider of services to sub- histocompatibility laboratory, rural mit periodic reports of its operations health clinic, federally qualified health that generally cover a consecutive 12- center, community mental health cen- month period of the provider’s oper- ter, or end-stage renal disease facility. ations. Amended cost reports to revise (ii) Effective for cost reporting peri- cost report information that has been ods beginning on or after October 1, previously submitted by a provider 1989 for hospitals, cost reporting peri- may be permitted or required as deter- ods ending on or after February 1, 1997 mined by CMS. for skilled nursing facilities and home (1) Cost reports—Terminated providers health agencies, cost reporting periods and changes of ownership. A provider ending on or after December 31, 2004 for that voluntarily or involuntarily hospices, and end-stage renal disease ceases to participate in the Medicare facilities, and cost reporting periods program or experiences a change of ending on or after March 31, 2005 for ownership must file a cost report for organ procurement organizations, that period under the program begin- histocompatibility laboratories, rural

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health clinics, Federally qualified (3) For hospices and end-stage renal health centers, and community mental disease facilities, effective for cost re- health centers, a provider is required porting periods ending on or after De- to submit cost reports in a standard- cember 31, 2004; and ized electronic format. The provider’s (4) For organ procurement organiza- electronic program must be capable of tions, histocompatibility laboratories, producing the CMS standardized out- rural health clinics, Federally qualified put file in a form that can be read by health centers, and community mental the contractor’s automated system. health centers, effective for cost re- This electronic file, which must con- porting periods ending on or after tain the input data required to com- March 31, 2005. plete the cost report and to pass speci- (B) The following certification state- fied edits, must be forwarded to the ment must immediately precede the contractor for processing through its dated original signature, or electronic system. signature as set forth in paragraph (iii) The contractor stores the pro- (f)(4)(iv)(C)(1) of this section, of the vider’s as-filed electronic cost report provider’s administrator or chief finan- and may not alter that file for any rea- cial officer: son. The contractor makes a ‘‘working MISREPRESENTATION OR FAL- copy’’ of the as-filed electronic cost re- SIFICATION OF ANY INFORMATION port to be used, as necessary, through- CONTAINED IN THIS COST REPORT out the settlement process (that is, MAY BE PUNISHABLE BY CRIMI- desk review, processing audit adjust- NAL, CIVIL AND ADMINISTRATIVE ments, and final settlement). The pro- ACTION, FINE AND/OR IMPRISON- vider’s electronic program must be MENT UNDER FEDERAL LAW. FUR- able to disclose if any changes have THERMORE, IF SERVICES IDENTI- been made to the as-filed electronic FIED IN THIS REPORT WERE PRO- cost report after acceptance by the VIDED OR PROCURED THROUGH contractor. If the as-filed electronic THE PAYMENT DIRECTLY OR INDI- RECTLY OF A KICKBACK OR WERE cost report does not pass all specified OTHERWISE ILLEGAL, CRIMINAL, edits, the contractor must return it to CIVIL AND ADMINISTRATIVE AC- the provider for correction. For pur- TION, FINES AND/OR IMPRISON- poses of the requirements in paragraph MENT MAY RESULT. (f)(2) of this section concerning due I hereby certify that I have read the dates, an electronic cost report is not above certification statement and that considered to be filed until it is accept- I have examined the accompanying ed by the contractor. electronically filed or manually sub- (iv)(A) Effective as specified in para- mitted cost report and the Balance graphs (f)(4)(iv)(A)(1) through (4) and Sheet and Statement of Revenue and except as provided in paragraph Expenses prepared by llll (Provider (f)(4)(iv)(C) of this section, a provider Name(s) and Number(s)) for the cost re- must submit a hard copy of a settle- porting period beginning lll and ment summary, if applicable, which is ending lll and that to the best of a statement of certain worksheet to- my knowledge and belief, this report tals found within the electronic file, and statement are true, correct, com- and the certification statement de- plete and prepared from the books and scribed in paragraph (f)(4)(iv)(B) of this records of the provider in accordance section signed by its administrator or with applicable instructions, except as chief financial officer certifying the ac- noted. I further certify that I am famil- curacy of the electronic file or the iar with the laws and regulations re- manually prepared cost report. garding the provision of health care (1) For hospitals, effective for cost re- services, and that the services identi- porting periods ending on or after Sep- fied in this cost report were provided in tember 30, 1994; compliance with such laws and regula- (2) For skilled nursing facilities and tions. home health agencies, effective for cost (C) Effective for cost reporting peri- reporting periods ending on or after ods ending on or after December 31, February 1, 1997; 2017—(1) A provider that is required to

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file an electronic cost report may elect ment must be submitted by the home to electronically submit the settle- office or chain organization as set forth ment summary, if applicable, and the in paragraph (f)(5)(i)(E) of this section. certification statement with an elec- A cost report is rejected for lack of tronic signature of the provider’s ad- supporting documentation if it does ministrator or chief financial officer. not include the following, except as The following checkbox for electronic provided in paragraph (f)(5)(i)(E) of this signature and submission will imme- section: diately follow the certification state- (A) Teaching hospitals—For teaching ment as set forth in paragraph hospitals, the Intern and Resident In- (f)(4)(iv)(B) of this section and must be formation System (IRIS) data. checked if electronic signature and (B) Bad debt—Effective for cost re- submission is elected. porting periods beginning on or after b I have read and agree with the October 1, 2018, for providers claiming above certification statement. I certify Medicare bad debt reimbursement, a that I intend my electronic signature detailed bad debt listing that cor- on this certification statement to be responds to the amount of bad debt the legally binding equivalent of my claimed in the provider’s cost report. original signature. (C) DSH eligible hospitals—Effective ( ) A provider that is required to file 2 for cost reporting periods beginning on an electronic cost report but does not or after October 1, 2018, for hospitals elect to electronically submit the cer- claiming a disproportionate share hos- tification statement with an electronic pital payment adjustment, a detailed signature, must submit a hard copy of listing of the hospital’s Medicaid eligi- the settlement summary, if applicable, ble days that corresponds to the Med- and a certification statement with an icaid eligible days claimed in the hos- original signature of the provider’s ad- pital’s cost report. If the hospital sub- ministrator or chief financial officer as mits an amended cost report that set forth in paragraphs (f)(4)(iv)(A) and changes its Medicaid eligible days, the (B) of this section. (v) A provider may request a delay or hospital must submit an amended list- waiver of the electronic submission re- ing or an addendum to the original list- quirement in paragraph (f)(4)(ii) of this ing of the hospital’s Medicaid eligible section if this requirement would cause days that corresponds to the Medicaid a financial hardship or if the provider eligible days claimed in the hospital’s qualifies as a low or no Medicare utili- amended cost report. zation provider. The provider must sub- (D) Charity care and uninsured dis- mit a written request for delay or counts—Effective for cost reporting pe- waiver with necessary supporting docu- riods beginning on or after October 1, mentation to its contractor no later 2018, for DSH eligible hospitals report- than 30 days after the end of its cost re- ing charity care and/or uninsured dis- porting period. The contractor reviews counts, a detailed listing of charity the request and forwards it, with a rec- care and/or uninsured discounts that ommendation for approval or denial, to corresponds to the amounts claimed in CMS central office within 30 days of re- the DSH eligible hospital’s cost report. ceipt of the request. CMS central office (E) Home office cost allocation. (1) Same either approves or denies the request fiscal year end. Effective for cost re- and notifies the contractor within 60 porting periods beginning on or after days of receipt of the request. October 1, 2018, for providers claiming (5) An acceptable cost report submis- costs on their cost report that are allo- sion is defined as follows: cated from a home office or chain orga- (i) All providers—The provider must nization with the same fiscal year end, accurately complete and submit the re- a Home Office Cost Statement com- quired cost reporting forms, including pleted and submitted by the home of- all necessary signatures and supporting fice or chain organization to its chain documents. For providers claiming provider’s servicing contractor that costs on their cost reports that are al- corresponds to the amounts allocated located from a home office or chain or- from the home office or chain organiza- ganization, the Home Office Cost state- tion to the provider’s cost report.

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(2) Differing fiscal year end. Effective within the same time period required for cost reporting periods beginning on for full or simplified cost reports: or after October 1, 2018, for providers (i) The cost reporting forms pre- claiming costs on their cost report that scribed by CMS for this situation; and are allocated from a home office or (ii) Any other financial and statis- chain organization with a different fis- tical data the contractor requires. cal year end, a Home Office Cost State- (i) [Reserved] ment completed and submitted by the (j) Substantive reimbursement require- home office or chain organization to its ment of an appropriate cost report claim— chain provider’s servicing contractor (1) General requirement. In order for a that corresponds to some portion of the provider to receive or potentially qual- amounts allocated from the home of- ify for reimbursement for a specific fice or chain organization to the pro- item for its cost reporting period, the vider’s cost report. provider’s cost report, whether deter- (ii) For providers that are required to mined on an as submitted, as amended, file electronic cost reports—In addition or as adjusted basis (as prescribed in to the requirements of paragraphs (f)(4) paragraph (j)(3) of this section), must and (f)(5)(i) of this section, the provider include an appropriate claim for the must submit its cost reports in an elec- specific item, by either— tronic cost report format in conform- (i) Claiming full reimbursement in ance with the requirements contained the provider’s cost report for the spe- in the Electronic Cost Report (ECR) cific item in accordance with Medicare Specifications Manual (unless the pro- policy, if the provider seeks payment vider has received an exemption from for the item that it believes comports CMS). with program policy; or (iii) The contractor makes a deter- (ii) Self-disallowing the specific item mination of acceptability within 30 in the provider’s cost report, if the pro- days of receipt of the provider’s cost vider seeks payment that it believes report. If the cost report is considered may not be allowable or may not com- unacceptable, the contractor returns port with Medicare policy (for example, the cost report with a letter explaining if the provider believes the contractor the reasons for the rejection. When the lacks the authority or discretion to cost report is rejected, it is deemed an award the reimbursement the provider unacceptable submission and treated as seeks for the item), by following the if a report had never been filed. procedures (set forth in paragraph (j)(2) (g) Exception from full cost reporting of this section) for properly self-dis- for lack of program utilization. If a pro- allowing the specific item in the provider does not furnish any covered vider’s cost report as a protested services to Medicare beneficiaries dur- amount. ing a cost reporting period, it is not re- (2) Self-disallowance procedures. In quired to submit a full cost report. It order to properly self-disallow a spe- must, however, submit an abbreviated cific item, the provider must— cost report, as prescribed by CMS. (i) Include an estimated reimburse- (h) Waiver of full or simplified cost re- ment amount for each specific self-dis- porting for low program utilization. (1) If allowed item in the protested amount the provider has had low utilization of line (or lines) of the provider’s cost recovered services by Medicare bene- port; and ficiaries (as determined by the con- (ii) Attach a separate work sheet to tractor) and has received correspond- the provider’s cost report for each spe- ingly low interim payments for the cific self-disallowed item, explaining cost reporting period, the contractor why the provider self-disallowed each may waive a full cost report or the specific item (instead of claiming full simplified cost report described in reimbursement in its cost report for § 413.321 if it decides that it can deter- the specific item) and describing how mine, without a full or simplified re- the provider calculated the estimated port, the reasonable cost of covered reimbursement amount for each spe- services provided during that period. cific self-disallowed item. (2) If a full or simplified cost report (3) Procedures for determining whether is waived, the provider must submit there is an appropriate cost report claim.

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Whether the provider’s cost report for tractor determines that the provider’s its cost reporting period includes an cost report included an appropriate appropriate claim for a specific item claim for a specific item (as specified (as prescribed in paragraph (j)(1) of this in paragraphs (j)(1), (2), and (3) of this section) must be determined by ref- section) and that all the other sub- erence to the cost report that the pro- stantive reimbursement requirements vider submits originally to, and was ac- for the specific item are also satisfied, cepted by, the contractor for such pe- the final contractor determination (as riod, provided that none of the fol- defined in § 405.1801(a) of this chapter) lowing exceptions applies: must include reimbursement for the (i) If the provider submits an amend- specific item to the extent permitted ed cost report for its cost reporting pe- by Medicare policy. If the contractor riod and such amended cost report is determines that the provider made an accepted by the contractor, then appropriate cost report claim for a spe- whether there is an appropriate cost cific item but the contractor disagrees report claim for the specific item must with material aspects of the provider’s be determined by reference to such claim for the specific item, the con- amended cost report, provided that nei- tractor must make appropriate adjust- ther of the exceptions set forth in para- ments to the provider’s cost report and graphs (j)(3)(ii) and (iii) of this section include reimbursement for the specific applies; item in the final contractor determina- (ii) If the contractor adjusts the pro- tion in accordance with such cost re- vider’s cost report, as submitted origi- port adjustments and to the extent per- nally by the provider and accepted by mitted by program policy. If the con- the contractor or as amended by the tractor determines that the provider provider and accepted by the con- did not make an appropriate cost re- tractor, whichever is applicable, with port claim for a specific item, the final respect to the specific item, then contractor determination must not in- whether there is an appropriate cost clude any reimbursement for the spe- report claim for the specific item must cific item, regardless of whether the be determined by reference to the pro- other substantive reimbursement re- vider’s cost report, as such cost report quirements for the specific item are or claim is adjusted for the specific item are not satisfied. in the final contractor determination (5) Administrative review of whether (as defined in § 405.1801(a) of this chap- there is an appropriate cost report claim. ter) for the provider’s cost reporting If the provider files an administrative period, provided that the exception set appeal (pursuant to Part 405, Subpart R forth in paragraph (j)(3)(iii) of this sec- of this chapter) seeking reimbursement tion does not apply; for a specific item and any party to (iii) If the contractor reopens either such appeal questions whether the pro- the final contractor determination for vider’s cost report included an appro- the provider’s cost reporting period priate claim for the specific item under (pursuant to § 405.1885 of this chapter) appeal (as specified in paragraphs (j)(1), or a revised final contractor deter- (2), (3), and (4) of this section), the re- mination for such period (issued pursu- viewing entity (as defined in ant to § 405.1889 of this chapter) and the § 405.1801(a) of this chapter) must follow contractor adjusts the provider’s cost the procedures prescribed in § 405.1873 report with respect to the specific of this chapter (if the appeal was filed item, then whether there is an appro- originally with the Board), or the propriate cost report claim for the specific cedures set forth in § 405.1832 of this item must be determined by reference chapter (if the appeal was filed ini- to the provider’s cost report, as such tially with the contractor), for review cost report claim is adjusted for the of whether the substantive reimburse- specific item in the most recent revised ment requirement of an appropriate final contractor determination for such cost report claim for the specific item period. under appeal is satisfied. The reviewing (4) Reimbursement effects of contrac- entity must follow the procedures set tor’s determination of whether there is an forth in paragraph (j)(3) of this section appropriate cost report claim. If the con- in determining whether the provider’s

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cost report included an appropriate (iii) Size of institution. claim for the specific item under ap- (iv) Nature and mix of services fur- peal. The reviewing entity may permit nished. reimbursement for the specific item (v) Type and mix of patients treated. under appeal solely to the extent au- (2) CMS bases its estimates of the thorized by § 405.1873(f) of this chapter costs necessary for efficient delivery of (if the appeal was filed originally with health services on cost reports or other the Board) or by § 405.1832(f) of this data providing indicators of current chapter (if the appeal was filed ini- costs. CMS adjusts current and past pe- tially with the contractor). riod data to arrive at estimated costs [51 FR 34793, Sept. 30, 1986] for the prospective periods to which limits are applied. EDITORIAL NOTE: For FEDERAL REGISTER ci- tations affecting § 413.24, see the List of CFR (3) Before the beginning of a cost pe- Sections Affected, which appears in the riod to which revised limits will be ap- Finding Aids section of the printed volume plied, CMS publishes a notice in the and at www.govinfo.gov. FEDERAL REGISTER, establishing cost limits and explaining the basis on Subpart C—Limits on Cost which they are calculated. Reimbursement (4) In establishing limits under paragraph (b)(1) of this section, CMS may § 413.30 Limitations on payable costs. find it inappropriate to apply par- (a) Introduction—(1) Scope. This sec- ticular limits to a class of SNFs or tion implements section 1861(v)(1)(A) of HHAs due to the characteristics of the the Act by setting forth the general SNF or HHA class, the data on which rules under which CMS may establish CMS bases those limits, or the method limits on SNF and HHA costs recog- by which CMS determines the limits. nized as reasonable in determining In these cases, CMS may exclude that Medicare program payments. It also class of SNFs or HHAs from the limits, sets forth rules governing exemptions explaining the basis of the exclusion in and exceptions to limits established the notice setting forth the limits for under this section that CMS may make the appropriate cost reporting periods. as appropriate in considering special (c) Requests regarding applicability of needs or situations of particular pro- cost limits. For cost reporting periods viders. beginning before July 1, 1998, a SNF (2) General principle. Reimbursable may request an exception or exemption provider costs may not exceed the to the cost limits imposed under this costs CMS estimates to be necessary section. An HHA may request only an for the efficient delivery of needed exception to the cost limits. The SNF health care services. CMS may estab- or HHA must make its request to its lish estimated cost limits for direct or contractor within 180 days of the date indirect overall costs or for costs of on the contractor’s notice of program specific services or groups of services. reimbursement. CMS imposes these limits prospec- (1) Home health agencies. The con- tively and may calculate them on a per tractor makes a recommendation on admission, per discharge, per diem, per the HHA’s request to CMS, which visit, or other basis. makes the decision. CMS responds to (b) Procedure for establishing limits. (1) the request within 180 days from the In establishing limits under this sec- date CMS receives the request from the tion, CMS may classify SNFs and contractor. The contractor notifies the HHAs by factors that CMS finds appro- HHA of CMS’s decision. The time re- priate and practical, including the fol- quired by CMS to review the request is lowing: considered good cause for the granting (i) Type of services furnished. of an extension of the time limit for re- (ii) Geographical area where services questing an contractor hearing or a are furnished, allowing for grouping of Provider Reimbursement Review Board noncontiguous areas having similar de- (Board) hearing as specified in mographic and economic characteris- §§ 405.1813 and 405.1836 of this chapter, tics. respectively.

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(2) Skilled nursing facility exception. to the services generally furnished by The contractor makes the final deter- SNFs or HHAs similarly classified; and mination on the SNF’s exception re- (ii) Atypical services are furnished quest and notifies the SNF of its deter- because of the special needs of the pa- mination within 90 days from the date tients treated and are necessary in the that the contractor receives the re- efficient delivery of needed health care. quest from the SNF. If the contractor (2) Extraordinary circumstances. The determines that the SNF did not pro- SNF or HHA can show that it incurred vide adequate documentation from higher costs due to extraordinary cir- which a proper determination can be cumstances beyond its control. These made, the contractor notifies the SNF circumstances include, but are not lim- that the request is denied. The contractor also notifies the SNF that it ited to, strikes, fire, earthquake, flood, has 45 days from the date on the con- or other unusual occurrences with sub- tractor’s denial letter to submit a new stantial cost effects. exception request with the complete (3) Areas with fluctuating populations. documentation and that otherwise, the The SNF meets the following condi- denial is the final determination. The tions: time required by the contractor to re- (i) Is located in an area (for example, view the request is considered good a resort area) that has a population cause for the granting of an extension that varies significantly during the of the time limit for requesting an con- year. tractor hearing or a Board hearing as (ii) Is furnishing similar services in specified in §§ 405.1813 and 405.1836 of an area for which the appropriate this chapter, respectively. health planning agency has determined (d) Exemptions. Exemptions from the does not have a surplus of beds or simi- limits imposed under this section may lar services and has certified that the be granted to a new SNF with cost re- beds or similar services furnished by porting periods beginning before July the SNF are necessary. 1, 1998 as stated in § 413.1(g)(1). The con- (iii) Meets occupancy or capacity tractor makes a recommendation on standards established by the Secretary. the provider’s request to CMS, which makes the decision. A new SNF is a (4) Medical and paramedical education. provider of inpatient services that has The SNF or HHA can demonstrate operated as a SNF (or the equivalent) that, if compared to other SNFs or for which it is certified for Medicare, HHAs in its group, it incurs increased under present and previous ownership, costs for services covered by limits for less than 3 full years. An exemption under this section because of its oper- granted under this paragraph expires ation of an approved education pro- at the end of the SNF’s first cost re- gram specified in § 413.85. porting period beginning at least 2 (5) Unusual labor costs. The SNF or years after the provider accepts its HHA has a percentage of labor costs first inpatient. that varies more than 10 percent from (e) Exceptions. Limits established that included in the promulgation of under this section may be adjusted up- the limits. ward for a SNF or HHA under the cir- (f) Operational review. Any SNF or cumstances specified in paragraphs HHA that applies for an exception to (e)(1) through (e)(5) of this section. An the limits established under paragraph adjustment is made only to the extent (e) of this section must agree to an that the costs are reasonable, attrib- operational review at the discretion of utable to the circumstances specified, CMS. The findings from this review separately identified by the SNF or HHA, and verified by the contractor. may be the basis for recommendations (1) Atypical services. The SNF or HHA for improvements in the efficiency and can show that the— economy of the SNF’s or the HHA’s op- (i) Actual cost of services furnished erations. If recommendations are by a SNF or HHA exceeds the applicable limit because the services are atypical in nature and scope, compared

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made, any future exceptions are con- as charges to meet the costs in excess tingent on the SNF’s or HHA’s imple- of the costs determined to be necessary mentation of these recommendations. in the efficient delivery of needed health services under Medicare. [64 FR 42612, Aug. 5, 1999; 65 FR 60104, Oct. 10, 2000, as amended at 67 FR 48802, July 26, 2002; (b) Provider request to charge bene- 73 FR 30267, May 23, 2008; 73 FR 49357, Aug. 21, ficiaries for costs in excess of limits. (1) If 2008] a provider’s actual costs (or, if less, the customary charges) in the second pre- § 413.35 Limitations on coverage of ceding cost period exceed the prospec- costs: Charges to beneficiaries if tive limits established for such costs, cost limits are applied to services. the contractor will, at the provider’s (a) Principle. A provider of services request, validate in advance the that customarily furnishes an indi- charges that may be made to the bene- vidual items or services that are more ficiaries for the excess. expensive than the items or services (2) If a provider does not have a sec- determined to be necessary in the effi- ond preceding cost period and is a new cient delivery of needed health services provider as defined in § 413.30(e), the described in § 413.30, may charge an in- provider, subject to validation by the dividual entitled to benefits under contractor, will estimate the current Medicare for such more expensive cost of the service to which a limit is items or services even though not re- being applied. Such amount will be ad- quested by the individual. The charge, justed to an amount equivalent to however, may not exceed the amount costs in the second preceding year by by which the cost of (or, if less, the use of a factor to be developed based on customary charges for) such more ex- estimates of cost increases during the pensive items or services furnished by preceding two years and published by such provider in the second cost report- SSA or CMS. The amount thus derived ing period immediately preceding the will be used in lieu of the second pre- cost reporting period in which such ceding cost period amount in deter- charges are imposed exceeds the appli- mining the charge to the beneficiary. cable limit imposed under the provi- (3) To obtain consideration of such a sions of § 413.30. This charge may be request, the provider must submit to made only if— the contractor a statement indicating (1) The contractor determines that the chagre for which it is seeking vali- the charges have been calculated prop- dation and providing the data and erly in accordance with the provisions method used to determine the amount. of this section; Such statement should include the— (2) The services are not emergency (i) Provider’s name and number; services as defined in paragraph (d) of (ii) Identity of class and prospective this section; cost limit for the class in which the (3) The admitting physician has no provider has been included; direct or indirect financial interest in (iii) Amount of charge and cost pe- such provider; riod in which the charge is to be im- (4) CMS has provided notice to the posed; public through notice in a newspaper of (iv) Cost and customary charge for general circulation servicing the pro- items and services furnished to bene- vider’s locality and such other notice ficiaries; and as the Secretary may require, of any (v) Cost period ending date of the sec- charges the provider is authorized to ond reporting period immediately pre- impose on individuals entitled to bene- ceding the cost period in which the fits under Medicare on account of costs charge is to be imposed. The contractor in excess of the costs determined to be may request such additional informa- necessary in the efficient delivery of tion as it finds necessary with respect needed health services under Medicare; to the request. and (c) Provider charges—(1) Establishing (5) The provider has, in the manner the charges. If the actual cost incurred described in paragraph (e) of this sec- (or, if less, the customary charges) in tion, identified such charges to such in- the prior period determined under dividual or person acting on his behalf paragraph (a) of this section exceeds

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the limits applicable to the pertinent to furnish such services. If an indi- period, the provider may charge the vidual has been admitted to such hos- beneficiary to the extent costs in the pital as an inpatient because of an second preceding cost reporting period emergency, the emergency will be (or the equivalent when there is no sec- deemed to continue until it is safe from ond preceding period) exceed the cur- a medical standpoint to move the indi- rent cost limits. (Data from the most vidual to another hospital or other in- recently submitted appropriate cost re- stitution or to discharge him. port will be used in determining the ac- (e) Identification of charges to indi- tual cost.) For example, if a limit of $58 vidual. For purposes of paragraph (a)(5) per day is applied to the cost of general of this section, a provider must give or routine services for the provider’s cost send to the individual or his represent- reporting period starting in calendar ative, a schedule of all items and serv- year 1975 and if the provider’s actual ices that the individual might need and general routine cost in the second pre- for which the provider imposes charges ceding reporting period, that is, the re- under this section, and the charge for porting period starting in calendar each. Such schedule must specify that year 1973, was $60 per day, the provider the charges are necessary to meet the (after first having obtained contractor costs in excess of the costs determined validation and subject to the consider- to be necessary in the efficient delivery ations and requirements specified in of needed health services under Medi- paragraph (a) of this section) may care and include such other informa- charge Medicare Part A beneficiaries tion as CMS considers necessary to up to $2 per day for general routine protect the individual’s rights under services. this section. The provider, in arranging (2) Adjusting cost. Program reimburse- for the individual’s admission, first ment for the costs to which limits im- service, or start of care, must give or posed under § 413.30 are applied in any send this schedule to the individual or cost reporting period will not exceed his representative when arrangements the lesser of the provider’s actual cost are being made for such services or if or the limits imposed under § 413.30. If this is not feasible, as soon thereafter program reimbursement for items or as is practicable but no later than at services to which such limits are ap- the initiation of services. plied plus the charges to beneficiaries [51 FR 34793, Sept. 30, 1986, as amended at 53 for such items or services imposed FR 6648, Mar. 20, 1988; 60 FR 45849, Sept. 1, under this section exceed the provider’s 1995] actual cost for such items or services, program payment to the provider will § 413.40 Ceiling on the rate of increase be reduced to the extent program pay- in hospital inpatient costs. ment plus charges to the beneficiaries (a) Introduction—(1) Scope. This sec- exceed actual cost. If the provider’s action implements section 1886(b) of the tual cost for general routine services in Act, establishing a ceiling on the rate 1975 was $57,000, the cost limit was of increase in operating costs per case $58,000, and billed charges to Medicare for hospital inpatient services fur- Part A beneficiaries were $2,000, the nished to Medicare beneficiaries that provider would receive $55,000 from the will be recognized as reasonable for program ($57,000 actual cost minus the purposes of determining the amount of $2,000 in charges to the beneficiaries). Medicare payment. This rate-of-in- (d) Definition of emergency services. crease ceiling applies to hospital cost For purposes of paragraph (a)(2) of this reporting periods beginning on or after section, emergency services are those October 1, 1982. This section also sets hospital services that are necessary to forth rules governing exemptions from prevent the death or serious impair- and adjustments to the ceiling. ment of the health of the individual, (2) Applicability. (i) This section is not and which, because of the threat to the applicable to— life or health of the individual, neces- (A) Hospitals reimbursed in accord- sitate the use of the most accessible ance with section 1814(b)(3) of the Act hospital (as determined under § 424.106 or under State reimbursement control of this chapter) available and equipped systems that have been approved under

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section 1886(c) of the Act and subpart C hospitals specified in § 412.23(e) of this of part 403 of this chapter; or subchapter. (B) Hospitals that are paid under the (iii) For cost reporting periods begin- prospective payment systems for inpa- ning on or after October 1, 1983 and be- tient hospital services in accordance fore January 1, 2005 this section applies with section 1886 (d) and (g) of the Act to psychiatric hospitals and psy- and part 412 of this chapter. chiatric units that are excluded from (C) Psychiatric hospitals and psy- the prospective payment systems as chiatric units that are paid under the specified in § 412.1(a)(1) of this chapter prospective payment system for inpa- and paid under the prospective pay- tient psychiatric facilities described in ment system as specified in § 412.1(a)(2) subpart N of part 412 of this chapter for of this chapter. cost reporting periods beginning on or (iv) For cost reporting periods begin- after January 1, 2005. ning on or after October 1, 1983 and be- (D) Rehabilitation hospitals and re- fore January 1, 2002, this section ap- habilitation units that are paid under plies to rehabilitation hospitals and re- the prospective payment system for in- habilitation units that are excluded patient hospital services in accordance from the prospective payment systems with section 1886(j) of the Act and sub- described in § 412.1(a)(1) of this subpart P of part 412 of this subchapter for chapter. cost reporting periods beginning on or (v) For cost reporting periods begin- after January 1, 2002. ning on or after October 1, 1983 and be- (E) Long-term care hospitals, as de- fore October 1, 2002, this section applies fined in section 1886(d)(1)(B)(iv) of the to long-term care hospitals that are ex- Act, that are paid based on 100 percent cluded from the prospective payment of the Federal prospective payment systems described in § 412.1(a)(1) of this rate for inpatient hospital services in subchapter. For cost reporting periods accordance with section 123 of Public beginning on or after October 1, 2002, Law 106–113 and section 307 of Public and before October 1, 2006, this section Law 106–554 and § 412.533(b) and (c) of also applies to long-term care hos- subpart O of part 412 of this subchapter pitals, subject to paragraph (a)(2)(i)(D) for cost reporting periods beginning on of this section. or after October 1, 2002. (3) Definitions. As used in this sec- (ii) For cost reporting periods begin- tion— ning on or after October 1, 1983, this Ceiling is the aggregate upper limit section applies to— on the amount of a hospital’s net Medi- (A) Hospitals excluded from the pro- care inpatient operating costs that the spective payment systems described in program will recognize for payment § 412.1(a)(1) of this subchapter; purposes. For each cost reporting pe- (B) Psychiatric and rehabilitation riod, the ceiling is determined by mul- units excluded from the prospective tiplying the updated target amount, as payment systems, as specified in defined in this paragraph, for that pe- § 412.1(a)(1) of this chapter and in ac- riod by the number of Medicare dis- cordance with § 412.25 through § 412.30 of charges during that period. For a hos- this chapter, except as limited by para- pital-within-a-hospital, as described in graphs (a)(2)(iii) and (a)(2)(iv) of this § 412.22(e) of this chapter, the number of section with respect to psychiatric and Medicare discharges in a cost reporting rehabilitation hospitals and psy- period does not include discharges of a chiatric and rehabilitation units as patient to another hospital in the same specified in §§ 412.22, 412.23, 412.25, building on or on the same campus, if— 412.27, 412.29 and 412.30 of this chapter. (A) The patient is subsequently re- (C) Long-term care hospitals ex- admitted to the hospital-within-a-hos- cluded from the prospective payment pital directly from the other hospital; systems described in § 412.1(a)(1) of this and subchapter and in accordance with (B) The hospital-within-a-hospital § 412.23 of this subchapter, except as has discharged to the other hospital limited by paragraph (a)(2)(v) of this and subsequently readmitted more section with respect to long-term care than 5 percent (that is, in excess of 5.0

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percent) of the total number of Medi- the appropriate annual rate-of-increase care inpatients discharged from the percentage. hospital-within-a-hospital in that cost Update adjustment percentage is the reporting period. percentage by which a hospital’s allow- Date of discharge is the earliest of the able inpatient operating service costs following dates: for the 12-month cost reporting period (A) The date the patient has ex- beginning in Federal fiscal year 1990 hausted Medicare Part A hospital inpa- exceeds the hospital’s ceiling for that tient benefits (including the election to period. use lifetime reserve days) during his or Update factor is the decimal equiva- her spell of illness. lent of the rate-of-increase percentage. (B) The date the patient is formally The update factor is the value by which released as specified in § 412.4(a)(1) of a hospital’s target amount for the pre- this chapter. ceding year is multiplied in order to determine the target amount for the (C) The date the patient is trans- following year. For example, if the ferred to another facility. rate-of-increase percentage for a year (D) The date the patient dies. is 2.7 percent, the update factor for Market basket index is CMS’s projec- that year is 1.027. tion of the annual percentage increase (b) Cost reporting periods subject to the in hospital inpatient operating costs. rate-of-increase ceiling—(1) Base period. The market basket index is a wage and Each hospital’s target amount is based price index that incorporates weighted on its allowable net inpatient oper- indicators of changes in wages and ating costs per case from the cost re- prices that are representative of the porting period of at least 12 months im- mix of goods and services included in mediately preceding the first cost re- the most common categories of hos- porting period subject to the rate-of-in- pital inpatient operating costs subject crease ceiling established under this to the ceiling, as described in para- section. If the immediately preceding graph (c)(1) of this section. cost reporting period is a short report- Net inpatient operating costs include ing period (fewer than 12 months), the the costs of certain preadmission serv- first period of at least 12 months subse- ices as specified in § 413.40(c)(2), the quent to that short period is the base costs of routine services, ancillary period. services, and intensive care services (as (i) The target amount established defined in § 413.53(b)) incurred by a hos- under this provision remains applicable pital in furnishing covered inpatient to a hospital or excluded hospital unit, services to Medicare beneficiaries. Net as described in §§ 412.25 through 412.30 inpatient operating costs exclude cap- of this chapter, despite intervening ital-related costs as described in cost reporting periods during which the § 413.130, the costs of approved medical hospital or excluded hospital unit is education programs as described in not subject to the ceiling as a result of §§ 413.75 through 413.83 and 413.85, and other provisions of the law or regula- heart, kidney, and liver acquisition tions, or nonparticipation in the Medi- costs incurred by approved transplan- care program, unless the hospital or tation centers. These costs are identi- excluded hospital unit qualifies as a fied and excluded from inpatient oper- new hospital or excluded part hospital ating costs before the application of unit under the provisions of paragraph the ceiling. (f) of this section. Rate-of-increase percentage is the per- (ii) The base period for a newly estab- centage by which each hospital’s target lished excluded unit is the first cost re- amount from the preceding Federal fis- porting period of at least 12 months fol- cal year is increased. lowing the unit’s certification to par- Target amount is the per discharge ticipate in the Medicare program. (case) limitation, derived from the hos- (iii) When the operational structure pital’s allowable net Medicare inpa- of a hospital or unit changes (that is, a tient operating costs in the hospital’s freestanding hospital becomes an ex- base year, and updated for each subse- cluded unit or an excluded unit be- quent hospital cost reporting period by comes a freestanding hospital, or an

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entity of a multicampus hospital be- term care hospital that meets the fol- comes a newly created hospital or unit lowing two conditions for its two most or a hospital or unit becomes a part of recent settled cost reports as of August a multicampus hospital), the base pe- 5, 1997: riod for the hospital or unit that (A) Its Medicare inpatient operating changed its operational structure is costs exceed 115 percent of the ceiling. the first cost reporting period of at (B) The hospital would have had a least 12 months effective with the re- disproportionate patient percentage (as vised Medicare certification classifica- defined in § 412.106) equal to or greater tion. than 70 percent if it were a prospective (iv) Request for rebased target amount payment hospital. for the cost reporting period beginning on (2) Periods subject to the ceiling. The or after October 1, 1997 and on or before ceiling established under this section September 30, 1998. Except for qualified applies to all cost reporting periods long-term care hospitals as defined in that— paragraph (b)(1)(v) of this section, each (i) Begin on or after October 1, 1982; hospital or unit under present or pre- and vious ownership that received payment (ii) Immediately follow the base pe- under section 1886(b) of the Act during riod established under paragraph (b)(1) cost reporting periods beginning before of this section unless the exception in October 1, 1990, may submit a request paragraph (b)(3) of this section is appli- to its contractor to rebase its target cable. amount. The request must be received (3) Periods of other than 12 months. by the contractor by the later of No- The ceiling established under this sec- vember 1, 1997 or 60 days before the be- tion does not apply to cost reporting ginning of its cost reporting period be- periods of fewer than 12 months that ginning during fiscal year 1998. The occur in conjunction with a change in rebased target amount for the cost re- operation of the facility, as defined in porting period beginning during fiscal paragraph (b)(1)(iii) of this section, as a year 1998 is determined as follows: result of changes in ownership, merger, (A) Determine the hospital’s inpa- or consolidation. However, the ceiling tient operating costs per case for each applies to cost reporting periods of of the five most recent settled cost re- fewer than 12 months that result solely ports as of August 5, 1997. from the approval of a hospital’s re- (B) For each of the five cost reports, quest for a change in accounting cycle, update the operating costs per case by as specified in § 413.24(f)(3). the applicable update factors up to the (c) Costs subject to the ceiling—(1) Ap- hospital’s cost reporting period begin- plicability. The ceiling established ning during FY 1998. under this section applies to net oper- (C) Exclude the highest and lowest of ating costs incurred by a hospital in the five updated amounts determined furnishing inpatient hospital services under paragraph (b)(1)(iv)(B) of this to Medicare beneficiaries. section. (2) Preadmission services otherwise (D) Compute the average for the re- payable under Medicare Part B fur- maining three updated amounts for op- nished to a beneficiary on the date of erating cost per case. the beneficiary’s admission to the hos- (v) Request by qualified long-term care pital and during the calendar day im- hospital. A qualified long-term care mediately preceding the date of the hospital may file a request to its con- beneficiary’s admission to the hospital tractor for a rebased FY 1998 target that meet the condition specified in amount. The request must be received paragraph (c)(2)(i) of this section and by the contractor by the later of No- at least one of the conditions specified vember 1, 1997 or 60 days before the be- in paragraphs (c)(2)(ii) through ginning of its cost reporting period be- (c)(2)(iv): ginning during fiscal year 1998. The (i) The services are furnished by the rebased FY 1998 target amount is the hospital or any entity wholly owned or hospital’s FY 1996 inpatient operating operated by the hospital. An entity is costs updated to FY 1997. A qualified wholly owned by the hospital if the long-term care hospital means a long- hospital is the sole owner of the entity.

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An entity is wholly operated by a hos- after October 1, 1987 and before October pital if the hospital has exclusive re- 1, 1988 is 2.3238 percent; the update fac- sponsibility for conducting and over- tor is 1.023238. For purposes of updating seeing the entity’s routine perations, the target amount for cost reporting regardless of whether the hospital also periods beginning on or after October 1, has policymaking authority over the 1988, the rate-of-increase percentage for entity. cost reporting periods beginning during (ii) For services furnished after Janu- FY 1988 is deemed to have been 2.7 per- ary 1, 1991, the services are diagnostic cent; the update factor is deemed to (including clinical diagnostic labora- have been 1.027. tory tests). (iv) Federal fiscal year 1989 through (iii) For services furnished on or after Federal fiscal year 1993. The applicable October 1, 1991 through June 24, 2010, rate-of-increase percentage for cost re- the services are furnished in connec- porting periods beginning on or after tion with the principal diagnosis that October 1, 1988, and before October 1, requires the beneficiary to be admitted 1993, is the percentage increase pro- as an inpatient and are not the fol- jected by the hospital market basket lowing: index (as defined in paragraph (a)(3) of (A) Ambulance services. this section). (B) Maintenance renal dialysis serv- (v) Federal fiscal year 1994 through ices. Federal fiscal year 1997. The applicable (iv) Nondiagnostic services furnished rate-of-increase percentage for cost re- on or after June 25, 2010, other than porting periods beginning on or after ambulance services and maintenance October 1, 1993, and before October 1, renal dialysis services, that are fur- 1998, is the market basket percentage nished on the date of the beneficiary’s increase minus the lesser of, 1 percent- inpatient admission or on the calendar age point, or the percentage point dif- day immediately preceding the date of ference between 10 percent and the hos- the beneficiary’s inpatient admission pital’s ‘‘update adjustment percent- and the hospital does not attest that age’’ (as defined in paragraph (a)(3) of such services are unrelated to the bene- this section); for hospitals with an ficiary’s inpatient admission. ‘‘update adjustment percentage’’ of at (3) Rate-of-increase percentages and up- least 10 percent, the applicable rate-of- date factors. The applicable rate-of-in- increase percentage is the market bas- crease percentages and update factors ket percentage increase. The ‘‘update are determined as follows: adjustment percentage’’ is increased in (i) Federal fiscal year 1986. The appli- each Federal fiscal year by the sum of cable rate-of-increase percentage for the hospital’s applicable reductions ap- cost reporting periods beginning on or plied to the market basket percentage after October 1, 1985 and before Sep- increase for previous Federal fiscal tember 30, 1986 is five twenty-fourths of years. one percent, and the update factor is (vi) Federal fiscal year 1998. The appli- 1.00208333. For purposes of determining cable rate-of-increase percentage for the target amount for cost reporting cost reporting periods beginning on or periods beginning on or after October 1, after October 1, 1997 is 0 percent. 1986, the applicable percentage increase (vii) Federal fiscal year 1999 through for cost reporting periods beginning Federal fiscal year 2002. The applicable during Federal fiscal year 1986 is rate-of-increase percentage for cost re- deemed to have been one-half percent, porting periods beginning on or after and the update factor is 1.005. October 1, 1998, and before October 1, (ii) Federal fiscal year 1987. The appli- 2002, based n data from the most recent cable rate-of-increase percentage for available cost report, is: cost reporting periods beginning on or (A) The percentage increase in the after October 1, 1986 and before Sep- market basket, if inpatient operating tember 30, 1987 is 1.15 percent; the up- costs are equal to or exceed the ceiling date factor is 1.0115. amount by 10 percent or more of the (iii) Federal fiscal year 1988. The appli- ceiling. cable rate-of-increase percentage for (B) The percentage increase in the cost reporting periods beginning on or market basket minus .25 percentage

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points for each percentage point by during FY 2001, the hospital-specific which inpatient operating costs are target amount is the net allowable less than 10 percent over the ceiling costs in a base period increased by the (but not less than 0), if inpatient oper- applicable update factors . ating costs exceed the ceiling by less (2) In the case of long-term care hos- than 10 percent of the ceiling. pitals, for cost reporting periods begin- (C) The greater of the percentage in- ning during FY 2001, the hospital-spe- crease in the market basket minus 2.5 cific target amount is the net allow- percentage points or 0 percent, if inpa- able costs in a base period increased by tient operating costs are equal to or the applicable update factors multi- less than the ceiling but greater than plied by 1.25. 66.7 percent of the ceiling. (B) One of the following for the appli- (D) 0 percent, if inpatient operating cable cost reporting period— costs do not exceed 66.7 percent of the (1) For cost reporting periods begin- ceiling. ning during fiscal year 1998, the 75th (viii) Federal fiscal year 2003 and fol- percentile of target amounts for hos- lowing. The applicable rate-of-increase pitals in the same class (psychiatric percentage for cost reporting periods hospital or unit, rehabilitation hos- beginning on or after October 1, 2002, is pital or unit, or long-term care hos- the percentage increase projected by pital) for cost reporting periods ending the hospital market basket index. during FY 1996, increased by the appli- (4) Target amounts. The contractor cable market basket percentage up to will establish a target amount for each the first cost reporting period begin- hospital. The target amount for a cost ning on or after October 1, 1997. reporting period is determined as fol- (2) For cost reporting periods begin- lows: ning during fiscal year 1999, the (i) Except as provided in paragraph amount determined under paragraph (c)(4)(iv) of this section, and subject to (c)(4)(iii)(B)(1) of this section, increased the provisions of paragraph (c)(4)(iii) of by the market basket percentage up this section, for the first cost reporting through the subject period, subject to period to which this ceiling applies, the the provisions of paragraph (c)(4)(iv) of target amount equals the hospital’s al- this section. lowable net inpatient operating costs (3) For cost reporting periods begin- per case for the hospital’s base period ning during fiscal year 2000— increased by the update factor for the (i) The labor-related portion and the subject period. nonlabor-related portion of the wage- (ii) Subject to the provisions of para- neutralized 75th percentile of target graph (c)(4)(iii) of this section, for sub- amounts for hospitals in the same class sequent cost reporting periods, the tar- (psychiatric hospital or unit, rehabili- get amount equals the hospital’s target tation hospital or unit, or long-term amount for the previous cost reporting care hospital) for cost reporting peri- period increased by the update factor ods ending during FY 1996, are infor the subject cost reporting period, creased by the applicable market bas- unless the provisions of paragraph ket percentage up to the first cost re- (c)(5)(ii) of this section apply. porting period beginning on or after (iii) For cost reporting periods begin- October 1, 1999. ning on or after October 1, 1997 through (ii) The labor-related portion of the September 30, 2002, in the case of a psy- wage-neutralized 75th percentile target chiatric hospital or unit, rehabilitation amounts under paragraph hospital or unit, or long-term care hos- (c)(4)(iii)(B)(4)(i) of this section is wage pital, the target amount is the lower of adjusted by multiplying it by the hos- the amounts specified in paragraph pital’s FY 2000 hospital inpatient pro- (c)(4)(iii)(A) or paragraph (c)(4)(iii)(B) spective payment system wage index. of this section. (iii) The wage-adjusted 75th per- (A) The hospital-specific target centile target amounts for hospitals in amount. the same class is determined by adding (1) In the case of all hospitals and the nonlabor-related portion of the units, except long-term care hospitals wage-neutralized 75th percentile target for cost reporting periods beginning amounts under paragraph

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(c)(4)(iii)(B)(3)(i) of this section and the subpart B of part 412 of this chapter, hospital’s wage-adjusted labor-related the hospital’s or unit’s target amount portion of the wage-neutralized 75th may not exceed the lowest applicable percentile target amounts determined limit. under paragraph (c)(4)(iii)(B)(3)(ii) of (v) In the case of a hospital that re- this section, subject to the provisions ceived payments under paragraph of paragraph (c)(4)(iv) of this section. (f)(2)(ii) of this section as a newly cre- (4) For cost reporting periods begin- ated hospital or unit, to determine the ning during fiscal years 2001 and 2002— hospital’s target amount for the hos- (i) The amounts determined under pital’s third 12-month cost reporting paragraph (c)(4)(iii)(B)(3)(i) of this sec- period, the payment amount deter- tion are: increased by the market bas- mined under paragraph (f)(2)(ii)(A) of ket percentage up through the subject this section for the preceding cost re- period; or in the case of a long-term porting period is updated to the third care hospital for cost reporting periods cost reporting period. beginning during FY 2001, the amounts (5) Applicable update factor. (i) The ap- determined under paragraph plicable update factor is derived from (c)(4)(iii)(B)(3)(i) of this section, in- the prospectively determined rate-of- creased by the market basket percent- increase percentage published by CMS. age up through the subject period and The update factor for each Federal fis- further increased by 2 percent. cal year is applied prospectively to the (ii) The labor-related portion of the target amount for each cost reporting wage-neutralized 75th percentile target period beginning during the Federal amounts under paragraph fiscal year. (c)(4)(iii)(B)(4)(i) of this section is (ii) In the case of cost reporting peri- wage-adjusted by multiplying by the ods of less than 12 months, the target hospital’s FY 2001 hospital inpatient amount determined for a hospital’s prospective payment system wage first cost reporting period beginning in index, for cost reporting periods begin- a Federal fiscal year applies to subse- ning during fiscal year 2001 and the hospital’s FY 2002 hospital inpatient quent periods beginning in the same prospective payment system wage Federal fiscal year. index for cost reporting periods begin- (d) Application of the target amount in ning during fiscal year 2002. determining the amount of payment—(1) (iii) The wage-adjusted 75th per- General process. (i) At the end of each centile target amounts for hospitals in cost reporting period subject to this the same class are determined by add- section, the hospital’s contractor will ing the nonlabor-related portion of the compare a hospital’s allowable net in- wage-neutralized 75th percentile target patient operating costs with that hos- amounts under paragraph pital’s ceiling (as defined in paragraph (c)(4)(iii)(B)(4)(i) of this section and the (a)(3) of this section) for that period. hospital’s wage-adjusted labor-related (ii) The hospital’s actual allowable portion of the wage-neutralized 75th costs will be determined without re- percentile target amounts determined gard to the lesser of cost or charges under paragraph (c)(4)(iii)(B)(4)(ii) of provisions of § 413.13, and in accordance this section, subject to the provisions with the provisions of paragraphs (d)(2) of paragraph (c)(4)(iv) of this section. or (d)(3) of this section, as applicable. (iv) For purposes of the limits on tar- (2) Net inpatient operating costs are less get amounts established under para- than or equal to the ceiling. (i) For cost graph (c)(4)(iii) of this section, each reporting periods beginning on or after hospital or unit that qualifies for ex- October 1, 1997, if a hospital’s allowable clusion as a member of only one class net inpatient operating costs do not ex- of excluded facility (psychiatric hos- ceed the hospital’s ceiling, payment to pital or unit, rehabilitation hospital or the hospital will be determined on the unit, or long-term care hospital) will basis of the lower of the— be subject to the limit applicable to (A) Net inpatient operating costs that class. If a hospital or unit quali- plus 15 percent of the difference be- fies to be classified in more than one tween inpatient operating costs and way under the exclusion criteria in the ceiling; or

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(B) Net inpatient operating costs plus ble. These payments are equal to the 2 percent of the ceiling. lesser of— (ii) For psychiatric hospitals and (A) 50 percent of the amount by units, for cost reporting periods begin- which the operating costs are less than ning on or after October 1, 2000 and be- the expected costs for the period; or fore October 1, 2001, if a hospital’s al- (B) 1.5 percent of the ceiling. lowable net inpatient operating costs (iii) For cost reporting periods begin- do not exceed the hospital’s ceiling, ning on or after October 1, 2001, and be- payment to the hospital will be deter- fore September 30, 2002, eligible psy- mined on the basis of the lower of the— chiatric hospitals and units and long- (A) Net inpatient operating costs term care hospitals receive payments plus 15 percent of the difference be- in addition to those in paragraph (d)(5) tween inpatient operating costs and of this section, as applicable. These the ceiling; or payments are equal to the lesser of— (B) Net inpatient costs plus 3 percent (A) 50 percent of the amount by of the ceiling. which the operating costs are less than (3) Net inpatient operating costs are the expected costs for the periods; or greater than the ceiling. For cost report- (B) 2 percent of the ceiling. ing periods beginning on or after Octo- (5) Eligibility requirements for contin- ber 1, 1997— uous improvement bonus payments. To qualify, a hospital must have been paid (i) If a hospital’s allowable net inpa- as a prospective payment excluded hos- tient operating costs do not exceed 110 pital for at least three full cost report- percent of the ceiling (or the adjusted ing periods prior to the applicable pe- ceiling, if applicable), payment will be riod, and the hospital’s operating costs the ceiling (or the adjusted ceiling, if per discharge for the period must be applicable); less than the least of the following: (ii) If a hospital’s allowable net inpa- (i) The hospital’s target amount. tient operating costs are greater than (ii) The hospital’s trended costs. 110 percent of the ceiling (or the ad- (A) For a hospital for which its cost justed ceiling, if applicable), payment reporting period ending during fiscal will be the ceiling (or the adjusted ceil- year 1996 was its third or subsequent ing, if applicable) plus the lesser of: full cost reporting period, trended costs (A) 50 percent of the allowable net in- are the lesser of the allowable inpa- patient operating costs in excess of 110 tient operating costs per discharge or percent of the ceiling (or the adjusted the target amount for the cost report- ceiling, if applicable); or ing period ending in fiscal year 1996, in- (B) 10 percent of the ceiling (or the creased in a compounded manner for adjusted ceiling, if applicable). each succeeding fiscal year by the mar- (4) Continuous improvement bonus pay- ket basket percentage increase; ments. (i) For cost reporting periods be- (B) For all other hospitals, trended ginning on or after October 1, 1997, eli- costs are the allowable inpatient oper- gible hospitals (as defined in paragraph ating costs per discharge for its third (d)(5) of this section) receive payments full cost reporting period increased in a in addition to those in paragraph (d)(2) compounded manner for each suc- of this section, as applicable. These ceeding fiscal year by the market bas- payments are equal to the lesser of— ket increase. (A) 50 percent of the amount by (iii) The hospital’s expected costs. which the operating costs are less than The hospital’s expected costs are the the expected costs for the period; or lesser of its allowable inpatient oper- (B) 1 percent of the ceiling. ating costs per discharge or the target (ii) For cost reporting periods begin- amount for the previous cost reporting ning on or after October 1, 2000, and be- period, updated by the market basket fore September 30, 2001, eligible psy- percentage increase for the fiscal year. chiatric hospitals and units and long- (e) Hospital requests regarding adjust- term care hospitals (as defined in para- ments to the payment allowed under the graph (d)(5) of this section) receive rate-of-increase ceiling—(1) Timing of ap- payments in addition to those in para- plication. A hospital may request an ad- graph (d)(2) of this section, as applica- justment to the rate-of-increase ceiling

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imposed under this section. The hos- quest for a review of the original deci- pital’s request must be received by the sion based on additional data. hospital’s contractor no later than 180 (f) Comparison to the target amount for days after the date on the contractor’s new hospitals and units—(1) New hos- initial notice of amount of program re- pitals and units—(i) New hospitals. For imbursement (NPR) for the cost report- purposes of this section, a new hospital ing period for which the hospital re- is a provider of hospital inpatient serv- quests an adjustment. ices that— (2) Contractor recommendation. Unless (A) Has operated as the type of hos- CMS has authorized the contractor to pital for which CMS granted it ap- make the decision, the contractor proval to participate in the Medicare makes a recommendation on the hos- program, under present or previous pital’s request to CMS, which makes ownership (or both), for less than 2 full the decision. CMS issues a decision to years; and the contractor no later than 180 days (B) Has provided the type of hospital after receipt of the completed applica- inpatient services for which CMS tion and the contractor’s recommenda- granted it approval to participate in tion. the Medicare program, for less than 2 (3) Contractor decision. If CMS has au- years. thorized the contractor to make the (ii) New units. A newly established decision, the contractor issues a deci- unit that is excluded from the prospec- sion no later than 180 days after receipt tive payments system under the provi- of the completed application. sions of §§ 412.25 through 412.30 of this (4) Notification and review. (i) The con- chapter does not qualify for the exemp- tractor notifies the hospital of the de- tion afforded to a new hospital under cision, including a full explanation of paragraph (f)(2)(i) of this section unless the grounds for the decision. A decision the unit is located in an acute care issued under paragraph (e)(2) or (e)(3) of hospital that, if it were subject to the this section is considered final unless provisions of this section, would qual- the hospital submits additional infor- ify as a new hospital under paragraph mation and requests a review of the de- (f)(1)(i) of this section. cision no later than 180 days after the (2) Comparison—(i) Exemptions. (A) A date on the contractor’s notice of the new children’s hospital is exempt from decision. the rate-of-increase ceiling imposed (ii) The final decision is subject to re- under this section. The exemption be- view under the provider reimbursement gins when the hospital accepts its first determination and appeal procedures in patient and ends at the end of the first subpart R of part 405 of this chapter, cost reporting period ending at least 2 provided the hospital has received an years after the hospital accepts its NPR for the cost reporting period in first patient. The first cost reporting question, and the NPR disallows costs period of at least 12 months beginning for which the hospital had requested an at least 1 year after the hospital ac- adjustment (see the definitions in cepts its first patient is the base year, § 405.1801(a) of this chapter and the pro- in accordance with paragraph (b) of visions regarding a provider’s right to this section. a Board hearing in § 405.1835 of this (B) Within 180 days of the date a hos- chapter). pital is excluded from the prospective (5) Extending the time limit for review payment system, the contractor deter- of NPR. The time required to review mines whether the hospital is exempt the request is considered good cause for from the rate-of-increase ceiling. The the granting of an extension of the contractor notifies the hospital of its time limit for requesting an contractor determination and the hospital’s base hearing or a Board hearing as specified period. in §§ 405.1813 and 405.1836 of this chap- (C) A decision issued under paragraph ter, respectively. (f)(2)(ii)(B) of this section is considered (6) Applicability. The provisions in final unless the hospital submits addi- paragraphs (e)(1) through (e)(5) of this tional information and requests a re- section apply to a hospital’s initial review of the decision no later than 180 quest for an adjustment and to a re- days after the date on the contractor’s

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notice of the decision. The final deci- (ii) When the hospital requests an ad- sion is subject to review under subpart justment, CMS makes an adjustment R of part 405 of this chapter, provided only to the extent that the hospital’s the hospital has received a notice of operating costs are reasonable, attrib- program reimbursement (NPR) for the utable to the circumstances specified cost reporting period in question and separately, identified by the hospital, the NPR does not reflect an exemption and verified by the contractor. (see the definitions in § 405.1801(a) of (iii) When the hospital requests an this chapter and the provisions regard- adjustment, CMS makes an adjustment ing a provider’s right to a Board hear- only if the hospital’s operating costs ing in § 405.1835 of this chapter). exceed the rate-of-increase ceiling im- (ii) Median target amount. (A) For cost posed under this section. reporting periods beginning on or after (iv) In the case of a psychiatric hos- October 1, 1997, the amount of payment pital or unit, rehabilitation hospital or for a new psychiatric hospital or unit, unit, or long-term care hospital, the a new rehabilitation hospital or unit, amount of payment under paragraph or a new long-term care hospital that (g)(3) of this section may not exceed was not paid as an excluded hospital the payment amount based on the tar- prior to October 1, 1997, is the lower of get amount determined under para- the hospital’s net inpatient operating graph (c)(4)(iii) of this section. cost per case or 110 percent of the na- (v) In the case of a hospital or unit tional median of the target amounts that received a revised FY 1998 target for the class of excluded hospitals and amount under the rebasing provisions units (psychiatric, rehabilitation, long- of paragraph (b)(1)(iv) of this section, term care) as adjusted for differences the amount of an adjustment payment in wage levels and updated to the first for a cost reporting period is based on cost reporting period in which the hos- a comparison of the hospital’s oper- pital receives payment. The second ating costs for the cost reporting pe- cost reporting period is subject to the riod to the average costs and statistics same target amount as the first cost reporting period. for the cost reporting periods used to (B) The national median of the target determine the FY 1998 rebased target amounts is the FY 1996 median target amount. amount— (2) Extraordinary circumstances. CMS (1) Adjusted to account for dif- may make an adjustment to take into ferences in area wage levels; account unusual costs (in either a cost (2) Updated by the market basket reporting period subject to the ceiling percentage increase to the fiscal year or the hospital’s base period) due to ex- in which the hospital first received traordinary circumstances beyond the payments as an excluded provider. hospital’s control. These circumstances (3) Risk-basis HMOs. Items or services include, but are not limited to, strikes, that are furnished to beneficiaries en- fire, earthquakes, floods, or similar un- rolled in an HMO by a hospital that is usual occurrences with substantial cost either owned or operated by a risk- effects. basis HMO or related to a risk-basis (3) Comparability of cost reporting peri- HMO by common ownership or control ods—(i) Adjustment for distortion. CMS are exempt from the rate-of-increase may make an adjustment to take into ceiling (see the definition of an entity account factors that would result in a with a risk sharing contract in § 417.401 significant distortion in the operating of this chapter). costs of inpatient hospital services be- (g) Adjustments—(1) General rules. (i) tween the base year and the cost re- CMS adjusts the amount of the oper- porting period subject to the limits. ating costs considered in establishing (ii) Factors. The adjustments de- the rate-of-increase ceiling for one or scribed in paragraph (g)(3)(i) of this more cost reporting periods, including section, include, but are not limited to, both periods subject to the ceiling and adjustments to take into account: the hospital’s base period, under the (A) FICA taxes (if the hospital did circumstances specified in paragraphs not incur costs for FICA taxes in its (g)(2), (g)(3), and (g)(4) of this section. base period).

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(B) Services billed under part B of ceeds 108 percent of the increase in the Medicare during the base period, but national average hourly earnings for paid under part A during the subject hospital workers: cost reporting period. (A) The rate of increase in the aver- (C) Malpractice insurance costs (if age hourly wage in the geographic area malpractice costs were not included in (determined by applying the applicable the base year operating costs). increase in the area wage index value (D) Increases in service intensity or to the rate of increase in the national length of stay attributable to changes average hourly earnings for hospital in the type of patient served. workers). (E) A change in the inpatient hos- (B) The rate of increase in the hospital services that a hospital provides, pital’s average hourly wage. and that are customarily provided di- (5) Adjustment limitations. For cost re- rectly by similar hospitals, such as an porting periods beginning on or after addition or discontinuation of services October 1, 1993, and before October 1, or treatment programs. 2003, the payment reductions under (F) The manipulation of discharges paragraph (c)(3)(v) through (c)(3)(vii) of to increase reimbursement. this section will not be considered (iii) Adjusting operating costs. Without when determining adjustments under a formal request from a hospital, CMS this paragraph. may adjust the amount of operating (h) [Reserved] costs determined under paragraph (c)(1) (i) Assignment of a new base period—(1) of this section to take into account General rule. (i) Effective with cost re- certain adjustments. These adjust- porting periods beginning on or after ments include, but are not limited to, April 1, 1990, CMS may assign a new adjustments under paragraphs base period to establish a revised ceil- (g)(3)(ii)(A), (B), (C), (E), and (F) of this ing if the new base period is more rep- section. resentative of the reasonable and nec- (4) Significant wage increase. (i) Cri- essary cost of furnishing inpatient teria. CMS may make an adjustment to services and all the following condi- take into account a significant in- tions apply: crease in wages occurring between the (A) The actual allowable inpatient base period and the cost reporting pe- costs of the hospital in the cost report- riod subject to the ceiling if there is a ing period that would be affected by significant increase in the average the revised ceiling exceed the target hourly wage for the geographic area in amount established under paragraph which the hospital is located (deter- (c) of this section. mined by reference to the wage index (B) The hospital documents that the for prospective payment hospitals higher costs are the result of substan- without regard to geographic reclassi- tial and permanent changes in fur- fications under sections 1886(d)(8) and nishing patient care services since the (10) of the Act). For this purpose, there base period. In making this determina- is a significant wage increase if the tion, CMS takes into consideration the wage index value based on wage survey following factors: data collected for the cost reporting (1) Changes in the services provided period subject to the ceiling is at least by the hospital. 8.0 percent higher than the wage index (2) Changes in applicable tech- value based on survey data collected nologies and medical practices. for the base year cost reporting period. (3) Differences in the severity of ill- If survey data are not available for the ness among patients or types of pa- cost reporting periods used in the com- tients served. parison, the wage index value based on (C) The adjustments described in the latest available survey data col- paragraph (g) of this section would not lected prior to that cost reporting pe- result in recognition of the reasonable riod is used. and necessary costs of providing inpa- (ii) Amount of the adjustment. The ad- tient services. justment for a significant wage in- (ii) The revised ceiling is based on crease equals the amount by which the the necessary and proper costs incurred lesser of the following calculations ex- during the new base period.

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(A) Increases in overhead costs (for the preceding discussion relating to al- example, administrative and general lowable costs. The share to be borne by costs and housekeeping costs) are not Medicare is to be determined in accord- taken into consideration unless the ance with principles relating to appor- hospital documents that these in- tionment of cost. creases result from substantial and (b) In the study and consideration de- permanent changes in furnishing pa- voted to the method of apportioning tient care services. costs, the objective has been to adopt (B) In determining whether wage in- methods for use under Medicare that creases are necessary and proper, CMS would, to the extent reasonably pos- takes into consideration whether in- sible, result in the program’s share of a creases in wages and wage-related costs provider’s total allowable costs being for hospitals in the labor market area the same as the program’s share of the exceed the national average increase. provider’s total services. This result is (2) New base period. The new base pe- essential for carrying out the statutory riod is the first cost reporting period directive that the program’s payments that is 12 months or longer that re- to providers should be such that the flects the substantial and permanent costs of covered services for bene- change. ficiaries would not be passed on to non- (3) New applicable rate-of-increase per- beneficiaries, nor would the cost of centages and update factors. The revised services for nonbeneficiaries be borne target amount resulting from the as- by the program. signment of a new base period is in- (c) A basic factor bearing upon appor- creased by the applicable rate-of-in- tionment of costs is that Medicare crease percentages (update factors) de- beneficiaries are not a cross section of scribed in paragraph (c)(3) of this sec- the total population. Nor will they con- tion. stitute a cross section of all patients (j) Reduction to capital-related costs. receiving services from most of the For psychiatric hospital and units, re- providers that participate in the pro- habilitation hospitals and units, and gram. Available evidence shows that long-term care hospitals, the amount the use of services by persons age 65 otherwise payable for capital-related and over differs significantly from costs for hospital inpatient services is other groups. Consequently, the objec- reduced by 15 percent for portions of tive sought in the determination of the cost reporting periods occurring on or Medicare share of a provider’s total after October 1, 1997 through Sep- costs means that the methods used for tember 30, 2002. apportionment must take into account [58 FR 46340, Sept. 1, 1993] the differences in the amount of serv- EDITORIAL NOTE: For FEDERAL REGISTER ci- ices received by patients who are bene- tations affecting § 413.40, see the List of CFR ficiaries and other patients serviced by Sections Affected, which appears in the the provider. Finding Aids section of the printed volume (d) The method of cost reimburse- and at www.govinfo.gov. ment most widely used at the present time by third-party purchasers of inpa- Subpart D—Apportionment tient hospital care apportions a provider’s total costs among groups served § 413.50 Apportionment of allowable on the basis of the relative number of costs. days of care used. This method, com- (a) Consistent with prevailing prac- monly referred to as average-per-diem tice in which third-party organizations cost, does not take into account, vari- pay for health care on a cost basis, re- ations in the amount of service which a imbursement under the Medicare pro- day of care may represent and thereby gram involves a determination of— assumes that the patients for whom (1) Each provider’s allowable costs payment is made on this basis are aver- for producing services; and age in their use of service. (2) The share of these costs which is (e) In considering the average-per- to be borne by Medicare. The provider’s diem method of apportioning cost for costs are to be determined in accord- use under the program, the difficulty ance with the principles reviewed in encountered is that the preponderance

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of presently available evidence strong- ure of the amount of services received ly indicates that the over-age 65 pa- and as the basis for allocating responsi- tient is not typical from the standpoint bility for payment among those receiv- of average-per-diem cost. On the aver- ing the provider’s services. age this patient stays in the hospital (i) An increasing number of third- twice as long and therefore the ancil- party purchasers who pay for services lary services that he uses are averaged on the basis of cost are developing over the longer period of time, result- methods that utilize charges to meas- ing in an average-per-diem cost for the ure the amount of services for which aged alone, significantly below the av- they have responsibility for payment. erage-per-diem for all patients. In this approach, the amount of (f) Moreover, the relative use of serv- charges for such services as a propor- ices by aged patients as compared to tion of the provider’s total charges to other patients differs significantly all patients is used to determine the among institutions. Consequently, con- proportion of the provider’s total costs siderations of equity among institu- for which the third-party purchaser as- tions are involved as well as that of ef- sumes responsibility. The approach is fectiveness of the apportionment meth- subject to numerous variations. It can od under the program in accomplishing be applied to the total of charges for the objective of paying each provider all services combined or it can be ap- fully, but only for services to bene- plied to components of the provider’s ficiaries. activities for which the amount of (g) A further consideration of long- costs and charges are ascertained range importance is that the relative through a breakdown of data from the use of services by aged and other pa- provider’s accounting records. tients can be expected to change, pos- (j) For the application of the ap- sibly to a significant extent in future proach to components, which represent years. The ability of apportionment types of services, the breakdown of methods used under the program to re- total costs is accomplished by ‘‘cost- flect such change is an element of finding’’ techniques under which indi- flexibility which has been regarded as rect costs and nonrevenue activities important in the formulation of the are allocated to revenue producing cost reimbursement principles. components for which charges are (h) An alternative to the relative made as services are furnished. number of days of care as a basis for apportioning costs is the relative § 413.53 Determination of cost of serv- amount of charges billed by the pro- ices to beneficiaries. vider for services to patients. The (a) Principle. Total allowable costs of amount of charges is the basis upon a provider will be apportioned between which the cost of hospital care is dis- program beneficiaries and other pa- tributed among patients who pay di- tients so that the share borne by the rectly for the services they receive. program is based upon actual services Payment for services on the basis of received by program beneficiaries. The charges applies generally under insur- methods of apportionment are defined ance programs in which individuals are as follows: indemnified for incurred expenses, a (1) Departmental method—(i) Method- form of health insurance widely held ology. Except as provided in paragraph throughout the United States. Also, (a)(1)(ii) of this section with respect to charges to patients are commonly a the treatment of the private room cost factor in determining the amount of differential for cost reporting periods payment to hospitals under insurance starting on or after October 1, 1982, the programs providing service benefits, ratio of beneficiary charges to total pa- many of which pay ‘‘costs or charges, tient charges for the services of each whichever is less’’ and some of which ancillary department is applied to the pay exclusively on the basis of charges. cost of the department; to this is added In all of these instances, the provider’s the cost of routine services for program own charge structure and method of beneficiaries, determined on the basis itemizing services for the purpose of of a separate average cost per diem for assessing charges is utilized as a meas- general routine patient care areas as

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defined in paragraph (b) of this section, as Medicare days. When Medicare cov- taking into account, in hospitals, a erage runs out, the Medicare rate no separate average cost per diem for each longer applies. intensive care unit, coronary care unit, (iii) The cost per diem attributable and other intensive care type inpatient to all non-Medicare swing-bed days is hospital units. based on the average statewide Med- (ii) Exception: Indirect cost of private icaid NF rate for the prior calendar rooms. For cost reporting periods start- year, adjusted to approximate the aver- ing on or after October 1, 1982, except age NF rate for the current calendar with respect to a hospital receiving year. payment under part 412 of this chapter (iv) The sum of total Medicare SNF- (relating to the prospective payment type days multiplied by the cost per system), the additional cost of fur- diem attributable to Medicare SNF- nishing services in private room ac- type services and the total NF-type commodations is apportioned to Medi- days multiplied by the cost per diem care only if these accommodations are attributable to all non-Medicare days furnished to program beneficiaries, and is subtracted from total inpatient gen- are medically necessary. To determine eral routine service costs. The cost per routine service cost applicable to bene- diem for inpatient routine hospital ficiaries— care is computed based on the remain- (A) Multiply the average cost per ing inpatient routine service costs. diem (as defined in paragraph (b) of (3) Cost per visit by type-of-service this section) by the total number of method—HHAs. For cost reporting peri- Medicare patient days (including pri- ods beginning on or after October 1, vate room days whether or not medi- 1980, all HHAs must use the cost per cally necessary); visit by type-of-service method of ap- (B) Add the product of the average portioning costs between Medicare and per diem private room cost differential non-Medicare beneficiaries. Under this (as defined in paragraph (b) of this sec- method, the total allowable cost of all tion) and the number of medically necessary private room days used by bene- visits for each type of service is divided ficiaries; and by the total number of visits for that (C) Effective October 1, 1990, do not type of service. Next, for each type of include private rooms furnished for service, the number of Medicare cov- SNF-type and NF-type services under ered visits is multiplied by the average the swing-bed provision in the number cost per visit just computed. This rep- of days in paragraphs (a)(1)(ii)(A) and resents the cost Medicare will recog- (B) of this section. nize as the cost for that service, subject to cost limits published by CMS (2) Carve-out out method. (i) The carve-out out method is used to allo- (see § 413.30). cate hospital inpatient general routine (b) Definitions. As used in this sec- service costs in a participating swing- tion— bed hospital, as defined in § 413.114(b). Ancillary services means the services Under this method, effective for serv- for which charges are customarily ices furnished on or after October 1, made in addition to routine services. 1990, the reasonable costs attributable Apportionment means an allocation or to the inpatient routine SNF-type and distribution of allowable cost between NF-type services furnished to all class- the beneficiaries of the Medicare pro- es of patients are subtracted from total gram and other patients. inpatient routine service costs before Average cost per diem for general rou- computing the average cost per diem tine services means the following: for inpatient routine hospital care. (1) For cost reporting periods begin- (ii) The cost per diem attributable to ning on or after October 1, 1982, subject the routine SNF-type services covered to the provisions on swing-bed hos- by Medicare is based on the regional pitals, the average cost of general rou- Medicare swing-bed SNF rate in effect tine services net of the private room for a given calendar year, as described cost differential. The average cost per in § 413.114(c). The Medicare SNF rate diem is computed by the following applies only to days covered and paid methodology:

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(i) Determine the total private room tients who receive the services. Im- cost differential by multiplying the av- plicit in the use of charges as the basis erage per diem private room cost dif- for apportionment is the objective that ferential determined in paragraph (c) charges for services be related to the of this section by the total number of cost of the services. private room patient days. Intensive care type inpatient hospital (ii) Determine the total inpatient unit means a hospital unit that fur- general routine service costs net of the nishes services to critically ill inpa- total private room cost differential by tients. Examples of intensive care type subtracting the total private room cost units include, but are not limited to, differential from total inpatient gen- intensive care units, trauma units, cor- eral routine service costs. onary care units, pulmonary care (iii) Determine the average cost per units, and burn units. Excluded as in- diem by dividing the total inpatient tensive care type units are post- general routine service cost net of pri- operative recovery rooms, vate room cost differential by all inpa- postanesthesia recovery rooms, mater- tient general routine days, including nity labor rooms, and subintensive or total private room days. intermediate care units. (The unit (2) For swing-bed hospitals, the must also meet the criteria of para- amount computed by— graph (d) of this section.) (i) Subtracting the routine costs as- Nursing facility (NF)-type services, for- sociated with Medicare SNF-type days merly known as ICF and SNF-type and non-Medicare NF-type days from services, are routine services furnished the total allowable inpatient cost for by a swing-bed hospital to Medicaid routine services (excluding the cost of and other non-Medicare patients. services provided in intensive care Under the Medicaid program, effective units, coronary care units, and other October 1, 1990, facilities are no longer intensive care type inpatient hospital certified as SNFs or ICFs but instead units and nursery costs); and are certified only as NFs and can pro- (ii) Dividing the remainder (exclud- vide services as defined in section ing the total private room cost dif- 1919(a)(1) of the Act. ferential) by the total number of inpatient hospital days of care (excluding Skilled nursing facility (SNF)-type serv- Medicare SNF-type days and non-Medi- ices are routine services furnished by a care NF-type days of care, days of care swing-bed hospital that would con- in intensive care units, coronary care stitute extended care services if fur- units, and other intensive care type in- nished by an SNF. SNF-type services patient hospital units; and newborn include routine SNF services furnished days; but including total private room in the distinct part SNF of a hospital days). complex that is combined with the hos- Average cost per diem for hospital in- pital general routine service area cost tensive care type units means the center under § 413.24(d)(5). Effective Oc- amount computed by dividing the total tober 1, 1990, only Medicare covered allowable costs for routine services in services are included in the definition each of these units by the total number of SNF-type services. of inpatient days of care furnished in Ratio of beneficiary charges to total each of these units. charges on a departmental basis means Average per diem private room cost dif- the ratio of charges to beneficiaries of ferential means the difference in the av- the Medicare program for services of a erage per diem cost of furnishing rou- revenue-producing department or cen- tine services in a private room and in a ter to the charges to all patients for semi-private room. (This differential is that center during an accounting pe- not applicable to hospital intensive riod. After each revenue-producing cen- care type units.) (The method for com- ter’s ratio is determined, the cost of puting this differential is described in services furnished to beneficiaries of paragraph (c) of this section.) the Medicare program is computed by Charges means the regular rates for applying the individual ratio for the various services that are charged to center to the cost of the related center both beneficiaries and other paying pa- for the period.

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Routine services means the regular bursed as one combined intensive care room, dietary, and nursing services, type unit if all other criteria are met. minor medical and surgical supplies, Float nurses (nurses who work in dif- and the use of equipment and facilities ferent units on an as-needed basis) can for which a separate charge is not cus- be utilized in the intensive care type tomarily made. unit. If a float nurse works in two dif- (c) Method for computing the average ferent units during the same eight hour per diem private room cost differential. shift, then the costs must be allocated Compute the average per diem private to the appropriate units depending room cost differential as follows: upon the time spent in those units. The (1) Determine the average per diem hospital must maintain adequate private room charge differential by records to support the allocation. If subtracting the average per diem such records are not available, then the charge for all semi-private room ac- costs must be allocated to the general commodations from the average per routine services cost areas; diem charge for all private room ac- (3) Has specific written policies that commodations. The average per diem include criteria for admission to, and charge for private room accommoda- discharge from, the unit; tions is determined by dividing the (4) Has registered nursing care avail- total charges for private room accom- able on a continuous 24-hour basis with modations by the total number of days at least one registered nurse present in of care furnished in private room ac- the unit at all times; commodations. The average per diem (5) Maintains a minimum nurse-pa- charge for semi-private accommoda- tient ratio of one nurse to two patients tions is determined by dividing the per patient day. Included in the cal- total charges for semi-private room ac- culation of this nurse-patient ratio are commodations by the total number of registered nurses, licensed vocational days of care furnished in semi-private nurses, licensed practical nurses, and accommodations. nursing assistants who provide patient (2) Determine the inpatient general care. Not included are general support routine cost to charge ratio by dividing personnel such as ward clerks, total inpatient general routine service custodians, and housekeeping per- cost by the total inpatient general rou- sonnel; and tine service charges. (6) Is equipped, or has available for (3) Determine the average per diem immediate use, life-saving equipment private room cost differential by mul- necessary to treat the critically ill pa- tiplying the average per diem private tients for which it is designed. This room charge differential determined in equipment may include, but is not lim- paragraph (c)(1) of this section by the ited to, respiratory and cardiac moni- ratio determined in paragraph (c)(2) of toring equipment, respirators, cardiac this section. defibrillators, and wall or canister oxy- (d) Criteria for identifying intensive gen and compressed air. care type units. For purposes of deter- (e) Application—(1) Departmental meth- mining costs under this section, a unit od; Cost reporting periods beginning on or will be identified as an intensive care after October 1, 1982. (i) The following type inpatient hospital unit only if the example illustrates how costs would be unit— determined, using only inpatient data, (1) Is in a hospital; for cost reporting periods beginning on (2) Is physically and identifiably sep- or after October 1, 1982, based on appor- arate from general routine patient care tionment of— areas, including subintensive or inter- (A) The average cost per diem for mediate care units, and ancillary serv- general routine services (subject to the ice areas. There cannot be a concurrent private room differential provisions of sharing f nursing staff between an in- paragraph (a)(1)(iii) of this section); tensive care type unit and units or (B) The average cost per diem for areas furnishing different levels or each intensive care type unit; types of care. However, two or more in- (C) The ratio of beneficiary charges tensive care type units that concur- to total charges applied to cost by de- rently share nursing staff can be reim- partment.

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HOSPITAL Y

Ratio of Charges to beneficiary Cost of ben- Department program Total charges to Total cost eficiary beneficiaries charges total services charges

Percent

Operating rooms ...... $20,000 $70,000 284⁄7 $77,000 $22,000 Delivery rooms ...... 0 12,000 0 30,000 0 Pharmacy ...... 20,000 60,000 331⁄3 45,000 15,000 X-ray ...... 24,000 100,000 24 75,000 18,000 Laboratory ...... 40,000 140,000 284⁄7 98,000 28,000 Others ...... 6,000 30,000 20 25,000 5,000

Total ...... 110,000 412,000 ...... 350,000 88,000

Average Cost of ben- Total inpa- Total cost cost per Program in eficiary tient days diem patient days services

General routine ...... 30,000 $630,000 $21 8,000 $168,000 Coronary care unit ...... 500 20,000 40 200 8,000 Intensive care unit ...... 3,000 108,000 36 1,000 36,000

33,500 758,000 ...... 9,200 212,000

Total ...... 300,000

(ii) The following illustrates how ap- per diem for general routine services is portionment based on an average cost determined.

HOSPITAL E

Private accom- Semi-private ac- Facts modations commodations Total

Total charges ...... $20,000 $175,000 $195,000 Total days ...... 100 1,000 1,100 Programs days ...... 70 400 470 Medically necessary for program beneficiaries ...... 20 ...... 20 Total general routine service costs ...... 165,000 Average private room per diem charge ($20,000 private room charges ÷ 100 days) ...... 1 $200 Average semi-private room per diem charge ($175,000 semi-private charge ÷ 1,000 days) ...... 1 $175 1 Per diem. Average per diem private room cost differential. 1. Average per diem private room charge differential ($200 private room per diem—$175, semi-private room per diem), $25. 2. Inpatient general routine cost/charge ratio ($165,000 total costs ÷ $195,000 total charges), 0.8461538. 3. Average per diem private room cost differential ($25 charge differential × .8461538 cost/charge ratio), $21.15. Average cost per diem for inpatient general routine services. 4. Total private room cost differential ($21.15 average per diem cost differential × 100 private room days), $2,115. 5. Total inpatient general routine service costs net of private room cost differential ($165,000 total routine cost ¥$2,115 private room cost differential), $162,885. 6. Average cost per diem for inpatient general routine services ($162,885 routine cost net of private room cost differential ÷ 1,100 patient days), $148.08. Medicare general routine service cost. 7. Total routine per diem cost applicable to Medicare ($148.08 average cost per diem × 470 Medicare private and semi-private patient days), $69,598. 8. Total private room cost differential applicable to Medicare ($21.15 average per diem private room cost differential × 20 medically necessary private room days), $423. 9. Medicare inpatient general routine service cost ($423 Medicare private room cost differential + $69,598 Medicare cost of general routine inpatient services), $70,021.

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(2) Carve out method. The following il- diem, or to charges, or to any other lustrates how apportionment is deter- ready basis of approximating costs. mined in a hospital reimbursed under (b) At the end of the period, the ac- the carve out method (subject to the tual apportionment, based on the cost private room differential provisions of finding and apportionment methods se- paragraph (a)(1)(ii) of this section): lected by the provider, determines the Medicare reimbursement for the actual HOSPITAL K services provided to beneficiaries dur- [Determination of cost of routine SNF-type and ICF-type ing the period. 1 services and general routine hospital services ] (c) Basically, therefore, interim pay- Days of care ments to providers will be made for services throughout the year, with Facts General routine SNF-type ICF-type final settlement on a retroactive basis hospital at the end of the accounting period. In- Total days of care ...... 2,000 400 100 terim payments will be made as often Medicare days of care ... 600 300 as possible and in no event less fre- Average Medicaid rate .. N/A $35 $20 quently than once a month. The retro- Total inpatient general routine service costs: $250,000 active payments will take fully into Calculation of cost of routine SNF-type services applicable to account the costs that were actually Medicare: incurred and settle on an actual, rather $35 × 300 = $10,500 than on an estimated basis. Calculation of cost of general routine hospital services: × § 413.64 Payments to providers: Spe- Cost of SNF-type services: $35 400 .. $14,000 cific rules. Cost of ICF-type services: $20 × 100 ... 2,000 (a) Reimbursement on a reasonable cost Total ...... $16,000 basis. Providers of services paid on the Average cost per diem of general routine hospital services: $250,000 ¥ $16,000 ÷ 2,000 days = $117 basis of the reasonable cost of services Medicare general routine hospital cost: furnished to beneficiaries will receive $117 × 600 = $70,200 interim payments approximating the Total Medicare reasonable cost for general routine inpatient actual costs of the provider. These pay- days: $10,500 + $70,200 = $80,700 ments will be made on the most expeditious schedule administratively fea- [51 FR 34793, Sept. 30, 1986, as amended at 59 sible but not less often than monthly. FR 45401, Sept. 1, 1994; 61 FR 51616, Oct. 3, A retroactive adjustment based on ac- 1996; 61 FR 58631, Nov. 18, 1996] tual costs will be made at the end of a reporting period. § 413.56 [Reserved] (b) Amount and frequency of payment. Medicare states that providers of serv- Subpart E—Payments to Providers ices will be paid the reasonable cost of services furnished to beneficiaries. § 413.60 Payments to providers: Gen- Since actual costs of services cannot be eral. determined until the end of the ac- (a) The fiscal contractors will estab- counting period, the providers must be lish a basis for interim payments to paid on an estimated cost basis during each provider. This may be done by one the year. While Medicare provides that of several methods. If an contractor is interim payments will be made no less already paying the provider on a cost often than monthly, contractors are basis, the contractor may adjust its expected to make payments on the rate of payment to an estimate of the most expeditious basis administra- result under the Medicare principles of tively feasible. Whatever estimated reimbursement. If no organization is cost basis is used for determining in- paying the provider on a cost basis, the terim payments during the year, the contractor may obtain the previous intent is that the interim payments year’s financial statement from the shall approximate actual costs as near- provider and, by applying the prin- ly as is practicable so that the retro- ciples of reimbursement, compute or active adjustment based on actual approximate an appropriate rate of costs will be as small as possible. payment. The interim payment may be (c) Interim payments during initial re- related to the last year’s average per porting period. At the beginning of the

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program or when a provider first par- evant factors to the provider for which ticipates in the program, it will be nec- the rate is needed, the contractor will essary to establish interim rates of base an interim rate of payment on the payment to providers of services. Once costs of the comparable provider. a provider has filed a cost report under (ii) If there are no substantially com- the Medicare program, the cost report parable providers from whom data are may be used as a basis for determining available, the contractor will deter- the interim rate of reimbursement for mine an interim rate of payment based the following period. However, since on the budgeted or projected costs of initially there is no previous history of the provider. cost under the program, the interim (2) Under either method, the con- rate of payment must be determined by tractor will review the provider’s cost other methods, including the following: experience after a period of three (1) If the contractor is already paying months. If need for an adjustment is the provider on a cost or cost-related basis, the contractor will adjust its indicated, the interim rate of payment rate of payment to the program’s prin- will be adjusted in line with the pro- ciples of reimbursement. This rate may vider’s cost experience. be either an amount per inpatient day, (e) Interim payments after initial re- or a percent of the provider’s charges porting period. Interim rates of pay- for services furnished to the program’s ment for services provided after the beneficiaries. initial reporting period will be estab- (2) If an organization other than the lished on the basis of the cost report contractor is paying the provider for filed for the previous year covering services on a cost or cost-related basis, Medicare services. The current rate the contractor may obtain from that will be determined—whether on a per organization or from the provider itself diem or percentage of charges basis— the rate of payment being used and using the previous year’s costs of cov- other cost information as may be need- ered services and making any appro- ed to adjust that rate of payment to priate adjustments required to bring, give recognition to the program’s prin- as closely as possible, the current ciples of reimbursement. year’s rate of interim payment into (3) It no organization is paying the agreement with current year’s costs. provider on a cost or cost-related basis, This interim rate of payment may be the contractor will obtain the previous adjusted by the contractor during an year’s financial statement from the accounting period if the provider sub- provider. By analysis of such state- mits appropriate evidence that its ac- ment in light of the principles of reim- tual costs are or will be significantly bursement, the contractor will com- higher than the computed rate. Like- pute an appropriate rate of payment. wise, the contractor may adjust the in- (4) After the initial interim rate has terim rate of payment if it has evi- been set, the provider may at any time dence that actual costs may fall sig- request, and be allowed, an appropriate nificantly below the computed rate. increase in the computed rate, upon presentation of satisfactory evidence (f) Retroactive adjustment. (1) Medi- to the contractor that costs have in- care provides that providers of services creased. Likewise, the contractor may will be paid amounts determined to be adjust the interim rate of payment if it due, but not less often than monthly, has evidence that actual costs may fall with necessary adjustments due to pre- significantly below the computed rate. viously made overpayments or under- (d) Interim payments for new providers. payments. Interim payments are made (1) Newly-established providers will not on the basis of estimated costs. Actual have cost experience on which to base costs reimbursable to a provider can- a determination of an interim rate of not be determined until the cost repayment. In such cases, the contractor ports are filed and costs are verified. will use the following methods to de- Therefore, a retroactive adjustment termine an appropriate rate: will be made at the end of the report- (i) If there is a provider or providers ing period to bring the interim pay- comparable in substantially all rel- ments made to the provider during the

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period into agreement with the reim- payment (PIP) method is available for bursable amount payable to the pro- Part A hospital and SNF inpatient vider for the services furnished to pro- services. gram beneficiaries during that period. (2) Covered services furnished on or (2) In order to reimburse the provider after July 1, 1987. Effective with claims as quickly as possible, an initial retro- received on or after July l, 1987, or as active adjustment will be made as soon otherwise specified, the periodic in- as the cost report is received. For this terim payment (PIP) method is avail- purpose, the costs will be accepted as able for the following: reported, unless there are obvious er- (i) Part A inpatient services fur- rors or inconsistencies, subject to later nished in hospitals that are excluded audit. When an audit is made and the from the prospective payment systems, final liability of the program is deter- as specified in § 412.1(a)(1) of this chap- mined, a final adjustment will be ter under subpart B of part 412 of this made. subchapter, or are paid under the pro- (3) To determine the retroactive ad- spective payment systems described in justment, the amount of the provider’s subpart N, O, and P of part 412 of this total allowable cost apportioned to the chapter. program for the reporting year is com- (ii) Part A services furnished in hos- puted. This is the total amount of re- pitals receiving payment in accordance imbursement the provider is due to re- with a demonstration project author- ceive from the program and the bene- ized under section 402(a) of Public Law ficiaries for covered services furnished 90–248 (42 U.S.C. 1395b–1) or section during the reporting period. The total 222(a) of Public Law 92–603 (42 U.S.C. of the interim payments made by the 1395b–1 (note)), or a State reimburse- program in the reporting year and the ment control system approved under deductibles and coinsurance amounts section 1886(c) of the Act and subpart C receivable from beneficiaries is com- of part 403 of this chapter, if that type puted. The difference between the re- of payment is specifically approved by imbursement due and the payments CMS as an integral part of the dem- made is the amount of the retroactive onstration or control system. If that adjustment. type of payment is not an integral part (g) Accelerated payments to providers. of the demonstration or control sys- Upon request, an accelerated payment tem, PIP is available for the hospital may be made to a provider of services under paragraph (h)(1)(i) of this section that is not receiving periodic interim for hospitals excluded from the pro- payments under paragraph (h) of this spective payment systems or under section if the provider has experienced § 412.116(b) of this chapter for prospec- financial difficulties due to a delay by tive payment hospitals. the contractor in making payments or (iii) Part A SNF services furnished in in exceptional situations, in which the cost reporting periods beginning before provider has experienced a temporary July 1, 1998. (For services furnished in delay in preparing and submitting bills subsequent cost reporting periods, see to the contractor beyond its normal § 413.350 regarding periodic interim pay- billing cycle. Any such payment must ments for skilled nursing facilities). be approved first by the contractor and (iv) Part A services furnished in hos- then by CMS. The amount of the pay- pitals paid under the prospective payment is computed as a percentage of ment system, including distinct part the net reimbursement for unbilled or psychiatric or rehabilitation units, as unpaid covered services. Recovery of described in § 412.116(b) of this chapter. the accelerated payment may be made (v) Services furnished in a hospice as by recoupment as provider bills are specified in part 418 of this chapter. processed or by direct payment. Payment on a PIP basis is described in (h) Periodic interim payment method of § 418.307 of this chapter. reimbursement—(1) Covered services fur- (vi) Effective for payments made on nished before July 1, 1987. In addition to or after July 1, 2004, inpatient CAH the regular methods of interim pay- services furnished by a CAH as speci- ment on individual provider billings for fied in § 413.70. Payment on a PIP basis covered services, the periodic interim is described in § 413.70(d).

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(3) Any participating provider fur- (not to exceed one month) between nishing the services described in para- payments. The payment amount will graphs (h)(1) and (h)(2) of this section be computed by the contractor to ap- that establishes to the satisfaction of proximate, on the average, the cost of the contractor that it meets the fol- covered inpatient or home health serv- lowing requirements may elect to be ices furnished by the provider during reimbursed under the PIP method, be- the period for which the payment is to ginning with the first month after its be made, and each payment will be request that the contractor finds ad- made two weeks after the end of such ministratively feasible: period of services. Upon request, the (i) The provider’s estimated total contractor will, if feasible, compute Medicare reimbursement for inpatient the provider’s payments to recognize services is at least $25,000 a year com- significant seasonal variation in Medi- puted under the PIP formula or, in the care utilization of services on a quar- case of an HHA, either its estimated— terly basis starting with the beginning (A) Total Medicare reimbursement of the provider’s reporting year. for Part A and Part B services is at (7) A provider’s PIP amount may be least $25,000 a year computed under the appropriately adjusted at any time if PIP formula; or the provider presents or the contractor (B) Medicare reimbursement com- otherwise obtains evidence relating to puted under the PIP formula is at least the provider’s costs or Medicare utili- 50 percent of estimated total allowable zation that warrants such adjustment. cost. In addition, the contractor will recom- (ii) The provider has filed at least one pute the payment immediately upon completed Medicare cost report accept- completion of the desk review of a pro- ed by the contractor as providing an vider’s cost report and also at regular accurate basis for computation of pro- intervals not less often than quarterly. gram payment (except in the case of a The contractor may make a retro- provider requesting reimbursement active lump sum interim payment to a under the PIP method upon first enter- provider, based upon an increase in its ing the Medicare program). PIP amount, in order to bring past in- (iii) The provider has the continuing terim payments for the provider’s cur- capability of maintaining in its records rent cost reporting period into line the cost, charge, and statistical data with the adjusted payment amount. needed to accurately complete a Medi- The objective of contractor monitoring care cost report on a timely basis. of provider costs and utilization is to (4) [Reserved] assure payments approximating, as (5) The contractor’s approval of a closely as possible, the reimbursement provider’s request for reimbursement to be determined at settlement for the under the PIP method will be condi- cost reporting period. A significant fac- tioned upon the contractor’s best judg- tor in evaluating the amount of the ment as to whether payment can be payment in terms of the realization of made to the provider under the PIP the projected Medicare utilization of method without undue risk of its re- services is the timely submittal to the sulting in an overpayment because of contractor of completed admission and greatly varying or substantially declin- billing forms. All providers must com- ing Medicare utilization, inadequate plete billings in detail under this meth- billing practices, or other cir- od as under regular interim payment cumstances. The contractor may ter- procedures. minate PIP reimbursement to a pro- (i) Bankruptcy or insolvency of provider at any time it determines that vider. If on the basis of reliable evi- the provider no longer meets the quali- dence, the contractor has a valid basis fying requirements or that the pro- for believing that, with respect to a vider’s experience under the PIP meth- provider, proceedings have been or will od shows that proper payment cannot shortly be instituted in a State or Fed- be made under this method. eral court for purposes of determining (6) Payment will be made biweekly whether such provider is insolvent or under the PIP method unless the pro- bankrupt under an appropriate State vider requests a longer fixed interval or Federal law, any payments to the

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provider will be adjusted by the con- which interest is computed begins on Janu- tractor, notwithstanding any other ary 1, 1975, and the interest beginning Janu- regulation or program instruction re- ary 1, 1975, would be at the rate of 11.625 per- garding the timing or manner of such cent per annum. adjustments, to a level necessary to in- [51 FR 34793, Sept. 30, 1986, as amended at 51 sure that no overpayment to the pro- FR 42238, Nov. 24, 1986; 53 FR 1628, Jan. 21, vider is made. 1988; 57 FR 39830, Sept. 1, 1992; 59 FR 36713, (j) Interest payments resulting from ju- July 19, 1994; 64 FR 41682, July 30, 1999; 65 FR dicial review—(1) Application. If a pro- 41211, July 3, 2000; 66 FR 41394, Aug. 7, 2001; 67 vider of services seeks judicial review FR 56056, Aug. 30, 2002; 69 FR 49252, Aug. 11, by a Federal court (see § 405.1877 of this 2004; 69 FR 66981, Nov. 15, 2004; 73 FR 30267, chapter) of a decision furnished by the May 23, 2008] Provider Reimbursement Review Board § 413.65 Requirements for a determina- or subsequent reversal, affirmation, or tion that a facility or an organiza- modification by the Secretary, the tion has provider-based status. amount of any award of such Federal court will be increased by interest pay- (a) Scope and definitions. (1) Scope. (i) able by the party against whom the This section applies to all facilities for judgment is made (see § 413.153 for which provider-based status is sought, treatment of interest). The interest be- including remote locations of hos- gins to accrue on the first day of the pitals, as defined in paragraph (a)(2) of first month following the 180-day pe- this section and satellite facilities as riod described in § 405.1835(a)(3)(i) or defined in §§ 412.22(h)(1) and 412.25(e)(1) (a)(3)(ii) of this chapter, as applicable. of this chapter, other than facilities de- (2) Amount due. Section 1878(f) of the scribed in paragraph (a)(1)(ii) of this Act, 42 U.S.C. 1395oo(f), authorizes a section. court to award interest in favor of the (ii) The determinations of provider- prevailing party on any amount due as based status for payment purposes de- a result of the court’s decision. If the scribed in this section are not made as contractor withheld any portion of the to whether the following facilities are amount in controversy prior to the provider-based: date the provider seeks judicial review (A) Ambulatory surgical centers by a Federal court, and the Medicare (ASCs). program is the prevailing party, inter- (B) Comprehensive outpatient reha- est is payable by the provider only on bilitation facilities (CORFs). the amount not withheld. Similarly, if (C) Home health agencies (HHAs). the Medicare program seeks to recover amounts previously paid to a provider, (D) Skilled nursing facilities (SNFs) and the provider is the prevailing (determinations for SNFs are made in party, interest on the amounts pre- accordance with the criteria set forth viously paid to a provider is not pay- in § 483.5 of this chapter). able by the Medicare program since (E) Hospices. that amount had been paid and is not (F) Inpatient rehabilitation units due the provider. that are excluded from the inpatient (3) Rate. The amount of interest to be PPS for acute hospital services. paid is equal to the rate of return on (G) Independent diagnostic testing equity capital (see § 413.157) in effect facilities furnishing only services paid for the month in which the civil action under a fee schedule, such as facilities is commenced. that furnish only screening mammog- Example: An contractor made a final deter- raphy services (as defined in section mination on the amount of Medicare pro- 1861(jj) of the Act), facilities that fur- gram reimbursement on June 15, 1974, and nish only clinical diagnostic labora- the provider appealed that determination to tory tests, other than those clinical di- the Provider Reimbursement Review Board. agnostic laboratories operating as The Board heard the appeal and rendered a parts of CAHs on or after October 1, decision adverse to the provider. On October 2010, or facilities that furnish only 28, 1974, the provider commenced civil action to have such decision reviewed. The rate of some combination of these services. return on equity capital for the month of Oc- (H) Facilities, other than those oper- tober 1974 was 11.625 percent. The period for ating as parts of CAHs, furnishing only

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physical, occupational, or speech ther- ‘‘department of a provider’’ does not apy to ambulatory patients, through- include an RHC or, except as specified out any period during which the annual in paragraph (n) of this section, an financial cap amount on payment for FQHC. coverage of physical, occupational, or Free-standing facility means an entity speech therapy, as described in section that furnishes health care services to 1833(g)(2) of the Act, is suspended by Medicare beneficiaries and that is not legislation. integrated with any other entity as a (I) ESRD facilities (determinations main provider, a department of a pro- for ESRD facilities are made under vider, remote location of a hospital, § 413.174 of this chapter). satellite facility, or a provider-based (J) Departments of providers that entity. perform functions necessary for the Main provider means a provider that successful operation of the providers either creates, or acquires ownership but do not furnish services of a type for of, another entity to deliver additional which separate payment could be health care services under its name, claimed under Medicare or Medicaid ownership, and financial and adminis- (for example, laundry or medical trative control. records departments). Provider-based entity means a provider (K) Ambulances. of health care services, or an RHC as (L) Rural health clinics (RHCs) affili- defined in § 405.2401(b) of this chapter, ated with hospitals having 50 or more that is either created by, or acquired beds. by, a main provider for the purpose of (2) Definitions. In this subpart E, un- furnishing health care services of a dif- less the context indicates otherwise— ferent type from those of the main pro- Campus means the physical area im- vider under the ownership and adminis- mediately adjacent to the provider’s trative and financial control of the main buildings, other areas and struc- main provider, in accordance with the tures that are not strictly contiguous provisions of this section. A provider- to the main buildings but are located based entity comprises both the spe- within 250 yards of the main buildings, cific physical facility that serves as and any other areas determined on an the site of services of a type for which individual case basis, by the CMS repayment could be claimed under the gional office, to be part of the pro- Medicare or Medicaid program, and the vider’s campus. personnel and equipment needed to de- Department of a provider means a fa- liver the services at that facility. A cility or organization that is either provider-based entity may, by itself, be created by, or acquired by, a main pro- qualified to participate in Medicare as vider for the purpose of furnishing a provider under § 489.2 of this chapter, health care services of the same type and the Medicare conditions of partici- as those furnished by the main pro- pation do apply to a provider-based en- vider under the name, ownership, and tity as an independent entity. financial and administrative control of Provider-based status means the rela- the main provider, in accordance with tionship between a main provider and a the provisions of this section. A depart- provider-based entity or a department ment of a provider comprises both the of a provider, remote location of a hos- specific physical facility that serves as pital, or satellite facility, that com- the site of services of a type for which plies with the provisions of this sec- payment could be claimed under the tion. Medicare or Medicaid program, and the Remote location of a hospital means a personnel and equipment needed to de- facility or an organization that is ei- liver the services at that facility. A de- ther created by, or acquired by, a hos- partment of a provider may not by pital that is a main provider for the itself be qualified to participate in purpose of furnishing inpatient hos- Medicare as a provider under § 489.2 of pital services under the name, owner- this chapter, and the Medicare condi- ship, and financial and administrative tions of participation do not apply to a control of the main provider, in accord- department as an independent entity. ance with the provisions of this sec- For purposes of this part, the term tion. A remote location of a hospital

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comprises both the specific physical fa- to CMS contractors upon request. If cility that serves as the site of services the facility is operated as a joint ven- for which separate payment could be ture, the provider would also have to claimed under the Medicare or Med- attest that it will comply with the re- icaid program, and the personnel and quirements of paragraph (f) of this sec- equipment needed to deliver the serv- tion. ices at that facility. The Medicare con- (ii) If the facility is not located on ditions of participation do not apply to the campus of the potential main pro- a remote location of a hospital as an vider, the provider seeking a deter- independent entity. For purposes of mination would be required to submit this part, the term ‘‘remote location of an attestation stating that the facility a hospital’’ does not include a satellite meets the criteria in paragraphs (d) facility as defined in §§ 412.22(h)(1) and and (e) of this section, and if the facil- 412.25(e)(1) of this chapter. ity is operated under a management (b) Provider-based determinations. (1) A contract, the requirements of para- facility or organization is not entitled graph (h) of this section. If the poten- to be treated as provider-based simply tial main provider is a hospital, the because it or the main provider believe hospital also would be required to at- it is provider-based. test that it will fulfill the obligations (2) If a facility was treated as proof hospital outpatient departments and vider-based in relation to a hospital or hospital-based entities described in CAH on October 1, 2000, it will continue paragraph (g) of this section. The pro- to be considered provider-based in rela- vider would be required to supply docu- tion to that hospital or CAH until the mentation of the basis for its attesta- start of the hospital’s first cost report- tions to CMS at the time it submits its ing period beginning on or after July 1, attestations. 2003. The requirements, limitations, (iii) Whenever a provider submits an and exclusions specified in paragraphs attestation of provider-based status for (d), (e), (f), (h), and (i) of this section an on-campus facility or organization, will not apply to that hospital or CAH as described in paragraph (b)(3)(i) of until the start of the hospital’s first this section, CMS will send the pro- cost reporting period beginning on or vider written acknowledgment of re- after July 1, 2003. For purposes of this ceipt of the attestation, review the at- paragraph (b)(2), a facility is consid- testation for completeness, consistency ered as provider-based on October 1, with the criteria in this section, and 2000 if, on that date, it either had a consistency with information in the written determination from CMS that possession of CMS at the time the at- it was provider-based, or was billing testation is received, and make a deter- and being paid as a provider-based de- mination as to whether the facility or partment or entity of the hospital. organization is provider-based. (3)(i) Except as specified in para- (iv) Whenever a provider submits an graphs (b)(2) and (b)(5) of this section, attestation of provider-based status for if a potential main provider seeks a de- an off-campus facility or organization, termination of provider-based status as described in paragraph (b)(3)(ii) of for a facility that is located on the this section, CMS will send the pro- campus of the potential main provider, vider written acknowledgment of re- the provider would be required to sub- ceipt of the attestation, review the at- mit an attestation stating that the fa- testation for completeness, consistency cility meets the criteria in paragraph with the criteria in this section, con- (d) of this section and, if it is a hos- sistency with the documentation sub- pital, also attest that it will fulfill the mitted with the attestation and con- obligations of hospital outpatient de- sistency with information in the pos- partments and hospital-based entities session of CMS at the time the attesta- described in paragraph (g) of this section is received, and make a deter- tion. The provider seeking such a de- mination as to whether the facility or termination would also be required to organization is provider-based. maintain documentation of the basis (4) A facility that is not located on for its attestations and to make that the campus of a hospital and that is documentation available to CMS and used as a site where physician services

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of the kind ordinarily furnished in phy- will determine that the facility or or- sician offices are furnished is presumed ganization does not have provider- as a free-standing facility, unless CMS based status. determines the facility has provider- (2) Clinical services. The clinical serv- based status. ices of the facility or organization (5) A facility that has requested pro- seeking provider-based status and the vider-based status in relation to a hos- main provider are integrated as evi- pital or CAH on or after October 1, 2000 denced by the following: and before October 1, 2002 will be treat- (i) Professional staff of the facility or ed as provider-based in relation to the organization have clinical privileges at hospital or CAH from the first date on the main provider. or after October 1, 2000 on which the fa- (ii) The main provider maintains the cility was licensed (to the extent re- same monitoring and oversight of the quired by the State), staffed and facility or organization as it does for equipped to treat patients until the any other department of the provider. date on which CMS determines that (iii) The medical director of the facil- the facility does not qualify for pro- ity or organization seeking provider- vider-based status. based status maintains a reporting re- (c) Reporting of material changes in relationship with the chief medical offi- lationships. A main provider that has cer or other similar official of the main had one or more facilities or organiza- provider that has the same frequency, tions considered provider-based also intensity, and level of accountability may report to CMS any material that exists in the relationship between change in the relationship between it the medical director of a department of and any provider-based facility or orga- the main provider and the chief med- nization, such as a change in ownership ical officer or other similar official of of the facility or organization or entry the main provider, and is under the into a new or different management same type of supervision and account- contract that would affect the pro- ability as any other director, medical vider-based status of the facility or or- or otherwise, of the main provider. ganization. (iv) Medical staff committees or (d) Requirements applicable to all facili- other professional committees at the ties or organizations. Any facility or or- main provider are responsible for med- ganization for which provider-based ical activities in the facility or organi- status is sought, whether located on or zation, including quality assurance, off the campus of a potential main pro- utilization review, and the coordina- vider, must meet all of the following tion and integration of services, to the requirements to be determined by CMS extent practicable, between the facility to have provider-based status: or organization seeking provider-based (1) Licensure. The department of the status and the main provider. provider, the remote location of a hos- (v) Medical records for patients pital, or the satellite facility and the treated in the facility or organization main provider are operated under the are integrated into a unified retrieval same license, except in areas where the system (or cross reference) of the main State requires a separate license for provider. the department of the provider, the re- (vi) Inpatient and outpatient services mote location of a hospital, or the sat- of the facility or organization and the ellite facility, or in States where State main provider are integrated, and pa- law does not permit licensure of the tients treated at the facility or organi- provider and the prospective depart- zation who require further care have ment of the provider, the remote loca- full access to all services of the main tion of a hospital, or the satellite facil- provider and are referred where appro- ity under a single license. If a State priate to the corresponding inpatient health facilities’ cost review commis- or outpatient department or service of sion or other agency that has authority the main provider. to regulate the rates charged by hos- (3) Financial integration. The financial pitals or other providers in a State operations of the facility or organiza- finds that a particular facility or orga- tion are fully integrated within the fi- nization is not part of a provider, CMS nancial system of the main provider, as

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evidenced by shared income and ex- mote location of a hospital, or a sat- penses between the main provider and ellite facility have the same governing the facility or organization. The costs body. of a facility or organization that is a (iii) The facility or organization is hospital department are reported in a operated under the same organiza- cost center of the provider, costs of a tional documents as the main provider. provider-based facility or organization For example, the facility or organiza- other than a hospital department are tion seeking provider-based status reported in the appropriate cost center must be subject to common bylaws and or cost centers of the main provider, operating decisions of the governing and the financial status of any pro- body of the main provider where it is vider-based facility or organization is based. incorporated and readily identified in (iv) The main provider has final re- the main provider’s trial balance. sponsibility for administrative deci- (4) Public awareness. The facility or sions, final approval for contracts with organization seeking status as a de- outside parties, final approval for per- partment of a provider, a remote loca- sonnel actions, final responsibility for tion of a hospital, or a satellite facility personnel policies (such as fringe bene- is held out to the public and other pay- fits or code of conduct), and final ap- ers as part of the main provider. When proval for medical staff appointments patients enter the provider-based facil- in the facility or organization. ity or organization, they are aware (2) Administration and supervision. The that they are entering the main pro- reporting relationship between the fa- vider and are billed accordingly. cility or organization seeking provider- (5) Obligations of hospital outpatient based status and the main provider departments and hospital-based entities. must have the same frequency, inten- In the case of a hospital outpatient de- sity, and level of accountability that partment or a hospital-based entity, exists in the relationship between the the facility or organization must fulfill main provider and one of its existing the obligations of hospital outpatient departments, as evidenced by compli- departments and hospital-based enti- ance with all of the following require- ties described in paragraph (g) of this ments: section. (i) The facility or organization is (e) Additional requirements applicable under the direct supervision of the to off-campus facilities or organizations. main provider. Except as described in paragraphs (b)(2) (ii) The facility or organization is op- and (b)(5) of this section, any facility erated under the same monitoring and or organization for which provider- oversight by the provider as any other based status is sought that is not lo- department of the provider, and is op- cated on the campus of a potential erated just as any other department of main provider must meet both the re- the provider with regard to supervision quirements in paragraph (d) of this sec- and accountability. The facility or or- tion and all of the following additional ganization director or individual re- requirements, in order to be deter- sponsible for daily operations at the mined by CMS to have provider-based entity— status. (A) Maintains a reporting relation- (1) Operation under the ownership and ship with a manager at the main pro- control of the main provider. The facility vider that has the same frequency, in- or organization seeking provider-based tensity, and level of accountability status is operated under the ownership that exists in the relationship between and control of the main provider, as the main provider and its existing de- evidenced by the following: partments; and (i) The business enterprise that con- (B) Is accountable to the governing stitutes the facility or organization is body of the main provider, in the same 100 percent owned by the main pro- manner as any department head of the vider. provider. (ii) The main provider and the facil- (iii) The following administrative ity or organization seeking status as a functions of the facility or organiza- department of the main provider, a re- tion are integrated with those of the

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provider where the facility or organiza- the main provider, by submitting tion is based: billing services, records, records showing that, during the 12- human resources, payroll, employee month period immediately preceding benefit package, salary structure, and the first day of the month in which the purchasing services. Either the same application for provider-based status is employees or group of employees han- filed with CMS, and for each subse- dle these administrative functions for quent 12-month period— the facility or organization and the (A) At least 75 percent of the patients main provider, or the administrative served by the facility or organization functions for both the facility or orga- reside in the same zip code areas as at nization and the entity are— least 75 percent of the patients served (A) Contracted out under the same by the main provider; or contract agreement; or (B) At least 75 percent of the patients (B) Handled under different contract served by the facility or organization agreements, with the contract of the who required the type of care furnished facility or organization being managed by the main provider received that care by the main provider. from that provider (for example, at (3) Location. The facility or organiza- least 75 percent of the patients of an tion meets the requirements in para- RHC seeking provider-based status re- graph (e)(3)(i), (e)(3)(ii), (e)(3)(iii), ceived inpatient hospital services from (e)(3)(iv), (e)(3)(v), or, in the case of an the hospital that is the main provider). RHC, paragraph (e)(3)(vi) of this sec- (iv) If the facility or organization is tion, and the requirements in para- unable to meet the criteria in paragraph (e)(3)(vii) of this section. graph (e)(3)(iii)(A) or paragraph (i) The facility or organization is lo- (e)(3)(iii)(B) of this section because it cated within a 35-mile radius of the was not in operation during all of the campus of the hospital or CAH that is 12-month period described in paragraph the potential main provider. (e)(3)(iii) of this section, the facility or (ii) The facility or organization is organization is located in a zip code owned and operated by a hospital or area included among those that, during CAH that has a disproportionate share all of the 12-month period described in adjustment (as determined under paragraph (e)(3)(iii) of this section, ac- § 412.106 of this chapter) greater than counted for at least 75 percent of the 11.75 percent or is described in patients served by the main provider. § 412.106(c)(2) of this chapter imple- (v) The facility or organization meets menting section 1886(d)(5)(F)(i)(II) of all of the following criteria: the Act and is— (A) The facility or organization is (A) Owned or operated by a unit of seeking provider-based status with re- State or local government; spect to a hospital that meets the cri- (B) A public or nonprofit corporation teria in § 412.23(d) for reimbursement that is formally granted governmental under Medicare as a children’s hos- powers by a unit of State or local gov- pital; ernment; or (B) The facility or organization (C) A private hospital that has a con- meets the criteria for identifying in- tract with a State or local government tensive care type units set forth in the that includes the operation of clinics Medicare reasonable cost reimburse- located off the main campus of the hos- ment regulations under § 413.53(d). pital to assure access in a well-defined (C) The facility or organization ac- service area to health care services for cepts only patients who are newborn low-income individuals who are not en- infants who require intensive care on titled to benefits under Medicare (or an inpatient basis. medical assistance under a Medicaid (D) The hospital in which the facility State plan). or organization is physically located is (iii) The facility or organization dem- in a rural area as defined in onstrates a high level of integration § 412.64(b)(1)(ii)(C) of this chapter. with the main provider by showing (E) The facility or organization is lo- that it meets all of the other provider- cated within a 100-mile radius of the based criteria and demonstrates that it children’s hospital that is the potential serves the same patient population as main provider.

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(F) The facility or organization is lo- §§ 489.20(l), (m), (q), and (r) and 489.24 of cated at least 35 miles from the nearest this chapter: other neonatal intensive care unit. (i) Any facility or organization that (G) The facility or organization is located on the main hospital campus meets all other requirements for pro- and is treated by Medicare under this vider-based status under this section. section as a department of the hos- (vi) Both of the following criteria are pital; and met: (ii) Any facility or organization that (A) The facility or organization is an is located off the main hospital campus RHC that is otherwise qualified as a that is treated by Medicare under this provider-based entity of a hospital that section as a department of the hospital has fewer than 50 beds, as determined and is a dedicated emergency depart- under § 412.105(b) of this chapter; and ment, as defined in § 489.24(b) of this (B) The hospital with which the facil- chapter. ity or organization has a provider- (2) Physician services furnished in based relationship is located in a rural hospital outpatient departments or area, as defined in § 412.64(b)(1)(ii)(C) of hospital-based entities (other than this subchapter. RHCs) must be billed with the correct (vii) A facility or organization may site-of-service so that appropriate phy- qualify for provider-based status under sician and practitioner payment this section only if the facility or orga- amounts can be determined under the nization and the main provider are lo- rules of Part 414 of this chapter. cated in the same State or, when consistent with the laws of both States, in (3) Hospital outpatient departments adjacent States. must comply with all the terms of the (f) Provider-based status for joint ven- hospital’s provider agreement. tures. In order for a facility or organi- (4) Physicians who work in hospital zation operated as a joint venture to be outpatient departments or hospital- considered provider-based, the facility based entities are obligated to comply or organization must— with the non-discrimination provisions (1) Be partially owned by at least one in § 489.10(b) of this chapter. provider’ (5) Hospital outpatient departments (2) Be located on the main campus of (other than RHCs) must treat all Medi- a provider who is a partial owner; care patients, for billing purposes, as (3) Be provider-based to that one pro- hospital outpatients. The department vider whose campus on which the facil- must not treat some Medicare patients ity or organization is located; and as hospital outpatients and others as (4) Also meet all the requirements physician office patients. applicable to all provider-based facili- (6) In the case of a patient admitted ties and organizations in paragraph (d) to the hospital as an inpatient after re- of this section. For example, where a ceiving treatment in the hospital out- provider has jointly purchased or joint- patient department or hospital-based ly created a facility under joint ven- entity, payments for services in the ture arrangements with one or more hospital outpatient department or hos- other providers, and the facility is not pital-based entity are subject to the located on the campus of the provider payment window provisions applicable or the campus of any other provider en- to PPS hospitals and to hospitals and gaged in the joint venture arrange- units excluded from PPS set forth at ment, no party to the joint venture ar- § 412.2(c)(5) of this chapter and at rangement can claim the facility as § 413.40(c)(2), respectively. provider-based. (7) When a Medicare beneficiary is (g) Obligations of hospital outpatient treated in a hospital outpatient depart- departments and hospital-based entities. ment that is not located on the main To qualify for provider-based status in provider’s campus, the treatment is relation to a hospital, a facility or or- not required to be provided by the anti- ganization must comply with the fol- dumping rules in § 489.24 of this chap- lowing requirements: ter, and the beneficiary will incur a co- (1) The following departments must insurance liability for an outpatient comply with the antidumping rules of visit to the hospital as well as for the

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physician service, the following re- services of a type that would be paid quirements must be met: for by Medicare under a fee schedule (i) The hospital must provide written established by regulations at part 414 notice to the beneficiary, before the de- of this chapter. Other than staff that livery of services, of— may be paid under such a Medicare fee (A) The amount of the beneficiary’s schedule, the main provider may not potential financial liability; or utilize the services of ‘‘leased’’ employ- (B) If the exact type and extent of ees (that is, personnel who are actually care needed are not known, an expla- employed by the management company nation that the beneficiary will incur a but provide services for the provider coinsurance liability to the hospital under a staff leasing or similar agree- that he or she would not incur if the fa- ment) that are directly involved in the cility were not provider-based, an esti- delivery of patient care. mate based on typical or average (2) The administrative functions of charges for visits to the facility, and a the facility or organization are inte- statement that the patient’s actual li- grated with those of the main provider, ability will depend upon the actual as determined under criteria in para- services furnished by the hospital. graph (e)(2)(iii) of this section. (ii) The notice must be one that the (3) The main provider has significant beneficiary can read and understand. control over the operations of the facil- (iii) If the beneficiary is unconscious, ity or organization as determined under great duress, or for any other under criteria in paragraph (e)(2)(ii) of reason unable to read a written notice this section. and understand and act on his or her (4) The management contract is held own rights, the notice must be pro- by the main provider itself, not by a vided, before the delivery of services, parent organization that has control to the beneficiary’s authorized rep- over both the main provider and the fa- resentative. cility or organization. (iv) In cases where a hospital out- (i) Furnishing all services under ar- patient department provides examina- rangement. A facility or organization tion or treatment that is required to be may not qualify for provider-based sta- provided by the antidumping rules of tus if all patient care services fur- § 489.24 of this chapter, notice, as de- nished at the facility or organization scribed in this paragraph (g)(7), must are furnished under arrangements. be given as soon as possible after the (j) Inappropriate treatment of a facility existence of an emergency has been or organization as provider-based—(1) De- ruled out or the emergency condition termination and review. If CMS learns has been stabilized. that a provider has treated a facility or (8) Hospital outpatient departments organization as provider-based and the must meet applicable hospital health provider did not request a determina- and safety rules for Medicare-partici- tion of provider-based status from CMS pating hospitals in part 482 of this under paragraph (b)(3) of this section chapter. and CMS determines that the facility (h) Management contracts. A facility or organization did not meet the re- or organization that is not located on quirements for provider-based status the campus of the potential main pro- under paragraphs (d) through (i) of this vider and otherwise meets the require- section, as applicable (or, in any period ments of paragraphs (d) and (e) of this before the effective date of these regu- section, but is operated under manage- lations, the provider-based requirement contracts, must also meet all of ments in effect under Medicare pro- the following criteria: gram regulations or instructions), CMS (1) The main provider (or an organi- will— zation that also employs the staff of (i) Issue notice to the provider in ac- the main provider and that is not the cordance with paragraph (j)(3) of this management company) employs the section, adjust the amount of future staff of the facility or organization who payments to the provider for services are directly involved in the delivery of of the facility or organization in ac- patient care, except for management cordance with paragraph (j)(4) of this staff and staff who furnish patient care section, and continue payments to the

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provider for services of the facility or (5) Continuation of payment. (i) The organization only in accordance with notice of denial of provider-based sta- paragraph (j)(5) of this section; and tus sent to the provider will ask the (ii) Except as otherwise provided in provider to notify CMS in writing, paragraphs (b)(2), (b)(5), or (j)(2) of this within 30 days of the date the notice is section, recover the difference between issued, of whether the provider intends the amount of payments that actually to seek a determination of provider- was made and the amount of payments based status for the facility or organi- that CMS estimates should have been zation under this section or whether made, in the absence of compliance the facility or organization (or, where with the provider-based requirements, applicable, the practitioners who staff to that provider for services at the fa- the facility or organization) will be cility or organization for all cost re- seeking to enroll and meet other reporting periods subject to reopening in quirements to bill for services in a accordance with §§ 405.1885 and 405.1889 freestanding facility. of this chapter. (ii) If the provider indicates that it (2) Exception for good faith effort. CMS will not be seeking a determination for will not recover any payments for any the facility or organization under this period before the beginning of the hos- section or that the facility or organiza- pital’s first cost reporting period begin- tion or its practitioners will not be ning on or after January 10, 2001, if, seeking to enroll, or if CMS does not during all of that period— receive a response within 30 days of the (i) The requirements regarding licen- date the notice was issued, all payment sure and public awareness in para- under this paragraph (j)(5) will end as graphs (d)(1) and (d)(4) of this section of the 30th day after the date of notice. were met; (iii) If the provider indicates that it (ii) All facility services were billed as will be seeking a determination for the if they had been furnished by a depart- facility or organization under this sec- ment of a provider, a remote location tion or that the facility or organiza- of a hospital, a satellite facility, or a tion or its practitioners will be seeking provider-based entity of the main pro- to meet enrollment and other require- vider; and ments for billing for services in a free- (iii) All professional services of phy- standing facility, payment for services sicians and other practitioners were of the facility or organization will con- billed with the correct site-of-service tinue, at the adjusted amounts de- indicator, as described in paragraph scribed in paragraph (j)(4) of this sec- (g)(2) of this section. tion, for as long as is required for all (3) Notice to provider. If CMS deter- billing requirements to be met (but not mines that a facility or organization longer than 6 months) if the provider was inappropriately treated as pro- or the facility or organization or its vider-based, CMS will issue written no- practitioners— tice to the provider that payments for past cost reporting periods may be re- (A) Submits, as applicable, a com- viewed and recovered as described in plete request for a determination of paragraph (j)(1)(ii) of this section, and provider-based status or a complete en- that future payments for services in or rollment application and provide all of the facility or organization will be other required information within 90 adjusted as described in paragraph days after the date of notice; and (j)(4) of this section. (B) Furnishes all other information (4) Adjustment of payments. If CMS de- needed by CMS to make a determina- termines that a facility or organization tion regarding provider-based status or was inappropriately treated as pro- process the enrollment application, as vider-based, CMS will adjust future applicable, and verifies that other bill- payments to the provider or the facil- ing requirements are met. ity or organization, or both, to esti- (v) If the necessary applications or mate the amounts that would be paid information are not provided, CMS will for the same services furnished by a terminate all payment to the provider, freestanding facility. facility, or organization as of the date

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CMS issues notice that necessary appli- failure to qualify for provider-based cations or information have not been status resulted from a material change submitted. in the relationship between the pro- (k) Temporary treatment as provider- vider and the facility or organization based. If a provider submits a complete that the provider did not report to attestation of compliance with the re- CMS under paragraph (c) of this sec- quirements for provider-based status tion, CMS will take the actions with for a facility or organization that has respect to notice to the provider, ad- not previously been found by CMS to justment of payments, and continu- have been inappropriately treated as ation of payment described in para- provider-based under paragraph (j) of graphs (j)(3), (j)(4), and (j)(5) of this sec- this section, the provider may bill and tion, and will recover past payments to be paid for services of the facility or the provider to the extent described in organization as provider-based from paragraph (j)(1)(ii) of this section. the date it submits the attestation and (m) Status of Indian Health Service and any required supporting documenta- Tribal facilities and organizations. Fa- tion until the date that CMS deter- cilities and organizations operated by mines that the facility or organization the Indian Health Services and Tribes does not meet the provider-based rules. will be considered to be departments of If CMS subsequently determines that hospitals operated by the Indian the requirements for provider-based Health Service or Tribes if they furnish status are not met, CMS will recover only services that are billed, using the the difference between the amount of CCN of the main provider and with the payments that actually was made since consent of the main provider, as if they the date the complete attestation of had been furnished by a department of compliance with provider-based re- a hospital operated by the Indian quirements was submitted and the Health Service or a Tribe and they are: amount of payments that CMS esti- (1) Owned and operated by the Indian mates should have been made in the Health Service; absence of compliance with the pro- (2) Owned by the Tribe but leased vider-based requirements. For purposes from the Tribe by the IHS under the of this paragraph (k), a complete attes- Indian Self-Determination Act (Pub. L. tation of compliance with provider- 93–638) in accordance with applicable based requirements is one that includes regulations and policies of the Indian all information needed to permit CMS Health Service in consultation with to make a determination under para- Tribes: or graph (b)(3) of this section. (3) Owned by the Indian Health Serv- (l) Correction of errors. (1) If CMS de- ice but leased and operated by the termines that a facility or organization Tribe under the Indian Self-Determina- that had previously been determined to tion Act (Pub. L. 93–638) in accordance be provider-based under this section no with applicable regulations and poli- longer qualifies for provider-based sta- cies of the Indian Health Service in tus, and the failure to qualify for pro- consultation with Tribes. vider-based status resulted from a ma- (n) FQHCs and ‘‘look alikes.’’ A facil- terial change in the relationship be- ity that has, since April 7, 1995, fur- tween the provider and the facility or nished only services that were billed as organization that the provider did re- if they had been furnished by a depart- port to CMS under paragraph (c) of this ment of a provider will continue to be section, treatment of the facility or or- treated, for purposes of this section, as ganization as provider-based ceases a department of the provider without with the date that CMS determines regard to whether it complies with the that the facility or organization no criteria for provider-based status in longer qualifies for provider-based sta- this section, if the facility— tus. (1) Received a grant on or before (2) If CMS determines that a facility April 7, 2000 under section 330 of the or organization that had previously Public Health Service Act and con- been determined to be provider-based tinues to receive funding under such a under this section no longer qualifies grant, or is receiving funding from a for provider-based status, and if the grant made on or before April 7, 2000

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under section 330 of the Public Health of a distinct part unit of the CAH and Service Act under a contract with the other than the items included in the beneficiary of such a grant, and con- incentive payment described in para- tinues to meet the requirements to re- graph (a)(5) of this section and subject ceive a grant under section 330 of the to the adjustments described in para- Public Health Service Act; or graph (a)(6) of this section, is 101 per- (2) Based on the recommendation of cent of the reasonable costs of the CAH the Public Health Service, was deter- in providing CAH services to its inpa- mined by CMS on or before April 7, 2000 tients, as determined in accordance to meet the requirements for receiving with section 1861(v)(1)(A) of the Act a grant under section 330 of the Public and the applicable principles of cost re- Health Service Act, and continues to imbursement in this part and in part meet such requirements. 415 of this chapter, except that the fol- (o) Effective date of provider-based sta- lowing payment principles are excluded tus—(1) General rule. Provider-based when determining payment for CAH in- status for a facility or organization is patient services: effective on the earliest date all of the (i) Lesser of cost or charges; requirements of this part have been (ii) Ceilings on hospital operating met. costs; (2) Inappropriate treatment as provider- (iii) Reasonable compensation equiv- based or not reporting material change. alent (RCE) limits for physician serv- Effective for any period on or after Oc- ices to providers; and tober 1, 2002 (or, in the case of facilities (iv) The payment window provisions or organizations described in paragraph for preadmission services, specified in (b)(2) of this section, for cost reporting § 412.2(c)(5) of this subchapter and periods starting on or after July 1, § 413.40(c)(2) of this part. 2003), if a facility or organization is (2) Except as specified in paragraph found by CMS to have been inappropri- (a)(3) of this section, payment to a CAH ately treated as provider-based under for inpatient services does not include paragraph (j) of this section for those any costs of physician services or other periods, or previously was determined professional services to CAH inpa- by CMS to be provider-based but no tients, and is subject to the Part A hos- longer qualifies as provider-based be- pital deductible and coinsurance, as de- cause of a material change occurring termined under subpart G of part 409 of during those periods that was not re- this chapter. ported to CMS under paragraph (c) of (3) If a CAH meets the criteria in this section, CMS will not treat the fa- § 412.113(c) of this subchapter for pass- cility or organization as provider-based through of costs of anesthesia services for payment purposes until CMS has furnished by qualified nonphysician an- determined, based on documentation esthetists employed by the CAH or ob- submitted by the provider, that the fa- tained under arrangements, payment cility or organization meets all re- to the CAH for the costs of those serv- quirements for provider-based status ices is made in accordance with under this part § 412.113(c). (4) Payment for inpatient services of [65 FR 18538, Apr. 7, 2000, as amended at 65 distinct part psychiatric or rehabilita- FR 58920, Oct. 3, 2000; 66 FR 1599, Jan. 9, 2001; 66 FR 59920, Nov. 30, 2001; 67 FR 50114, Aug. 1, tion units is described in paragraph (e) 2002; 68 FR 46070, Aug. 4, 2003; 68 FR 53261, of this section. Sept. 9, 2003; 70 FR 47487, Aug. 12, 2005; 74 FR (5) A qualifying CAH receives an in- 44000, Aug. 27, 2009; 82 FR 38515, Aug. 14, 2017] centive payment for the reasonable costs of purchasing certified EHR tech- § 413.70 Payment for services of a nology in a cost reporting period dur- CAH. ing a payment year as determined (a) Payment for inpatient services fur- under § 495.106 of this chapter in lieu of nished by a CAH (other than services of payment for such reasonable costs distinct part units). (1) Effective for cost under paragraph (a)(1) of this section. reporting periods beginning on or after (6)(i) For cost reporting periods be- January 1, 2004, payment for inpatient ginning in or after FY 2015, if a CAH is services of a CAH, other than services not a qualifying CAH for the applicable

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EHR reporting period, as defined in hospital has had at least one 12-month §§ 495.4 and 495.106(a) of this chapter, (or longer) cost reporting period after then notwithstanding the percentage they accept their first Medicare-cov- applicable in paragraph (a)(1) of this ered patient. For the purposes of this section, the reasonable costs of the exception, the following CAHs are not CAH in providing CAH services to its considered new CAHs: inpatients are adjusted by the fol- (1) A CAH that builds new or replace- lowing applicable percentage: ment facilities at the same or another (A) For cost reporting periods begin- location even if coincidental with a ning in FY 2015, 100.66 percent. change of ownership, a change in man- (B) For cost reporting periods begin- agement, or a lease arrangement. ning in FY 2016, 100.33 percent. (C) For cost reporting periods begin- (2) A CAH that closes and subse- ning in FY 2017 and each subsequent quently reopens. fiscal year, 100 percent. (3) A CAH that has been converted (ii) The Secretary may on a case-by- from an eligible hospital as defined at case basis, exempt a CAH that is not a § 495.4 of this chapter. qualifying CAH from the application of (iii) Exception for decertified EHR tech- the payment adjustment under para- nology. Beginning with the fiscal year graph (a)(6)(i) of this section if the Sec- 2018 payment adjustment year, the Sec- retary determines that compliance retary shall exempt a CAH that is not with the requirement for being a mean- a qualifying CAH from the application ingful user would result in a significant of the payment adjustment under para- hardship for the CAH. In order to be graph (a)(6)(i) of this section if the Sec- considered for an exception, a CAH retary determines that compliance must submit an application dem- with the requirement for being a mean- onstrating that it meets one or more of ingful EHR user is not possible because the criteria specified in this paragraph the certified EHR technology used by (a)(6) for the applicable payment ad- the CAH has been decertified under justment year no later than November ONC’s Health IT Certification Pro- 30 after the close of the applicable EHR gram. In order to be considered for an reporting period, or a later date speci- exception, a CAH must submit an ap- fied by CMS. The Secretary may grant plication, in the manner specified by an exception for one or more of the following: CMS, demonstrating that the certified (A) During any 90-day period from EHR technology was decertified during the beginning of the cost reporting pe- the 12-month period preceding the ap- riod that begins in the fiscal year be- plicable EHR reporting period for the fore the payment adjustment year to payment adjustment year, or during November 30 after the end of the pay- the applicable EHR reporting period for ment adjustment year, or a later date the payment adjustment year, and that specified by CMS, the hospital was lo- the CAH made a good faith effort to ob- cated in an area without sufficient tain another certified EHR technology Internet access to comply with the for that EHR reporting period. Applica- meaningful use objectives requiring tions requesting this exception must be Internet connectivity, and faced insur- submitted by November 30 after the mountable barriers to obtaining such end of the applicable payment adjust- Internet connectivity. ment year, or a later date specified by (B) A CAH that faces extreme and un- CMS. controllable circumstances that pre- (iv) Exceptions granted under para- vent it from becoming a meaningful graphs (a)(6)(ii) and (iii) of this section EHR user during the payment adjust- are subject to annual renewal, but in ment year. no case may a CAH be granted such an (C) The CAH is new in the payment exception for more than 5 years. adjustment year and has not previously operated (under previous or (7) There is no administrative or judi- present ownership). This exception ex- cial review under section s1869 and 1878 pires beginning with the first Federal of the Actor otherwise of the following: fiscal year that begins on or after the

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(i) The methodology and standards the Part B deductible and coinsurance for determining the amount of pay- amounts as determined under ment under paragraph (a)(5) of this sec- §§ 410.152(k), 410.160, and 410.161 of this tion, including the calculation of rea- chapter. sonable costs under § 495.106(c) of this (iii) [Reserved] chapter. (3) Election to be paid reasonable costs (ii) The methodology and standards for facility services plus fee schedule for for determining the amount of pay- professional services. (i) A CAH may ment adjustments made under para- elect to be paid for outpatient services graph (a)(6). in any cost reporting period beginning (iii) The methodology and standards on or after July 1, 2004 under the meth- for determining a CAH to be a quali- od described in paragraphs (b)(3)(ii) and fying CAH under § 495.106 of this chap- (b)(3)(iii) of this section. ter. (A)(1) For cost reporting periods begin- (iv) The methodology and standards ning before October 1, 2010. The election for determining if the hardship exemp- must be made in writing, made on an tion applies to a CAH under paragraph annual basis, and delivered to the con- (a)(6)(ii) of this section. tractor or MAC servicing the CAH at (v) The specification of the cost re- least 30 days before the start of the porting periods, payment years, or fis- cost reporting period for which the cal years as applied under this para- election is made. An election, once graph. made for a cost reporting period, re- (b) Payment for outpatient services fur- mains in effect for all of that period. nished by CAH—(1) General. (i) Unless the CAH elects to be paid for services (2) For cost reporting periods beginning to its outpatients under the method on or after October 1, 2010. If a CAH had specified in paragraph (b)(3) of this sec- elected the method specified in para- tion, the amount of payment for out- graph (b)(3)(i) of this section in its patient services of a CAH is determined most recent cost reporting period be- under paragraph (b)(2) of this section. ginning prior to October 1, 2010, that (ii) Except as specified in paragraph election remains in effect for all of (b)(6) of this section, payment to a CAH that period and for all subsequent cost for outpatient services does not include reporting periods, unless the CAH sub- any costs of physician services or other mits a termination request to the con- professional services to CAH out- tractor or MAC servicing the CAH at patients. least 30 days before the start of the (2) Reasonable costs for facility services. next cost reporting period. However, (i) Effective for cost reporting periods for cost reporting periods beginning in beginning on or after January 1, 2004, October 2010 and November 2010, if a payment for outpatient services of a CAH wishes to terminate its previous CAH is 101 percent of the reasonable election, the CAH must submit a ter- costs of the CAH in providing CAH mination request to the contractor or services to its outpatients, as deter- MAC servicing the CAH prior to De- mined in accordance with section cember 1, 2010. If a CAH had no election 1861(v)(1)(A) of the Act and the applica- in effect in its most recent preceding ble principles of cost reimbursement in cost reporting period and chooses to this part and in part 415 of this chap- elect the method specified in paragraph ter, except that the following payment (b)(3)(i) of this section on or after Octo- principles are excluded when deter- ber 1, 2010, the election must be made mining payment for CAH outpatient in writing and delivered to the con- services: tractor or MAC servicing the CAH at (A) Lesser of cost or charges; and least 30 days before the start of the (B) RCE limits. first cost reporting period for which (ii) Payment to a CAH under para- the election is made. Once the election graph (b)(2) of this section does not in- is made, it remains in effect for all of clude any costs of physician services or that period and for all subsequent cost other professional services to CAH out- reporting periods unless the CAH sub- patients and, other than for clinical di- mits a termination request to the con- agnostic laboratory tests, is subject to tractor or MAC servicing the CAH at

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least 30 days before the start of the CAH had not elected payment under next cost reporting period. this method. Effective for primary care (B) An election of the payment meth- services furnished by primary care od specified under paragraph (b)(3)(i) of practitioners (as defined in § 414.80(a)) this section applies to all services fur- and major surgical procedures furnished to outpatients by a physician or nished by general surgeons in health other practitioner who has reassigned professional shortage areas (as defined his or her rights to bill for those serv- in § 414.2) furnished on or after January ices to the CAH in accordance with 1, 2011 and before January 1, 2016, in- subpart F of part 424 of this chapter. If centive payments specified under a physician or other practitioner does § 414.80 and § 414.67(b), respectively, of not reassign his or her billing rights to this title must not be included in de- the CAH in accordance with subpart F termining payment made under this of part 424 of this chapter, payment for paragraph. the physician’s or practitioner’s serv- (iii) Payment to a CAH, other than ices furnished to CAH outpatients will for clinical diagnostic laboratory tests, be made on a fee schedule or other ap- is subject to the Part B deductible and plicable basis as specified in subpart B coinsurance amounts, as determined of part 414 of this subchapter. under §§ 410.152(k), 410.160, and 410.161 of (C) In the case of a CAH that made an this chapter. election under this section before No- (4) Costs of certain emergency room on- vember 1, 2003, for a cost reporting pe- call providers. (i) Effective for cost re- riod beginning before December 1, 2003, porting periods beginning on or after the rules in paragraph (b)(3)(i)(B) of October 1, 2001, the reasonable costs of this section are applicable to cost re- outpatient CAH services under para- porting periods beginning on or after graph (b) of this section may include July 1, 2001. amounts for reasonable compensation (D) An election made under para- and related costs for an emergency graph (b)(3)(i) of this section is effec- room physician who is on call but who tive as provided for under paragraph is not present on the premises of the (b)(3)(i)(A) or paragraph (b)(3)(i)(C) of CAH involved, is not otherwise fur- this section and does not apply to an nishing physicians’ services, and is not election that was terminated prior to on call at any other provider or facil- the start of the cost reporting period ity. Effective for costs incurred for for which it would otherwise apply. services furnished on or after January (ii) If the CAH elects payment under 1, 2005, the payment amount of 101 per- this method, payment to the CAH for cent of the reasonable costs of out- each outpatient visit will be the sum of patient CAH services may also include the following: amounts for reasonable compensation (A) Effective for cost reporting peri- and related costs for the following ods beginning on or after January 1, emergency room providers who are on 2004, for facility services not including call but who are not present on the any services for which payment may be premises of the CAH involved, are not made under paragraph (b)(3)(ii)(B) of otherwise furnishing physicians’ serv- this section, 101 percent of the reason- ices, and are not on call at any other able costs of the services as determined provider or facility: physician assist- under paragraph (b)(2)(i) of this sec- ants, nurse practitioners, and clinical tion; and nurse specialists. (B) For professional services that are (ii) For purposes of this paragraph furnished by a physician or other prac- (b)(4)— titioner who has reassigned his or her (A) ‘‘Amounts for reasonable com- rights to bill for those services to the pensation and related costs’’ means all CAH in accordance with part 424, sub- allowable costs of compensating emer- part F of this chapter, and that would gency room physicians, physician as- otherwise be payable to the physician sistants, nurse practitioners, and clin- or other practitioner if the rights to ical nurse specialists who are on call to bill for them had not been reassigned, the extent that the costs are found to 115 percent of the amounts that other- be reasonable under the rules specified wise would be paid for the service if the in paragraph (b)(2) of this section and

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the applicable sections of part 413. provider or supplier of ambulance serv- Costs of compensating these specified ices located within a 35-mile drive of medical emergency room staff are al- the CAH and there is an entity that is lowable only if the costs are incurred owned and operated by a CAH that is under written contracts that require more than a 35-mile drive from the the physician, physician assistant, CAH, payment for ambulance services nurse practitioner, or clinical nurse furnished by that entity is 101 percent specialist to come to the CAH when the of the reasonable costs of the entity in physician’s or other practitioner’s furnishing those services, but only if presence is medically required. the entity is the closest provider or (B) Effective for costs incurred on or supplier of ambulance services to the after January 1, 2005, an ‘‘emergency CAH. room physician, physician assistant, (D) Effective for cost reporting peri- nurse practitioner, or clinical nurse ods beginning on or after October 1, specialist who is on call’’ means a doc- 2019, payment for ambulance services tor of medicine or osteopathy, a physi- furnished by a CAH or by a CAH-owned cian assistant, a nurse practitioner, or and operated entity is 101 percent of a clinical nurse specialist, with train- the reasonable costs of the CAH or the ing or experience in emergency care entity in furnishing those services, but who is immediately available by tele- only if the CAH or the entity is the phone or radio contact, and is available only provider or supplier of ambulance onsite within the timeframes specified services located within a 35-mile drive in § 485.618(d) of this chapter. of the CAH, excluding ambulance pro- (5) Costs of ambulance services. (i)(A) viders or suppliers that are not legally Effective for services furnished on or authorized to furnish ambulance serv- after December 21, 2000 and on or before ices to transport individuals to or from December 31, 2003, payment for ambu- the CAH. If there is no provider or sup- lance services furnished by a CAH or an plier of ambulance services located entity that is owned and operated by a within a 35-mile drive of the CAH and CAH is the reasonable costs of the CAH there is an entity that is owned and op- or the entity in furnishing those serv- erated by a CAH that is more than a 35- ices, but only if the CAH or the entity mile drive from the CAH, payment for is the only provider or supplier of am- ambulance services furnished by that bulance services located within a 35- entity is 101 percent of the reasonable mile drive of the CAH or the entity. costs of the entity in furnishing those (B) Effective for cost reporting peri- services, but only if the entity is the ods beginning on or after January 1, closest provider or supplier of ambu- 2004 and on or before September 30, lance services to the CAH. 2011, payment for ambulance services (ii) For purposes of paragraph (b)(5) furnished by a CAH or an entity that is of this section, the distance between owned and operated by a CAH is 101 the CAH or the entity and the other percent of the reasonable costs of the provider or supplier of ambulance serv- CAH or the entity in furnishing those ices will be determined as the shortest services, but only if the CAH or the en- distance in miles measured over im- tity is the only provider or supplier of proved roads between the CAH or the ambulance services located within a 35- entity and the site at which the vehi- mile drive of the CAH or the entity. cles of the closest provider or supplier (C) Effective for cost reporting peri- of ambulance services are garaged. An ods beginning on or after October 1, improved road for this purpose is any 2011 and on or before September 30, road that is maintained by a local, 2019, payment for ambulance services State, or Federal government entity furnished by a CAH or an entity that is and is available for use by the general owned and operated by a CAH is 101 public. An improved road will be con- percent of the reasonable costs of the sidered to include the paved surface up CAH or the entity in furnishing those to the front entrance of the hospital services, but only if the CAH or the en- and the front entrance of the garage. tity is the only provider or supplier of (6) If a CAH meets the criteria in ambulance services located within a 35- § 412.113(c) of this subchapter for pass- mile drive of the CAH. If there is no through of costs of anesthesia services

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furnished by nonphysician anesthetists 1833(a)(1)(D) and 1833(a)(2)(D) of the employed by the CAH or obtained Act. under arrangement, payment to the (c) Final payment based on cost report. CAH for the costs of those services is Final payment to the CAH for CAH fa- made in accordance with § 412.113(c) of cility services to inpatients and out- this chapter. patients furnished during a cost report- (7) Payment for clinical diagnostic lab- ing is based on a cost report for that oratory tests included as outpatient CAH period, as required under § 413.20(b). services. (i) Payment for clinical diag- (d) Periodic interim payments. Subject nostic laboratory tests is not subject to the provisions of § 413.64(h), a CAH to the Medicare Part B deductible and receiving payments under this section coinsurance amounts. may elect to receive periodic interim (ii) Subject to the provisions of para- payments (PIP) for Part A inpatient graphs (b)(7)(iii) through (b)(7)(vi) of CAH services, effective for payments this section, payment to a CAH for made on or after July l, 2004. Payment clinical diagnostic laboratory tests is made biweekly under the PIP meth- will be made at 101 percent of reason- od unless the CAH requests a longer able costs of the services as determined fixed interval (not to exceed one in accordance paragraph (b)(2)(i) of this month) between payments. The bi- section. weekly interim payment amount is (iii) For services furnished before based on the total estimated Medicare July 1, 2009, payment to a CAH for clin- payment (after estimated beneficiary ical diagnostic laboratory tests will be deductibles and coinsurance) for the made under paragraph (b)(7)(ii) of this cost reporting period. Each payment is section only if the individual is an out- made 2 weeks after the end of a bi- patient of the CAH, as defined in § 410.2 weekly period of service, as described of this chapter, and is physically in § 413.64(h)(6). These PIP provisions present in the CAH at the time the are further described in § 413.64(h)(6). specimen is collected. Under certain circumstances that are (iv) Except as provided in paragraphs described in § 413.64(g), a CAH that is (b)(7)(iii) and (b)(7)(v) of this section, not receiving PIP may request an ac- payment to a CAH for clinical diag- celerated payment. nostic laboratory tests will be made (e) Payment for service of distinct part under paragraph (b)(7)(ii) of this sec- psychiatric and rehabilitation units of tion only if the individual is an out- CAHS. Payment for inpatient services patient of the CAH, as defined in § 410.2 of distinct part psychiatric units of of this chapter, without regard to CAHs— (1) For cost reporting periods begin- whether the individual is physically ning before January 1, 2005, payment is present in the CAH at the time the made on a reasonable cost basis, sub- specimen is collected and at least one ject to the provisions of § 413.40. of the following conditions is met: (2) For cost reporting periods begin- (A) The individual is receiving out- ning on or after January 1, 2005, pay- patient services in the CAH on the ment is made in accordance with regu- same day the specimen is collected; or lations governing inpatient psychiatric (B) The specimen is collected by an facilities at subpart N (§ 412.400 through employee of the CAH. § 412.432) of Part 412 of this subchapter. (v) Notwithstanding paragraph (3) Payment for inpatient services of (b)(7)(iv) of this section, payment for distinct part rehabilitation units of outpatient clinical diagnostic labora- CAHs is made in accordance with regu- tory tests will not be made under para- lations governing the inpatient reha- graph (b)(7)(ii) of this section if the bilitation facilities prospective pay- billing rules under § 411.15(p) of this ment system at subpart P (§ 412.600 chapter apply. through § 412.632) of part 412 of this sub- (vi) Payment for clinical diagnostic chapter. laboratory tests for which payment may not be made under paragraph [65 FR 47109, Aug. 1, 2000] (b)(7)(iii) or paragraph (b)(7)(iv) of this EDITORIAL NOTE: For FEDERAL REGISTER ci- section will be made in accordance tations affecting § 413.70, see the List of CFR with the provisions of sections Sections Affected, which appears in the

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Finding Aids section of the printed volume All or substantially all of the costs for and at www.govinfo.gov. the training program in the nonhospital setting means— § 413.74 Payment to a foreign hospital. (1) Effective on or after January 1, (a) Principle. Section 1814(f) of the 1999 and for cost reporting periods be- Act provides for the payment of emer- ginning before July 1, 2007, the resi- gency and nonemergency inpatient dents’ salaries and fringe benefits (in- hospitals services furnished by foreign cluding travel and lodging where appli- hospitals to Medicare beneficiaries. cable) and the portion of the cost of Subpart H of part 424 of this chapter, teaching physicians’ salaries and fringe together with this section, specifies the benefits attributable to direct graduate conditions for payment. medical education (GME); and (b) Amount of payment. Effective with (2) Effective for cost reporting peri- admissions on or after January 1, 1980, ods beginning on or after July 1, 2007 the reasonable cost for services covered and before July 1, 2010, at least 90 per- under the Medicare program furnished cent of the total of the costs of the to beneficiaries by a foreign hospital residents’ salaries and fringe benefits will be equal to 100 percent of the hos- (including travel and lodging where ap- pital’s customary charges (as defined plicable) and the portion of the cost of in § 413.13(b)) for the services. (c) Submittal of claims. The hospital teaching physicians’ salaries attrib- must establish its customary charges utable to nonpatient care direct GME for the services by submitting an activities. itemized bill with each claim it files in Approved geriatric program means a accordance with its election under fellowship program of one or more § 424.104 of this chapter. years in length that is approved by one (d) Exchange rate. Payment to the of the national organizations listed in hospital will be subject to the official § 415.152 of this chapter under that re- exchange rate on the date the patient spective organization’s criteria for is discharged and to the applicable de- geriatric fellowship programs. ductible and coinsurance amounts de- Approved medical residency program scribed in §§ 409.80 through 409.83. means a program that meets one of the following criteria: [51 FR 34793, Sept. 30, 1986, as amended at 51 (1) Is approved by one of the national FR 41351, Nov. 14, 1986; 53 FR 6648, Mar. 2, 1988; 53 FR 12945, Apr. 20, 1988; 71 FR 48141, organizations listed in § 415.152 of this Aug. 18, 2006] chapter. (2) May count towards certification Subpart F—Specific Categories of of the participant in a specialty or sub- Costs specialty listed in the current edition of either of the following publications: § 413.75 Direct GME payments: Gen- (i) The Directory of Graduate Med- eral requirements. ical Education Programs published by (a) Statutory basis and scope—(1) Basis. the American Medical Association, and This section and §§ 413.76 through 413.83 available from American Medical Asso- implement section 1886(h) of the Act by ciation, Department of Directories and establishing the methodology for Medi- Publications, 515 North State Street, care payment of the cost of direct grad- Chicago, Illinois 60610; or uate medical educational activities. (ii) The Annual Report and Reference (2) Scope. This section and §§ 413.76 Handbook published by the American through 413.83 apply to Medicare pay- Board of Medical Specialties, and ments to hospitals and hospital-based available from American Board of Med- providers for the costs of approved resi- ical Specialties, One Rotary Center, dency programs in medicine, osteop- Suite 805, Evanston, Illinois 60201. athy, dentistry, and podiatry for cost (3) Is approved by the Accreditation reporting periods beginning on or after Council for Graduate Medical Edu- July 1, 1985. cation (ACGME) as a fellowship pro- (b) Definitions. For purposes of this gram in geriatric medicine. section and §§ 413.76 through 413.83, the (4) Is a program that would be ac- following definitions apply: credited except for the accrediting

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agency’s reliance upon an accredita- tively, a geographic area in which, or a tion standard that requires an entity period during which, there exists— to perform an induced abortion or re- (i) An emergency or disaster declared quire, provide, or refer for training in by the President pursuant to the Na- the performance of induced abortions, tional Emergencies Act or the Robert or make arrangements for such train- T. Stafford Disaster Relief and Emer- ing, regardless of whether the standard gency Assistance Act; and provides exceptions or exemptions. (ii) A public health emergency de- Base period means a cost reporting clared by the Secretary pursuant to period that began on or after October 1, section 319 of the Public Health Service 1983 but before October 1, 1984. Act. Community support means funding Foreign medical graduate means a resi- that is provided by the community and dent who is not a graduate of a med- generally includes all non-Medicare ical, osteopathy, dental, or podiatry sources of funding (other than pay- school, respectively, accredited or ap- ments made for furnishing services to proved as meeting the standards nec- individual patients), including State essary for accreditation by one of the and local government appropriations. following organizations: Community support does not include (1) The Liaison Committee on Med- grants, gifts, and endowments of the ical Education of the American Med- kind that are not to be offset in accord- ical Association. ance with section 1134 of the Act. (2) The American Osteopathic Asso- CPI-U stands for the Consumer Price ciation. Index for All Urban Consumers as com- (3) The Commission on Dental Ac- piled by the Bureau of Labor Statis- creditation. tics. (4) The Council on Podiatric Medical Emergency Medicare GME affiliated Education. group means at least one home hospital FMGEMS stands for the Foreign Med- and one or more host hospitals, as ical Graduate Examination in the Med- those terms are defined below, that ical Sciences (Part I and Part II). meet the requirements at § 413.79(f)(6). FTE stands for full-time equivalent. For purposes of an emergency Medicare GME stands for graduate medical GME affiliated group, the following education. definitions apply: Medicare GME affiliated group means— (1) Home hospital means a hospital (1) Two or more hospitals that are lo- that— cated in the same urban or rural area (i) Is located in section 1135 emer- (as those terms are defined in subpart gency area; D of Part 412 of this subchapter) or in (ii) Had its inpatient bed occupancy a contiguous area and meet the rota- decreased by 20 percent or more as the tion requirements in § 413.79(f)(2). result of a section 1135 emergency pe- (2) Two or more hospitals that are riod so that it is unable to train the not located in the same or in a contig- number of residents it originally in- uous urban or rural area, but meet the tended to train in that academic year; rotation requirement in § 413.79(f)(2), and and are jointly listed— (iii) Needs to send the displaced resi- (i) As the sponsor, primary clinical dents to train at a host hospital. site, or major participating institution (2) Host hospital means a hospital for one or more programs as these training residents displaced from a terms are used in the most current home hospital. publication of the Graduate Medical (i) In-State host hospital means a host Education Directory; or hospital located in the same State as a (ii) As the sponsor or is listed under home hospital. ‘‘affiliations and outside rotations’’ for (ii) Out-of-State host hospital means a one or more programs in operation in host hospital located in a different Opportunities, Directory of Osteopathic State from the home hospital. Postdoctoral Education Programs. (3) Section 1135 emergency area or sec- (3) Two or more hospitals that are tion 1135 emergency period mean, respec- under common ownership and, effective

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for all Medicare GME affiliation agree- mary activity is the care and treatments beginning July 1, 2003, meet the ment of patients. rotation requirement in § 413.79(f)(2). Orientation activities means activities Medicare GME affiliation agreement that are principally designed to pre- means a written, signed, and dated pare an individual for employment as a agreement by responsible representa- resident in a particular setting, or for tives of each respective hospital in a participation in a particular specialty Medicare GME affiliated group, as de- program and patient care activities as- fined in this section, that specifies— sociated with that particular specialty (1) The term of the Medicare GME af- program. filiation agreement (which, at a min- Patient care activities means the care imum is 1 year), beginning on July 1 of and treatment of particular patients, a year; including services for which a physi- (2) Each participating hospital’s di- cian or other practitioner may bill, and rect and indirect GME FTE caps in ef- orientation activities as defined in this fect prior to the Medicare GME affili- section. ation; Primary care resident is a resident who is enrolled in an approved medical resi- (3) The total adjustment to each hos- dency training program in family med- pital’s FTE caps in each year that the icine, general internal medicine, gen- Medicare GME affiliation agreement is eral pediatrics, preventive medicine, in effect, for both direct GME and IME, geriatric medicine or osteopathic gen- that reflects a positive adjustment to eral practice. Effective for cost report- one hospital’s direct and indirect FTE ing periods beginning on or after Octo- caps that is offset by a negative adjust- ber 1, 2010, primary care resident is a ment to the other hospital’s (or hos- resident who is formally accepted, en- pitals’) direct and indirect FTE caps of rolled, and participating in an ap- at least the same amount; proved medical residency training pro- (4) The adjustment to each partici- gram in family medicine, general inter- pating hospital’s FTE counts resulting nal medicine, general pediatrics, pre- from the FTE resident’s (or residents’) ventive medicine, geriatric medicine or participation in a shared rotational ar- osteopathic general practice. rangement at each hospital partici- Redistribution of costs occurs when a pating in the Medicare GME affiliated hospital counts FTE residents in med- group for each year the Medicare GME ical residency programs and the costs affiliation agreement is in effect. This of the program had previously been in- adjustment to each participating hos- curred by an educational institution. pital’s FTE count is also reflected in Resident means an intern, resident, or the total adjustment to each hospital’s fellow who participates in an approved FTE caps (in accordance with paramedical residency program, including graph (3) of this definition); and programs in osteopathy, dentistry, and (5) The names of the participating podiatry, as required in order to be- hospitals and their Medicare provider come certified by the appropriate spe- numbers. cialty board. Effective for cost report- Medicare patient load means, with re- ing periods beginning on or after Octo- spect to a hospital’s cost reporting pe- ber 1, 2010, resident means an intern, riod, the total number of hospital inpa- resident, or fellow who is formally ac- tient days during the cost reporting pe- cepted, enrolled, and participating in riod that are attributable to patients an approved medical residency pro- for whom payment is made under Medi- gram, including programs in osteop- care Part A divided by total hospital athy, dentistry, and podiatry, as re- inpatient days. In calculating inpatient quired in order to become certified by days, inpatient days in any distinct the appropriate specialty board. part of the hospital furnishing a hos- Rural track FTE limitation means the pital level of care are included and maximum number of residents (as spec- nursery days are excluded. ified in § 413.79(k)) training in a rural Nonprovider setting that is primarily track residency program that an urban engaged in furnishing patient care means hospital may include in its FTE count a nonprovider setting in which the pri- and that is in addition to the number

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of FTE residents already included in (7) The name of the employer paying the hospital’s FTE cap. the resident’s salary. Rural track or integrated rural track [69 FR 49254, Aug. 11, 2004, as amended at 70 means an approved medical residency FR 47489, Aug. 12, 2005; 71 FR 18666, Apr. 12, training program established by an 2006; 71 FR 48141, Aug. 18, 2006; 72 FR 26995, urban hospital in which residents train May 11, 2007; 72 FR 47412, Aug. 22, 2007; 72 FR for a portion of the program at the 66931, Nov. 27, 2007; 75 FR 50418, Aug. 16, 2010; 75 FR 72262, Nov. 24, 2010; 79 FR 50357, Aug. urban hospital and then rotate for a 22, 2014] portion of the program to a rural hospital(s) or a rural nonhospital site(s). § 413.76 Direct GME payments: Cal- Shared rotational arrangement means a culation of payments for GME costs. residency training program under A hospital’s Medicare payment for which a resident(s) participates in the costs of an approved residency pro- training at two or more hospitals in gram is calculated as follows: that program. (a) Step one. The hospital’s updated (c) Payment for GME costs—General per resident amount (as determined rule. Beginning with cost reporting pe- under § 413.77) is multiplied by the ac- riods starting on or after July 1, 1985, tual number of FTE residents (as deter- hospitals, including hospital-based pro- mined under § 413.79). This result is the aggregate approved amount for the viders, are paid for the costs of ap- cost reporting period. proved GME programs as described in (b) Step two. The product derived in §§ 413.76 through 413.83. step one is multiplied by the hospital’s (d) Documentation requirements. To in- Medicare patient load. clude a resident in the FTE count for a (c) Step three. For portions of cost re- particular cost reporting period, the porting periods occurring on or after hospital must furnish the following in- January 1, 1998, the product derived in formation. The information must be step one is multiplied by the propor- certified by an official of the hospital tion of the hospital’s inpatient days at- and, if different, an official responsible tributable to individuals who are en- for administering the residency pro- rolled under a risk-sharing contract gram. with an eligible organization under sec- (1) The name and social security tion 1876 of the Act and who are enti- number of the resident. tled to Medicare Part A or with a Medi- (2) The type of residency program in care + Choice organization under Title XVIII, Part C of the Act. This amount which the individual participates and is multiplied by an applicable payment the number of years the resident has percentage equal to— completed in all types of residency pro- (1) 20 percent for 1998; grams. (2) 40 percent for 1999; (3) The dates the resident is assigned (3) 60 percent in 2000; to the hospital and any hospital-based (4) 80 percent in 2001; and providers. (5) 100 percent in 2002 and subsequent (4) The dates the resident is assigned years. to other hospitals, or other free- (d) Step four. Effective for portions of standing providers, and any nonpro- cost reporting periods occurring on or vider setting during the cost reporting after January 1, 2000, the product de- period, if any. rived from step three is reduced by a (5) The name of the medical, osteo- percentage equal to the ratio of the pathic, dental, or podiatric school from Medicare + Choice nursing and allied which the resident graduated and the health payment ‘‘pool’’ for the current calendar year as described at § 413.87(f), date of graduation. to the projected total Medicare + (6) If the resident is an FMG, docu- Choice direct GME payments made to mentation concerning whether the all hospitals for the current calendar resident has satisfied the requirements year. of this section. (e) Step five. (1) For portions of cost reporting periods beginning on or after January 1, 1998 and before January 1,

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2000, add the results of steps two and the hospital’s prospective payment three. base year and were not allowable under (2) Effective for portions of cost re- § 412.113(b)(3) of this chapter during the porting periods beginning on or after GME base period. These costs may be January 1, 2000, add the results of steps included only if the hospital requests two and four. an adjustment of its prospective pay- (f) Step six. The product derived in ment hospital-specific rate or target step two is apportioned between Part A amount as described in § 413.82(a) of and Part B of Medicare based on the this chapter. ratio of Medicare’s share of reasonable (3) If the hospital’s cost report for its costs excluding GME costs attributable GME base period is no longer subject to to each part as determined through the reopening under § 405.1885 of this chap- Medicare cost report. ter, the contractor may modify the [69 FR 49254, Aug. 11, 2004] hospital’s base-period costs solely for purposes of computing the per resident § 413.77 Direct GME payments: Deter- amount. mination of per resident amounts. (4) If the contractor modifies a hos- (a) Per resident amount for the base pe- pital’s base-period GME costs as de- riod. (1) Except as provided in para- scribed in paragraph (a)(2)(ii) of this graph (d) of this section, the contractor section, the hospital may request an determines a base-period per resident adjustment of its prospective payment amount for each hospital as follows: hospital-specific rate or target amount (i) Determine the allowable GME as described in § 413.82(a) of this chap- costs for the cost reporting period be- ter. ginning on or after October 1, 1983 but (5) The contractor notifies each hos- before October 1, 1984. In determining pital that either had direct GME costs these costs, GME costs allocated to the or received indirect education payment nursery cost center, research and other in its cost reporting period beginning nonreimbursable cost centers, and hos- on or after October 1, 1984, and before pital-based providers that are not par- October 1, 1985, of its base-period aver- ticipating in Medicare are excluded and age per resident amount. A hospital GME costs allocated to distinct-part may appeal this amount within 180 hospital units and hospital-based pro- days of the date of that notice. viders that participate in Medicare are included. (b) Per resident amount for cost report- (ii) Divide the costs calculated in ing periods beginning on or after July 1, paragraph (a)(1)(i) of this section by 1985, and before July 1, 1986. For cost re- the average number of FTE residents porting periods beginning on or after working in all areas of the hospital July 1, 1985, and before July 1, 1986, a complex (including those areas whose hospital’s base-period per resident costs were excluded under paragraph amount is adjusted as follows: (a)(1)(i) of this section) for its cost re- (1) If a hospital’s base period began porting period beginning on or after on or after October 1, 1983, and before October 1, 1983 but before October 1, July 1, 1984, the amount is adjusted by 1984. the percentage change in the CPI-U (2) In determining the base-period per that occurred between the hospital’s resident amount under paragraph (a)(1) base period and the first cost reporting of this section, the contractor— period to which the provisions of this (i) Verifies the hospital’s base-period section apply. The adjusted amount is GME costs and the hospital’s average then increased by one percent. number of FTE residents; (2) If a hospital’s base period began (ii) Excludes from the base-period on or after July 1, 1984 and before Octo- GME costs any nonallowable or ber 1, 1984, the amount is increased by misclassified costs, including those one percent. previously allowed under § 412.113(b)(3) (c) Per resident amount for cost report- of this chapter; and ing periods beginning on or after July 1, (iii) Upon a hospital’s request, in- 1986. Subject to the provisions of para- cludes GME costs that were graph (d) of this section, for cost re- misclassified as operating costs during porting periods beginning on or after

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July 1, 1986, a hospital’s base-period per (ii) Primary care/obstetrics and gyne- resident amount is adjusted as follows: cology and nonprimary care per resident (1) Except as provided in paragraph amounts. A hospital’s per resident (c)(2) of this section, each hospital’s amount is an amount inclusive of any per resident amount for the previous CPI-U adjustments that the hospital cost reporting is adjusted by the pro- may have received since the hospital’s jected change in the CPI-U for the 12- base year, including any CPI-U adjust- month cost reporting period. This ad- ments the hospital may have received justment is subject to revision during because the hospital trains primary the settlement of the cost report to re- care/obstetrics and gynecology resi- flect actual changes in the CPI-U that dents and nonprimary care residents as occurred during the cost reporting pe- specified under paragraph (c)(2) of this riod. section. (2) For cost reporting periods begin- (2) Adjustment beginning in FY 2001 ning on or after October 1, 1993 through and ending in FY 2013. For cost report- September 30, 1995, each hospital’s per ing periods beginning on or after Octo- resident amount for the previous cost ber 1, 2000, and ending on or before Sep- reporting period will not be adjusted tember 30, 2013, a hospital’s per resi- for any resident FTEs who are not ei- dent amount is adjusted in accordance ther a primary care resident or an ob- with paragraphs (d)(2)(i) through stetrics and gynecology resident. (d)(2)(iv) of this section, in that order: (d) Per resident amount for cost report- (i) Updating the weighted average per ing periods beginning on or after October resident amount for inflation. The 1, 2000 and ending on or before September weighted average per resident amount 30, 2013. For cost reporting periods be- (as determined under paragraph ginning on or after October 1, 2000 and (d)(1)(i) of this section) is updated by ending on or before September 30, 2013, the estimated percentage increase in a hospital’s per resident amount for the CPI-U during the period beginning each fiscal year is adjusted in accord- with the month that represents the ance with the following provisions: midpoint of the cost reporting periods (1) General provisions. For purposes of ending during FY 1997 (that is, October this § 413.77— 1, 1996) and ending with the midpoint of (i) Weighted average per resident the hospital’s cost reporting period amount. The weighted average per resi- that begins in FY 2001. dent amount is established as follows: (ii) Adjusting for locality. The updated (A) Using data from hospitals’ cost weighted average per resident amount reporting periods ending during FY determined under paragraph (d)(2)(i) of 1997, CMS calculates each hospital’s this section (the national average per single per resident amount by adding resident amount) is adjusted for the lo- each hospital’s primary care and non- cality of each hospital by multiplying primary care per resident amounts, the national average per resident weighted by its respective FTEs, and amount by the 1999 geographic adjust- dividing by the sum of the FTEs for ment factor for the physician fee primary care and nonprimary care resi- schedule area in which each hospital is dents. located, established in accordance with (B) Each hospital’s single per resi- § 414.26 of this chapter. dent amount calculated under para- (iii) Determining necessary revisions to graph (d)(1)(i)(A) of this section is the per resident amount. The locality-ad- standardized by the 1999 geographic adjusted national average per resident justment factor for the physician fee amount, as calculated in accordance schedule area (as determined under with paragraph (d)(2)(ii) of this section, § 414.26 of this chapter) in which the is compared to the hospital’s per resi- hospital is located. dent amount and is revised, if appro- (C) CMS calculates an average of all priate, according to the following three hospitals’ standardized per resident categories: amounts that are determined under (A) Floor. (1) For cost reporting peri- paragraph (d)(1)(i)(B) of this section. ods beginning on or after October 1, The resulting amount is the weighted 2000, and before October 1, 2001, if the average per resident amount. hospital’s per resident amount would

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otherwise be less than 70 percent of the (3) FY 2003. For cost reporting periods locality-adjusted national average per beginning on or after October 1, 2002, resident amount for FY 2001 (as deter- and on or before September 30, 2003, if mined under paragraph (d)(2)(ii) of this the hospital’s per resident amount for section), the per resident amount is the previous cost reporting period is equal to 70 percent of the locality-ad- greater than 140 percent of the local- justed national average per resident ity-adjusted national average per resi- amount for FY 2001. dent amount for that same previous (2) For cost reporting periods begin- cost reporting period (for example, for ning on or after October 1, 2001, and be- cost reporting periods beginning in FY fore October 1, 2002, if the hospital’s 2003, compare the hospital’s per resi- per resident amount would otherwise dent amount from the FY 2002 cost re- be less than 85 percent of the locality- port to the hospital’s locality-adjusted adjusted national average per resident national average per resident amount amount for FY 2002 (as determined from FY 2002), subject to the provision under paragraph (d)(2)(ii) of this sec- stated in paragraph (d)(2)(iii)(B)(5) of tion), the per resident amount is equal this section, the hospital’s per resident to 85 percent of the locality-adjusted amount is adjusted using the method- national average per resident amount ology specified in paragraph (c)(1) of for FY 2002. this section, except that the CPI-U ap- (3) For subsequent cost reporting pe- plied for a 12-month period is reduced riods beginning on or after October 1, (but not below zero) by 2 percentage 2002, the hospital’s per resident amount points. is updated using the methodology spec- (4) FY 2004 through FY 2013. For cost ified under paragraph (c)(1) of this sec- reporting periods beginning on or after tion. October 1, 2003, and on or before Sep- (B) Ceiling. If the hospital’s per resi- tember 30, 2013, if the hospital’s pre- dent amount is greater than 140 per- ceding year per resident amount ex- cent of the locality-adjusted national ceeds 140 percent of the current year’s average per resident amount, the per locality-adjusted national average per resident amount is adjusted as follows resident amount (as calculated under for FY 2001 through FY 2013: paragraph (d)(2)(ii) of this section), (1) FY 2001. For cost reporting periods subject to the provision stated in para- beginning on or after October 1, 2000 graph (d)(2)(iii)(B)(5) of this section, and on or before September 30, 2001, if the hospital-specific per resident the hospital’s FY 2000 per resident amount is frozen for the current year amount exceeds 140 percent of the FY at the preceding year’s hospital-spe- 2001 locality-adjusted national average cific per resident amount and is not upper resident amount (as calculated dated by the CPI-U factor. under paragraph (d)(2)(ii) of this sec- (5) General rule for hospitals that ex- tion), subject to the provision stated in ceed the ceiling. For cost reporting peri- paragraph (d)(2)(iii)(B)(5) of this sec- ods beginning on or after October 1, tion, the hospital’s per resident 2000, and on or before September 30, amount is frozen at the FY 2000 per 2013, if a hospital’s per resident amount resident amount and is not updated for exceeds 140 percent of the hospital’s lo- FY 2001 by the CPI-U factor. cality-adjusted national average per (2) FY 2002. For cost reporting periods resident amount and it is adjusted beginning on or after October 1, 2001, under any of the criteria under para- and on or before September 30, 2002, if graphs (d)(2)(iii)(B)(1) through the hospital’s FY 2001 per resident (d)(2)(iii)(B)(3) of this section, the cur- amount exceeds 140 percent of the FY rent year per resident amount cannot 2002 locality-adjusted national average be reduced below 140 percent of the lo- per resident amount, subject to the cality-adjusted national average per provision stated in paragraph resident amount. (d)(2)(iii)(B)(5) of this section, the hos- (C) Per resident amounts greater than pital’s per resident amount is frozen at or equal to the floor and less than or the FY 2001 per resident amount and is equal to the ceiling. For cost reporting not updated for FY 2002 by the CPI-U periods beginning on or after October 1, factor. 2000 and on or before September 30,

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2013, if a hospital’s per resident amount (A) For base periods that begin before is greater than or equal to 70 percent October 1, 2002, the updated weighted and less than or equal to 140 percent of mean value of per resident amounts of the hospital’s locality-adjusted na- all hospitals located in the same geo- tional average per resident amount for graphic wage area, as that term is used each respective fiscal year, the hos- in the prospective payment system pital’s per resident amount is updated under Part 412 of this chapter. using the methodology specified in (B) For base periods beginning on or paragraph (c)(1) of this section. after October 1, 2002, the updated (e) Exceptions—(1) Base period for cer- weighted mean value of per resident tain hospitals. If a hospital did not have amounts of all hospitals located in the any approved medical residency train- same geographic wage area is cal- ing programs or did not participate in culated using all per resident amounts Medicare during the base period, but (including primary care and obstetrics either condition changes in a cost re- and gynecology and nonprimary care) porting period beginning on or after July 1, 1985, the contractor establishes and FTE resident counts from the most a per resident amount for the hospital recently settled cost reports of those using the information from the first teaching hospitals. cost reporting period during which the (iii) If, under paragraph (e)(1)(ii)(A) hospital participates in Medicare and or paragraph (e)(1)(ii)(B) of this sec- the residents are on duty during the tion, there are fewer than three exist- first month of that period. Effective for ing teaching hospitals with per resi- cost reporting periods beginning on or dent amounts that can be used to cal- after October 1, 2006, if a hospital did culate the weighted mean value per not have any approved medical resi- resident amount, for base periods be- dency training programs or did not ginning on or after October 1, 1997, the participate in Medicare during the base per resident amount equals the updated period, but either condition changes in weighted mean value of per resident a cost reporting period beginning on or amounts of all hospitals located in the after October 1, 2006, and the residents same census region as that term is are not on duty during the first month used in subpart D of part 412 of this of that period, the contractor estab- subchapter. lishes a per resident amount for the (2) Short or long base-period cost report- hospital using the information from ing periods. If a hospital’s base-period the first cost reporting period imme- cost reporting period reflects GME diately following the cost reporting pe- costs for a period that is shorter than riod during which the hospital partici- 50 weeks or longer than 54 weeks, the pates in Medicare and residents began contractor converts the allowable costs training at the hospital. The per resi- for the base period into a daily figure. dent amount is based on the lower of The daily figure is then multiplied by the amount specified in paragraph 365 or 366, as appropriate, to derive the (e)(1)(i) or paragraph (e)(1)(ii) of this approved per resident amount for a 12- section, subject to the provisions of paragraph (e)(1)(iii) of this section. month base-period cost reporting pe- Any GME costs incurred by the hos- riod. If a hospital has two cost report- pital during the cost reporting period ing periods beginning in the base pe- prior to the base period used for calcu- riod, the later period serves as the lating the PRA are reimbursed on a base-period cost reporting period. reasonable cost basis. (3) Short or long cost reporting periods (i) The hospital’s actual cost per resi- beginning on or after July 1, 1985. If a dent incurred in connection with the hospital’s cost reporting period is GME program(s) based on the cost and shorter than 50 weeks or longer than 54 resident data from the hospital’s base weeks, the hospital’s contractor should year cost reporting period as estab- contact CMS Central Office to receive lished in paragraph (e)(1) of this sec- a special CPI-U adjustment factor. tion. (f) Residency match. Effective for por- (ii) Except as specified in paragraph tions of cost reporting periods begin- (e)(1)(iii)of this section— ning on or after October 1, 2004, with

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respect to a resident who matches si- settled cost reports of the respective multaneously for a first year of train- hospitals prior to the merger. ing in a primary care specialty, and for [69 FR 49254, Aug. 11, 2004, as amended at 69 an additional year(s) of training in a FR 60252, Oct. 7, 2004; 70 FR 47489, Aug. 12, nonprimary care specialty, the per 2005; 71 FR 48142, Aug. 18, 2006] resident amount that is used to determine direct GME payment with respect § 413.78 Direct GME payments: Deter- to that resident is the nonprimary care mination of the total number of FTE residents. per resident amount for the first year of training in the primary care spe- Subject to the weighting factors in cialty and for the duration of the resi- §§ 413.79 and 413.80, and subject to the dent’s training in the nonprimary care provisions of § 413.81, the count of FTE residents is determined as follows: specialty. (a) Residents in an approved program (g) Special use of locality-adjusted na- working in all areas of the hospital tional average per resident amount. Effec- complex may be counted. tive for portions of cost reporting peri- (b) No individual may be counted as ods beginning on or after July 1, 2005, more than one FTE. A hospital cannot for a hospital that counts additional claim the time spent by residents residents as a result of an increase in training at another hospital, except as its FTE resident cap under § 413.79(c)(4) provided in paragraph (i) of this sec- direct GME payments attributable to tion. Except as provided in paragraphs those additional FTE residents are cal- (c), (d), and (e) of this section, if a resi- culated using the locality-adjusted na- dent spends time in more than one hos- tional average per resident amount, as pital or in a nonprovider setting, the determined under paragraph (d)(2)(ii) of resident counts as partial FTE based this section. The hospital will receive on the proportion of time worked at direct GME payments based on the sum the hospital to the total time worked. of the following two direct GME cal- A part-time resident counts as a par- culations: tial FTE based on the proportion of al- (1) A calculation using the per resi- lowable time worked compared to the dent amount(s) as determined under total time necessary to fill a full-time paragraph (d) of this section and the internship or residency slot. (c) On or after July 1, 1987, and for hospital’s number of FTE residents portions of cost reporting periods oc- that is not attributable to an FTE resi- curring before January 1, 1999, the time dent cap increase under § 413.79(c)(4); residents spend in nonprovider settings and such as freestanding clinics, nursing (2) A calculation using the locality- homes, and physicians’ offices in con- adjusted national average per resident nection with approved programs is not amount, as determined under para- excluded in determining the number of graph (d)(2)(ii) of this section, inflated FTE residents in the calculation of a to the hospital’s current cost reporting hospital’s resident count if the fol- period, and the hospital’s number of lowing conditions are met— FTE residents that is attributable to (1) The resident spends his or her the increase in the hospital’s FTE resi- time in patient care activities, as de- dent cap under § 413.79(c)(4). fined in § 413.75(b). (h) Hospital mergers. Effective for cost (2) There is a written agreement be- reporting periods beginning on or after tween the hospital and the outside en- October 1, 2006, when multiple hos- tity that states that the resident’s pitals merge, a primary care and ob- compensation for training time spent stetrics and gynecology weighted aver- outside of the hospital setting is to be age per resident amount and a nonpri- paid by the hospital. mary care weighted average per resi- (d) For portions of cost reporting periods occurring on or after January 1, dent amount is calculated, if applica- 1999, and before October 1, 2004, the ble, for the surviving hospital, using time residents spend in nonprovider FTE resident data and per resident settings such as freestanding clinics, amount data from the most recently nursing homes, and physicians’ offices

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in connection with approved programs the training in the nonhospital site oc- may be included in determining the curred. number of FTE residents in the cal- (ii) There is a written agreement be- culation of a hospital’s resident count tween the hospital and the nonhospital if the following conditions are met— site that states that the hospital will (1) The resident spends his or her incur the cost of the resident’s salary time in patient care activities, as de- and fringe benefits while the resident is fined in § 413.75(b). training in the nonhospital site and the (2) The written agreement between hospital is providing reasonable com- the hospital and the nonhospital site pensation to the nonhospital site for must indicate that the hospital will supervisory teaching activities. The incur the cost of the resident’s salary agreement must indicate the com- and fringe benefits while the resident is pensation the hospital is providing to training in the nonhospital site and the the nonhospital site for supervisory hospital is providing reasonable com- teaching activities. pensation to the nonhospital site for (iii) If the hospital has in place an supervisory teaching activities. The emergency Medicare GME affiliation agreement must indicate the com- agreement in accordance with pensation the hospital is providing to § 413.79(f)(6), during the period covered the nonhospital site for supervisory by the emergency Medicare GME affili- teaching activities. ation agreement— (A) The hospital must pay all or sub- (3) The hospital must incur all or stantially all of the costs of the train- substantially all of the costs for the ing program in a nonhospital setting(s) training program in the nonhospital attributable to training that occurs setting in accordance with the defini- during a month by the end of the sixth tion in § 413.75(b). month following the month in which (4) The hospital is subject to the the training in the nonhospital site oc- principles of community support and curred. For the costs that would other- redistribution of costs as specified in wise be required to be paid by the hos- § 413.81. pital during the period of August 29, (e) For portions of cost reporting pe- 2005 through November 1, 2007, the par- riods occurring on or after October 1, ticipating hospital must pay the costs 2004, and for cost reporting periods be- by April 29, 2008; or ginning before July 1, 2007, the time (B) There is a written agreement that residents spend in nonprovider settings specifies that the hospital is incurring such as freestanding clinics, nursing the cost of the resident’s salary and homes, and physicians’ offices in con- fringe benefits while the resident is nection with approved programs may training in the nonhospital site and the be included in determining the number hospital is providing reasonable com- of FTE residents in the calculation of a pensation to the nonhospital site for hospital’s resident count if the fol- supervisory teaching activities. The lowing conditions are met: agreement must indicate the com- (1) The resident spends his or her pensation the hospital is providing to time in patient care activities, as de- the nonhospital site for supervisory fined in § 413.75(b). teaching activities. The written agree- (2) The hospital must incur all or ment must be submitted to the con- substantially all of the costs of the tractor by 180 days after the training training program in a nonhospital set- at the nonhospital site begins. For ting(s) (in accordance with the defini- written agreements that would other- tion under § 413.75(b)). wise be required to be submitted prior (3) The hospital must comply with to the date the resident(s) begin train- one of the following: ing at the nonhospital site during the (i) The hospital must pay all or sub- period of August 29, 2005 through No- stantially all of the costs of the train- vember 1, 2007, the written agreement ing program in a nonhospital setting(s) must be submitted to the CMS con- attributable to training that occurs tractor by April 29, 2008. during a month by the end of the third (4) The hospital is subject to the month following the month in which principles of community support and

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redistribution of costs as specified in the portion of the amount the hospital § 413.81. will incur that reflects residents’ sala- (f) For cost reporting periods begin- ries and fringe benefits (and travel and ning on or after July 1, 2007, and before lodging where applicable), and the por- July 1, 2010, the time residents spend in tion of this amount that reflects teach- nonprovider settings such as free- ing physician compensation. Hospitals standing clinics, nursing homes, and may modify the amounts specified in physicians’ offices in connection with the written agreement by the end of approved programs may be included in the academic year (that is, June 30) to determining the number of FTE resi- reflect that at least 90 percent of the dents in the calculation of a hospital’s costs of the training program in the resident count if the following condi- nonhospital site has been incurred. tions are met— (iii) If the hospital has in place an (1) The resident spends his or her emergency Medicare GME affiliation time in patient care activities as de- agreement in accordance with fined at § 413.75(b), except that for cost § 413.79(f)(6), during the period covered reporting periods beginning on or after by the emergency Medicare GME affili- July 1, 2009, the time spent training in ation agreement— nonpatient care activities, such as di- (A) The hospital must pay all or sub- dactic conferences and seminars, but stantially all of the costs of the train- excluding research not associated with ing program in a nonhospital setting(s) the treatment or diagnosis of a par- attributable to training that occurs ticular patient, in a nonprovider set- during a month by the end of the sixth ting that is primarily engaged in fur- month after the month in which the nishing patient care activities, as de- training in the nonhospital site occurs. fined at § 413.75(b), also may be count- For the costs that would otherwise be ed. required to be incurred by the hospital (2) The hospital must incur all or during the period of August 29, 2005 substantially all of the costs for the through November 1, 2007, the partici- training program in the nonhospital pating hospital must incur the costs by setting(s) (in accordance with the defi- April 29, 2008; or nition under § 413.75(b)). (B) There is a written agreement that (3) The hospital must comply with specifies that the hospital will incur at one of the following: least 90 percent of the total of the costs (i) The hospital must pay for all or of the resident’s salary and fringe bene- substantially all of the costs for the fits (and travel and lodging where ap- training program in a nonhospital set- plicable) while the resident is training ting(s) attributable to training that oc- in the nonhospital site and the portion curs during a month by the end of the of the cost of the teaching physician’s third month following the month in salary attributable to nonpatient care which the training in the nonhospital direct GME activities. The written site occurred. agreement must specify the total cost (ii) There is a written agreement in of the training program at the nonhos- place between the hospital and the pital site, and the amount the hospital nonhospital site before the training be- will incur (at least 90 percent of the gins that states that the hospital will total), and must indicate the portion of incur at least 90 percent of the total of the amount the hospital will incur that the costs of the resident’s salary and reflects residents’ salaries and fringe fringe benefits (and travel and lodging benefits (and travel and lodging where where applicable) while the resident is applicable), and the portion of this training in the nonhospital site and the amount that reflects teaching physi- portion of the cost of the teaching phy- cian compensation. The written agree- sician’s salary attributable to non- ment must be submitted to the con- patient care direct GME activities. The tractor by 180 days after the training written agreement must specify the at the nonhospital site begins. Hos- total cost of the training program at pitals may modify the amounts speci- the nonhospital site, and the amount fied in the written agreement by the the hospital will incur (at least 90 per- end of the academic year (that is, June cent of the total), and must indicate 30) to reflect that at least 90 percent of

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the costs of the training program in (iii) If hospitals choose to pay the the nonhospital site has been incurred. nonprovider site concurrently as de- For written agreements that would scribed in paragraph (g)(3)(i) of this otherwise be required to be submitted section, the hospitals must record the prior to the date the training begins in proportion of cost and FTE time they the nonhospital site during the period are incurring and counting in a written of August 29, 2005 through November 1, agreement between the hospitals. 2007, the hospital must submit the (3) The hospital or hospitals must written agreement to its contractor by comply with one of the following: April 29, 2008. (i) The hospital or hospitals must (4) The hospital is subject to the incur the costs of the salaries and principles of community support and fringe benefits of the resident during redistribution of costs as specified in the time the resident spends in the § 413.81. nonprovider setting by the end of the (g) For cost reporting periods begin- third month following the month in ning on or after July 1, 2010, the time which the training in the nonprovider residents spend in nonprovider settings site occurred. such as freestanding clinics, nursing (ii) There is a written agreement be- homes, and physicians’ offices in con- tween the hospital or hospitals and the nection with approved programs may outside entity that states that the resi- be included in determining the number dents’ salaries and fringe benefits (in- of FTE residents in the calculation of a cluding travel and lodging where appli- hospital’s resident count if the fol- cable) during the time the resident lowing conditions are met— spends in the nonprovider setting is to be paid by the hospital(s). Hospitals (1) The resident spends his or her may modify the amounts specified in time— the written agreement by the end of (i) In patient care activities as de- the academic year (that is, June 30) to fined at § 413.75(b); or reflect that the costs of the training (ii) In nonpatient care activities, program in the nonprovider site have such as didactic conferences and semi- been incurred. nars, but excluding research not associ- (4) The hospital is subject to the ated with the treatment or diagnosis of principles of community support and a particular patient, in a nonprovider redistribution of costs as specified in setting that is primarily engaged in § 413.81. furnishing patient care activities, as (5) For cost reporting periods begin- defined at § 413.75(b). ning on or after July 1, 2010, a hospital (2) The hospital or hospitals must must maintain and make available incur the costs of the salaries and records of the FTE count determined fringe benefits of the resident during for direct GME purposes under this sec- the time the resident spends in the tion that its residents spend in nonpro- nonprovider setting. If more than one vider sites, in order to compare that hospital incurs these costs, either di- time to the time spent by its residents rectly or through a third party, the in nonprovider sites in the base year of hospitals must count a proportional cost reporting periods beginning on or share of the time that residents train after July 1, 2009, and before June 30, at the nonprovider setting(s) as re- 2010. The hospital must supply the CMS corded in a written agreement between contractor with the data for each of its the hospitals. primary care programs on a program- (i) Hospitals must have a reasonable specific basis, and with data for its basis for establishing that proportion nonprimary care programs on an over- of the cost and the FTE time that each all basis. will incur and count. (6) The provisions of paragraphs (ii) If hospitals already arrange pay- (g)(1)(ii), (g)(2), (g)(3), and (g)(5) of this ment to the nonprovider site via a section shall not be applied in a man- written agreement as described in ner that requires reopening of any set- paragraph (g)(3)(ii) of this section, the tled cost reports as to which there is proportion may be recorded in that not a jurisdictionally proper appeal agreement. pending as of March 23, 2010, on direct

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GME or IME payments. Cost reporting (a) Initial residency period. Generally, periods beginning before July 1, 2010 for purposes of this section, effective are not governed by paragraph (g) of July 1, 1995, an initial residency period this section. is defined as the minimum number of (h) Effective for cost reporting peri- years required for board eligibility. ods beginning on or after January 1, (1) Prior to July 1, 1995, the initial 1983, the time spent by a resident in an residency period equals the minimum approved medical residency program number of years required for board eli- on vacation, sick leave, or other ap- gibility in a specialty or subspecialty proved leave that does not prolong the plus 1 year. An initial residency period total time the resident is participating may not exceed 5 years in order to be in the approved program beyond the counted toward determining FTE sta- normal duration of the program is tus except in the case of a resident in countable. This provision cannot be ap- an approved geriatric program whose plied in a manner that would require initial residency period may last up to the reopening of settled cost reports, 2 additional years. except those cost reports on which there is a jurisdictionally proper ap- (2) Effective October 1, 2003, for a peal pending on direct GME or IME resident who trains in an approved payments as of March 23, 2010. geriatric program that requires the (i) For the time frame that the Pub- residents to complete 2 years of train- lic Health Emergency (as defined in ing to initially become board eligible § 400.200 of this chapter) associated with in the geriatric specialty, the 2 years COVID–19 was in effect, a sending hos- spent in the geriatrics program are pital can include FTE residents train- treated as part of the resident’s initial ing at another hospital in its FTE residency period. count if all of the following conditions (3) Effective July 1, 2000, for resi- are met. dency programs that began before, on, (1) The sending hospital sends the or after November 29, 1999, the period resident to the other hospital in re- of board eligibility and the initial resi- sponse to the COVID–19 pandemic. dency period for a resident in an ap- (2) The time spent by the resident proved child neurology program is the training at the other hospital is in lieu period of board eligibility for pediat- of time that would have been spent in rics plus 2 years. approved training at the sending hos- (4) Effective August 10, 1993, residents pital. or fellows in an approved preventive (3) The time that the resident spent medicine residency or fellowship pro- training immediately prior to and/or gram also may be counted as a full subsequent to the time frame that the FTE resident for up to 2 additional Public Health Emergency (as defined in years beyond the initial residency pe- § 400.200 of this chapter) associated with riod limitations. COVID–19 was in effect is included in (5) For combined residency programs, the FTE count for the sending hospital. an initial residency period is defined as [69 FR 49254, Aug. 11, 2004, as amended at 71 the time required for individual certifi- FR 48142, Aug. 18, 2006; 72 FR 26995, May 11, cation in the longer of the programs. If 2007; 72 FR 66931, Nov. 27, 2007; 75 FR 72262, the resident is enrolled in a combined Nov. 24, 2010; 78 FR 50968, Aug. 19, 2013; 79 FR 50357, Aug. 22, 2014; 85 FR 27623, May 8, 2020] medical residency training program in which all of the individual programs § 413.79 Direct GME payments: Deter- (that are combined) are for training mination of the weighted number of primary care residents (as defined in FTE residents. § 413.75(b)) or obstetrics and gynecology Subject to the provisions in § 413.80, residents, the initial residency period CMS determines a hospital’s number of is the time required for individual cer- FTE residents by applying a weighting tification in the longer of the programs factor to each resident and then sum- plus 1 year. ming the resulting numbers that rep- (6) For residency programs other resent each resident. The weighting than those specified in paragraphs factor is determined as follows: (a)(2) through (a)(4) of this section, the

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initial residency period is the min- the specialty program for which the imum number of years of formal train- resident matched for subsequent training necessary to satisfy the require- ing year(s). ments for initial board eligibility in (b) Weighting factor. (1) If the resident the particular specialty for which the is in an initial residency period, the resident is training, as specified in the weighting factor is one. most recently published edition of the (2) If the resident is not in an initial Graduate Medical Education Directory. residency period, the weighting factor (7) For residency programs in osteop- is 1.00 during the period beginning on athy, dentistry, and podiatry, the min- or after July 1, 1985 and before July 1, imum requirement for certification in 1986, .75 during the period beginning on a specialty or subspecialty is the min- or after July 1, 1986 and before July 1, imum number of years of formal train- 1987, and .50 thereafter without regard ing necessary to satisfy the require- to the hospital’s cost reporting period. ments of the appropriate approving (c) Unweighted FTE counts—(1) Defini- body listed in § 415.152 of this chapter. tions. As used in this paragraph (c): (8) For residency programs in geri- (i) Otherwise applicable resident cap re- atric medicine, accredited by the ap- fers to a hospital’s FTE resident cap propriate approving body listed in that is determined for a particular cost § 415.152 of this chapter, these programs reporting period under paragraph (c)(2) are considered approved programs on of this section. the later of— (ii)(A) For purposes of paragraph (i) The starting date of the program (c)(3) of this section, reference resident within a hospital; or level refers to a hospital’s resident level (ii) The hospital’s cost reporting peri- in the applicable reference period spec- ods beginning on or after July 1, 1985. ified under paragraph (c)(3) of this sec- (9) The time spent in residency pro- tion. grams that do not lead to certification (B) For purposes of paragraph (m) of in a specialty or subspecialty, but that this section, reference resident level otherwise meet the definition of ap- means with respect to a hospital, the proved programs, as described in highest resident level for any of the § 413.75(b), is counted toward the initial three most recent cost reporting peri- residency period limitation. ods ending before March 23, 2010, for (10) Effective for portions of cost re- which a cost report has been either set- porting periods beginning on or after tled or submitted (subject to audit) to October 1, 2004, if a hospital can docu- the Medicare contractor by March 23, ment that a resident simultaneously 2010. matched for one year of training in a (iii) Resident level refers to the num- particular specialty program, and for a ber of unweighted allopathic and osteo- subsequent year(s) of training in a dif- pathic FTE residents who are training ferent specialty program, the resident’s in a hospital in a particular cost re- initial residency period will be deter- porting period. mined based on the period of board eli- (2) Determination of the FTE resident gibility for the specialty associated cap. Subject to the provisions of para- with the program for which the resi- graphs (c)(3) through (c)(6) and (m) dent matched for the subsequent through (o) of this section and § 413.81, year(s) of training. Effective for por- for purposes of determining direct GME tions of cost reporting periods begin- payment— ning on or after October 1, 2005, if a (i) For cost reporting periods begin- hospital can document that a par- ning on or after October 1, 1997, a hos- ticular resident, prior to beginning the pital’s resident level may not exceed first year of residency training, the hospital’s unweighted FTE count matched in a specialty program for (or, effective for cost reporting periods which training would begin at the con- beginning on or after April 1, 2000, 130 clusion of the first year of training, percent of the unweighted FTE count that resident’s initial residency period for a hospital located in a rural area) will be determined in the resident’s for these residents for the most recent first year of training based on the pe- cost reporting period ending on or be- riod of board eligibility associated with fore December 31, 1996.

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(ii) If a hospital’s number of FTE (i) Exemption for certain rural hos- residents in a cost reporting period be- pitals. A rural hospital, as defined at ginning on or after October 1, 1997, and subpart D of part 412 of this sub- before October 1, 2001, exceeds the limit chapter, with less than 250 beds (as de- described in this section, the hospital’s termined at § 412.105(b)) in its most re- total weighted FTE count (before ap- cent cost reporting period ending on or plication of the limit) will be reduced before September 30, 2002, is exempt in the same proportion that the num- from any reduction to the otherwise ber of FTE residents for that cost re- applicable FTE resident cap limit porting period exceeds the number of under paragraph (c)(3) of this section. FTE residents for the most recent cost (ii) Reference cost reporting periods. reporting period ending on or before (A) To determine a hospital’s ref- December 31, 1996. erence resident level, CMS uses one of (iii) If the hospital’s number of FTE the following periods: residents in a cost reporting period be- (1) A hospital’s most recent cost re- ginning on or after October 1, 2001 ex- porting period ending on or before Sep- ceeds the limit described in this sec- tember 30, 2002, for which a cost report tion, the hospital’s weighted FTE has been settled or if the cost report count (before application of the limit) has not been settled, the as-submitted for primary care and obstetrics and cost report (subject to audit); or gynecology residents and nonprimary (2) A hospital’s cost reporting period care residents, respectively, will be re- that includes July 1, 2003 if the hos- duced in the same proportion that the pital submits a timely request to CMS number of FTE residents for that cost to increase its resident level due to an reporting period exceeds the number of expansion of an existing program and FTE residents for the most recent cost that expansion is not reflected on the reporting period ending on or before hospital’s most recent settled cost re- December 31, 1996. port. An expansion of an existing program means that, except for expan- (iv) Hospitals that are part of the sions due to newly approved programs same Medicare GME affiliated group or under paragraph (c)(3)(ii)(A)(3) of this the same emergency Medicare GME af- section, the number of unweighted filiated group (as described under allopathic and osteopathic FTE resi- § 413.75(b)) may elect to apply the limit dents in any cost reporting period after on an aggregate basis as described the hospital’s most recent settled cost under paragraph (f) of this section. report, up to and including the hos- (v) The contractor may make appro- pital’s cost report that includes July 1, priate modifications to apply the pro- 2003, is greater than the number of visions of this paragraph (c) of this sec- unweighted allopathic and osteopathic tion based on the equivalent of a 12- FTE residents in programs that were month cost reporting period. existing at that hospital during the (3) Determination of the reduction to hospital’s most recent settled cost re- the FTE resident cap due to unused FTE port. resident slots under section 422 of Public (3) A hospital may submit a timely Law 108–173. If a hospital’s reference request that CMS adjust the resident resident level is less than its otherwise level for purposes of determining any applicable FTE resident cap as deter- reduction under paragraph (c)(3) of this mined under paragraph (c)(2) of this section for the following purposes: section or paragraph (e) of this section (i) In the hospital’s reference cost re- in the reference cost reporting period porting period under paragraph (as described under paragraph (c)(3)(ii) (c)(3)(ii)(A)(1) of this section, to include of this section), for portions of cost re- the number of FTE residents for which porting periods beginning on or after a new program was accredited by the July 1, 2005, the hospital’s otherwise appropriate allopathic or osteopathic applicable FTE resident cap is reduced accrediting body (listed under § 415.152 by 75 percent of the difference between of this chapter) before January 1, 2002, the otherwise applicable FTE resident if the program was not in operation cap and the reference resident level. during the reference cost reporting pe- Under this provision— riod under paragraph (c)(3)(ii)(A)(1); or

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(ii) In the hospital’s reference cost re- resident count is less than its other- porting period under paragraph wise applicable resident cap (as ad- (c)(3)(ii)(A)(2) of this section, to include justed by affiliation agreement(s)) in the number of FTE residents for which the hospital’s cost report that includes a new program was accredited by the July 1, 2003. If the hospital’s FTE resi- appropriate allopathic or osteopathic dent count is in excess of its otherwise accrediting body (listed under § 415.152 applicable FTE resident cap, the hos- of this chapter) before January 1, 2002, pital will not have its otherwise appli- if the program was not in operation cable FTE resident cap reduced under during the cost reporting period that paragraph (c)(3) of this section. Hos- includes July 1, 2003, and if the hospital pitals in the affiliated group that have also qualifies to use its cost report FTE resident counts below their indi- under paragraph (c)(3)(ii)(A)(2) of this vidual otherwise applicable FTE resi- section due to an expansion of an exist- dent caps are subject to a pro rata re- ing program. duction in their otherwise applicable (B) If the cost report that is used to FTE resident caps that is equal, in determine a hospital’s otherwise appli- total, to 75 percent of the difference be- cable FTE resident cap in the reference tween the aggregate FTE cap and the period is not equal to 12 months, the aggregate FTE count for the affiliated contractor may make appropriate group. The pro rata reduction to the modifications to apply the provisions individual hospital’s otherwise applica- of paragraph (c)(3)(i)(A) of this section ble resident cap is calculated by divid- based on the equivalent of a 12-month ing the difference between the hos- cost reporting period. pital’s individual otherwise applicable (iii) If the new program described in FTE resident cap and the hospital’s paragraph (c)(3)(ii)(A)(3)(i) or para- FTE resident count by the total graph (c)(3)(ii)(A)(ii) was accredited for amount by which all of the hospitals’ a range of residents, the hospital may individual FTE resident counts are request that its reference resident level below their otherwise affiliated FTE in its applicable reference cost report- resident caps, multiplying the quotient ing period under paragraph by the difference between the aggre- (c)(3)(ii)(A)(1) or (c)(3)(ii)(A)(2) of this gate FTE resident cap and the aggre- section be adjusted to reflect the max- gate FTE resident counts for the affili- imum number of accredited slots appli- ated group, and multiplying that result cable to that hospital. by 75 percent. (iv) Consideration of Medicare GME af- (4) Determination of an increase in the filiated group agreements. For hospitals otherwise applicable resident cap under that are members of the same affili- section 422 of Public Law 108–173. For ated group for the program year July 1, portions of cost reporting periods be- 2003 through June 30, 2004, in deter- ginning on or after July 1, 2005, a hos- mining whether a hospital’s otherwise pital may receive an increase in its applicable resident FTE resident cap is otherwise applicable FTE resident cap reduced under paragraph (c)(3) of this up to an additional 25 FTEs (as deter- section, CMS treats these hospitals as mined by CMS) if the hospital meets a group. Using information from the the requirements and qualifying cri- hospitals’ cost reports that include teria of section 1886(h)(7) of the Act and July 1, 2003, if the hospitals’ aggregate implementing instructions issued by FTE resident counts are equal to or CMS and if the hospital submits an ap- greater than the aggregate otherwise plication to CMS within the timeframe applicable FTE resident cap for the af- specified by CMS. filiated group, then no reductions are (5) Special rules for hospitals that par- made under paragraph (c)(3) of this sec- ticipate in demonstration projects or vol- tion to the hospitals’ otherwise appli- untary resident reduction plans for pur- cable FTE resident caps. If the hos- poses of section 422 of Public Law 108–173. pitals’ aggregate FTE resident count is (i) If a hospital was participating in a below the aggregate otherwise applica- demonstration project under section ble FTE resident cap, then CMS deter- 402 of Public Law 90–248 or the vol- mines on a hospital-specific basis untary reduction plan under § 413.88 for whether the individual hospital’s FTE a greater period of time than the time

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period that elapsed since it withdrew areas adopted by CMS, the redesig- from participation (or if it completed nated urban hospital may receive an its participation) in the demonstration increase to its FTE resident cap for a program or the voluntary reduction new program, in accordance with para- plan, for purposes of determining a pos- graph (e) of this section, if it received sible reduction to the FTE resident a letter of accreditation for the new caps under paragraph (c)(3) of this sec- program and/or started training resi- tion, CMS compares the higher of the dents in the new program prior to the hospital’s base number of residents redesignation becoming effective. (after subtracting any dental and (d) Weighted FTE counts. Subject to podiatric FTE residents) or the hos- the provisions of § 413.81, for purposes pital’s reference resident level to the of determining direct GME payment— hospital’s otherwise applicable resident (1) For the hospital’s first cost re- cap determined under paragraph (c)(2) porting period beginning on or after of this section. October 1, 1997, the hospital’s weighted (ii) If a hospital participated in the FTE count is equal to the average of demonstration project or the voluntary the weighted FTE count for the pay- resident reduction plan for a period of ment year cost reporting period and time that is less than the time that the preceding cost reporting period. elapsed since it withdraw from partici- (2) For cost reporting periods begin- pation in the demonstration project or ning on or after October 1, 1998, and be- the voluntary reduction plan, the spe- fore October 1, 2001, the hospital’s cial rules in paragraph (c)(5)(i) do not weighted FTE count is equal to the av- apply, and the hospital is subject to erage of the weighted FTE count for the procedures applicable to all other the payment year cost reporting period hospitals for determining possible re- and the preceding two cost reporting ductions to the FTE resident caps periods. under paragraph (c)(3) of this section. (3) For cost reporting periods begin- (iii) CMS will not redistribute resi- ning on or after October 1, 2001, the dency positions that are attributable hospital’s weighted FTE count for pri- to a hospital’s participation in a dem- mary care and obstetrics and gyne- onstration project or a voluntary resi- cology residents is equal to the average dent reduction plan to other hospitals of the weighted primary care and ob- that seek to increase their FTE resi- stetrics and gynecology counts for the dent caps under paragraph (c)(4) of this payment year cost reporting period and section. the preceding two cost reporting peri- (6) FTE resident caps for rural hospitals ods, and the hospital’s weighted FTE that are redesignated as urban. A rural count for nonprimary care residents is hospital redesignated as urban after equal to the average of the weighted September 30, 2004, as a result of the nonprimary care FTE counts for the most recent census data and implemen- payment year cost reporting period and tation of the new MSA definitions an- the preceding two cost reporting peri- nounced by OMB on June 6, 2003, may ods. retain the increases to its FTE resident (4) The contractor may make appro- cap that it received under paragraphs priate modifications to apply the pro- (c)(2)(i), (e)(1)(iii), and (e)(3) of this sec- visions of this paragraph (d) based on tion while it was located in a rural the equivalent of 12-month cost report- area. Effective October 1, 2014, if a ing periods. rural hospital is redesignated as urban (5) (i) For new programs started prior due to the most recent OMB standards to October 1, 2012, if a hospital qualifies for delineating statistical areas adopt- for an adjustment to the limit estab- ed by CMS, the redesignated urban hos- lished under paragraph (c)(2) of this pital may retain any existing increases section for new medical residency pro- to its FTE resident cap that it had re- grams created under paragraph (e) of ceived prior to when the redesignation this section, the count of the residents became effective. Effective October 1, participating in new medical residency 2014, if a rural hospital is redesignated training programs above the number as urban due to the most recent OMB included in the hospital’s FTE count standards for delineating statistical for the cost reporting period ending

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during calendar year 1996 is added after of either another hospital or another applying the averaging rules in this hospital’s program are added to the paragraph (d), for a period of years. FTE count after applying the aver- Residents participating in new medical aging rules in this paragraph (d), for residency training programs are in- the receiving hospital for the duration cluded in the hospital’s FTE count be- of the time that the displaced residents fore applying the averaging rules after are training at the receiving hospital. the period of years has expired. For (ii) If a hospital receives a permanent purposes of this paragraph (d), for each increase in its FTE resident cap under new program started, the period of paragraph (o)(1) of this section due to years equals the minimum accredited redistribution of slots from a closed length for each new program. The pe- hospital, the displaced FTE residents riod of years begins when the first resi- that the hospital receives are added to dent begins training in each new pro- the FTE count after applying the aver- gram. aging rules only in the first cost re- (ii) For new programs started on or porting period in which the receiving after October 1, 2012, for hospitals for hospital trains the displaced FTE resi- which the FTE cap may be adjusted in dents. In subsequent cost reporting pe- accordance with § 413.79(e), FTE resi- riods, the displaced FTE residents are dents participating in new medical included in the receiving hospital’s residency training programs are ex- rolling average calculation. cluded from the hospital’s FTE count (7) Subject to the provisions under before applying the averaging rules paragraph (k) of this section, effective during the cost reporting periods prior for cost reporting periods beginning on to the beginning of the applicable hos- or after April 1, 2000, FTE residents in pital’s cost reporting period that coin- a rural track program at an urban hos- cides with or follows the start of the pital are included in the urban hos- sixth program year of the first new pital’s rolling average calculation de- program started, for hospitals for scribed in this paragraph (d). which the FTE may be adjusted in ac- (e) New medical residency training pro- cordance with § 413.79(e)(1), and prior to grams. If a hospital establishes a new the beginning of the applicable hos- medical residency training program as pital’s cost reporting period that coin- defined in paragraph (l) of this section cides with or follows the start of the on or after January 1, 1995, the hos- sixth program year of the each indi- pital’s FTE cap described under para- vidual new program started, for hos- graph (c) of this section may be ad- pitals for which the FTE cap may be justed as follows: adjusted in accordance with (1) If a hospital had no allopathic or § 413.79(e)(3). Beginning with the appli- osteopathic residents in its most re- cable hospital’s cost reporting period cent cost reporting period ending on or that coincides with or follows the start before December 31, 1996, and it begins of the sixth program year of the first training residents in a new medical new program started for hospitals for residency training program(s) for the which the FTE cap may be adjusted in first time on or after January 1, 1995, accordance with § 413.79(e)(1), and be- but before October 1, 2012, the hos- ginning with the applicable hospital’s pital’s unweighted FTE resident cap cost reporting period that coincides under paragraph (c) of this section may with or follows the start of the sixth be adjusted for new residency training program year of the each individual programs based on the sum of the prod- new program started for hospitals for ucts of the highest number of FTE resi- which the FTE cap may be adjusted in dents in any program year during the accordance with § 413.79(e)(3), FTE resi- third year of the first new program’s dents participating in new medical existence and the number of years in residency training programs are in- which residents are expected to com- cluded in the hospital’s FTE count be- plete the program based on the min- fore applying the averaging rules. imum accredited length for each type (6)(i) Subject to the provisions of of program. The adjustment to the cap paragraph (h) of this section, FTE resi- may not exceed the number of accred- dents who are displaced by the closure ited slots available to the hospital for

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the new program. If a hospital had no during the fifth year of the first new allopathic or osteopathic residents in program’s existence at all of the hos- its most recent cost reporting period pitals to which the residents in the ending on or before December 31, 1996, program rotate; and it begins training residents in a (B) The number of years in which new medical residency training pro- residents are expected to complete the gram(s) for the first time on or after program, based on the minimum ac- October 1, 2012, the hospital’s credited length for each type of pro- unweighted FTE resident cap under gram. paragraph (c) of this section may be ad- (C) The ratio of the number of FTE justed for new residency training pro- residents in the new program that grams based on the sum of the products trained at the hospital over the entire of the highest number of FTE residents 5-year period to the total number of in any program year during the fifth FTE residents that trained at all hos- year of the first new program’s existence and the number of years in which pitals over the entire 5-year period. residents are expected to complete the (ii) If a hospital begins training resi- program based on the minimum ac- dents in a new medical residency train- credited length for each type of pro- ing program(s) for the first time on or gram. The adjustment to the cap may after January 1, 1995, but before Octo- not exceed the number of accredited ber 1, 2012, prior to the implementation slots available to the hospital for the of the hospital’s adjustment to its FTE new program. cap beginning with the fourth year of (i) If a hospital begins training resi- the hospital’s first new residency pro- dents in a new medical residency train- gram(s), the hospital’s cap may be tem- ing program(s) for the first time on or porarily adjusted during each of the after January 1, 1995, but before Octo- first 3 years of the hospital’s first new ber 1, 2012, and if the residents are residency program using the actual spending portions of a program year (or number of residents participating in years) at one hospital and the remain- the new program. The adjustment may der of the program at another hos- not exceed the number of accredited pital(s), the adjustment to each quali- slots available to the hospital for each fying hospital’s cap for a new medical program year. If a hospital begins residency training program(s) is equal training residents in a new medical to the sum of the products of the high- residency training program(s) for the est number of FTE residents in any first time on or after October 1, 2012, program year during the third year of prior to the implementation of the hos- the first new program’s existence and pital’s adjustment to its FTE cap be- the number of years in which residents ginning with the sixth year of the hos- are expected to complete the program pital’s first new residency program(s), based on the minimum accredited the hospital’s cap may be adjusted length for each type of program and temporarily during each of the first 5 the number of years the residents are years of the hospital’s first new resi- training at each respective hospital. If a hospital begins training residents in dency program using the actual num- a new medical residency training pro- ber of FTE residents participating in gram(s) for the first time on or after the new program. The adjustment may October 1, 2012, and if the residents are not exceed the number of accredited spending portions of a program (or slots available to the hospital for each years) at one hospital and the remain- program year. der of the program at another hos- (iii) If a hospital begins training resi- pital(s), the adjustment to each quali- dents in a new medical residency train- fying hospital’s cap for new residency ing program for the first time on or training program (s) is equal to the after January 1, 1995, but before Octo- sum of the products of three factors ber 1, 2012, the cap will not be adjusted (limited to the number of accredited for new programs established more slots for each program): than 3 years after residents begin (A) The highest total number of FTE training in the first new program, or if residents trained in any program year a hospital begins training residents in

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a new medical residency training pro- affiliated group for purposes of estab- gram for the first time on or after Oc- lishing an aggregate FTE cap. tober 1, 2012, the cap will not be ad- (2) If a hospital had allopathic or os- justed for new programs established teopathic residents in its most recent more than 5 years after residents begin cost reporting period ending on or be- training in the first new program. fore December 31, 1996, the hospital’s (iv)(A) Effective for Medicare GME unweighted FTE cap may be adjusted affiliation agreements entered into on for a new medical residency training or after October 1, 2005, exceptas pro- program(s) established on or after Jan- vided in paragraph (e)(1)(iv)(B) of this uary 1, 1995, and on or before August 5, section, an urban hospital that quali- 1997. The adjustment to the hospital’s fies for an adjustment to its FTE cap FTE resident cap for new residency under paragraph (e)(1) of this section is training programs is based on the sum permitted to be part of a Medicare of the product of the highest number of GME affiliated group for purposes of FTE residents in any program year establishing an aggregate FTE cap during the third year of the newly es- only if the adjustment that results tablished program and the number of from the affiliation is an increase to years in which residents are expected the urban hospital’s FTE cap. to complete each program based on the (B) Effective for Medicare GME affili- minimum accredited length for the ation agreements entered into on or type of program. after July 1, 2019, an urban hospital (i) If the residents are spending por- that qualifies for an adjustment to its tions of a program year (or years) at FTE cap under paragraph (e)(1) of this one hospital and the remainder of the section is permitted to be part of a program at another hospital(s), the ad- Medicare GME affiliated group for pur- justment to each respective hospital’s poses of establishing an aggregate FTE cap for each program is equal to the product of the highest number of FTE cap and receive an adjustment that is a residents in any program year during decrease to the urban hospital’s FTE the third year of each program’s exist- cap, provided the Medicare GME affili- ence and the number of years in which ated group meets one of the following residents are expected to complete the conditions: program based on the minimum ac- (1) The Medicare GME affiliated credited length for each type of pro- group consists solely of two or more gram and the number of years the resi- urban hospitals that qualify for adjust- dents are training at each respective ments to their FTE caps under para- hospital. graph (e)(1) of this section. (ii) Prior to the implementation of (2) The Medicare GME affiliated the hospital’s adjustment to its FTE group includes an urban hospital(s) cap beginning with the fourth year of that received FTE cap(s) under para- the hospital’s residency program, the graph (c)(2)(i) of this section or hospital’s cap may be temporarily ad- § 412.105(f)(1)(iv)(A) of this subchapter, justed during each of the first 3 years or both. This Medicare GME affiliated of the hospital’s new residency pro- group must be established effective gram, using the actual number of FTE with a July 1 date (the residency train- residents in the new programs. The ad- ing year) that is at least 5 years after justment may not exceed the number the start of the cost reporting period of accredited slots available to the hos- that coincides with or follows the start pital for each program year. of the sixth program year of the first (3) If a rural hospital participates in new program for which the hospital’s new medical residency training pro- FTE cap was adjusted in accordance grams, regardless of whether the rural with paragraph (e)(1) of this section or hospital had allopathic or osteopathic § 412.105(f)(1)(v)(C) or (D) of this sub- residents in its most recent cost re- chapter, or both. porting period ending on or before De- (v) A rural hospital that qualifies for cember 31, 1996, the hospital’s an adjustment to its FTE cap under unweighted FTE cap may be adjusted paragraph (e)(1) of this section is per- in the same manner described in para- mitted to be part of a Medicare GME graph (e)(2) of this section to reflect

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the increase for residents training in a § 413.75(b), more than one of the hos- new medical residency training pro- pitals in the Medicare GME affiliated gram(s) established after August 5, 1997 group must count the proportionate and before October 1, 2012. If a rural amount of the time spent by the resi- hospital participates in new medical dent(s) in its FTE resident counts. No residency training programs on or after resident may be counted in the aggre- October 1, 2012, the hospital’s gate as more than one FTE. unweighted FTE cap is adjusted in ac- (4) The net effect of the adjustments cordance with paragraph (e)(1) of this (positive or negative) on the Medicare section, except that the adjustment is GME affiliated hospitals’ aggregate based on the sum of the products of the FTE cap for each Medicare GME affili- highest number of FTE residents in ation agreement must not exceed zero. any program year during the fifth year (5) If the Medicare GME affiliation of each new program’s existence and agreement terminates for any reason, the number of years in which residents the FTE cap of each hospital in the are expected to complete the program Medicare GME affiliated group will rebased on the minimum accredited vert to the individual hospital’s pre-af- length for each type of program. filiation FTE cap that is determined (4) A hospital seeking an adjustment under the provisions of paragraph (c) of to its FTE cap must provide docu- this section. mentation to its fiscal contractor jus- (6) Effective October 1, 2009, a hos- tifying the adjustment. pital that is new after July 1 and be- (5) The cap will not be adjusted for gins training residents for the first expansion of existing or previously ex- time after the July 1 start date of an isting programs. academic year may receive a tem- (f) Medicare GME affiliated group. A porary adjustment to its FTE resident hospital may receive a temporary ad- cap to reflect its participation in an ex- justment to its FTE cap, which is sub- isting Medicare GME affiliated group ject to the averaging rules under para- by submitting the Medicare GME affili- graph (d) of this section, to reflect resi- ation agreement, as defined under dents added or subtracted because the § 413.75(b), to the CMS contractor or hospital is participating in a Medicare MAC servicing the hospital and sending GME affiliated group (as defined under a copy to the CMS Central Office by § 413.75(b)). Under this provision— the earlier of June 30 of the residency (1) Except as provided in paragraph program year during which the Medi- (f)(6) of this section, each hospital in care GME affiliation agreement will be the Medicare GME affiliated group in effect or the end of the first cost re- must submit the Medicare GME affili- porting period during which the hos- ation agreement, as defined under pital begins training residents. The § 413.75(b) of this section, to the CMS Medicare GME affiliation agreement contractor or MAC servicing the hos- must specify the effective period for pital and send a copy to the CMS Cen- the agreement, which may begin no tral Office no later than July 1 of the earlier than the date the affiliation residency program year during which agreement is submitted to CMS. Each the Medicare GME affiliation agree- of the other hospitals participating in ment will be in effect. the Medicare GME affiliated group (2) Each hospital in the Medicare must submit an amended Medicare GME affiliated group must have a GME affiliation agreement that re- shared rotational arrangement, as de- flects the participation of the new hos- fined in § 413.75(b), with at least one pital to the CMS contractor or MAC other hospital within the Medicare servicing the hospital and send a copy GME affiliated group, and all of the to the CMS Central Office no later than hospitals within the Medicare GME af- June 30 of the residency program year filiated group must be connected by a during which the Medicare GME affili- series of such shared rotational ar- ation agreement will be in effect. For rangements. purposes of this paragraph, a new hos- (3) During the shared rotational ar- pital is one for which a new Medicare rangements under a Medicare GME af- provider agreement takes effect in ac- filiation agreement, as defined in cordance with § 489.13 of this chapter.

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(7) Emergency Medicare GME affiliated caps under the emergency Medicare group. Effective on or after August 29, GME affiliation agreement may not ex- 2005, home and host hospitals as de- ceed the aggregate adjusted FTE caps fined in § 413.75(b) may form an emer- of the hospitals participating in the gency Medicare GME affiliated group emergency Medicare GME affiliated by meeting the requirements provided group. in this section. The emergency Medi- (2) A home hospital’s IME and direct care GME affiliation agreements may GME FTE cap reductions in an emer- be made effective beginning on or after gency Medicare GME affiliation agree- the first day of a section 1135 emer- ment are limited to the home hos- gency period, and must terminate no pital’s IME and direct GME FTE resi- later than at the conclusion of 4 aca- dent caps at § 413.79(c) or § 413.79(f)(1) demic years following the academic through (f)(5), that is, as adjusted by year during which the section 1135 any and all existing affiliation agree- emergency period began. ments as applicable. (i) Requirements for submission of emer- (3) For emergency Medicare GME af- gency Medicare GME affiliation agree- filiation agreements for the third or ments. Each hospital in the emergency fourth academic years subsequent to Medicare GME affiliated group must the year in which the section 1135 submit an emergency Medicare GME emergency period began and involving affiliation agreement that is written, an out-of-State host hospital, the posi- signed, and dated by responsible rep- tive adjustment to the out-of-State resentatives of each participating hos- host hospital’s direct and indirect FTE pital in the manner specified in para- caps pursuant to the agreement shall graph (ii) and includes the following in- reflect only FTE residents that were formation: actually displaced from a home hos- (A) List each participating hospital pital immediately following the emer- and its provider number; and indicate gency. whether each hospital is a home or (E) Attach copies of all existing host hospital. (B) Specify the effective period of the Medicare GME affiliation agreements emergency Medicare GME affiliation and emergency Medicare GME affili- agreement (which must, in any event, ation agreements in which the hospital terminate at the conclusion of four is participating at the time the emer- academic years following the academic gency Medicare GME affiliation agree- year in which the section 1135 emer- ment is executed. gency period began). (ii) Deadline for submission of the emer- (C) List each participating hospital’s gency Medicare GME affiliation agree- IME and direct GME FTE caps in effect ment. Each participating home and before the emergency Medicare GME host hospital must submit an emer- affiliation agreement (including any gency Medicare GME affiliation agree- adjustments to those caps in effect as a ment to CMS and submit a copy to the result of other Medicare GME affili- CMS contractor/MAC by the applicable ation agreements but not including due date. any slots gained under § 413.79(c)(4)). (A) For emergency Medicare GME af- (D) Specify the total adjustment to filiation agreements that would other- each participating hospital’s FTE caps wise be required to be submitted by in each academic year that the emer- June 30, 2006, or July 1, 2006, each par- gency Medicare GME affiliation agree- ticipating host and home hospital must ment is in effect, for both direct GME submit an emergency Medicare GME and IME, that reflects a positive ad- affiliation agreement to CMS and sub- justment to the host hospital’s direct mit a copy to its CMS contractor/MAC and indirect FTE caps that is offset by on or before October 9, 2006. a negative adjustment to the home (B) Except for emergency Medicare hospital’s (or hospitals’) direct and in- GME affiliation agreements specified direct FTE caps of at least the same in paragraph (f)(6)(ii)(A) of this section, amount subject to the following— for emergency Medicare GME affili- (1) The sum total of adjustments to ation agreements that would otherwise all the participating hospitals’ FTE be required to be submitted prior to

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October 1, 2008, the following due dates hospital’s 3-year rolling average FTE are applicable: resident count to determine the host (1) First year. The later of 180 days hospital’s FTE resident count for pay- after the section 1135 emergency period ment purposes. begins or by June 30 of the academic (g) Newly constructed hospitals. A hos- year in which the section 1135 emer- pital that began construction of its fa- gency was declared; or cility prior to August 5, 1997, and spon- (2) Subsequent academic years. The sored new medical residency training later of 180 days after the section 1135 programs on or after January 1, 1995, emergency period begins, or by July 1 and on or before August 5, 1997, that ei- of each academic year. ther received initial accreditation by (C) For emergency Medicare GME af- the appropriate accrediting body or filiation agreements that would other- temporarily trained residents at an- wise be required to be submitted after other hospital(s) until the facility was October 1, 2008, the following due dates completed, may receive an adjustment are applicable: to its FTE cap. (1) First year. By 180 days after the (1) The newly constructed hospital’s end of the academic year in which the FTE cap is equal to the lesser of— section 1135 emergency was declared; (i) The product of the highest number (2) Second academic year. By 180 days of residents in any program year dur- after the end of the next academic year ing the third year of the newly estab- following the academic year in which lished program and the number of the section 1135 emergency was de- years in which residents are expected clared; or to complete the programs based on the (3) Subsequent academic years. By July minimum accredited length for each 1 of each academic year. type of program; or (iii) Exemption from the Shared Rota- (ii) The number of accredited slots tional Arrangement Requirement. During available to the hospital for each year the effective period of the emergency of the programs. Medicare GME affiliation agreement, (2) If the new medical residency hospitals in the emergency Medicare training programs sponsored by the GME affiliated group are not required newly constructed hospital have been to participate in a shared rotational in existence for 3 years or more by the arrangement as defined at § 413.75(b). time the residents begin training at (iv) Host Hospital Exception from the the newly constructed hospital, the Rolling Average for the Period from Au- newly constructed hospital’s cap will gust 29, 2005 to June 30, 2006. To deter- be based on the number of residents mine the FTE resident count for a host training in the third year of the pro- hospital that is training residents in grams begun at the temporary training excess of its cap, a two step process site. will be applied. First, subject to the (3) If the new medical residency limit at paragraph (f)(6)(i)(D) of this training programs sponsored by the section, a host hospital is to exclude newly constructed hospital have been the displaced FTE residents that are in existence for less than 3 years by the counted by a host hospital in excess of time the residents begin training at the hospital’s cap pursuant to an emer- the newly constructed hospital, the gency Medicare GME affiliation agree- newly constructed hospital’s cap will ment from August 29, 2005, to June 30, be based on the number of residents 2006, from the current year’s FTE resi- training at the newly constructed hos- dent count before applying the three- pital in the third year of the programs year rolling averaging rules under (including the years at the temporary paragraph (d) of this section to cal- training site). culate the average FTE resident count. (4) A hospital that qualifies for an ad- Second, the displaced FTE residents justment to its FTE cap under this that are counted by the host hospital paragraph (g) may be part of an affili- in excess of the host hospital’s cap pur- ated group for purposes of establishing suant to an emergency Medicare GME an aggregate FTE cap. affiliation agreement from August 29, (5) The provisions of this paragraph 2005, to June 30, 2006, are added to the (g) are applicable during portions of

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cost reporting periods occurring on or (3) Closure of a hospital’s residency after October 1, 1999. training program. If a hospital that (h) Closure of hospital or hospital resi- closes its residency training program dency program—(1) Definitions. For pur- voluntarily agrees to temporarily re- poses of this section— duce its FTE cap according to the cri- (i) Closure of a hospital means the hos- teria specified in paragraph (h)(3)(ii) of pital terminates its Medicare agree- this section, another hospital(s) may ment under the provisions of § 489.52 of receive a temporary adjustment to its this chapter. FTE cap to reflect residents added be- (ii) Closure of a hospital residency cause of the closure of the residency training program means the hospital training program if the criteria speci- ceases to offer training for residents in fied in paragraph (h)(3)(i) of this sec- a particular approved medical resi- tion are met. dency training program. (i) Receiving hospital(s). A hospital (iii) Displaced resident means a resi- may receive a temporary adjustment dent who— to its FTE cap to reflect residents (A) Leaves a program after the hos- added because of the closure of another pital or program closure is publicly an- hospital’s residency training program nounced, but before the actual hospital if— or program closure; (A) The hospital is training addi- (B) Is assigned to and training at tional residents from the residency planned rotations at another hospital training program of a hospital that who will be unable to return to his/her closed a program; and rotation at the closing hospital or program; (B) No later than 60 days after the (C) Is accepted into a GME program hospital begins to train the residents, at the closing hospital or program but the hospital submits to its contractor a has not yet started training at the request for a temporary adjustment to closing hospital or program; its FTE cap, documents that it is eligi- (D) Is physically training in the hos- ble for this temporary adjustment by pital on the day prior to or day of pro- identifying the residents who have gram or hospital closure; or come from another hospital’s closed (E) Is on approved leave at the time program and have caused the hospital of the announcement of closure or ac- to exceed its cap, specifies the length tual closure, and therefore, cannot re- of time the adjustment is needed, and turn to his/her rotation at the closing submits to its contractor a copy of the hospital or program. FTE reduction statement by the hos- (2) Closure of a hospital. A hospital pital that closed its program, as speci- may receive a temporary adjustment fied in paragraph (h)(3)(ii)(B) of this to its FTE cap to reflect residents section. added because of another hospital’s clo- (ii) Hospital that closed its program(s). sure if the hospital meets the following A hospital that agrees to train resi- criteria: dents who have been displaced by the (i) The hospital is training additional closure of another hospital’s program residents from a hospital that closed may receive a temporary FTE cap ad- on or after July 1, 1996. justment only if the hospital with the (ii) No later than 60 days after the closed program— hospital begins to train the residents, (A) Temporarily reduces its FTE cap the hospital submits a request to its based on the FTE residents in each pro- contractor for a temporary adjustment gram year training in the program at to its FTE cap, documents that the the time of the program’s closure. This hospital is eligible for this temporary yearly reduction in the FTE cap will be adjustment by identifying the resi- determined based on the number of dents who have come from the closed those residents who would have been hospital and have caused the hospital to exceed its cap, and specifies the training in the program during that length of time the adjustment is need- year had the program not closed; and ed.

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(B) No later than 60 days after the the non-VA hospital, if that hospital residents who were in the closed pro- meets the following criteria: gram begin training at another hos- (1) The transferred residents had been pital, submit to its contractor a state- training previously at a VA hospital in ment signed and dated by its represent- a program that would have lost its ac- ative that specifies that it agrees to creditation by the ACGME if the resi- the temporary reduction in its FTE cap dents continued to train at the VA hos- to allow the hospital training the dis- pital; placed residents to obtain a temporary (2) The residents were transferred to adjustment to its cap; identifies the the hospital from the VA hospital on or residents who were in training at the after January 1, 1997, and before July time of the program’s closure; identi- 31, 1998; and fies the hospitals to which the resi- (3) The hospital submits a request to dents are transferring once the pro- its contractor for a temporary adjust- gram closes; and specifies the reduc- ment to its FTE cap, documents that it tion for the applicable program years. is eligible for this temporary adjust- (i) Additional FTEs for residents on ma- ment by identifying the residents who ternity or disability leave or other ap- have come from the VA hospital, and proved leave of absence. Effective for specifies the length of time those resi- cost reporting periods beginning on or dents will be trained at the hospital. after November 29, 1999, a hospital may (k) Residents training in rural track receive an adjustment to its FTE cap programs. Subject to the provisions of of up to three additional resident § 413.81, an urban hospital that estab- FTEs, if the hospital meets the fol- lishes a new residency program, or has lowing criteria: an existing residency program, with a (1) The additional residents are resi- rural track (or an integrated rural dents of a primary care program that track) may include in its FTE count residents in those rural tracks, in addi- would have been counted by the hos- tion to the residents subject to its FTE pital as residents for purposes of the cap specified under paragraph (c) of hospital’s FTE cap but for the fact that this section. An urban hospital with a the additional residents were on mater- rural track residency program may nity or disability leave or a similar ap- count residents in those rural tracks proved leave of absence during the hos- up to a rural track FTE limitation if pital’s most recent cost reporting pe- the hospital complies with the condi- riod ending on or before December 31, tions specified in paragraphs (k)(2) 1996; through (k)(7) of this section. (2) The leave of absence was approved (1) If an urban hospital rotates resi- by the residency program director to dents to a separately accredited rural allow the residents to be absent from track program at a rural hospital(s) for the program and return to the program two-thirds of the duration of the pro- after the leave of absence; and gram for cost reporting periods begin- (3) No later than 6 months after Au- ning on or after April 1, 2000, and be- gust 1, 2000, the hospital submits to the fore October 1, 2003, or for more than contractor a request for an adjustment one-half of the duration of the program to its FTE cap, and provides contem- for cost reporting periods beginning on poraneous documentation of the ap- or after October 1, 2003, the urban hos- proval of the leave of absence by the pital may include those residents in its residency director, specific to each ad- FTE count for the time the rural track ditional resident that is to be counted residents spend at the urban hospital. for purposes of the adjustment. The urban hospital may include in its (j) Residents previously trained at VA FTE count those residents in the rural hospitals. For cost reporting periods be- track training at the urban hospital, ginning on or after October 1, 1997, a not to exceed its rural track FTE limi- non-Veterans Affairs (VA) hospital tation, determined as follows: may receive a temporary adjustment (i) For rural track programs started to its FTE cap to reflect residents who prior to October 1, 2012, for the first 3 had previously trained at a VA hospital years of the rural track’s existence, the and were subsequently transferred to rural track FTE limitation for each

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urban hospital will be the actual num- count those residents in the rural ber of FTE residents, subject to the track, not to exceed its rural track rolling average at paragraph (d)(7) of FTE limitation, determined as follows: this section, training in the rural track (i) For rural track programs started at the urban hospital. For rural track prior to October 1, 2012, for the first 3 programs started on or after October 1, years of the rural track’s existence, the 2012, prior to the start of the urban rural track FTE limitation for each hospital’s cost reporting period that urban hospital will be the actual num- coincides with or follows the start of ber of FTE residents, subject to the the sixth program year of the rural rolling average specified in paragraph track’s existence, the rural track FTE (d)(7) of this section, training in the limitation for each urban hospital will rural track at the urban hospital and be the actual number of FTE residents, the rural nonprovider site(s). For rural subject to the rolling average at para- track programs started on or after Oc- graph (d)(7) of this section, training in tober 1, 2012, prior to the start of the the rural track at the urban hospital. urban hospital’s cost reporting period (ii) For rural track programs started that coincides with or follows the start prior to October 1, 2012, beginning with of the sixth program year of the rural the fourth year of the rural track’s ex- track’s existence, the rural track FTE istence, the rural track FTE limitation limitation for each urban hospital will is equal to the product of the highest be the actual number of FTE residents, number of residents, in any program subject to the rolling average specified year, who during the third year of the in paragraph (d)(7) of this section, rural track’s existence are training in training in the rural track at the urban the rural track at the urban hospital hospital and the rural nonprovider and are designated at the beginning of site(s). their training to be rotated to the (ii)(A) For rural track programs rural hospital(s) for at least two-thirds started prior to October 1, 2012, begin- of the duration of the program for cost ning with the fourth year of the rural reporting periods beginning on or after track’s existence, the rural track FTE April 1, 2000, and before October 1, 2002, limitation is equal to the product of— or for more than one-half of the duration of the program effective for cost (1) The highest number of residents reporting periods beginning on or after in any program year who, during the October 1, 2003, and the number of third year of the rural track’s exist- years those residents are training at ence, are training in the rural track the urban hospital. For rural track at— programs started on or after October 1, (i) The urban hospital and are des- 2012, beginning with the start of the ignated at the beginning of their train- urban hospital’s cost reporting period ing to be rotated to a rural nonprovider that coincides with or follows the start site(s) for at least two-thirds of the du- of the sixth program year of the rural ration of the program for cost report- track’s existence, the rural track FTE ing periods beginning on or after April limitation is calculated in accordance 1, 2000 and before October 1, 2003, or for with paragraph (e)(1) of this section. more than one-half of the duration of (2) If an urban hospital rotates resi- the program for cost reporting periods dents to a separately accredited rural beginning on or after October 1, 2003; track program at a rural nonprovider and site(s) for two-thirds of the duration of (ii) The rural nonprovider site(s); and the program for cost reporting periods (2) The number of years in which the beginning on or after April 1, 2000, and residents are expected to complete before October 1, 2003, or for more than each program based on the minimum one-half of the duration of the program accredited length for the type of pro- for cost reporting periods beginning on gram. or after October 1, 2003, the urban hos- (B) For rural track programs started pital may include those residents in its on or after October 1, 2012, beginning FTE count, subject to the require- with the start of the urban hospital’s ments under § 413.78(d) through (g). The cost reporting period that coincides urban hospital may include in its FTE with or follows the start of the sixth

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program year of the rural track’s exist- (A) For the first 3 years of the rural ence, the rural track FTE limitation is track’s existence, the rural track FTE calculated in accordance with para- limitation for the urban hospital will graph (e)(1) of this section. be the actual number of FTE residents, (3) For rural track programs started subject to the rolling average specified prior to October 1, 2012, if an urban hos- in paragraph (d)(7) of this section, pital rotates residents in the rural training in the rural track at the rural track program to a rural hospital(s) for nonprovider site(s). less than two-thirds of the duration of (B) Beginning with the fourth year of the program for cost reporting periods the rural track’s existence, the rural beginning on or after April 1, 2000, and track FTE limitation is equal to the before October 1, 2003, or for one-half or product of— less than one-half of the duration of (1) The highest number of residents the program for cost reporting periods in any program year who, during the beginning on or after October 1, 2003, third year of the rural track’s exist- the rural hospital may not include ence, are training in the rural track at those residents in its FTE count (if the the rural nonprovider site(s) or are des- rural track is not a new program under ignated at the beginning of their training to be rotated to the rural nonpro- paragraph (e)(3) of this section, or if vider site(s) for a period that is less the rural hospital’s FTE count exceeds than two-thirds of the duration of the that hospital’s FTE cap), nor may the program for cost reporting periods be- urban hospital include those residents ginning on or after April 1, 2002, and when calculating its rural track FTE before October 1, 2003, or for one-half or limitation. For rural track programs less than one-half of the duration of started on or after October 1, 2012, if an the program for cost reporting periods urban hospital rotates residents in the beginning on or after October 1, 2003; rural track program to a rural hos- and pital(s) for one-half or less than one- (2) The length of time in which the half of the duration of the program, the residents are training at the rural non- rural hospital may not include those provider site(s) only. residents in its FTE count (if the rural (ii) For rural track programs started track is not a new program under para- on or after October 1, 2012, if an urban graph (e)(3) of this section, or if the hospital rotates residents in the rural rural hospital’s FTE count exceeds track program to a rural nonprovider that hospital’s FTE cap), nor may the site(s) for one-half or less than one-half urban hospital include those residents of the duration of the program, the when calculating its rural track FTE urban hospital may include those resi- limitation. dents in its FTE count, subject to the (4)(i) For rural track programs start- requirements under § 413.78(g). The ed prior to October 1, 2012, if an urban urban hospital may include in its FTE hospital rotates residents in the rural count those residents in the rural track program to a rural nonprovider track, not to exceed its rural track site(s) for less than two-thirds of the limitation, determined as follows: duration of the program for cost re- (A) Prior to the start of the urban porting periods beginning on or after hospital’s cost reporting period that April 1, 2000 and before October 1, 2003, coincides with or follows the start of or for one-half or less than one-half of the sixth program year of the rural the duration of the program for cost re- track’s existence, the rural track FTE porting periods beginning on or after limitation for the urban hospital will October 1, 2003, the urban hospital may be the actual number of FTE residents, include those residents in its FTE subject to the rolling average specified count, subject to the requirements in paragraph (d)(7) of this section, under § 413.78(d) through (g), as applica- training in the rural track at the rural ble. The urban hospital may include in nonprovider site(s). its FTE count those residents in the (B) Beginning with the start of the rural track, not to exceed its rural urban hospital’s cost reporting period track limitation, determined as fol- that coincides with or follows the start lows: of the sixth program year of the rural

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track’s existence, the rural track FTE part of its FTE count did not actually limitation is equal to the product of— complete the training in the rural area, (1) The highest number of residents CMS will reopen the urban hospital’s in any program year who, during the cost report within the 3-year reopening fifth year of the rural track’s exist- period as specified in § 405.1885 of this ence, are training in the rural track at chapter and adjust the hospital’s Medi- the rural nonprovider site(s) or are des- care GME payments (and, where appli- ignated at the beginning of their train- cable, the hospital’s rural track FTE ing to be rotated to the rural nonpro- limitation). vider site(s) for a period that is for one- (7)(i) Effective prior to October 1, half or less than one-half of the dura- 2014, if an urban hospital had estab- tion of the program; and lished a rural track training program (2) The ratio of the length of time in under the provisions of this paragraph which the residents are training at the (k) with a hospital located in a rural rural nonprovider site(s) only to the area and that rural area subsequently total duration of the program. becomes an urban area due to the most (5) All urban hospitals that wish to recent census data and implementation count FTE residents in rural tracks, of the new labor market area defini- not to exceed their respective rural tions announced by OMB on June 6, track FTE limitation, must also com- 2003, the urban hospital may continue ply with all of the following conditions: to adjust its FTE resident limit in ac- (i) An urban hospital may not include cordance with this paragraph (k) for in its rural track FTE limitation or the rural track programs established (assuming the urban hospital’s FTE prior to the adoption of such new labor count exceeds its FTE cap) FTE count market area definitions. In order to re- residents who are training in a rural ceive an adjustment to its FTE resi- track residency program that were al- dent cap for a new rural track resi- ready included as part of the hospital’s dency program, the urban hospital FTE cap. must establish a rural track program (ii) The hospital must base its count with hospitals that are designated of residents in a rural track on written rural based on the most recent geo- contemporaneous documentation that graphical location delineations adopted each resident enrolled in a rural track by CMS. program at the hospital intends to ro- (ii)(A) For rural track programs tate for a portion of the residency pro- started prior to October 1, 2012, effec- gram to a rural area. tive October 1, 2014, if an urban hos- (iii) All residents that are included pital started a rural track training pro- by the hospital as part of its rural gram under the provisions of this para- track FTE count (not to exceed its graph (k) with a hospital located in a rural track FTE limitation) must train rural area and, during the 3-year period in the rural area. However, where a that is used to calculate the urban hos- resident begins to train in the rural pital’s rural track FTE limit, that track program at the urban hospital rural area subsequently becomes an but leaves the program before com- urban area due to the most recent OMB pleting the total required portion of standards for delineating statistical training in the rural area, the urban areas adopted by CMS and the most re- hospital may count the time the resi- cent Census Bureau data, the urban dent trained in the urban hospital if hospital may continue to adjust its another resident fills the vacated FTE FTE resident limit in accordance with slot and completes the training in the this paragraph (k) and subject to para- rural portion of the rural track pro- graph (k)(7)(iii) of this section for the gram. An urban hospital may not re- rural track programs started prior to ceive GME payment for the time the the adoption of such new OMB stand- resident trained at the urban hospital ards for delineating statistical areas. if another resident fills the vacated (B) For rural track programs started FTE slot and first begins to train at on or after October 1, 2012, effective Oc- the urban hospital. tober 1, 2014, if an urban hospital start- (6) If CMS finds that residents who ed a rural track training program are included by the urban hospital as under the provisions of this paragraph

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(k) with a hospital located in a rural find a new site that is geographically area and, during the 5-year period that rural consistent with the most recent is used to calculate the urban hos- geographical location delineations pital’s rural track FTE limit, that adopted by CMS. In order to receive an rural area subsequently becomes an adjustment to its FTE resident cap for urban area due to the most recent OMB an additional new rural track resi- standards for delineating statistical dency program, the urban hospital areas adopted by CMS and the most re- must participate in a rural track pro- cent Census Bureau data, the urban gram with sites that are geographi- hospital may continue to adjust its cally rural based on the most recent FTE resident limit in accordance with geographical location delineations this paragraph (k) and subject to para- adopted by CMS. graph (k)(7)(iii) of this section for the (B) For rural track programs started rural track programs started prior to on or after October 1, 2012, effective Oc- the adoption of such new OMB stand- tober 1, 2014, if an urban hospital start- ards for delineating statistical areas. ed a rural track training program (iii)(A) For rural track programs under the provisions of this paragraph started prior to October 1, 2012, effec- (k) with a hospital located in a rural tive October 1, 2014, if an urban hos- area and that rural area subsequently pital started a rural track training pro- becomes an urban area due to the most gram under the provisions of this para- recent OMB standards for delineating graph (k) with a hospital located in a statistical areas adopted by CMS and rural area and that rural area subse- the most recent Census Bureau data, quently becomes an urban area due to regardless of whether the redesignation the most recent OMB standards for de- of the rural hospital occurs during the lineating statistical areas adopted by 5-year period that is used to calculate CMS and the most recent Census Bu- the urban hospital’s rural track FTE reau data, regardless of whether the re- limit, or after the 5-year period used to designation of the rural hospital occurs calculate the urban hospital’s rural during the 3-year period that is used to track FTE limit, the urban hospital calculate the urban hospital’s rural may continue to adjust its FTE resi- track FTE limit, or after the 3-year pe- dent limit in accordance with this riod used to calculate the urban hos- paragraph (k) based on the rural track pital’s rural track FTE limit, the programs started prior to the change in urban hospital may continue to adjust the hospital’s geographic designation. its FTE resident limit in accordance In order for the urban hospital to re- with this paragraph (k) based on the ceive or use the adjustment to its FTE rural track programs started prior to resident cap for training FTE residents the change in the hospital’s geographic in the rural track residency program designation. In order for the urban hos- that was started prior to the most re- pital to receive or use the adjustment cent OMB standards for delineating to its FTE resident cap for training statistical areas adopted by CMS, one FTE residents in the rural track resi- of the following two conditions must be dency program that was started prior met by the end of a period that begins to the most recent OMB standards for when the most recent OMB standards delineating statistical areas adopted for delineating statistical areas are by CMS, one of the following two con- adopted by CMS and continues through ditions must be met by the end of a pe- the end of the second residency train- riod that begins when the most recent ing year following the date the most OMB standards for delineating statis- recent OMB delineations are adopted tical areas are adopted by CMS and by CMS: The hospital that has been re- continues through the end of the sec- designated from rural to urban must ond residency training year following reclassify as rural under § 412.103 of this the date the most recent OMB delinea- chapter, for purposes of IME only; or tions are adopted by CMS: The hospital the urban hospital must find a new site that has been redesignated from rural that is geographically rural consistent to urban must reclassify as rural under with the most recent geographical lo- § 412.103 of this chapter, for purposes of cation delineations adopted by CMS. In IME only; or the urban hospital must order to receive an adjustment to its

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FTE resident cap for an additional new under paragraph (m) of this section if, rural track residency program, the by January 21, 2011, it submits a plan urban hospital must participate in a to CMS for filling all of its unused FTE rural track program with sites that are resident slots by not later than March geographically rural based on the most 23, 2012. recent geographical location delinea- (3) Exemption for a hospital described at tions adopted by CMS. section 1886(h)(4)(H)(v) of the Act. A hos- (l) For purposes of this section, a new pital described at section medical residency training program 1886(h)(4)(H)(v) of the Act, is exempt means a medical residency that re- from any reduction to its otherwise ap- ceives initial accreditation by the applicable FTE resident cap under para- propriate accrediting body or begins graph (m) of this section. training residents on or after January (4) Exemptions for certain other hos- 1, 1995. pitals. A hospital training at or above (m) Determination of the reduction to the FTE resident cap due to unused FTE its otherwise applicable FTE resident resident slots under section 5503 of Public cap as determined under paragraph Law 111–148. If a hospital’s reference (c)(2) of this section for all three most resident level, as defined under para- recent cost reporting periods ending graph (c)(1)(ii)(B) of this section is less prior to March 23, 2010, for which a cost than its otherwise applicable FTE resi- report has been either settled or sub- dent cap as determined under para- mitted (subject to audit) to the Medi- graph (c)(2) of this section or paragraph care contractor by March 23, 2010, is ex- (e) of this section in the reference cost empt from any reduction to its other- reporting period (as described under wise applicable FTE resident cap under paragraph (m)(6) of this section), for paragraph (m) of this section. portions of cost reporting periods be- (5) New teaching hospital. A new ginning on or after July 1, 2011, the teaching hospital that does not have an hospital’s otherwise applicable FTE otherwise applicable FTE resident cap resident cap is reduced by 65 percent of as determined under paragraph (e)(1) of the difference between the otherwise this section for all three most recent applicable FTE resident cap and the cost reporting periods ending prior to reference resident level. The reduction March 23, 2010, for which a cost report shall take into account the hospital’s has been either settled or submitted FTE resident cap as reduced under (subject to audit) to the Medicare con- paragraph (c)(3) of this section. Under tractor by March 23, 2010, is exempt this provision— from any reduction to its otherwise ap- (1) Exemption for certain rural hos- plicable FTE resident cap under para- pitals. A rural hospital, as defined at graph (m) of this section. subpart D of part 412 of this sub- (6) Reference cost reporting period. (i) chapter, with fewer than 250 beds (as To determine a hospital’s reference determined at § 412.105(b)) in its most recent cost reporting period ending on resident level, CMS determines, for a or before March 23, 2010, for which a hospital’s three most recent cost re- cost report has been either settled or porting periods ending before March 23, submitted (subject to audit) to the 2010, for which a cost report has been Medicare contractor by March 23, 2010, either settled or submitted (subject to is exempt from any reduction to its audit) to the Medicare contractor by otherwise applicable FTE resident cap March 23, 2010, the cost reporting pe- under paragraph (m) of this section. riod with the highest resident level. (2) Exemption for certain hospitals that (ii) If the cost report that is used to participate in demonstration projects or determine a hospital’s otherwise appli- voluntary residency reduction plans. A cable FTE resident cap in the reference hospital that was participating in a period is not equal to 12 months, the demonstration project under section Medicare contractor may make appro- 402 of Public Law 90–248 or the vol- priate modifications to apply the pro- untary reduction plan under § 413.88, is visions of paragraph (m) of this section exempt from any reduction to its oth- based on the equivalent of a 12-month erwise applicable FTE resident cap cost reporting period.

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(7) Consideration for members of Medi- paragraph (m) of this section, and no care GME affiliated groups. For a hos- further steps are necessary for that pital that is a member of a Medicare hospital. GME affiliated group at any point dur- (iv) If the hospitals’ aggregate FTE ing any of the hospital’s three most re- resident count is less than the aggre- cent cost reporting periods ending be- gate FTE resident cap, then the Medi- fore March 23, 2010 for which a cost re- care contractor would determine on a port has been settled or has been sub- hospital-specific basis whether the par- mitted to Medicare contractor by ticular hospital’s FTE resident count is March 23, 2010, in determining whether less than its otherwise applicable FTE a hospital’s otherwise applicable resi- resident cap (as adjusted by affiliation dent FTE resident cap is reduced under agreement(s)) in the hospital’s ref- paragraph (m) of this section, the erence cost report. Medicare contractor determines a hos- (v) If the hospital’s FTE resident pital’s reference cost reporting period count exceeds its otherwise applicable by finding the cost reporting period FTE resident cap, the hospital will not that results in the smallest difference have its otherwise applicable FTE resi- between the reference resident level dent cap reduced under paragraph (m) and the otherwise applicable resident of this section. limit. (vi) If the particular hospital’s FTE (i) If the reference resident level is resident count is less than its other- less than the otherwise applicable resi- wise applicable FTE resident cap, the dent limit in that reference cost re- Medicare contractor determines a pro porting period, the Medicare con- rata cap reduction amount that is tractor must then determine if the hos- equal, in total, to 65 percent of the dif- pital was a member of a Medicare GME ference between the aggregate FTE affiliated group as of the July 1 that resident cap and the aggregate FTE occurs during that reference cost re- resident count for the Medicare GME porting period. affiliated group. (ii) If the hospital was a member of a (A) The pro rata cap reduction to the Medicare GME affiliated group as of particular hospital’s otherwise applica- the July 1 that occurs during that ref- ble FTE resident cap is calculated by erence cost report, the Medicare con- dividing the difference between the tractor does all of the following: hospital’s otherwise applicable FTE (A) Treat the members of the Medi- resident cap and the hospital’s FTE care GME affiliated group as a group resident count, by the total amount by for that reference cost reporting pe- which all of the hospitals’ individual riod, for the purpose of determining a FTE resident counts are below their af- reduction to the particular hospital’s filiated FTE resident caps, multiplying FTE resident cap. the quotient by the difference between (B) Determine for each hospital in the aggregate FTE resident cap and the the Medicare GME affiliated group re- aggregate FTE resident counts for the spectively the FTE resident cap and Medicare GME affiliated group, and FTE resident count (IME and direct multiplying that result by 65 percent. GME separately). (B) The final reduction takes into ac- (C) Add each hospital’s FTE resident count the hospital’s FTE resident cap caps (IME and direct GME separately) as reduced under the provisions of to determine the aggregate FTE resi- paragraph (c)(3) of this section. dent cap. (n) Determination of an increase in the (D) Add each hospital’s FTE resident otherwise applicable resident cap under count (IME and direct GME separately) section 5503 of Public Law 111–148. (1) For to determine the aggregate FTE resi- portions of cost reporting periods be- dent count. ginning on or after July 1, 2011, a hos- (iii) If the aggregate FTE resident pital may receive an increase in its count is equal to or exceeds the aggre- otherwise applicable FTE resident cap gate FTE resident cap, then the Medi- (as determined by CMS) of not more care contractor would make no reduc- than 75 additional FTEs if the hospital tion to the particular hospital’s other- meets the requirements and qualifying wise applicable FTE resident cap under criteria of section 1886(h)(8) of the Act

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and implementing instructions issued (C) The portion, if any, of the in- by CMS and if the hospital submits an crease in the otherwise applicable FTE application to CMS within the time- resident cap under paragraph (n)(1) of frame specified by CMS. this section used for cap relief, subject (2) A hospital that receives an in- to the requirements in paragraph crease in the otherwise applicable FTE (n)(2)(i) of this section. resident cap under paragraph (n)(1) of (iii) CMS may determine whether a this section must ensure, during the 5- hospital has met the requirements year period beginning on July 1, 2011 under paragraphs (n)(2)(i) and (n)(2)(ii) and ending on June 30, 2016, that— of this section during the 5-year period (i) The number of FTE primary care of July 1, 2011, through June 30, 2016, in residents, as defined in § 413.75(b), ex- such manner and at such time as CMS cluding any additional positions under determines appropriate, including at this paragraph, is not less than the av- the end of such 5-year period. erage number of FTE primary care (iv) In a case where the Medicare residents (as so determined) during the contractor determines that a hospital three most recent cost reporting peri- did not meet the requirements under ods ending prior to March 23, 2010 (and paragraphs (n)(2)(i), (n)(2)(ii), and submitted to the Medicare contractor (n)(2)(iii) of this section in a cost re- by March 23, 2010); and not less than 75 porting period within the 5-year time percent of the positions attributable to period, the Medicare contractor will re- such increase are in a primary care or duce the otherwise applicable FTE general surgery residency programs. resident cap of the hospital by the (ii) If a hospital receives an increase amount by which such limit was in- in the otherwise applicable FTE resi- creased under paragraph (n)(1) of this dent cap under paragraph (n)(1) of this section from the earliest cost reporting section, and does not use all of that in- period that is reopenable in which it crease in its final (12-month or partial) would be determined that the hospital cost report of the 5-year period begin- did not meet the requirements. ning July 1, 2011 and ending June 30, (o) Determination of an increase in the 2016, the Medicare contractor will re- FTE resident cap due to slots redistributed move the applicable unused slots, and from a closed hospital. (1) Except in the the hospital’s increase in the otherwise case of the closure of the hospital with applicable FTE resident cap received Medicare Provider Number 05–0578, in under paragraph (n)(1) of this section the instance of a hospital closure, as will be reduced for portions of cost re- defined at paragraph (h)(1)(i) of this porting periods on or after July 1, 2016. section, the FTE resident cap of the The number of applicable unused slots closed hospital would be redistributed, is equal to the difference between the and a hospital that meets the require- increase in the otherwise applicable ments and qualifying criteria of sec- FTE resident cap and the applicable tion 1886(h)(4)(H)(vi) of the Act and im- slots used. In determining the applica- plementing instructions issued by ble slots used, the following amounts CMS, including submission of a timely are added, as relevant: application to CMS, may receive an in- (A) If a hospital uses the increase in crease in its FTE resident cap, as de- the otherwise applicable FTE resident termined by CMS. cap under paragraph (n)(1) of this sec- (2)(i) Except in the case of the closure tion to expand an existing program(s), of the hospital with Medicare Provider the used slots are equal to the lesser of Number 05–0578, in redistributing the the number of slots used for an expan- FTE resident cap of a closed hospital, sion(s) in the fourth 12-month cost reconsideration shall be given to ensure port or the final cost report. that there is no duplication of FTE (B) If a hospital uses the increase in slots between FTE slots redistributed the otherwise applicable FTE resident under this paragraph and temporary cap under paragraph (n)(1) of this sec- adjustments to FTE resident caps pro- tion to start a new program(s), the vider under paragraph (h)(2) of this sec- used slots are equal to the number of tion. slots used for a new program(s) in the (ii) The provisions of this paragraph final cost report. (o) will not be applied in a manner that

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will require the reopening of settled under paragraphs (a) and (d) of this sec- cost reports, except where the provider tion. On or after July 1, 1993, only the has a jurisdictionally proper appeal results of steps I and II of the United pending on direct GME or IME pay- States Medical Licensing Examination ments as of March 23, 2010. will be accepted for purposes of making [69 FR 49254, Aug. 11, 2004] this determination. EDITORIAL NOTE: For FEDERAL REGISTER ci- [69 FR 49254, Aug. 11, 2004] tations affecting § 413.79, see the List of CFR Sections Affected, which appears in the § 413.81 Direct GME payments: Appli- Finding Aids section of the printed volume cation of community support and and at www.govinfo.gov. redistribution of costs in determining FTE resident counts. § 413.80 Direct GME payments: Deter- mination of weighting factors for (a) For purposes of determining di- foreign medical graduates. rect GME payments, the following principles apply: (a) The weighting factor for a foreign (1) Community support. If the commu- medical graduate is determined under nity has undertaken to bear the costs the provisions of § 413.79 if the foreign of medical education through commu- medical graduate— nity support, the costs are not consid- (1) Has passed FMGEMS; or (2) Before July 1, 1986, received cer- ered GME costs to the hospital for pur- tification from, or passed an examina- poses of Medicare payment. tion of, the Educational Committee for (2) Redistribution of costs. The costs of Foreign Medical Graduates. training residents that constitute a re- (b) Before July 1, 1986, the weighting distribution of costs from an edu- factor for a foreign medical graduate is cational institution to the hospital are 1.0 times the weight determined under not considered GME costs to the hos- the provisions of § 413.79. On or after pital for purposes of Medicare pay- July 1, 1986, and before July 1, 1987, the ment. weighting factor for a graduate of a (b) Application. A hospital must con- foreign medical school who was in a tinuously incur costs of direct GME of residency program both before and residents training in a particular pro- after July 1, 1986 but who does not gram at a training site since the date meet the requirements set forth in the residents first began training in paragraph (a) of this section is .50 that program in order for the hospital times the weight determined under the to count the FTE residents in accord- provisions of § 413.79. ance with the provisions of §§ 413.78, (c) On or after July 1, 1987, these for- 413.79 (c) through (e), and 413.79(k). eign medical graduates are not counted This rule also applies to providers that in determining the number of FTE resi- are paid for direct GME in accordance dents. with § 405.2468 of this chapter, § 422.270 (d) During the cost reporting period of this subchapter, and § 413.70. in which a foreign medical graduate (c)(1) Effective date. Subject to the passes FMGEMS, the weighting factor provisions of paragraph (c)(2) of this for that resident is determined under section, payments made in accordance the provisions of § 413.79 for the part of with determinations made under the the cost reporting period beginning provisions of paragraphs (a) and (b) of with the month the resident passes the this section will be effective for por- test. tions of cost reporting periods occur- (e) On or after September 1, 1989, the ring on or after October 1, 2003. National Board of Medical Examiners (2) Applicability for certain hospitals. Examination, Parts I and II, may be With respect to an FTE resident who substituted for FMGEMS for purposes begins training in a residency program of the determination made under para- on or before October 1, 2003, and with graphs (a) and (d) of this section. respect to whom there has been a redis- (f) On or after June 1, 1992, the United tribution of costs or community sup- States Medical Licensing Examination port determined under the provisions may be substituted for the FMGEMS of paragraphs (a) and (b) of this sec- for purposes of the determination made tion, the hospital may continue to

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count the FTE resident until the resi- reports that are not subject to reopen- dent has completed training in that ing under § 405.1885 of this chapter, the program, or until 3 years after the date hospital’s reopening request must ex- the resident began training in that pro- plicitly state that the review is limited gram, whichever comes first. to this one issue. [69 FR 49254, Aug. 11, 2004] (2) Request for review. The hospital must request review of the classifica- § 413.82 Direct GME payments: Special tion of its rate-of-increase ceiling or rules for States that formerly had a prospective payment base year costs no waiver from Medicare reimburse- later than 180 days after the date of the ment principles. notice by the contractor of the hos- (a) Effective for cost reporting peri- pital’s base-period average per resident ods beginning on or after January 1, amount. A hospital’s request for review 1986, hospitals in States that, prior to must include sufficient documentation becoming subject to the prospective to demonstrate to the contractor that payment system, had a waiver for the adjustment of the hospital’s hospital- operation of a State reimbursement specific rate or target amount is war- control system under section 1886(c) of ranted. the Act, section 402 of the Social Secu- (3) Effect of contractor’s review. If the rity Amendments of 1967 (42 U.S.C. contractor, upon review of the hos- 1395b–1 or section 222(a) of the Social pital’s costs, determines that the hos- Security Amendment of 1972 (42 U.S.C. pital’s hospital-specific rate or target 1395b–1 (note)) are permitted to change amount should be adjusted, the adjust- the order in which they allocate ad- ment of the hospital-specific rate or ministrative and general costs to the the target amount is effective for the order specified in the instructions for the Medicare cost report. hospital’s cost reporting periods sub- (b) For hospitals making this elec- ject to the prospective payment system tion, the base-period costs for the pur- or the rate-of-increase ceiling that are pose of determining the per resident still subject to reopening under amount are adjusted to take into ac- § 405.1885 of this chapter. count the change in the order by which (b) Misclassification of GME costs—(1) they allocate administrative and gen- General rule. If costs that should have eral costs to interns and residents in been classified as GME costs were approved program cost centers. treated as operating costs during both (c) Per resident amounts are deter- the GME base period and the rate-of-in- mined for the base period and updated crease ceiling base year or prospective as described in § 413.77. For cost report- payment base year and the hospital ing periods beginning on or after Janu- wishes to receive benefit for the appro- ary 1, 1986, payment is made based on priate classification of these costs as the methodology described in § 413.76. GME costs in the GME base period, the hospital must request that the con- [69 FR 49254, Aug. 11, 2004] tractor review the classification of the § 413.83 Direct GME payments: Adjust- affected costs in the rate-of-increase ment of a hospital’s target amount ceiling or prospective payment base or prospective payment hospital- year for purposes of adjusting the hos- specific rate. pital’s target amount or hospital-spe- (a) Misclassified operating costs—(1) cific rate. For those cost reports that General rule. If a hospital has its base- are not subject to reopening under period GME costs reduced under § 405.1885 of this chapter, the hospital’s § 413.77(a) of this section because those reopening request must explicitly state costs included misclassified operating that the review is limited to this one costs, the hospital may request that issue. the contractor review the classifica- (2) Request for review. The hospital tion of the affected costs in its rate-of- must request review of the classifica- increase ceiling or prospective pay- tion of its costs no later than 180 days ment base year for purposes of adjust- after the date of the contractor’s no- ing the hospital’s target amount or tice of the hospital’s base-period aver- hospital-specific rate. For those cost age per resident amount. A hospital’s

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request for review must include suffi- (3) Meet the requirements of para- cient documentation to demonstrate to graph (e) of this section for State licen- the contractor that modification of the sure or accreditation. adjustment of the hospital’s hospital- Classroom instruction costs are those specific rate or target amount is war- costs associated with formal, didactic ranted. instruction on a specific topic or sub- (3) Effect of contractor’s review. If the ject in a class that meets at regular, contractor, upon review of the hos- scheduled intervals over a specific time pital’s costs, determines that the hos- period (for example, semester or quar- pital’s hospital-specific rate or target ter), and for which a student receives a amount should be adjusted, the adjust- grade. ment of the hospital-specific rate and Clinical training costs means costs of the adjustment of the target amount is training for the acquisition and use of effective for the hospital’s cost report- the skills of a nursing or allied health ing periods subject to the prospective profession or trade in the actual envi- payment system or the rate-of-increase ronment in which these skills will be ceiling that are still subject to reopen- used by the student upon graduation. ing under § 405.1885 of this chapter. Clinical training may involve occa- [69 FR 49254, Aug. 11, 2004] sional or periodic meetings to discuss or analyze cases, critique performance, § 413.85 Cost of approved nursing and or discuss specific skills or techniques; allied health education activities. it involves no classroom instruction. (a) Statutory basis. This section im- Community support means funding plements section 1861(v)(1)(A) of the that is provided by the community and Act and section 4004(b) of the Omnibus generally includes all non-Medicare Budget Reconciliation Act of 1990 (Pub- sources of funding (other than pay- lic Law 101–508) by establishing the ments made for furnishing services to methodology for Medicare payment of individual patients), including State the costs of approved nursing and al- and local government appropriations. lied health education activities. Community support does not include (b) Scope. (1) This section sets forth grants, gifts, and endowments of the the rules for determining Medicare kind that are not to be offset in accord- payments to hospitals for the costs of ance with section 1134 of the Act. nursing and allied health education ac- Redistribution of costs means an at- tivities. tempt by a provider to increase the (2) This section does not address amount, or to expand the types, of the Medicare payments for the direct and costs of educational activities that are indirect costs of graduate medical edu- allowed for Medicare payment purposes cation (that is, approved residency pro- by claiming costs that previously were grams in medicine, osteopathy, den- not claimed by the provider and were tistry, and podiatry). Medicare pay- considered costs of an educational in- ment for these costs is determined as stitution. For example, costs for a provided in § 412.105 of this subchapter school of nursing or allied health edu- and §§ 413.75 through 413.83. cation or a medical school that were (3) The rules under this section do incurred by an educational institution not apply to activities that are speci- and were not allowable to the provider fied in paragraph (h) of this section and in its prospective payment or rate-of- identified as normal operating costs. increase limit base year cost report, or (c) Definitions. For purposes of this graduate medical education per resi- section, the following definitions dent amount calculated under §§ 413.75 apply: through 413.83, are not allowable costs Approved educational activities means in subsequent fiscal years. formally organized or planned pro- (d) General payment rules. (1) Payment grams of study of the type that: for a provider’s net cost of nursing and (1) Are operated by providers as spec- allied health education activities is de- ified in paragraph (f) of this section; termined on a reasonable cost basis, (2) Enhance the quality of health subject to the following conditions and care at the provider; and limitations:

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(i) An approved educational activ- costs related to the clinical training of ity— students for which the CRNA may not (A) Is recognized by a national ap- receive payment under the CRNA fee proving body or State licensing author- schedule. No pass-through compensa- ity as specified in paragraph (e) of this tion costs are allowable for the time a section; CRNA spends in the clinical training of (B) Meets the criteria specified in a student anesthetist during a surgical paragraph (f) of this section for identi- procedure in the operating room for fication as an operator of an approved which the CRNA may receive payment education program. under the CRNA fee schedule. As speci- (C) Enhance the quality of health fied at § 414.46 of this chapter, if the care at the provider. CRNA continuously supervises the (ii) The cost for certain nonprovider- services of a single student nurse anes- operated programs are reimbursable on thetist, or where the medical direction a reasonable cost basis if the programs rules allow a CRNA to bill for the serv- meet the criteria specified in para- ice, payment can be made under the graph (g)(2) of this section. CRNA fee schedule. (iii) The costs of certain nonprovider- (iv) Net costs are subject to appor- operated programs at wholly owned tionment for Medicare utilization as subsidiary educational institutions are described in § 413.50. reimbursable on a reasonable cost basis (e) Approved nursing and allied health if the provisions of paragraph (g)(3) of education programs. CMS will consider this section are met. an activity an approved nursing and al- (2) Determination of net cost. (i) Sub- lied health education program if the ject to the provisions of paragraph program is a planned program of study (d)(2)(iii) of this section, the net cost of that is licensed by State law, or if li- approved educational activities is de- censing is not required, is accredited termined by deducting the revenues by the recognized national professional that a provider receives from tuition organization for the particular activ- and student fees from the provider’s ity. Such national accrediting bodies total allowable educational costs that include, but are not limited to, the are directly related to approved edu- Commission on Accreditation of Allied cational activities. Health Education Programs, the Na- (ii) A provider’s total allowable edu- tional League of Nursing Accrediting cational costs are those costs incurred Commission, the Association for Clin- by the provider for trainee stipends, ical Pastoral Education Inc., and the compensation of teachers, and other American Dietetic Association. costs of the activities as determined (f) Criteria for identifying programs op- under the Medicare cost-finding prin- erated by a provider. (1) Except as pro- ciples in § 413.24. These costs do not in- vided in paragraph (f)(2) of this section, clude patient care costs, costs incurred for cost reporting periods beginning on by a related organization, or costs that or after October 1, 1983, in order to be constitute a redistribution of costs considered the operator of an approved from an educational institution to a nursing or allied health education pro- provider or costs that have been or are gram, a provider must meet all of the currently being provided through com- following requirements: munity support. (i) Directly incur the training costs. (iii) The net costs of approved cer- (ii) Have direct control of the pro- tified registered nurse anesthetist gram curriculum. (A provider may (CRNA) education programs that are enter into an agreement with an edu- determined on a reasonable cost basis cational institution to furnish basic are subject to the additional condition academic courses required for comple- that allowable compensation costs for tion of the program, but the provider faculty members who are CRNAs are must provide all of the courses relating limited to the compensation costs for to the theory and practice of the nurs- administrative activities related to the ing or allied health profession involved educational program, the compensa- that are required for the degree, dition costs directly related to hours ploma, or certificate awarded at the spent in classroom instruction, and the completion of the program.)

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(iii) Control the administration of that ended on or before October 1, 1989. the program, including collection of This condition is met if a notice of pro- tuition (where applicable), control the gram reimbursement (NPR) was issued maintenance of payroll records of for that cost reporting period by No- teaching staff or students, or both vember 5, 1990, and the clinical training (where applicable), and be responsible costs were included as pass-through for day-to-day program operation. (A costs. If an NPR was not issued by that provider may contract with another date, or an NPR was issued but did not entity to perform some administrative treat the clinical training costs as functions, but the provider must main- pass-through costs, the condition is tain control over all aspects of the con- met if— tracted functions.) (A) The contractor included the clin- (iv) Employ the teaching staff. ical training costs in the allowable (v) Provide and control both class- costs used to determine the interim room instruction and clinical training rate for the most recent cost reporting (where classroom instruction is a re- period ending on or before October 1, quirement for program completion), 1989; or subject to the parenthetical sentence (B) The provider claimed the clinical in paragraph (f)(1)(ii) of this section. training costs as pass-through costs (2) Absent evidence to the contrary, when the cost report for the most re- the provider that issues the degree, di- cent cost reporting period ending on or ploma, or other certificate upon suc- before October 1, 1989, was initially cessful completion of an approved edu- submitted. cation program is assumed to meet all (iii) In any cost reporting period, the of the criteria set forth in paragraph percentage of total allowable provider (f)(1) of this section and to be the oper- cost attributable to allowable clinical ator of the program. training cost does not exceed the per- (g) Payment for certain nonprovider-op- centage of total cost for clinical train- erated programs—(1) Payment rule. Costs ing in the provider’s most recent cost incurred by a provider, or by an edu- reporting period ending on or before cational institution that is related to October 1, 1989. the provider by common ownership or (iv) The students in the educational control (that is, a related organization program must provide a benefit to the as defined in § 413.17(b)), for the clinical provider through the provision of clin- training of students enrolled in an ap- ical services to patients of the pro- proved nursing or allied health edu- vider. cation program that is not operated by (v) The clinical training costs must the provider, are paid on a reasonable be incurred by the provider or by an cost basis if the conditions specified in educational institution related to the paragraph (g)(2) of this section are met. provider by common control or owner- (2) Criteria for identification of nonpro- ship as defined in § 413.17(b) (‘‘Cost to re- vider-operated education programs. Pay- lated organizations.’’) Costs incurred by ment for the incurred costs of edu- a third-party, regardless of its relation- cational activities identified in para- ship to either the provider or the edu- graph (g)(1) of this section will be made cational institution, are not allowed. if the following conditions are met: (vi) The costs incurred by a provider (i) The clinical training must occur does not exceed the costs the provider on the premises of the provider, that is, would have incurred if it was the sole in the hospital itself or in the physical operator of the program. area immediately adjacent to the pro- (3) Special rule: Payment for certain vider’s main buildings, or in other nonprovider-operated programs at wholly areas and structures that are not owned subsidiary educational institu- strictly contiguous to the main build- tions. (i) Effective for portions of cost ings but are located within 250 yards of reporting periods occurring on or after the main buildings. October 1, 2003, a provider that incurs (ii) The provider must have claimed costs for a nursing or allied health edu- and been paid for clinical training cation program(s) where those pro- costs on a reasonable cost basis during gram(s) had originally been provider- the most recent cost reporting period operated according to the criteria at

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paragraph (f) of this section, and then which the employees or trainees par- operation of the program(s) was trans- ticipate that enhance the quality of ferred to a wholly owned subsidiary medical care or operating efficiency of educational institution in order to the provider and, effective October 1, meet accreditation standards prior to 2003, do not lead to the ability to prac- October 1, 2003, and where the provider tice and begin employment in a nurs- has continuously incurred the costs of ing or allied health specialty. both the classroom and clinical train- (4) Maintenance of a medical library. ing portions of the program(s) at the (5) Training of a patient or patient’s educational institution, may receive family in the use of medical appliances reasonable cost payment for such a or other treatments. program(s) according to the specifica- (6) Except as provided in paragraph tions under paragraphs (g)(3)(ii) and (g) of this section, clinical training and (g)(3)(iii) of this section. classroom instruction of students en- (ii) Payment for the incurred costs of rolled in an educational program that educational activities identified in is not operated by the provider. The paragraph (g)(3)(i) of this section will following are clinical training and be made on a reasonable cost basis if a classroom instruction costs that are al- provider, as described in paragraph lowable as normal operating costs: (g)(3)(i) of this section, received Medi- (i) Costs incurred in the clinical care reasonable cost payment for those training of students, including the clin- nursing and allied health education ical training or clerkship of under- program(s) both prior and subsequent graduate medical school students that to the date the provider transferred op- takes place in a provider. eration of the program(s) to its wholly (ii) Classroom instruction costs in- owned subsidiary educational institu- curred by a provider that meet the fol- tion (and ceased to be a provider-oper- lowing criteria: ated program(s) according to the cri- (A) The provider’s support does not teria under paragraph (f) of this sec- constitute a redistribution of nonpro- tion). vider costs to the provider. The support (iii) The provider that meets the re- must be in addition to the costs al- quirements in paragraphs (g)(3)(i) and ready being incurred by the nonpro- (g)(3)(ii) of this section will be eligible vider-operated program. If the nonpro- to receive payment under this para- vider entity reduces its costs due to re- graph for: (A) the clinical training ceiving provider support, this reduc- costs incurred for the program(s) as de- tion constitutes a redistribution of scribed in paragraph (g)(3)(i) of this costs from an educational institution section; and (B) classroom costs, but to a patient care institution and is a only those costs incurred by the pro- nonallowable provider cost. vider for the courses that were in- (B) The provider receives a benefit cluded in the programs. for the support it furnishes. (h) Cost of educational activities treated (C) The cost of the provider’s support as normal operating costs. The costs of is less than the cost the provider would the following educational activities in- incur were it to operate the program. curred by a provider but not operated (7) Other activities that do not in- by that provider are recognized only as volve the actual operation of an ap- normal operating costs and paid in ac- proved educational program. cordance with the reimbursement prin- [66 FR 3374, Jan. 12, 2001, as amended at 66 ciples specified in Part 412 of this sub- FR 14342, Mar. 12, 2001; 68 FR 45471, Aug. 1, chapter. They include: 2003; 69 FR 49254, Aug. 11, 2004; 71 FR 48142, (1) Orientation and on-the-job train- Aug. 18, 2006; 75 FR 50418, Aug. 16, 2010] ing. (2) Part-time education for bona fide § 413.87 Payments for Medicare + full-time employees at properly accred- Choice nursing and allied health ited academic or technical institutions education programs. (including other providers) devoted to (a) Statutory basis. This section im- undergraduate or graduate work. plements section 1886(l) of the Act, (3) Educational seminars, workshops, which provides for additional payments and continuing education programs in to hospitals that operate and receive

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Medicare reasonable cost reimburse- Choice utilization greater than zero in ment for approved nursing and allied its cost reporting period(s) ending in health education programs and the the fiscal year that is 2 years prior to methodology for determining the addi- the current calendar year. tional payments. (d) Calculating the additional payment (b) Scope. This section sets forth the amount for portions of cost reporting peri- rules for determining an additional ods occurring on or after January 1, 2000 payment amount to hospitals that re- and before January 1, 2001. For portions ceive payments for the costs of oper- of cost reporting periods occurring on ating approved nursing or allied health or after January 1, 2000 and before Jan- education programs under § 413.85. uary 1, 2001, subject to the provisions of (c) Qualifying conditions for payment. § 413.76(d)(4) relating to calculating a (1) For portions of cost reporting peri- proportional reduction in Medicare + ods occurring on or after January 1, Choice direct GME payments, the addi- 2000 and before January 1, 2001, a hos- tional payment amount specified in pital that operates and receives pay- paragraph (c) of this section is cal- ment for a nursing or allied health edu- culated according to the following cation program under § 413.85 may re- steps: ceive an additional payment amount (1) Step one. Each calendar year, de- associated with Medicare + Choice uti- termine the hospital’s total nursing lization. The hospital may receive the and allied health education program additional payment amount, which is payments from its cost reporting pe- calculated in accordance with the pro- riod(s) ending in the fiscal year that is visions of paragraph (d) of this section, 2 years prior to the current calendar if both of the conditions specified in year. paragraphs (c)(1)(i) and (c)(1)(ii) of this (2) Step two. Determine the ratio of section are met. the hospital’s payments from step one (i) The hospital must have received to the total of all nursing and allied Medicare reasonable cost payment for health education program payments an approved nursing or allied health across all hospitals for all cost report- education program under § 413.85 in its ing periods ending in the fiscal year cost reporting period(s) ending in the that is 2 years prior to the current cal- fiscal year that is 2 years prior to the endar year. current calendar year. (For example, if (3) Step three. Multiply the ratio cal- the current year is calendar year 2000, culated in step two by the Medicare + the fiscal year that is 2 years prior to Choice nursing and allied health pay- calendar year 2000 is FY 1998.) For a ment ‘‘pool’’ determined in accordance hospital that first establishes a nursing with paragraph (f) of this section for or allied health education program the current calendar year. The result- after FY 1998 and receives reasonable ing product is each respective hos- cost payment for the program as speci- pital’s additional payment amount. fied under § 413.85 after FY 1998, the (e) Calculating the additional payment hospital is eligible to receive an addi- amount for portions of cost reporting peri- tional payment amount in a calendar ods occurring on or after January 1, 2001. year that is 2 years after the respective For portions of cost reporting periods fiscal year so long as the hospital also occurring on or after January 1, 2001, meets the condition under paragraph subject to the provisions of § 413.76(d) (c)(1(ii) of this section. relating to calculating a proportional (ii) The hospital must be receiving reduction in Medicare + Choice direct reasonable cost payment for an ap- GME payments, the additional pay- proved nursing or allied health edu- ment amount specified in paragraph (c) cation program under § 413.85 in the of this section is calculated according current calendar year. to the following steps: (2) For portions of cost reporting pe- (1) Step one. Each calendar year, de- riods occurring on or after January 1, termine for each eligible hospital the 2001, in addition to meeting the condi- total— tions specified in paragraphs (c)(1)(i) (i) Medicare payments received for and (c)(1)(ii) of this section, the hos- approved nursing or allied health edu- pital must have had a Medicare + cation programs based on data from

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the settled cost reports for the pe- provisions of § 413.76(c) across all hos- riod(s) ending in the fiscal year that is pitals in the current calendar year to 2 years prior to the current calendar projected total direct GME payments year; and made across all hospitals in the cur- (ii) Inpatient days for that same cost rent calendar year. reporting period. (ii) Multiply the ratio calculated in (iii) Medicare + Choice inpatient days paragraph (f)(1)(i) of this section by for that same cost reporting period. projected total Medicare nursing and (2) Step two. Using the data from step allied health education reasonable cost one, determine the ratio of the indi- payments made to all hospitals in the vidual hospital’s total nursing or allied current calendar year. health payments, to its total inpatient days. Multiply this ratio by the hos- (2) The resulting product of the steps pital’s total Medicare + Choice inpa- under paragraphs (f)(1)(i) and (f)(1)(ii) tient days. of this section is the Medicare + Choice (3) Step three. CMS will determine, nursing and allied health payment using the best available data, for all el- ‘‘pool’’ for the current calendar year. igible hospitals the total of all— (3) The payment pool may not exceed (i) Nursing and allied health edu- $60 million in any calendar year. cation program payments made to all [65 FR 47051, Aug. 1, 2000, as amended at 66 hospitals for all cost reporting periods FR 32195, June 13, 2001; 69 FR 49265, Aug. 11, ending in the fiscal year that is 2 years 2004; 70 FR 47489, Aug. 12, 2005] prior to the current calendar year; (ii) Inpatient days from those same § 413.88 Incentive payments under cost reporting periods; and plans for voluntary reduction in (iii) Medicare + Choice inpatient days number of medical residents. for those same cost reporting periods. (a) Statutory basis. This section im- (4) Step four. Using the data from step plements section 1886(h)(6) of the Act, three, CMS will determine the ratio of which establishes a program under the total of all nursing and allied health education program payments which incentive payments may be made to all hospitals for all cost re- made to qualifying entities that de- porting periods ending in the fiscal velop and implement approved plans to year that is 2 years prior to the current voluntarily reduce the number of resi- calendar year, to the total of all inpa- dents in medical residency training. tient days from those same cost report- (b) Qualifying entity defined. ‘‘Quali- ing periods. CMS will multiply this fying entity’’ means: ratio by the total of all Medicare + (1) An individual hospital that is op- Choice inpatient days for those same erating one or more approved medical cost reporting periods. residency training programs as defined (5) Step 5. Calculate the ratio of the in § 413.75(b) of this chapter; or product determined in step two to the (2) Two or more hospitals that are product determined in step four. operating approved medical residency (6) Step 6. Multiply the ratio cal- training programs as defined in culated in step five by the amount de- § 413.75(b) of this chapter and that sub- termined in accordance with paragraph mit a residency reduction application (f) of this section for the current cal- as a single entity. endar year. The resulting product is (c) Conditions for payments. (1) A each respective hospital’s additional qualifying entity must submit an ap- payment amount. (f) Calculation of the payment ‘‘pool.’’ plication for a voluntary residency re- (1) Subject to paragraph (f)(3) of this duction plan that meets the require- section, each calendar year, CMS will ments and conditions of this section in calculate a Medicare + Choice nursing order to receive incentive payments for and allied health payment ‘‘pool’’ ac- reducing the number of residents in its cording to the following steps: medical residency training programs. (i) Determine the ratio of projected (2) The incentive payments will be total Medicare + Choice direct GME determined as specified under para- payments made in accordance with the graph (g) of this section.

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(d) Requirements for voluntary plans. (i) The reduction in the qualifying In order for a qualifying entity to re- entity’s FTE count as specified in the ceive incentive payments under a vol- plan during each year of the plan; and untary residency reduction plan, the (ii) The 1996 FTE count of the other qualifying entity must submit an ap- hospital(s) in the affiliated group. plication that contains the following (8) A statement indicating voluntary information, documents, and agree- participation in the plan under the ments— terms of this section, signed by each (1) A description of the operation of a hospital that is part of the applying en- plan for reducing the full-time equiva- tity. lent (FTE) residents in its approved (e) Deadline for applications. A quali- medical residency training programs, fying entity must submit an applica- consistent with the percentage reduction that meets the requirements of tion requirements specified in para- paragraph (d) of this section at least graphs (g)(2) and (g)(3) of this section; one day prior to the first day of the pe- (2) An election of the period of resi- riod to which the plan would be effec- dency training years during which the tive but no later than November 1, 1999. reductions will occur. The reductions The application must be submitted to must be fully implemented by not later the contractor, with a copy to CMS. than the fifth residency training year (f) Effective dates of plans. Residency in which the plan is effective; reduction plans that are submitted to (3) FTE counts for the base number the contractor on or after September of residents, as defined in paragraph 17, 1999 but on or before November 1, (g)(1) of this section, with a breakdown 1999, may be effective for portions of of the number of primary care resi- cost reporting periods beginning no dents compared to the total number of earlier than the day after the date of residents; and the direct and indirect the application. FTE counts of the entity on June 30, 1997. For joint applicants, these counts (g) Residency reduction requirements— must be provided individually and col- (1) Base number of residents defined. (i) lectively; ‘‘Base number of residents’’ means the (4) Data on the annual and cumu- lesser of— lative targets for reducing the number (A) The number of FTE residents in of FTE residents and the ratios of the all approved medical residency train- number of primary care residents to ing programs of the qualifying entity the total number of residents for the (before application of weighting factors base year and for each year in the 5- under § 413.79) for the most recent resi- year reduction period. For joint appli- dency training year ending June 30, cants, these data must be provided in- 1996; or dividually and collectively; (B) The number of FTE residents in (5) An agreement to not reduce the all approved medical residency train- proportion of its primary care resi- ing programs of the qualifying entity dents to its total number of residents (before application of weighting factors below the proportion that exists in the under § 413.79) for any subsequent resi- base year, as specified in paragraph dency training year that ends before (g)(1) of this section; the date the entity submits its plan to (6) An agreement to comply with the contractor and CMS. data submission requirements deemed (ii) The residency training year used necessary by CMS to make annual in- to determine the base number of resi- centive payments during the 5-year dents is the ‘‘base year’’ for deter- residency reduction plan, and to fully mining reduction requirements. cooperate with additional audit and (iii) The qualifying entity’s base monitoring activities deemed nec- number of residents may not be ad- essary by CMS; justed to reflect adjustments that may (7) For a qualifying entity that is a otherwise be made to the entity’s FTE member of an affiliated group as de- caps for new medical residency train- fined in § 413.75(b), a statement that all ing programs. members of the group agree to an ag- (2) Qualifying entity consisting of indi- gregate FTE cap that reflects— vidual hospital. The base number of

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FTE residents in all the approved med- (A) It has failed to meet a specified ical residency training programs oper- annual target for a plan year in the 5- ated by or through a qualifying entity year period; and consisting of an individual hospital (B) It wishes to adjust future annual must be reduced as follows: targets for the remaining years of the (i) If the base number of residents ex- plan in order to comply with its cumu- ceeds 750, residents, by at least 20 per- lative target. cent of the base number. (iii) An updated plan allowed under (ii) If the base number of residents paragraph (g)(5)(ii) of this section must exceeds 600 but is less than or equal to be submitted prior to the beginning of 750 residents— each July 1 medical residency training (A) By 150 residents; or year during the plan years. (B) By 20 percent, if the qualifying (h) Computation of incentive payment entity increases the number of primary amount. (1) Incentive payments to care residents included in the base qualifying entities that meets the re- number by at least 20 percent. quirements and conditions of para- (iii) If the base number of residents is graphs (d) and (g) of this section will be 600 or less residents— computed as follows: (A) By 25 percent; or (i) Step 1. Determine the amount (if (B) By 20 percent, if the qualifying any) by which the payment amount entity increases the number of primary that would have been made under care residents included in the base § 413.76 if there had been a 5-percent re- number of residents by at least 20 per- duction in the number of FTE residents cent. in the approved medical education (3) Qualifying entity consisting of two training programs of the hospital as of or more hospitals. The base number of June 30, 1997, exceeds the amount of FTE residents in the aggregate for all payment that would have been made the approved medical residency train- under § 413.76 in each year under the ing programs operated by or through a voluntary residency reduction plan, qualifying entity consisting of two or taking into account the reduction in more hospitals must be reduced— the number of FTE residents under the (i) By 25 percent; or plan. (ii) By 20 percent, if the qualifying (ii) Step 2. Determine the amount (if entity increases the number of primary any) by which the payment amount care residents included in the base that would have been made under number of residents by at least 20 per- § 412.105 of this chapter if there had cent. been a 5-percent reduction in the num- (4) Treatment of rotating residents. A ber of FTE residents in the approved qualifying entity will not be eligible medical education training programs for incentive payments for a reduction of the hospital as of June 30, 1997, ex- in the base number of residents if the ceeds the payment amount made under reduction is a result of the entity ro- § 412.105 of this chapter in each year tating residents to another hospital under the voluntary residency reduc- that is not a part of its voluntary resi- tion plan, taking into account the ac- dency reduction plan. tual reduction in the number of FTE (5) Updates to annual and cumulative residents. targets (i) Except as provided in para- (iii) Step 3. Determine the amount (if graph (g)(5)(ii) of this section an entity any) by which the payment amount with an approved voluntary residency that would have been made under reduction plan may not change the annual and cumulative reduction targets § 412.322 of this chapter if there had that are specified in its plan in accord- been a 5-percent reduction in the num- ance with paragraphs (g)(2) and (g)(3) of ber of FTE residents in the approved this section. medical education training programs (ii) An entity may update annual re- of the hospital as of June 30, 1997, ex- duction targets specified in its plan ceeds the payment amount made under only if— § 412.322 of this chapter in each year

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under the voluntary residency reduc- posed. Upon completion of a voluntary tion plan, taking into account the ac- residency reduction plan, if no penalty tual reduction in the number of FTE is imposed, the qualifying entity’s 1996 residents. FTE count is permanently adjusted to (iv) Step 4. Multiply the sum of the equal the unweighted FTE count used amounts determined under paragraph for direct GME payments for the last (h)(i), (ii), and (iii) of this section by residency training year in which a the applicable hold harmless percent- qualifying entity participates. ages specified in paragraph (i) of this (2) Penalty imposed. Upon completion section. of the voluntary residency reduction (2) The determination of the amounts plan— under paragraph (h)(1) of this section (i) During repayment period. If a pen- for any year is based on the applicable alty is imposed under paragraph (k)(2) Medicare statutory provisions in effect of this section, during the period of re- on the application deadline date for the payment, the qualifying entity’s FTE voluntary reduction plan specified count is as specified in paragraph (l)(1) under paragraph (e) of this section. of this section. (i) Applicable hold-harmless percentage. (ii) After repayment period. Once the The applicable hold-harmless percent- penalty repayment is completed, the ages for each year in which the resi- qualifying entity’s FTE reverts back to dency reduction plan is in effect are as its original 1996 FTE cap. follows: [64 FR 44855, Aug. 18, 1999, as amended at 69 (1) 100 percent for the first and sec- FR 49265, Aug. 11, 2004] ond residency training years; (2) 75 percent for the third year; § 413.89 Bad debts, charity, and cour- (3) 50 percent for the fourth year; and tesy allowances. (4) 25 percent for the fifth year. (a) Principle. Bad debts, charity, and (j) Payments to qualifying entities. An- courtesy allowances are deductions nual incentive payments through cost from revenue and are not to be in- reports will be made to each hospital cluded in allowable cost. However, sub- that is or is part of a qualifying entity ject to the limitations described under over the 5-year reduction period if the paragraph (h) of this section and the qualifying entity meets the annual and exception for services described under cumulative reduction targets specified paragraph (i) of this section, bad debts in its voluntary reduction plan. attributable to the deductibles and co- (k) Penalty for noncompliance—(1) insurance amounts are reimbursable Nonpayment. No incentive payment under the program. may be made to a qualifying entity for (b) Definitions—(1) Bad debts. (i) For a residency training year if the quali- cost reporting periods beginning before fying entity has failed to reduce the October 1, 2020: number of FTE residents according to (A) ‘‘Bad debts’’ are amounts consid- its voluntary residency reduction plan. ered to be uncollectible from accounts (2) Repayment of incentive amounts. and notes receivable that were created The qualifying entity is liable for re- or acquired in providing services. payment of the total amount of incen- (B) ‘‘Accounts receivable’’ and ‘‘notes tive payments it has received if the receivable’’ are designations for claims qualifying entity— arising from the furnishing of services, (i) Fails to reduce the base number of and are collectible in money in the rel- residents by the percentages specified atively near future. in paragraphs (g)(2) and (g)(3) of this (ii) For cost reporting periods begin- section by the end of the fifth resi- ning on or after October 1, 2020, ‘‘bad dency training year; or debts’’ are amounts considered to be (ii) Increases the number of FTE resi- uncollectible from patient accounts dents above the number of residents that were created or acquired in pro- permitted under the voluntary resi- viding services and are categorized as dency reduction plan as of the comple- implicit price concessions for cost re- tion date of the plan. porting purposes and are recorded in (l) Postplan determination of FTE caps the provider’s accounting records as a for qualifying entities—(1) No penalty im- component of net patient revenue.

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(2) Charity allowances. Charity allow- beneficiaries of the program generally ances are reductions in charges made means the provider has not recovered by the provider of services because of the cost of services covered by that the indigence or medical indigence of revenue. The failure of beneficiaries to the patient. Cost of free care (uncom- pay the deductible and coinsurance pensated services) furnished under a amounts could result in the related Hill-Burton obligation are considered costs of covered services being borne by as charity allowances. other than Medicare beneficiaries. To (3) Courtesy allowances. Courtesy al- assure that such covered service costs lowances indicate a reduction in are not borne by others, the costs at- charges in the form of an allowance to tributable to the deductible and coin- physicians, clergy, members of reli- surance amounts that remain unpaid gious orders, and others as approved by are added to the Medicare share of al- the governing body of the provider, for lowable costs. Bad debts arising from services received from the provider. other sources are not allowable costs. Employee fringe benefits, such as hos- (e) Criteria for allowable bad debt. A pitalization and personnel health pro- bad debt must meet the following cri- grams, are not considered to be cour- teria to be allowable: tesy allowances. (1) The debt must be related to cov- (c) Normal accounting treatment: Re- ered services and derived from deduct- duction in revenue. (1) For cost report- ible and coinsurance amounts. ing periods beginning before October 1, (2) The provider must be able to es- 2020: tablish that reasonable collection ef- (i) Bad debts, charity, and courtesy forts were made. allowances represent reductions in rev- (i) Non-indigent beneficiary. A non-in- enue. The failure to collect charges for digent beneficiary is a beneficiary who services furnished does not add to the has not been determined to be categori- cost of providing the services as these cally or medically needy by a State costs have already been incurred in the Medicaid Agency to receive medical as- production of the services. sistance from Medicaid, nor have they (ii) Medicare bad debts must not be been determined to be indigent by the written off to a contractual allowance provider for Medicare bad debt pur- account but must be charged to an ex- poses. To be considered a reasonable pense account for uncollectible ac- collection effort for non-indigent bene- counts. ficiaries, all of the following are appli- (2) For cost reporting periods begin- cable: ning on or after October 1, 2020: (A) A provider’s collection effort or (i) Bad debts, also known as ‘‘implicit the effort of a collection agency acting price concessions,’’ charity, and cour- on the provider’s behalf, or both, to tesy allowances represent reductions in collect Medicare deductible or coinsur- revenue. The failure to collect charges ance amounts must consist of all of the for services furnished does not add to following: the cost of providing the services as (1) Be similar to the collection effort these costs have already been incurred put forth to collect comparable in the production of the services. amounts from non-Medicare patients. (ii) Medicare bad debts must not be (2) For cost reporting periods begin- written off to a contractual allowance ning before October 1, 2020, involve the account but must be recorded as an im- issuance of a bill to the beneficiary or plicit price concession that results in a the party responsible for the bene- reduction in revenue. ficiary’s personal financial obligations (d) Requirements for Medicare. Under on or shortly after discharge or death Medicare, costs of covered services fur- of the beneficiary. nished beneficiaries are not to be borne (3) For cost reporting periods begin- by individuals not covered by the Medi- ning on or after October 1, 2020, involve care program, and conversely, costs of the issuance of a bill to the beneficiary services provided for other than bene- or the party responsible for the beneficiaries are not to be borne by the ficiary’s personal financial obligations Medicare program. Uncollected rev- on or before 120 days after the latter of enue related to services furnished to one of the following:

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(i) The date of the Medicare remit- termined to be indigent or medically tance advice that results from proc- indigent by the provider and is not eli- essing the claim for services furnished gible for Medicaid as categorically or to the beneficiary and generates the medically needy. beneficiary’s cost sharing amounts. (A) To determine a beneficiary to be (ii) The date of the remittance advice an indigent non-dual eligible bene- from the beneficiary’s secondary payer, ficiary, the provider— if any. (1) Must not use a beneficiary’s dec- (iii) The date of the notification that laration of their inability to pay their the beneficiary’s secondary payer does medical bills or deductibles and coin- not cover the service furnished to the surance amounts as sole proof of indi- beneficiary. gence or medical indigence; (4) Include other actions such as sub- (2) Must take into account the anal- sequent billings, collection letters, and ysis of both the beneficiary’s assets telephone calls, emails, text messages, (only those convertible to cash and un- or personal contacts with this party. necessary for the beneficiary’s daily (5)(i) Last at least 120 days after living) and income; paragraph (e)(2)(i)(A)(2) or (3) of this (3) May consider extenuating cir- section is met before being written off cumstances that would affect the de- as uncollectible under paragraph (e)(3) termination of the beneficiary’s indi- of this section. gence or medical indigence which may (ii) Start a new 120-day collection pe- include an analysis of both the bene- riod each time a payment is received ficiary’s liabilities and expenses, if in- within a 120-day collection period. digence is unable to be determined (6) Maintaining and, upon request, under paragraph (e)(ii)(A)(2) of this sec- furnishing verifiable documentation to tion; its contractor that includes all of the (4) Must determine that no source following: other than the beneficiary would be le- (i) The provider’s bad debt collection gally responsible for the beneficiary’s policy which describes the collection medical bill, such as a legal guardian process for Medicare and non-Medicare or State Medicaid program; and patients. (5) Must maintain and, upon request, (ii) The patient account history docu- furnish its contractor its indigence pol- ments which show the dates of various icy describing the method by which in- collection actions such as the issuance digence or medical indigence is deter- of bills to the beneficiary, follow-up mined and all the verifiable beneficiary collection letters, reports of telephone specific documentation which supports calls and personal contact, etc. the provider’s determination of each (iii) The beneficiary’s file with copies beneficiary’s indigence or medical indi- of the bill(s) and follow-up notices. gence. (B) A provider that uses a collection (B) Once indigence is determined the agency to perform its collection effort bad debt may be deemed uncollectible must do all of the following: without applying a collection effort (1) Reduce the beneficiary’s account under paragraph (e)(2)(i)(A) or (B) of receivable by the gross amount col- this section. lected. (iii) Indigent dual-eligible beneficiaries (2) Include any fee charged by the (including qualified Medicare bene- collection agency as an administrative ficiaries). Providers may deem Medicare cost. beneficiaries indigent or medically in- (3) Before claiming the unpaid digent when such individuals have also amounts as a Medicare bad debt, cease been determined eligible for Medicaid all collection efforts, including the col- under a State’s Title XIX Medicaid pro- lection agency efforts, and ensure that gram as either categorically needy in- the collection accounts have been re- dividuals or medically needy individ- turned to the provider from the agen- uals. To be considered a reasonable col- cy. lection effort for dual-eligible bene- (ii) Indigent non-dual eligible beneficiaries: ficiary. An indigent non-dual eligible (A) When a State permits a Medicare beneficiary is a beneficiary who is de- provider’s Medicaid enrollment for the

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purposes of processing a beneficiary’s (3) May include the Medicare deduct- claim, to determine the State’s liabil- ible or coinsurance amount, or any por- ity for the beneficiary’s Medicare cost tion thereof that the State is not obli- sharing, the provider— gated to pay, and which remains un- (1) Must determine whether the paid by the beneficiary, as an allowable State’s Title XIX Medicaid Program Medicare bad debt. (or a local welfare agency, if applica- (3) The debt was actually ble) is responsible to pay all or a por- uncollectible when claimed as worth- tion of the beneficiary’s Medicare de- less. ductible or coinsurance amounts; (4) Sound business judgment estab- (2) Must submit a bill to its Medicaid/ lished that there was no likelihood of Title XIX agency (or to its local wel- recovery at any time in the future. fare agency) to determine the State’s (f) Reporting period for writing off bad cost sharing obligation to pay all or a debts and reporting of recoveries of bad portion of the applicable Medicare de- debts reimbursed in prior periods. For ductible and coinsurance; cost reporting periods beginning be- (3) Must submit the Medicaid remit- fore, on, or after October 1, 2020, the de- tance advice received from the State to ductible and coinsurance amounts units Medicare contractor; collected from beneficiaries are to be (4) Must reduce allowable Medicare written off and recognized as allowable bad debt by any amount that the State bad debts in the cost reporting period is obligated to pay, either by statute or in which the accounts are deemed to be under the terms of its approved Med- worthless. icaid State plan, regardless of whether (1) Any payment on the account the State actually pays its obligated made by the beneficiary or a respon- amount to the provider; and sible party, after the write-off date but (5) May include the Medicare deduct- before the end of the cost reporting pe- ible or coinsurance amount, or any por- riod, must be used to reduce the final tion thereof that the State is not obli- bad debt for the account claimed in gated to pay, and which remains un- that cost report. paid by the beneficiary, as an allowable (2) In some cases an amount written Medicare bad debt. off as a bad debt and reimbursed by the (B) When, through no fault of the program in a prior cost reporting pe- provider, a provider does not receive a riod may be recovered in a subsequent Medicaid remittance advice because period. the State does not permit a Medicare (i) In situations described in this provider’s Medicaid enrollment for the paragraph (f)(2), the recovered amount purposes of processing a beneficiary’s must be used to reduce the provider’s claim, or because the State does not reimbursable costs in the period in generate a Medicaid remittance advice, which the amount is recovered. the provider— (ii) The amount of reduction in the (1) Must submit to its contractor, all period of recovery (as specified in para- of the following auditable and graph (f)(2)(i) of this section) must not verifiable documentation: exceed the actual amount reimbursed (i) The State’s Medicaid notification by the program for the related bad debt stating that the State has no legal ob- in the applicable prior cost reporting ligation to pay the provider for the period. beneficiary’s Medicare cost sharing. (g) Charity allowances. Charity allow- (ii) A calculation of the amount the ances have no relationship to bene- State owes the provider for Medicare ficiaries of the Medicare program and cost sharing. are not allowable costs. These charity (iii) Verification of the beneficiary’s allowances include the costs of uncom- eligibility for Medicaid for the date of pensated services furnished under a service; Hill-Burton obligation. (Note: In ac- (2) Must reduce allowable Medicare cordance with section 106(b) of Pub. L. bad debt by any amount the State is 97–248 (enacted September 3, 1982), this obligated to pay, regardless of whether sentence is effective with respect to the State actually pays its obligated any costs incurred under Medicare ex- amount to the provider; and cept that it does not apply to costs

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which have been allowed prior to Sep- ity or a patient receiving post-hospital tember 3, 1982, pursuant to a final court SNF care in a swing bed hospital. order affirmed by a United States (B) For cost reporting periods begin- Court of Appeals.) The cost to the pro- ning during fiscal year 2014, by 24 per- vider of employee fringe-benefit pro- cent, for a patient in a skilled nursing grams is an allowable element of reim- facility or a patient receiving post-hos- bursement. pital SNF care in a swing bed hospital. (h) Limitations on bad debts—(1) Hos- (C) For cost reporting periods begin- pitals. In determining reasonable costs ning during a subsequent fiscal year, for hospitals, the amount of allowable by 35 percent, for a patient in a skilled bad debt (as defined in paragraph (e) of nursing facility or a patient receiving this section) is reduced: post-hospital SNF care in a swing bed (i) For cost reporting periods begin- hospital. ning during fiscal year 1998, by 25 per- (3) End-stage renal dialysis facilities. In cent; determining reasonable costs for an (ii) For cost reporting periods begin- end-stage renal dialysis facility, the ning during fiscal year 1999, by 40 per- amount of allowable bad debt (as de- cent; fined in paragraph (e) of this section) (iii) For cost reporting periods begin- is: ning during fiscal year 2000, by 45 per- (i) For cost reporting periods begin- cent; and ning before October 1, 2012, reimbursed (iv) For cost reporting periods begin- up to the facility’s costs. ning during fiscal years 2001 through (ii) For cost reporting periods begin- 2012, by 30 percent. ning on or after October 1, 2012 and be- (v) For cost reporting periods begin- fore January 1, 2013, reduced by 12 per- ning during a subsequent fiscal year, cent with the resulting amount reim- by 35 percent. bursed up to the facility’s costs. (2) Skilled nursing facilities and swing (iii) For cost reporting periods begin- bed hospitals. For the purposes of this ning on or after January 1, 2013 and be- paragraph (h)(2), a dual eligible indi- fore October 1, 2013, reduced by 12 per- vidual is defined as an individual that cent. is entitled to benefits under Part A of (iv) For cost reporting periods begin- Medicare and is determined eligible by ning during fiscal year 2014, reduced by the State for medical assistance under 24 percent. Title XIX of the Act as described under (v) For cost reporting periods begin- paragraph (2) of the definition of a ning during a subsequent fiscal year, ‘‘full-benefit dual eligible individual’’ reduced by 35 percent. at § 423.772 of this chapter. In deter- (4) All other providers. In determining mining reasonable costs for a skilled reasonable costs for all other providers, nursing facility and for post-hospital suppliers and other entities not de- SNF care furnished in a swing bed hos- scribed elsewhere in paragraph (h) of pital, as defined in § 413.114(b), the this section that are eligible to receive amount of allowable bad debt (as de- reimbursement for bad debts under this fined in paragraph (e) of this section) is section, the amount of allowable bad reduced: debts (as defined in paragraph (e) of (i) For non-dual eligible individuals— this section) is reduced: (A) For cost reporting periods begin- (i) For cost reporting periods beginning during fiscal years 2006 through ning during fiscal year 2013, by 12 per- 2012, by 30 percent, for a patient in a cent. skilled nursing facility. (ii) For cost reporting periods begin- (B) For cost reporting periods beginning during fiscal year 2014, by 24 per- ning during a subsequent fiscal year, cent. by 35 percent, for a patient in a skilled (iii) For cost reporting periods begin- nursing facility or receiving post-hos- ning during a subsequent fiscal year, pital SNF care in a swing bed hospital. by 35 percent. (ii) For dual eligible individuals—(A) (i) Exceptions applicable to bad debt re- For cost reporting periods beginning imbursement. (1) Bad debts arising from during fiscal year 2013, by 12 percent, covered services paid under a reason- for a patient in a skilled nursing facil- able charge-based methodology or a fee

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schedule are not reimbursable under § 413.92 Costs of surety bonds. the program. Costs incurred by a provider to ob- (2) For end-stage renal dialysis serv- tain a surety bond required by part 489, ices furnished on or after January 1, subpart F of this chapter are not in- 2011 and paid for under the end-stage cluded as allowable costs. renal dialysis prospective payment system described in § 413.215, bad debts [63 FR 310, Jan. 5, 1998] arising from covered items or services § 413.94 Value of services of nonpaid that, prior to January 1, 2011 were paid workers. under a reasonable charge-based methodology or a fee schedule, including but (a) Principle. The value of services in positions customarily held by full-time not limited to drugs, laboratory tests, employees performed on a regular, and supplies are not reimbursable scheduled basis by individuals as under the program. nonpaid members of organizations [51 FR 34793, Sept. 30, 1986, as amended at 57 under arrangements between such or- FR 33898, July 31, 1992; 60 FR 63189, Dec. 8, ganizations and a provider for the per- 1995; 63 FR 41005, July 31, 1998; 66 FR 32195, formance of such services without di- June 13, 2001. Redesignated at 69 FR 49254, rect remuneration from the provider to Aug. 11, 2004, and amended at 71 FR 48142, such individuals is allowable as an op- Aug. 18, 2006; 71 FR 69785, Dec. 1, 2006; 75 FR erating expense for the determination 49198, Aug. 12, 2010; 77 FR 67350, Nov. 9, 2012; of allowable cost subject to the limita- 85 FR 59023, Sept. 18, 2020] tion contained in paragraph (b) of this § 413.90 Research costs. section. The amounts allowed are not to exceed those paid others for similar (a) Principle. Costs incurred for re- work. Such amounts must be identifi- search purposes, over and above usual able in the records of the institutions patient care, are not includable as al- as a legal obligation for operating ex- lowable costs. penses. (b) Application. (1) There are numer- (b) Limitations: Services of nonpaid ous sources of financing for health-re- workers. The services must be per- lated research activities. Funds for this formed on a regular, scheduled basis in purpose are provided under many Fed- positions customarily held by full-time eral programs and by other tax-sup- employees and necessary to enable the ported agencies. Also, many founda- provider to carry out the functions of tions, voluntary health agencies, and normal patient care and operation of other private organizations, as well as the institution. The value of services of individuals, sponsor or contribute to a type for which providers generally do the support of medical and related re- not remunerate individuals performing search. Funds available from such such services is not allowable as a resources are generally ample to meet imbursable cost under the Medicare basic medical and hospital research program. For example, donated serv- needs. A further consideration is that ices of individuals in distributing quality review should be assured as a books and magazines to patients, or in condition of governmental support for serving in a provider canteen or cafe- research. Provisions for such review teria or in a provider gift shop, would would introduce special difficulties in not be reimbursable. the Medicare programs. (c) Application. The following illus- (2) If research is conducted in con- trates how a provider would determine junction with, and as a part of, the an amount to be allowed under this care of patients, the costs of usual pa- principle: The prevailing salary for a lay nurse working in Hospital A is tient care and studies, analyses, sur- $5,000 for the year. The lay nurse re- veys, and related activities to serve the ceives no maintenance or special per- provider’s administrative and program quisites. A sister working as a nurse needs are allowable costs in the deter- engaged in the same activities in the mination of payment under Medicare. same hospital receives maintenance [51 FR 34793, Sept. 30, 1986, as amended at 61 and special perquisites which cost the FR 63748, Dec. 2, 1996] hospital $2,000 and are included in the

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hospital’s allowable operating costs. come. However, modern accounting The hospital would then include in its theory holds that income is not derived records an additional $3,000 to bring from a purchase but rather from a sale the value of the services rendered to or an exchange and that purchase dis- $5,000. The amount of $3,000 would be counts are reductions in the cost of allowable if the provider assumes obli- whatever was purchased. The true cost gation for the expense under a written of the goods or services is the net agreement with the sisterhood or other amount actually paid for them. Treat- religious order covering payment by ing purchase discounts as income the provider for the services. would result in an overstatement of costs to the extent of the discount. § 413.98 Purchase discounts and allow- (2) As with discounts, allowances, ances, and refunds of expenses. and rebates received from purchases of (a) Principle. Discounts and allow- goods or services, refunds of previous ances received on purchases of goods or expense payments are clearly reduc- services are reductions of the costs to tions in costs and must be reflected in which they relate. Similarly, refunds of the determination of allowable costs. previous expense payments are reduc- This treatment is equitable and is in tions of the related expense. accord with that generally followed by (b) Definitions—(1) Discounts. Dis- other governmental programs and counts, in general, are reductions third-party payment organizations granted for the settlement of debts. paying on the basis of cost. (2) Allowances. Allowances are deductions granted for damage, delay, short- § 413.100 Special treatment of certain age, imperfection, or other causes, ex- accrued costs. cluding discounts and returns. (a) Principle. As described in (3) Refunds. Refunds are amounts § 413.24(b)(2), under the accrual basis of paid back or a credit allowed on ac- accounting, revenue is reported in the count of an overcollection. period in which it is earned and ex- (c) Normal accounting treatment—Re- penses are reported in the period in duction of costs. All discounts, allow- which they are incurred. In the case of ances, and refunds of expenses are re- accrued costs described in this section, ductions in the cost of goods or serv- for Medicare payment purposes the ices purchased and are not income. If costs are allowable in the year in they are received in the same account- which the costs are accrued and ing period in which the purchases were claimed for Medicare payment only made or expenses were incurred, they under the conditions set forth in para- will reduce the purchases or expenses graph (c) of this section. of that period. However, if they are re- (b) Definitions—(1) All-inclusive paid ceived in a later accounting period, days off benefit. An all-inclusive paid they will reduce the comparable pur- days off benefit replaces other vacation chases or expenses in the period in and sick pay plans. It is a formal plan which they are received. under which, based on actual hours (d) Application. (1) Purchase discounts worked, all employees accrue vested have been classified as cash, trade, or leave or payment in lieu of vested quantity discounts. Cash discounts are leave for any combination of types of reductions granted for the settlement leave, such as illness, medical appoint- of debts before they are due. Trade dis- ments, holidays, and vacations. counts are reductions from list prices (2) Self-insurance. Self-insurance is a granted to a class of customers before means by which a provider independ- consideration of credit terms. Quantity ently or as part of a group undertakes discounts are reductions from list the risk of protecting itself against an- prices granted because of the size of in- ticipated liabilities by providing funds dividual or aggregate purchase trans- in an amount equal to anticipated li- actions. Whatever the classification of abilities, rather than by purchasing in- purchase discounts, like treatment in surance coverage. reducing allowable costs is required. In (c) Recognition of accrued costs—(1) the past, purchase discounts were con- General. Although Medicare recognizes, sidered as financial management in- in the year of accrual, the accrual of

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costs for which a provider has not actu- in the period in which the cost was ac- ally expended funds during the current crued and claimed for Medicare pay- cost reporting period, for purposes of ment. However, an contractor may payment Medicare does not recognize choose to require the adjustment in the the accrual of costs unless the related period in which the cost was accrued liabilities are liquidated timely. and claimed for Medicare payment if (2) Requirements for liquidation of li- the cost report for that period is open abilities. For accrued costs to be recog- or can be reopened as provided in nized for Medicare payment in the year § 405.1885 of this chapter, and if the con- of the accrual, the requirements set tractor believes the adjustment is more forth below must be met with respect appropriate in that period. to the liquidation of related liabilities. (iii) Sick pay. (A) If sick leave is vest- If liquidation does not meet these re- ed and funded in a deferred compensa- quirements, the cost is disallowed, gen- tion plan, liabilities related to the con- erally in the year of accrual, except as tributions to the fund must be liq- specified in paragraph (c)(2)(ii) of this section. uidated, generally within 1 year after (i) A short-term liability. (A) Except as the end of the cost reporting period in provided in paragraph (c)(2)(i)(B) of which the liability is incurred. If, with- this section, a short-term liability, in- in the 1-year time limit, the provider cluding the current portion of a long- furnishes to the contractor sufficient term liability (for example, mortgage written justification (based upon docu- interest payments due to be paid in the mented evidence) for nonpayment of current year), must be liquidated with- the liability, the contractor may grant in 1 year after the end of the cost re- an extension for good cause. The exten- porting period in which the liability is sion may not exceed 3 years beyond the incurred. end of the cost reporting year in which (B) If, within the 1-year time limit, the liability was incurred. Contribu- the provider furnishes to the con- tions to the deferred compensation tractor sufficient written justification plan must be reduced to reflect esti- (based upon documented evidence) for mated forfeitures. Actual forfeitures nonpayment of the liability , the con- above or below estimated forfeitures tractor may grant an extension for must be used to adjust annual con- good cause. The extension may not ex- tributions to the fund. ceed 3 years beyond the end of the cost (B) If the sick leave plan grants em- reporting year in which the liability ployees the nonforfeitable right to de- was incurred. mand cash payment for unused sick (ii) Vacation pay and all-inclusive paid leave at the end of each year, sick pay days off. (A) If the provider’s vacation is includable in allowable costs, with- policy, or its policy for all-inclusive out funding, in the cost reporting pe- paid days off, is consistent for all em- riod in which it is earned. ployees, liquidation of the liability (C) Sick pay paid on any basis other must be made within the period pro- than that specified in paragraphs vided for by that policy. (B) If the provider’s vacation policy, (c)(2)(iii) (A) or (B) of this section can or its policy for all-inclusive paid days be claimed for Medicare payment only off, is not consistent for all employees, on a cash basis for the year in which liquidation of the liability must be the benefits are paid. made within 2 years after the close of (iv) Compensation of owners. Accrued the cost reporting period in which the liability related to compensation of liability is accrued. owners other than sole proprietors and (C) If payment is not made within the partners must be liquidated within 75 required time period or if benefits are days after the close of the cost report- forfeited by the employee, an adjusting period in which the liability occurs. ment to disallow the accrued cost is (v) Nonpaid workers. Obligations in- made in the current period (that is, the curred under a legally-enforceable latest year in which payment should agreement to remunerate an organiza- have been made or the year in which tion of nonpaid workers must be dis- the benefits are forfeited) rather than charged no later than the end of the

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provider’s cost reporting period fol- regarding deferred compensation and lowing the period in which the services to applicable program instructions for were furnished. determining Medicare payment for de- (vi) FICA and other payroll taxes—(A) ferred compensation. General rule. The provider’s share of (D) Exception: Qualified defined ben- FICA and other payroll taxes that the efit pension plans, which are funded de- provider becomes obligated to remit to ferred compensation arrangements, governmental agencies is included in shall be reported on a cash accounting allowable costs only during the cost re- basis as follows: porting period in which payment (upon (1) The allowable pension cost shall which the payroll taxes are based) is be equal to the amount of actual pen- actually made to the employee. For example, payroll taxes applicable to va- sion contributions funded during the cation benefits are not to be accrued in hospital’s current Medicare cost re- the period in which the vacation bene- porting period, plus any contributions fits themselves are accrued but rather funded in a prior period and carried for- are allowable only in the period in ward, subject to the limit under para- which the employee takes the vaca- graph (c)(2)(vii)(D)(2) of this section. tion. (2) Except as provided in paragraph (B) Exception. If payment would be (c)(2)(vii)(D)(3) of this section, the al- made to an employee during a cost re- lowable pension cost shall not exceed porting period but for the fact the reg- 150 percent of the average contribu- ularly scheduled payment date is after tion(s) funded during the three con- the end of the period, costs of accrued secutive Medicare cost reporting peri- payroll taxes related to the portion of ods that produce the highest average payroll accrued through the end of the contribution(s), out of the five most re- period, but paid to the employee after cent Medicare cost reporting periods the beginning of the new period, are al- (ending with the current cost reporting lowable costs in the year of accrual, period). Contributions in excess of the subject to the liquidation requirements limit may be carried forward to future specified in paragraph (c)(2)(i) of this period(s). In the case of a newly adopt- section. ed pension plan, the 5-year look-back (vii) Deferred compensation. (A) Rea- period and/or the 3-year averaging pe- sonable provider payments made under riod will be limited to the number of unfunded deferred compensation plans are included in allowable costs only cost reporting periods the provider during the cost reporting period in sponsored a qualified defined benefit which actual payment is made to the pension plan. participating employee. (3) A waiver of the limit imposed (B) Accrued liability related to con- under paragraph (c)(2)(vii)(D)(2) of this tributions to a funded deferred com- section may be granted for a specific pensation plan must be liquidated Medicare cost reporting period for all within 1 year after the end of the cost or a portion of the contributions in ex- reporting period in which the liability cess of the limit imposed under para- is incurred. An extension, not to exceed graph (c)(2)(vii)(D)(2) of this section if 3 years beyond the end of the cost re- it is determined that such excess costs porting year in which the liability was are reasonable and necessary for that incurred, may be granted by the con- period. tractor for good cause if the provider, (viii) Self-insurance. Accrued liability within the 1-year time limit, furnishes related to contributions to a self-insur- to the contractor sufficient written ance program that are systematically justification for non-payment of the li- made to a funding agency and that ability. cover malpractice and comprehensive (C) Postretirement benefit plans (in- general liability, unemployment com- cluding those addressed in Statement pensation, workers’ compensation in- of Financial Accounting Standards No. 106 (December 1990)) are deferred com- surance losses, or employee health ben- pensation arrangements and thus are efits, must be liquidated within 75 days subject to the provisions of this section

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after the close of the cost reporting pe- services, and a reasonable compensa- riod. tion for these services is an allowable cost. In corporate providers, the sala- [60 FR 33136, June 27, 1995, as amended at 64 FR 51909, Sept. 27, 1999; 77 FR 53682, Aug. 31, ries of owners who are also employees 2012] are subject to the same requirements of reasonableness. If the services are § 413.102 Compensation of owners. furnished on less than a full-time basis, (a) Principle. A reasonable allowance the allowable compensation should re- of compensation for services of owners flect an amount proportionate to a is an allowable cost provided that the full-time basis. Reasonableness of com- services are actually performed in a pensation may be determined by ref- necessary function. erence to, or in comparison with, com- (b) Definitions—(1) Compensation. pensation paid for comparable services Compensation means the total benefit and responsibilities in comparable in- received by the owner for the services stitutions; or it may be determined by he furnishes to the institution. It in- other appropriate means. cludes the following items: (i) Salary amounts paid for manage- § 413.106 Reasonable cost of physical and other therapy services fur- rial, administrative, professional, and nished under arrangements. other services. (ii) Amounts paid by the institution (a) Principle. The reasonable cost of for the personal benefit of the propri- the services of physical, occupational, etor. speech, and other therapists, and serv- (iii) The cost of assets and services ices of other health specialists (other that the proprietor receives from the than physicians), furnished under ar- institution. rangements (as defined in section (iv) Deferred compensation. 1861(w) of the Act) with a provider of (2) Reasonableness. Reasonableness re- services, a clinic, a rehabilitation quires that the compensation allow- agency or a public health agency, may ance— not exceed an amount equivalent to (i) Be such an amount as would ordi- the prevailing salary and additional narily be paid for comparable services costs that would reasonably have been by comparable institutions; and incurred by the provider or other orga- (ii) Depend upon the facts and cir- nization had such services been per- cumstances of each case. formed by such person in an employ- (3) Necessary. Necessary requires that ment relationship, plus the cost of the function be— other reasonable expenses incurred by (i) Such that had the owner not fur- such person in furnishing services nished the services, the institution under such an arrangement. However, would have had to employ another per- if the services of a therapist are re- son to perform the services; and quired on a limited part-time basis, or (ii) Pertinent to the operation and to perform intermittent services, pay- sound conduct of the institution. ment may be made on the basis of a (c) Application. (1) Owners of provider reasonable rate per unit of service, organizations often furnish services as even though this rate may be greater managers, administrators, or in other per unit of time than salary-related capacities. In such cases, it is equitable amounts, if the greater payment is, in that reasonable compensation for the the aggregate, less than the amount services furnished to be an allowable that would have been paid had a thera- cost. To do otherwise would disadvan- pist been employed on a full-time or tage such owners in comparison with regular part-time salaried basis. Pursu- corporate providers or providers em- ant to section 17(a) of Public Law 93– ploying persons to perform similar 233 (87 Stat. 967), the provisions of this services. section are effective for cost reporting (2) Ordinarily, compensation paid to periods beginning after March, 1975. proprietors is a distribution of profits. (b) Definitions—(1) Prevailing salary. However, if a proprietor furnishes nec- The prevailing salary is the hourly sal- essary services for the institution, the ary rate based on the 75th percentile of institution is in effect employing his salary ranges paid by providers in the

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geographical area, by type of therapy, the range of salaries paid to full-time to therapists working full time in an employee therapists. employment relationship. (7) Administrative responsibility. Ad- (2) Fringe benefit and expense factor. ministrative responsibility is the per- The standard fringe benefit and ex- formance of those duties that normally pense factor is an amount that takes fall within the purview of a department account of fringe benefits, such as va- head or other supervisor. This term cation pay, insurance premiums, pen- does not apply to directing aides or sion payments, allowances for job-re- other assistants in furnishing direct lated training, meals, etc., generally patient care. received by an employee therapist, as (c) Application. (1) Under this provi- well as expenses, such as maintaining sion, CMS will establish criteria for use an office, appropriate insurance, etc., in determining the reasonable cost of an individual not working as an em- physical, occupational, speech, and ployee might incur in furnishing serv- other therapy services and the services ices under arrangements. of other health specialists (other than (3) Adjusted hourly salary equivalency physicians) furnished by individuals amount. The adjusted hourly salary under arrangements with a provider of equivalency amount is the prevailing services, a clinic, a rehabilitation hourly salary rate plus the standard agency, or public health agency. It is fringe benefit and expense factor. This recognized that providers have a wide amount is determined on a periodic variety of arrangements with such in- basis for appropriate geographical dividuals. These individuals may be areas. independent practitioners or employees (4) Travel allowance. A standard trav- of organizations furnishing various el allowance is an amount that is rec- health care specialists. This provision ognized, in addition to the adjusted does not require change in the sub- hourly salary equivalency amount. stance of these arrangements. (5) Limited part-time or intermittent (2) If therapy services are performed services. Therapy services are consid- under arrangements at a provider site ered to be on a limited part-time or on a full-time or regular part-time intermittent basis if the provider or basis, the reasonable cost of such serv- other organization furnishing the services may not exceed the amount deter- ices under arrangements requires the mined by taking into account the total services of a therapist or therapists on number of hours of services furnished an average of less than 15 hours per by the therapist, the adjusted hourly week. This determination is made by salary equivalency amount appropriate dividing the total hours of services fur- for the particular therapy in the geo- nished during the cost reporting period graphical area in which the services by the number of weeks in which the are furnished and a standard travel al- services were furnished in the cost re- lowance. porting period regardless of the number (3) If therapy services are performed of days in each week in which services under arrangements on a limited part- were performed. time or intermittent basis at the pro- (6) Guidelines. Guidelines are the vider site, the reasonable cost of such amounts published by CMS reflecting services is evaluated on a reasonable the application of paragraphs (b) (1) rate per unit of service basis, except through (4) of this section to an indi- that payment for these services, in the vidual therapy service and a geo- aggregate, during the cost reporting graphical area. Other statistically period, may not exceed the amount valid data may be used to establish that would be determined to be reason- guidelines for a geographical area, pro- able under paragraph (c)(2) of this sec- vided that the study designs, question- tion, had a therapist furnished the pro- naires and instructions, as well as the vider or other organization furnishing resultant survey data for determining the services under arrangements 15 the guidelines are submitted to and ap- hours of service per week on a regular proved in advance by CMS. Such data part-time basis for the weeks in which must be arrayed so as to permit the de- services were furnished by the non-em- termination of the 75th percentile of ployee therapist.

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(4) If an HHA furnishes services under (5) If therapy services are performed arrangements at the patient’s resi- in situations where compensation to a dence or in other situations in which therapist employed by the provider is therapy services are not performed at based, at least in part, on a fee-for- the provider’s site, the reasonable cost service or on a percentage of income of such services is evaluated as follows: (or commission), the guidelines will (i) Time records available. If time apply. The entire compensation will be records of HHA visits are maintained subject to the guidelines in cases where by the provider, the reasonable cost of the nature of the arrangements is most such services is evaluated on a unit-of- like an under ‘‘arrangement’’ situa- time basis, by taking into account the tion, although technically the provider total number of hours of service fur- may treat the therapists as employees. nished by the therapist, the adjusted The intent of this section is to prevent hourly salary equivalency amount ap- an employment relationship from propriate for the particular therapy in being used to circumvent the guide- the geographical area in which the lines. services are furnished, and a standard (6) These provisions are applicable to travel allowance for each visit. How- individual therapy services or dis- ever, if the travel time of the therapist ciplines by means of separate guide- is accurately recorded by the therapist, lines by geographical area and apply to and approved and maintained by the costs incurred after issuance of the provider, the reasonable cost of such guidelines but no earlier than the be- services may be evaluated, at the op- ginning of the provider’s cost reporting tion of the provider, by taking into ac- period described in paragraph (a) of count the total number of hours of this section. Until a guideline is issued service furnished by the therapist, infor a specific therapy or discipline, cluding travel time, and the adjusted costs are evaluated so that such costs hourly salary equivalency amount ap- do not exceed what a prudent and cost- propriate for the particular therapy in conscious buyer would pay for the the geographical area in which the given service. services are furnished. This option does (d) Notice of guidelines to be imposed. not apply to services furnished by HHAs under arrangements with pro- Prior to the beginning of a period to viders other than HHAs. which a guideline will be applied, a no- (ii) No time records available. If time tice will be published in the FEDERAL records are unavailable or found to be REGISTER establishing the guideline inaccurate, each HHA visit is consid- amounts to be applied to each geo- ered the equivalent of one hour of serv- graphical area by type of therapy. ice. In such cases, the reasonable cost (e) Additional allowances. (1) If a ther- of such services is determined by tak- apist supervises other therapists or has ing into account the number of visits administrative responsibility for oper- made by the therapist under arrange- ating a provider’s therapy department, ments with such agency, the adjusted a reasonable allowance may be added hourly salary equivalency amount ap- to the adjusted hourly salary equiva- propriate for the particular therapy in lency amount by the contractor based the geographical area in which the on its knowledge of the differential be- services are furnished, and a standard tween therapy supervisors’ and thera- travel allowance. pists’ salaries in similar provider set- (iii) Limited part-time or intermittent tings in the area. services. If under paragraph (c)(4) (i) or (2) If a therapist performing services (ii) of this section, the provider re- under arrangements furnishes equip- quired therapy services on an average ment and supplies used in furnishing of less than 15 hours per week, the therapy services, the guideline amount services are considered limited part- may be supplemented by the cost of the time or intermittent services, and the equipment and supplies, provided the reasonable cost of such services is eval- cost does not exceed the amount the uated on a reasonable rate per unit of provider, as a prudent and cost-con- service basis as described in paragraph scious buyer, would have been able to (c)(3) of this section. include as allowable cost.

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(f) Exceptions. The following excep- SNF care furnished by rural hospitals tions may be granted but only upon the and CAHs having a swing-bed approval. provider’s demonstration that the con- (1) Services furnished in cost reporting ditions indicated are present: periods beginning prior to July 1, 2002. (1) Exception because of unique cir- Posthospital SNF care furnished in cumstances or special labor market condi- general routine inpatient beds in rural tions. An exception may be granted hospitals and CAHs is paid in accord- under this section by the contractor if ance with the special rules in para- a provider demonstrates that the costs graph (c) of this section for deter- for therapy services established by the mining the reasonable cost of this care. guideline amounts are inappropriate to When furnished by rural and CAH a particular provider because of some swing-bed hospitals approved after unique circumstances or special labor March 31, 1988 with more than 49 beds market conditions in the area. (but fewer than 100), these services (2) Exception for services furnished by must also meet the additional payment risk-basis HMO providers. For special requirements set forth in paragraph (d) rules concerning services furnished to of this section. an HMO’s enrollees who are Medicare (2) Services furnished in cost reporting beneficiaries by a provider owned or periods beginning on and after July 1, operated by a risk-basis HMO (see 2002. Posthospital SNF care furnished § 417.201(b) of this chapter) or related to in general routine inpatient beds in a risk-basis HMO by common owner- rural hospitals (other than CAHs) is ship or control (see § 417.250(c) of this paid in accordance with the provisions chapter). of the prospective payment system for (3) Exception for inpatient hospital SNFs described in subpart J of this services. Effective with cost reporting part, except that for purposes of this periods beginning on or after October 1, paragraph, the requirements of 1983, the costs of therapy services furnished under arrangements to a hos- § 413.343(a) must be met using the spe- pital inpatient are excepted from the cific assessment instrument and data guidelines issued under this section if designated by CMS for this purpose. such costs are subject to the provisions Posthospital SNF care furnished in of § 413.40 or part 412 of this chapter. general routine inpatient beds in CAHs The contractor will grant the excep- is paid based on reasonable cost for tion without request from the provider. cost reporting periods beginning on and (g) Appeals. A request by a provider after July l, 2002 and before January 1, for a hearing on the determination of 2004, and is paid based on 101 percent of an contractor concerning the therapy reasonable cost for cost reporting peri- costs determined to be allowable based ods beginning on and after January 1, on the provisions of this section, in- 2004, in accordance with the provisions cluding a determination with respect of subparts A through G of this part to an exception under paragraph (f) of (other than paragraphs (c) and (d) of this section, is made to the contractor this section). only after submission of its cost report (b) Definitions. For purposes of this and receipt of the notice of amount of section— program reimbursement reflecting Availability date means with respect such determination, in accordance with to a posthospital SNF care patient in a the provisions of subpart R of part 405 swing-bed hospital, the later of— of this chapter. (i) Any date on which a bed is avail- [51 FR 34793, Sept. 30, 1986, as amended at 63 able for the patient in a Medicare-par- FR 5139, Jan. 30, 1998] ticipating SNF located within the hospital’s geographic region; § 413.114 Payment for posthospital (ii) The date that a hospital learns SNF care furnished by a swing-bed that a bed is available in a Medicare- hospital. participating SNF; or (a) Purpose and basis. This section im- (iii) If the notice is prospective, the plements section 1883 of the Act, which date that a bed will become available provides for payment for posthospital in a Medicare-participating SNF.

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Geographic region means an area that lary services furnished by the hospital includes the SNFs with which a hos- in accordance with § 413.53(a)(1). pital has traditionally arranged trans- (d) Additional requirements—(1) Gen- fers and all other SNFs within the eral rule. For services furnished in cost same proximity to the hospital. In the reporting periods beginning prior to case of a hospital without existing July 1, 2002, in order for Medicare pay- transfer practices upon which to base a ment to be made to a swing-bed hos- determination, the geographic region pital with more than 49 beds (but fewer is an area that includes all the SNFs than 100), the following payment re- within 50 miles (as defined in quirements must be met: § 412.92(c)(1) of this chapter) of the hos- (i) If there is an available SNF bed in pital unless the hospital can dem- the geographic region, a posthospital onstrate that the SNFs are inaccessible SNF care patient must be transferred to its patients. In the event of a dis- within 5 days (excluding weekends and pute as to whether an SNF is within a holidays) of the availability date, un- hospital’s geographic region or the less the patient’s physician certifies SNF is inaccessible to hospital pa- within the 5-day period that transfer is tients, the CMS Regional Office makes not medically appropriate. a determination. (ii) The number of patient days for Swing-bed hospital means a hospital posthospital SNF care in a cost report- or CAH participating in Medicare that ing period does not exceed 15 percent of has an approval from CMS to provide the product of the number of days in posthospital SNF care as defined in the period and the average number of § 409.20 of this chapter, and meets the licensed beds in the hospital in the pe- requirements specified in § 482.58 or riod. In those States that do not li- § 485.645 of this chapter, respectively. cense their hospital beds, the hospitals (c) Special rules for determining the must use the total number of hospital reasonable cost of posthospital SNF care beds reported on their most recent Cer- furnished in cost reporting periods begin- tificate of Need (CON), excluding bassi- ning prior to July 1, 2002. The reasonable nets. If during the cost reporting pe- cost of posthospital SNF care furnished riod, there is an increase or decrease in by a swing-bed hospital is determined the number of ‘‘licensed’’ beds, the as follows: number of ‘‘licensed’’ beds for each (1) The reasonable cost of routine part of the period is to be multiplied by SNF services is based on the average the number of days for which that Medicare rate per patient day for rou- number of ‘‘licensed’’ beds was avail- tine services provided in freestanding able. After totalling the results, com- SNFs in the region where the swing- pute 15 percent of the total available bed hospital is located. The rates are ‘‘licensed’’ bed days to determine the calculated using the regions as defined payment limitation. in section 1886(d)(2)(D) of the Social Se- (2) Payment restrictions. (i) The hos- curity Act. The rates are based on the pital must not seek payment for most recent year for which settled cost posthospital SNF care after the end of reporting period data are available, in- the 5 day period (excluding weekends creased in a compounded manner, using and holidays) beginning on the avail- the increase applicable to the SNF rou- ability date of a SNF bed unless the pa- tine cost limits, up to and including tient’s physician has certified, within the calendar year for which the rates that 5 day period, that the transfer of are in effect. If the current Medicare the patient to the SNF was not medi- swing-bed rate for routine extended cally appropriate. care services furnished by a swing-bed (ii) The hospital must not seek pay- hospital during a calendar year is less ment for posthospital SNF care in a than the rate for the prior calendar cost reporting period to the extent that year, payment is made based on the they exceed 15 percent of the product of prior calendar year’s rate. the number of days in the period and (2) The reasonable cost of ancillary the average number of licensed beds in services furnished as posthospital SNF the period. In those States that do not care is determined in the same manner license hospital beds, the hospital must as the reasonable cost of other ancil- use the average number of hospital

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beds reported on its most recent CON, accordance with § 413.13, reduced by excluding bassinets. deductibles and coinsurance; or (3) Payment exception. Payment will (2) The blended payment amount as continue to be made during the cost re- described in paragraph (d) of this sec- porting period in which the 15 percent tion, which is based on hospital-spe- limit specified in paragraph (d)(1)(ii) of cific cost and charge data and rates this section is reached for those pa- paid to free-standing ASCs. tients who are receiving posthospital (d) Blended payment amount. (1) For SNF care at the time the hospital cost reporting periods beginning on or reaches the limit. after October 1, 1987 but before October [51 FR 34793, Sept. 30, 1986, as amended at 54 1, 1988, the blended payment amount is FR 37274, Sept. 7, 1989; 56 FR 54545, Oct. 22, equal to the sum of— 1991; 58 FR 30671, May 26, 1993; 61 FR 51616, (i) 75 percent of the hospital-specific Oct. 3, 1996; 62 FR 46037, Aug. 29, 1997; 66 FR amount (the lesser of the hospital’s 39600, July 31, 2001; 69 FR 49265, Aug. 11, 2004; 79 FR 27153, May 12, 2014; 85 FR 47633, Aug. 5, reasonable cost or customary charges, 2020] reduced by deductibles and coinsurance); and § 413.118 Payment for facility services (ii) 25 percent of the ASC payment related to covered ASC surgical amount (that is, 80 percent of the re- procedures performed in hospitals sult obtained by subtracting the on an outpatient basis. deductibles from the sum of the stand- (a) Basis and scope. This section im- ard overhead amounts.) plements section 1833(a)(4) and (i)(3) of (2) For the period of time beginning the Act and establishes the method for with the first day of a hospital’s cost determining Medicare payments for reporting period that begins on or after services related to covered ambulatory October 1, 1988 and ends on December surgical center (ASC) procedures per- 31, 1990, the blended payment amount formed in a hospital on an outpatient is equal to 50 percent of the hospital- basis. It does not apply to services fur- specific amount and 50 percent of the nished by an ASC operated by a hos- ASC payment amount. pital that has an agreement with CMS to be paid in accordance with § 416.30 of (3) For portions of cost reporting pe- this chapter. (For regulations gov- riods beginning on or after January 1, erning ASCs see part 416 of this chap- 1991, the blended payment amount is ter.) equal to 42 percent of the hospital-spe- (b) Definitions. For purposes of this cific amount and 58 percent of the ASC section— payment amount. Facility services are those items and (4) For cost reporting periods begin- services, as specified in § 416.61 of this ning on or after October 1, 1988 and be- chapter, that are furnished by a hos- fore January 1, 1995, the blended pay- pital on an outpatient basis in connec- ment amount is equal to the sum of 75 tion with covered ASC surgical proce- percent of the hospital-specific amount dures, as described in § 416.65 of this and 25 percent of the ASC payment chapter. amount for a hospital that makes an Standard overhead amount means an application to its contractor and meets amount equal to the prospectively de- the following requirements. termined payment rate that would be (i) More than 60 percent of the hos- paid for the procedure if it had been pital’s inpatient hospital discharges, as furnished by an ASC in the same geo- described in § 412.60 of this chapter, oc- graphic area. curring during its cost reporting period (c) Payment principle. The aggregate beginning on or after October 1, 1986 amount of payments for facility serv- and before October 1, 1987, are classi- ices, furnished in a hospital on an out- fied in diagnosis related groups 36 patient basis, that are related to cov- through 74. ered ASC surgical procedures (covered (ii) During its cost reporting period under § 416.65 of this chapter) is equal beginning on or after October 1, 1986 to the lesser of— and before October 1, 1987, more than 30 (1) The hospital’s reasonable cost or percent of the hospital’s total revenues customary charges, as determined in is derived from outpatient services.

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(5) For portions of cost reporting pe- (ii) The blended payment amount de- riods beginning on or after October 1, scribed in paragraph (b)(2) of this sec- 1997, for purposes of calculating the tion. blended payment amount under para- (2) The blended payment amount for graph (d)(4) of this section, the ASC hospital outpatient radiology services payment amount is the sum of the furnished on or after October 1, 1988, standard overhead amounts reduced by but before October 1, 1989, is equal to deductibles and coinsurance as defined the sum of— in section 1866(a)(2)(ii) of the Act. (i) 65 percent of the hospital-specific (e) Aggregation of cost, charges, and amount (the hospital’s reasonable cost the blended amount. For purposes of de- or customary charges, whichever is termining the correct payment amount less, reduced by the applicable Part B under paragraphs (c) and (d) of this sec- annual deductible and coinsurance tion, all reasonable costs and cus- amounts); and tomary charges attributable to facility (ii) 35 percent of a prevailing charge services furnished during a cost report- or fee schedule amount that is cal- ing period are aggregated and treated culated as 80 percent of the amount de- separately from the reasonable costs termined by subtracting the applicable and customary charges attributable to Part B annual deductible from 62 per- all other services furnished in the hos- cent of the prevailing charges (or for pital. services furnished on or after January 1, 1989, the fee schedule amount estab- [52 FR 36773, Oct. 1, 1987; 52 FR 37715, Oct. 8, 1987, as amended at 55 FR 33699, Aug. 17, 1990; lished) for the same services when fur- 55 FR 34797, Aug. 24, 1990; 57 FR 36017, Aug. nished by participating physicians in 12, 1992; 57 FR 45113, Sept. 30, 1992; 65 FR their offices in the same locality. 18541, Apr. 7, 2000] (3) For hospital outpatient radiology services furnished on or after October § 413.122 Payment for hospital out- 1, 1989, the blended payment amount is patient radiology services and equal to the sum of 50 percent of the other diagnostic procedures. hospital-specific amount and 50 percent (a) Basis and purpose. (1) This section of the fee schedule amount. implements section 1833(n) of the Act (4) For hospital outpatient radiology and establishes the method for deter- services furnished on or after January mining Medicare payments for radi- 1, 1991, the blended payment amount is ology services and other diagnostic equal to the sum of 42 percent of the procedures performed by a hospital on hospital-specific amount and 58 percent an outpatient basis. of the fee schedule amount. (2) For purposes of this section— (5) For hospital outpatient radiology (i) Radiology services include diag- services furnished on or after October nostic and therapeutic radiology, nu- 1, 1997, the blended payment amount is clear medicine, CAT scan procedures, equal to the sum of— magnetic resonance imaging, (i) 42 percent of the hospital-specific ultrasound and other imaging services; amount; and and (ii) 58 percent of the fee schedule (ii) Other diagnostic procedures are amount calculated as 62 percent of the those identified by CMS, and do not in- sum of the fee schedule amounts pay- clude diagnostic radiology procedures able for the same services when fur- or diagnostic laboratory tests. nished by participating physicians in (b) Payment for hospital outpatient ra- their offices in the same locality, less diology services. (1) The aggregate pay- deductible and coinsurance as defined ment for hospital outpatient radiology in section 1866(a)(2)(A)(ii) of the Act. services furnished on or after October (c) Payment for other diagnostic proce- 1, 1988 is equal to the lesser of the fol- dures. (1) The aggregate payment for lowing: other diagnostic procedures performed (i) The hospital’s reasonable cost or by a hospital on an outpatient basis on customary charges, as determined in or after October 1, 1989 is equal to the accordance with § 413.13, reduced by the lesser of the following: applicable Part B annual deductible (i) The hospital’s reasonable cost or and coinsurance amounts. customary charges, as determined in

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accordance with § 414.13, reduced by the mined in accordance with the technical applicable Part B annual deductible component billing requirements in and coinsurance amounts. § 405.534(d) of this chapter. (ii) The blended payment described in [55 FR 53522, Dec. 31, 1990, as amended at 59 paragraph (c)(2) of this section. FR 49834, Sept. 30, 1994] (2) The blended payment amount for other diagnostic procedures furnished § 413.124 Reduction to hospital out- on or after October 1, 1989, but before patient operating costs. October 1, 1990, is equal to the sum of— (a) Except for sole community hos- (i) 65 percent of the hospital-specific pitals, as defined in § 412.92 of this amount (the hospital’s reasonable cost chapter, and critical access hospitals, or customary charges, whichever is the reasonable costs of outpatient hos- less, reduced by the applicable Part B pital services (other than capital-re- annual deductible and coinsurance lated costs of these services) are re- amounts); and duced by 5.8 percent for services fur- (ii) 35 percent of a prevailing charge nished during portions of cost report- amount that is calculated as 80 percent ing periods occurring on or after Octo- of the amount determined by sub- ber 1, 1990 and until the first date that tracting the applicable Part B annual the prospective payment system under deductible from 42 percent of the pre- part 419 of this chapter is implemented. vailing charges for the same services (b) For purposes of determining the furnished by participating physicians blended payment amounts of ambula- in their offices in the same locality. tory surgical center approved surgical (3) For other diagnostic procedures procedures performed in the hospital performed by a hospital on or after Oc- outpatient setting under § 413.118 and tober 1, 1990, the blended payment is hospital outpatient radiology services equal to 50 percent of the hospital-spe- and other diagnostic procedures under cific amount and 50 percent of the pre- § 413.122, the reduction is applicable vailing charge amount. only to the hospital-specific portion of (4) For other diagnostic services fur- the blended payment amounts. nished on or after October 1, 1997, the blended payment amount is equal to [57 FR 36017, Aug. 12, 1992, as amended at 59 the sum of— FR 26960, May 25, 1994; 62 FR 46037, Aug. 29, (i) 50 percent of the hospital-specific 1997; 65 FR 18542, Apr. 07, 2000] amount; and § 413.125 Payment for home health (ii) 50 percent of the fee schedule agency services. amount calculated as 42 percent of the sum of the fee schedule amounts pay- (a) For additional rules on the allowable for the same services when fur- ability of certain costs incurred by nished by participating physicians in home health agencies, see §§ 409.46 and their offices in the same locality less 409.49(b) of this chapter. deductible and coinsurance as defined (b) The reasonable cost of outpatient in section 1866(a)(2)(A)(ii) of the Act. rehabilitation services furnished by a home health agency to homebound pa- [56 FR 8842, Mar. 1, 1991, as amended at 57 FR tients who are not entitled to home 36017, Aug. 12, 1992; 65 FR 18542, Apr. 7, 2000] health benefits may not exceed the amounts payable under the physician § 413.123 Payment for screening mammography performed by hospitals fee schedule for comparable services ef- on an outpatient basis. fective January 1, 1999. (a) Basis and scope. This section im- [59 FR 65497, Dec. 20, 1994, as amended at 63 plements section 1834(c)(1)(C) of the FR 58910, Nov. 2, 1998] Act and establishes the method for determining Medicare payment for Subpart G—Capital-Related Costs screening mammographies performed by hospitals. § 413.130 Introduction to capital-re- (b) Payment to hospitals for outpatient lated costs. services. Payment to hospitals for (a) General rule. Capital-related costs screening mammography services per- and an allowance for return on equity formed on an outpatient basis is deter- are limited to the following:

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(1) Net depreciation expense as deter- possession, use, and enjoyment of the mined under §§ 413.134, 413.144, and assets. 413.149, adjusted by gains and losses re- (2) For sale and leaseback agree- alized from the disposal of depreciable ments for hospitals and SNFs entered assets under § 413.134(f). into before October 23, 1992 and for sale (2) Taxes on land or depreciable as- and leaseback agreements for other sets used for patient care. providers entered into at any time, a (3) Leases and rentals, including li- provider may include incurred rental cense and royalty fees, for the use of charges in its capital-related costs, as depreciable assets or land, as described specified in a sale and leaseback agree- in paragraph (b) of this section. ment with a nonrelated purchaser (in- (4) The costs of betterments and im- cluding shared service organizations provements as described in paragraph not related within the meaning of (c) of this section. § 413.17) involving plant facilities or (5) The costs of minor equipment equipment only if the following condi- that are capitalized, rather than ex- tions are met: pensed, as described in paragraph (d) of (i) The rental charges are reasonable this section. based on the following— (A) Consideration of rental charges of (6) Insurance expense on depreciable comparable facilities and market con- assets, as described in paragraph (e) of ditions in the area; this section. (B) The type, expected life, condition, (7) Interest expense as determined and value of the facilities or equipment under § 413.153, subject to the qualifica- rented; and tions of paragraph (f) of this section. (C) Other provisions of the rental (8) For certain proprietary providers, agreements. return on equity capital, as determined (ii) Adequate alternative facilities or under § 413.157. equipment that would serve the pur- (9) The capital-related costs of re- pose are not or were not available at lated organizations (as described in lower cost. § 413.17), as determined in accordance (iii) The leasing was based on eco- with paragraph (g) of this section. nomic and technical considerations. (10) Debt issuance costs, debt dis- (3) If the conditions of paragraph counts, and debt redemption costs, if (b)(2) of this section are not met, the the associated debt was incurred to ac- amount a provider may include in its quire land or depreciable assets used capital-related costs as rental or lease for patient care or to refinance existing expense under a sale and leaseback debt for which the original purpose was agreement may not exceed the amount to acquire land or depreciable assets that the provider would have included used for patient care. in its capital-related costs had the pro- (11) The apportionment of the cap- vider retained legal title to the facili- ital-related costs of jointly owned as- ties or equipment, such as interest on sets among the owners must be on a mortgage, taxes, depreciation, and in- basis that reflects the relative use by surance costs. each owner, rather than the ownership (4) For sale and leaseback agree- share or the amount of time the asset ments for hospitals and SNFs entered is located at each owners site. into on or after October 23, 1992, the (b) Leases and rentals. (1) Subject to amount a provider may include in its the qualifications of paragraphs (b) (2), capital-related costs as rental or lease (4), (5), and (8) of this section, leases expense may not exceed the amount and rentals, including licenses and roy- that the provider would have included alty fees, are includable in capital-re- in its capital-related costs had the pro- lated costs if they relate to the use of vider retained legal title to the facili- assets that would be depreciable if the ties or equipment, such as interest ex- provider owned them outright or they pense on mortgages, taxes, deprecia- relate to land, which is neither depre- tion, and insurance costs (the costs of ciable nor amortizable if owned out- ownership). This limitation applies right. The terms ‘‘leases’’ and ‘‘rentals both on an annual basis and over the of assets’’ signify that a provider has useful life of the asset.

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(i) If in the early years of the lease, right to purchase the facilities or the annual rental or lease costs are less equipment at a price that appears to be than the annual costs of ownership, but significantly less than what the fair in the later years of the lease the an- market value of the facilities or equip- nual rental or lease costs are more ment would be at the time acquisition than the annual costs of ownership, in by the provider is permitted. the years that the annual rental or (6)(i) If a lease is a virtual purchase lease costs are more than the annual under paragraph (b)(5) of this section, costs of ownership, the provider may the rental charge is includable in cap- include in capital-related costs annu- ital-related costs only to the extent ally the actual amount of rental or that it does not exceed the amount lease costs. The aggregate rental or that the provider would have included lease costs included in capital-related in capital-related costs if it had legal costs may not exceed the aggregate title to the asset (the cost of owner- costs of ownership that would have ship), such as straight-line deprecia- been included in capital-related costs tion, insurance, and interest. A pro- over the useful life of the asset had the vider may not include in its capital-re- provider retained legal title to the lated costs accelerated depreciation in asset. this situation. (ii) If in the early years of the lease, (ii) The difference between the the annual rental or lease costs exceed amount of rent paid and the amount of the annual costs of ownership, but in rent allowed as capital-related costs is the later years of the lease the annual considered a deferred charge and is rental or lease costs are less than the capitalized as part of the historical annual costs of ownership, the provider cost of the asset when the asset is pur- may carry forward amounts of rental chased. or lease costs that were not included in (iii) If an asset is returned to the capital-related costs in the early years owner, instead of being purchased, the of the lease due to the costs of owner- deferred charge may be included in ship limitation, and include these capital-related costs in the year the amounts in capital-related costs in the asset is returned. years of the lease when the annual (iv) If the term of the lease is ex- rental or lease costs are less than the tended for an additional period of time annual costs of ownership. at a reduced lease cost and the option (iii) In any given year the amount of to purchase still exists, the deferred actual annual rental or lease costs plus charge may be included in capital-re- the amount carried forward to that lated costs to the extent of increasing year may not exceed the amount of the the reduced rental to an amount not in costs of ownership for that year. excess of the cost of ownership. (iv) In the aggregate, the amount of (v) If the term of the lease is ex- rental or lease costs included in cap- tended for an additional period of time ital-related costs may not exceed the at a reduced lease cost and the option amount of the costs of ownership that to purchase no longer exists, the de- the provider could have included in ferred charge may be included in the capital-related costs had the provider capital-related costs to the extent of retained legal title to the asset. increasing the reduced rental to a fair (5) For lease purchase transactions rental value. entered into before October 23, 1992, a (7) Amounts included in lease or rent- lease that meets the following condi- al payments for repair or maintenance tions establishes a virtual purchase: agreements are excluded from capital- (i) The rental charge exceeds rental related costs. If no amount is identified charges of comparable facilities or in the lease or rental agreement for equipment in the area. maintenance, the entire lease payment (ii) The term of the lease is less than is considered a capital-related cost sub- the useful life of the facilities or equip- ject to the provisions of paragraph ment. (b)(1) of this section. (iii) The provider has the option to (8) For lease purchase transactions renew the lease at a significantly re- entered into on or after October 23, duced rental, or the provider has the 1992, a lease that meets any one of the

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following conditions establishes a vir- at a reduced lease cost and the option tual purchase: to purchase still exists, the deferred (i) The lease transfers title of the fa- charge may be included in capital-re- cilities or equipment to the lessee dur- lated costs to the extent of increasing ing the lease term. the reduced rental to an amount not in (ii) The lease contains a bargain pur- excess of the cost of ownership. chase option. (v) If the term of the lease is ex- (iii) The lease term is at least 75 per- tended for an additional period of time cent of the useful life of the facilities at a reduced lease cost and the option or equipment. This provision is not ap- to purchase no longer exists, the de- plicable if the lease begins in the last ferred charge may be included in cap- 25 percent of the useful life of the fa- ital-related costs to the extent of in- cilities or equipment. creasing the reduced rental to a fair (iv) The present value of the min- rental value. imum lease payments (payments to be made during the lease term including (vi) If the lessee becomes the owner bargain purchase option, guaranteed of the leased asset (either by operation residual value, and penalties for failure of the lease or by other means), the to renew) equals at least 90 percent of amount considered as depreciation, for the fair market value of the leased the purpose of having computed the property. This provision is not applica- limitation on rental charges in parable if the lease begins in the last 25 per- graph (b)(9)(i) of this section, must be cent of the useful life of the facilities used in calculating the limitation on or equipment. Present value is com- adjustments for the purpose of deter- puted using the lessee’s incremental mining any gain or loss under borrowing rate, unless the interest rate § 413.134(f) upon disposal of an asset. implicit in the lease is known and is (c) Betterments and improvements. (1) less than the lessee’s incremental bor- Betterments and improvements are rowing rate, in which case the interest changes which extend the estimated rate implicit in the lease is used. useful life of an asset at least two (9)(i) If a lease establishes a virtual years beyond its original estimated purchase under paragraph (b)(8) of this useful life, or increase the productivity section, the rental charge is includable of an asset significantly over its origi- in capital-related costs to the extent nal productivity. that it does not exceed the amount (2) A provider must capitalize and that the provider would have included prorate the costs of betterments and in capital-related costs if it had legal improvements over the remaining esti- title to the asset (the cost of owner- mated useful life of the asset, as modi- ship). The cost of ownership includes fied by the betterment or improve- straight-line depreciation, insurance, ment. and interest. For purposes of com- (d) Minor equipment. A provider must puting the limitation on allowable include in its capital-related costs the rental cost in this paragraph, a pro- costs of minor equipment that are cap- vider may not include accelerated de- italized rather than charged off to ex- preciation. pense if— (ii) The difference between the amount of rent paid and the amount of (1) The net book value of minor rent allowed as capital-related costs is equipment at the time the provider en- considered a deferred charge and is ters the program is prorated over three capitalized as part of the historical years (that is, one-third of the net cost of the asset when the asset is pur- book value is written off each year), chased. and new purchases are also prorated (iii) If an asset is returned to the over a 3-year period; or owner instead of being purchased, the (2) The cost of minor equipment is deferred charge may be included in prorated over their actual useful lives. capital-related costs in the year the (e) Insurance. (1) A provider must in- asset is returned. clude in its capital-related costs the (iv) If the term of the lease is ex- costs of insurance on depreciable assets tended for an additional period of time used for patient care or insurance that

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provides for the payment of capital-re- (2) Supplying organizations not related lated costs during business interrup- to the provider. If the supplying organi- tion. zation is not related to the provider (2) If an insurance policy also pro- within the meaning of § 413.17, no part vides protection for other than the re- of the charge to the provider may be placement of depreciable assets or to considered a capital-related cost (un- pay capital-related costs in the case of less the services, facilities, or supplies business interruption insurance, only are capital-related in nature) unless— that portion of the premium related to (i) The capital-related equipment is the replacement of depreciable assets leased or rented (as described in para- or to pay capital-related costs in the graph (b) of this section) by the pro- case of business interruption insurance vider; is includable in capital-related costs. (ii) The capital-related equipment is (f) Debt premiums and debt discounts. located on the provider’s premises, or Debt premiums or debt discount are ap- is located offsite and is on real estate plied as adjustments to capital-related owned, leased or rented by the pro- costs if the associated debt is incurred vider; and for acquiring land or depreciable assets (iii) The capital-related portion of used for patient care or for refinancing the charge is separately specified in existing debt for which the original the charge to the provider. purpose was to acquire land or depre- (i) Costs excluded from capital-related ciable assets used for patient care. costs. The following costs are not cap- (g) Interest expense. (1) A provider ital-related costs. To the extent that must include in its capital-related they are allowable, they must be in- costs interest expense, as described in cluded in determining each provider’s § 413.153, if such expense is incurred in— operating costs: (i) Acquiring land or depreciable as- (1) Costs incurred for the repair or sets (either through purchase or lease) maintenance of equipment or facilities. used for patient care; or (2) Amounts included in rentals or (ii) Refinancing existing debt, if the lease payments for repair or mainte- original purpose of the refinanced debt nance agreements. was to acquire land or depreciable as- (3) Interest expense incurred to bor- sets used for patient care. row working capital (for operating ex- (2) If investment income offset is re- penses). quired under § 413.153(b)(2)(iii), only (4) General liability insurance or any that portion of investment income that other form of insurance to provide pro- bears the same relationship to total in- tection other than for the replacement vestment income, as the portion of cap- of depreciable assets or to pay capital- ital-related interest expense bears to related costs in the case of business total interest expense, is offset against interruption. capital-related costs. (5) Taxes other than those assessed (h) Costs of supplying organizations— on the basis of some valuation of land (1) Supplying organizations related to the or depreciable assets used for patient provider. (i) If the supplying organiza- care. (Taxes not related to patient tion is related to the provider within care, such as income taxes, are not al- the meaning of § 413.17, except as pro- lowable, and are therefore not included vided in paragraph (g)(1)(ii) of this sec- among either capital-related or oper- tion, a provider’s capital-related costs ating costs.) include the capital-related costs of the (6) The costs of minor equipment supplying organization. that are charged off to expense rather (ii) If the costs of the services, facili- than capitalized as described in para- ties or supplies being furnished exceed graph (d) of this section. the open market price, or if the provi- (7) The costs incurred for mainte- sions of § 413.17(d) apply, no part of the nance and repair insurance agreements cost to the provider of the services, fa- (commonly referred to as maintenance cilities, or supplies are considered cap- agreements). ital-related costs, unless the services, (j) Reduction to capital-related costs. (1) facilities, or supplies would otherwise Except for sole community hospitals be considered capital-related. and critical access hospitals, the

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amount of capital-related costs of all the provider was participating in the hospital outpatient services is reduced program on August 1, 1970; by— (C) Depreciable assets of a provider if (i) 15 percent for portions of cost re- construction of such depreciable asset porting periods occurring on or after began before February 5, 1970, and the October 1, 1989, through September 30, provider was participating in the pro- 1991; and gram on February 5, 1970; or (ii) 10 percent for portions of cost re- (D) Depreciable assets of a provider if porting periods occurring on or after a valid written contract was entered October 1, 1991 and until the first date into by a provider participating in the that the prospective payment system program before February 5, 1970, for under part 419 of this chapter is imple- construction, acquisition, or for the mented. permanent financing thereof, and such (2) For purposes of determining the contract was binding on a provider on blended payment amounts for hospital February 5, 1970, and at all times there- outpatient services under §§ 413.118 and after; or 413.122, the reduction is applicable only (iii) A declining balance method, not to the hospital-specific portion of the to exceed 150 percent of the straight- blended amounts. line rate, for a depreciable asset ac- [51 FR 34793, Sept. 30, 1986, as amended at 52 quired after July 31, 1970; however, this FR 21225, June 4, 1987; 56 FR 43456, Aug. 30, declining balance method may be used 1991; 57 FR 3017, Jan. 27, 1992; 57 FR 36017, only if the cash flow from depreciation Aug. 12, 1992; 57 FR 43917, Sept. 23, 1992; 58 FR on the total assets of the institution 17528, Apr. 5, 1993; 59 FR 26960, May 25, 1994; during the reporting period, including 62 FR 46037, Aug. 29, 1997; 65 FR 18542, Apr. 7, straight-line depreciation on the assets 2000] in question, is insufficient (assuming § 413.134 Depreciation: Allowance for funding of available capital not re- depreciation based on asset costs. quired currently for amortization and (a) Principle. An appropriate allow- assuming reasonable interest income ance for depreciation on buildings and on such funds) to supply the funds re- equipment used in the provision of pa- quired to meet the reasonable principal tient care is an allowable cost. The de- amortization schedules on the capital preciation must be— debts related to the provider’s total de- (1) Identifiable and recorded in the preciable assets. For each depreciable provider’s accounting records; asset for which a provider requests au- (2) Based on the historical cost of the thorization to use a declining balance asset, except as specified in paragraph method for Medicare reimbursement (j) of this section regarding donated as- purposes, but not to exceed 150 percent sets; and of the straight-line rate, the provider (3) Prorated over the estimated use- must demonstrate to the contractor’s ful life of the asset using— satisfaction that the required cash flow (i) The straight-line method; or need exists. For each depreciable asset (ii) Accelerated depreciation under a in which a provider justifies the use of declining balance method (not to ex- accelerated depreciation, the con- ceed double the straight-line rate) or tractor must give written approval for the sum-of-the-years’ digits method in the use of a depreciation method other the following situations: than straight-line before basing any in- (A) Depreciable assets for which ac- terim payment on this accelerated de- celerated depreciation was used for preciation or making its reasonable Medicare purposes before August 1, cost determination which includes an 1970, including those assets for which a allowance for such depreciation. timely request to change from (b) General rules—(1) Historical cost. straight-line depreciation to acceler- Historical cost is the cost incurred by ated depreciation was received by an the present owner in acquiring the contractor before August 1, 1970; asset. (B) Depreciable assets acquired be- (i) All providers—(A) Depreciable assets fore August 1, 1970, if no election to use acquired after July 31, 1970 and before De- straight-line or accelerated deprecia- cember 1, 1997. For depreciable assets tion was in effect on August 1, 1970, and acquired after July 31, 1970 and before

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December 1, 1997, and for a hospital or tion as described in § 413.139(e). If the an SNF, acquired before July 18, 1984, provider did not change to actual de- the historical cost may not exceed the preciation, as described in § 413.139(e), lower of current reproduction cost ad- for optional allowance assets, the ac- justed for straight-line depreciation quisition cost to the owner of record is over the life of the asset to the time of based on the provider’s recorded histor- the purchase or the fair market value ical cost of the asset when acquired. If of the asset at the time of its purchase. the provider has no historical cost (B) Depreciable assets acquired on or records for optional allowance assets, after December 1, 1997. For depreciable the acquisition cost to the owner of assets acquired on or after December 1, record is established by appraisal. 1997, the historical cost of the asset (6) The historical cost of an asset ac- that will be recognized under this pro- quired on or after July 18, 1984 may not gram must not exceed the historical include costs attributable to the nego- cost less depreciation allowed to the tiation or settlement of the sale or pur- owner of record as of August 5, 1997 (or chase (by acquisition, merger, or con- if an asset did not exist as of August 5, solidation) of any capital asset for 1997, the first owner of record after Au- which any payment was previously gust 5, 1997). For this paragraph made under the Medicare program. The (b)(1)(i)(B), the following apply: costs to be excluded include, but are (1) An asset that was not in existence not limited to, appraisal costs (except as of August 5, 1997 includes an asset those incurred at the request of the that physically existed but was not contractor under paragraph (f)(2)(iv) of owned by a provider participating in this section), legal fees, accounting and the Medicare program as of that date. administrative costs, travel costs, and (2) The acquisition cost to the owner the costs of feasibility studies. of record is subject to the limitation on (ii) Hospitals and SNFs only. (A) For historical costs described in paragraphs assets acquired on or after July 18, 1984 (g) (1), (2), and (3) of this section, and is and before December 1, 1997 and not reduced by any depreciation taken by subject to an enforceable agreement the owner of record. The limitation on entered into before July 18, 1984, his- historical cost is also applied to the torical cost may not exceed the lowest purchase of land, which is a capital of the following: asset that is neither depreciable nor amortizable under any circumstances. (1) The allowable acquisition cost of (See §§ 413.153(d) and 413.157(b) for appli- the asset to the owner of record as of cation of the limitation to the cost of July 18, 1984 (or, in the case of an asset land for purposes of determining the al- not in existence as of July 18, 1984, the lowable interest expense.) first owner of record of the asset after (3) Acquisition cost to the owner of that date); record includes the costs of betterment (2) The acquisition cost of the asset or improvements that extend the esti- to the new owner; or mated useful life of an asset at least 2 (3) The fair market value of the asset years beyond its original estimated on the date of acquisition. useful life or that increase the produc- (B) For purposes of applying para- tivity of an asset significantly over its graph (b)(1)(ii)(A) of this section, an original productivity. asset not in existence as of July 18, 1984 (4) For assets acquired prior to a pro- includes any asset that physically ex- vider’s entrance into the Medicare pro- isted, but was not owned by a hospital gram, the acquisition cost to the owner or SNF participating in the Medicare of record is the historical cost when ac- program as of July 18, 1984. quired, rather than when the provider (C) The acquisition cost to the owner entered the program. of record is subject to any limitation (5) For assets subject to the optional on historical costs described in para- depreciation allowance as described in graphs (b)(1)(i) or (g)(1) and (2) of this § 413.139, the acquisition cost to the section, and is not reduced by any de- owner of record is the historical cost preciation taken by the owner of established for those assets when the record. This limitation on historical provider changed to actual deprecia- cost is also applied to the purchase of

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land, a capital asset that is neither de- sets of a hospital-based provider other preciable nor amortizable under any than a SNF, or assets of a SNF-based circumstances. (See §§ 413.153(d) and provider, the provisions of paragraph 413.157(b) for application of the limita- (b)(1)(ii) of this section are not application to the cost of land for purposes of ble. A reasonable allocation of the pur- determining allowable interest expense chase price must be made, so that the and return on equity capital or propri- hospital-based provider other than a etary providers.) SNF, or a SNF-based provider, is not (D) Acquisition cost to the owner of affected by the limitations described in record includes the costs of better- paragraph (b)(1)(ii) of this section. The ments or improvements that extend historical cost of assets of providers the estimated useful life of an asset at other than hospitals and SNFs is gov- least two years beyond its original es- erned by paragraph (b)(1)(i) of this sec- timated useful life or increase the pro- tion. ductivity of an asset significantly over (2) Fair market value. Fair market its original productivity. value is the price that the asset would (E) For assets acquired prior to a bring by bona fide bargaining between hospital’s or SNF’s entrance into the well-informed buyers and sellers at the Medicare program, the acquisition cost date of acquisition. Usually the fair to the owner of record is the historical market price is the price that bona fide cost of the asset when acquired, rather sales have been consummated for as- than when the hospital or SNF entered sets of like type, quality, and quantity the program. in a particular market at the time of (F) For assets subject to the optional acquisition. depreciation allowance as described in (3) The straight-line method. Under the § 413.139, the acquisition cost to the straight-line method of depreciation, owner of record is the historical cost the cost or other basis (for example, established for those assets when the fair market value in the case of do- hospital or SNF changed to actual de- nated assets) of the asset, less its esti- preciation as described in § 413.139(e). If mated salvage value, if any, is deter- the hospital or SNF did not change to mined first. Then this amount is dis- actual depreciation, as described in tributed in equal amounts over the pe- § 413.139(e), for optional allowance as- riod of the estimated useful life of the sets, the acquisition cost to the owner asset. of record is established by reference to (4) Declining balance method. Under the hospital’s or SNF’s recorded histor- the declining balance method, the an- ical cost of the asset when acquired. If nual depreciation allowance is com- the hospital or SNF has no historical puted by multiplying the cost records for optional allowance as- undepreciated cost of the asset each sets, the acquisition cost to the owner year by a uniform rate up to double the of record is established by appraisal. straight-line rate or 150 percent, as the (G) The historical cost of an asset ac- case may be (see paragraph (a)(3) of quired on or after July 18, 1984 may not this section for limitations on use of include costs attributable to the nego- accelerated methods of depreciation). tiation or settlement of the sale or pur- (5) Sum-of-the-years’ digits method. chase (by acquisition, merger, or con- Under the sum-of-the-years’ digits solidation) of any capital asset for method, the annual depreciation allow- which any payment was previously ance is computed by multiplying the made under the Medicare program. The depreciable cost basis (cost less salvage costs to be excluded include, but are value) by a constantly decreasing frac- not limited to, appraisal costs (except tion. The numerator of the fraction is those incurred at the request of the represented by the remaining years of contractor under paragraph (f)(2)(iv) of useful life of the asset at the beginning this section), legal fees, accounting and of each year, and the denominator is administrative costs, travel costs, and always represented by the sum of the the costs of feasibility studies. years’ digits of useful life at the time (iii) Hospital-based providers other of acquisition. than SNFs and SNF-based providers. For (6) Current reproduction cost. Current changes of ownership that involve as- reproduction cost is the cost at current

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prices, in a particular locality or mar- (iii) Changing useful life. A change in ket area, of reproducing an item of the estimated useful life may be made property or a group of assets. Where if clear and convincing evidence justi- depreciable assets are concerned, this fies a redetermination of the useful life means the reasonable cost to have used by the provider. Such a change built, reproduce in kind, or, in the case must be approved by the contractor in of equipment or similar assets, to pur- writing, and the factors cited in para- chase in the competitive market. graphs (b)(7) and (b)(7)(i) of this section (7) Useful life. The estimated useful are applicable in making such redeter- life of a depreciable asset is its normal minations of useful life. If the request operating or service life to the pro- is approved, the change is effective vider, subject to the provisions in para- with the reporting period immediately graph (b)(7)(i) of this section. Factors following the period in which the pro- to be considered in determining useful vider’s request is submitted for ap- life include normal wear and tear; ob- proval. solescence due to normal economic and (8) Donated asset. An asset is consid- technological changes; climatic and ered donated when the provider ac- other local conditions; and the pro- quires the asset without making pay- vider’s policy for repairs and replacement in the form of cash, new debt, as- ment. sumed debt, property or services. Ex- (i) Initial selection of useful life. In se- cept as provided in paragraph (j)(3) of lecting a proper useful life for com- this section, if a provider makes pay- puting depreciation under the Medicare ment in any form to acquire an asset, program, providers must use the useful the payment is considered the purchase life guidelines published by CMS. If price for the purpose of determining al- CMS has not published applicable use- lowable historical cost. ful life guidelines, providers must use— (9) Net book value. The net book value (A) The edition of the American Hos- of an asset is the depreciable basis used pital Association useful life guidelines, for the Medicare program by the as- as specified in CMS Medicare program set’s last participating owner less de- manuals; or preciation recognized under the Medi- (B) A different useful life specifically care program. requested by the provider and approved (c) Recording of depreciation. Appro- by the contractor. A different useful priate recording of depreciation in- life may be approved by the contractor cludes the identification of the depre- if the provider’s request is properly ciable assets in use, the assets’ histor- supported by acceptable factors that ical costs, the assets’ dates of acquisi- affect the determination of useful life. tion, the method of depreciation, esti- However, such factors as an expected mated useful lives, and the assets’ ac- early sale, retirement, demolition or cumulated depreciation. abandonment of an asset, or termi- (d) Depreciation methods—(1) General. nation of the provider from the Medi- Proration of the cost of an asset over care program may not be used. its useful life is allowed on the (ii) Application of guidelines. The pro- straight-line method, or, when per- visions concerning the selection of use- mitted under paragraph (a)(3) of this ful life guidelines described in para- section, the declining balance or the graph (b)(7)(i) of this section apply to sum-of-the-years’ digits methods. One assets acquired on or after January 1, method may be used on a single asset 1981. For assets acquired before Janu- or group of assets and another method ary 1, 1981, providers must use the use- on others. In applying the declining ful life guidelines published by the balance or sum-of-the-years’ digits American Hospital Association in its method to an asset that is not new, the 1973 edition of Chart of Accounts for undepreciated cost of the asset is treat- Hospitals, or those published by the In- ed as the cost of a new asset in com- ternal Revenue Service, or those ap- puting depreciation. proved for use by contractors as pro- (2) Change in method. Prior to August vided in paragraph (b)(7)(i)(B) of this 1, 1970, a provider may change from the section. straight-line method to an accelerated

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method or vice versa, upon advance ap- participation by the facility in the proval from the contractor on a pro- Medicare program. spective basis with the request being (B) Criteria. The following criteria made before the end of the first month must be met if the recovery of excess of the prospective reporting period. reimbursable cost is not to be made: Only one such change with respect to a (1) The termination of the provider particular asset may be made by a pro- agreement is due to a change in owner- vider. Effective with August 1, 1970, a ship of the provider resulting from a provider may only change from an ac- transaction between related organiza- celerated method or optional method tions. (see § 413.139) to the straight-line meth- (2) The successor provider continues od. Such a change may be made with- to participate in the Medicare pro- out contractor approval and the basis gram. for depreciation is the undepreciated (3) Control and the extent of the fi- cost reduced by the salvage value. nancial interest of the owners of the Thereafter, once straight-line deprecia- provider before and after the termi- tion is selected for a particular asset, nation remain the same; that is, the an accelerated method may not be es- successor owners acquire the same per- tablished for that asset. centage of control or financial invest- (3) Recovery of accelerated deprecia- ment as the transferors had. tion—(i) General. If a provider who has (4) All assets and liabilities of the used an accelerated method of depre- terminated provider are transferred to ciation for any of its assets terminates the related successor participating pro- participation in the program, or if the vider. Medicare proportion of its allowable (C) Effect of transaction. In trans- costs decreases so that cumulatively actions meeting the criteria specified substantially more depreciation was in paragraph (d)(3)(ii)(B) of this sec- paid than would have been paid using tion, the provision concerning recovery the straight-line method of deprecia- of excess reimbursable cost tion, the excess of reimbursable cost (§ 413.134(d)(3)(i)) is not applied, and the determined by using accelerated depre- transaction is treated as follows: ciation methods and paid under the (1) The successor provider must program over the reimbursable cost record the historical cost and accumu- that would have been determined and lated depreciation and the method of paid under the program by using the depreciation recognized under the straight-line method of depreciation, Medicare program, and these are con- will be recovered as an offset to cur- sidered as incurred by the successor rent reimbursement due or, if the pro- provider for Medicare purposes. vider has terminated participation in (2) The Medicare program’s utiliza- the program, as an overpayment. In tion of the terminated provider is con- this determination of excess payment, sidered as having been incurred by the recognition will be given to the effects successor provider for Medicare pur- the adjustment to straight-line depre- poses. ciation would have on the return on eq- (3) The equity capital of the termi- uity capital and on the allowance in nated provider as of the closing of its lieu of specific recognition of other final cost reporting period must be costs in the respective years. wholly contained in the equity capital (ii) Transaction between related organi- of the successor provider as of the be- zations—(A) General. If the termination ginning of its first cost reporting pe- of the provider agreement is due to a riod. change in provider ownership, as de- (e) Funding of depreciation. Although fined in § 489.18 of this chapter, result- funding of depreciation is not required, ing from a transaction between related it is strongly recommended that pro- organizations, as defined in § 413.17, and viders use this mechanism as a means the criteria in paragraph (b) of this sec- of conserving funds for replacement of tion are met, the excess of reimburs- depreciable assets. Funded deprecia- able cost, as determined in paragraph tion account funds must be placed in (d)(3)(i) of this section may not be re- readily marketable investments of the covered if there is a continuation of type that assures the availability and

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conservation of the funds. Additions to isted at the time of the unnecessary the funded depreciation account must borrowing and is not classified as remain in the account for at least 6 tainted must be used before any of the months to be considered valid funding tainted funds. transactions. (iv) When only a portion of the bor- (1) Incentive. As an incentive for fund- rowing is considered unnecessary under ing, investment income on funded de- paragraph (e)(2)(ii) of this section, sub- preciation is not treated as a reduction sequent repayments of such borrowing of allowable interest expense provided from general funds are applied first to such investment income is deposited the allowable portion of the borrowing in, and becomes part of, the funded de- and then, when all of the allowable bor- preciation account at the time of re- rowing is repaid, to the unallowable ceipt by the provider. Investment in- portion of the borrowing. When funds come earned on deposits before the 6- from the funded depreciation account month period elapses are not offset un- are used for the repayment of the unless the deposits are withdrawn for an necessary borrowing, an equivalent improper purpose during this period. If amount of tainted funds is cured with- a provider transfers assets of the fund- out regard to the provisions of para- ed depreciation account to a related or- graphs (e)(2)(ii) and (e)(3)(i)(C) of this ganization (for example, pooling of sev- section. Similarly, where general funds eral chain organization providers’ fund- are used to pay for the unallowable ed depreciation accounts at the chain borrowing after the necessary bor- home office for investment purposes), rowing has been repaid, an equivalent these assets shall be treated as the pro- amount of tainted funded depreciation vider’s funds and are subject to all the is cured without regard to the provi- requirements specified in paragraph (e) sions of paragraphs (e)(2)(ii) and of this section. (e)(3)(i)(C) of this section. (2) Availability of funded depreciation. (3) Withdrawals of funded deprecia- (i) CMS considers funded depreciation tion—(i) Proper withdrawals. (A) With- available for use in the acquisition or drawals from funded depreciation are replacement of depreciable assets re- considered proper if made either for lated to patient care unless the funded the acquisition or replacement of de- depreciation funds have been com- preciable assets related to the fur- mitted by contract for the acquisition nishing of patient care or for other cap- of depreciable assets related to the fur- ital purposes related to patient care. nishing of patient care or for other capital purposes related to patient care. (B) First-in, first-out basis. Proper (ii) Borrowing for a purpose for which withdrawals from funded depreciation funded depreciation account funds are made on a first-in, first-out basis. should have been used makes the bor- (C) Exception. If CMS determines that rowing unnecessary to the extent that a borrowing is unnecessary because of funded depreciation account funds were the existence of available funded depre- available at the time of the borrowing. ciation, and additional deposits have Available funds in the funded deprecia- been made to funded depreciation after tion account, to the extent of the un- the occurrence of the unnecessary bor- necessary borrowing, are called rowing, withdrawals made after the ‘‘tainted’’ funds. Interest expense in- date of the additional deposits are curred on borrowing for a capital pur- deemed to be made on a last-in, first- pose is not an allowable cost to the ex- out basis. tent that funded depreciation account (ii) Improper withdrawals. (A) With- funds were available at the time of the drawals from funded depreciation that borrowing. do not meet the requirements for prop- (iii) A provider can remove the ‘‘un- er withdrawals under the provisions in necessary’’ characterization of bor- paragraph (e)(3)(i)(A) of this section rowing, and thereby cure tainted fund- are considered improper withdrawals. ed depreciation, by using the tainted (B) Improper withdrawals from fund- funds for a proper purpose described in ed depreciation are made on a last-in, paragraph (e)(3)(i) of this section. How- first-out basis. If improper withdrawals ever, any funded depreciation that ex- are made, interest expense is reduced

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in accordance with section repayments of the general fund. There- § 413.153(c)(3). fore, any subsequent interest expense (C) Improper withdrawals will result of the general fund paid to the funded in the offset of otherwise allowable in- depreciation fund is not an allowable terest expense under the offset provi- cost. sions in § 413.153(c)(3). (iv) A provider may loan its funded (4) Loans from funded depreciation. (i) depreciation to a related organization When the general fund of the provider for any purpose subject to the fol- borrows from the funded depreciation lowing conditions: to obtain working capital for normal (A) Authorization for such a loan by operating expenses to furnish patient the provider’s appropriate managing care, interest incurred by the general body of the provider, such as Board of fund is an allowable operating cost Trustees or Board of Directors, must be only if the interest expense is sup- on file. ported by documents that evidence (B) The funded depreciation loaned that the funds were borrowed and that must remain available, as specified in payment of interest and repayment of paragraph (e)(2) of this section, to the the funds are required, is separately provider making the loan. Costs in- identified in the provider’s accounting curred for lines of credit to assure such records, and meets the necessary and availability are not allowable costs. proper tests described in §§ 413.153(b)(2) During the period of time that the loan and (b)(3). However, if the general fund is outstanding, if the provider making of the provider borrows from the fund- the loan resorts to outside borrowing ed depreciation account to acquire de- for a purpose for which its funded depreciable assets used in furnishing pa- preciation should have been used, in- tient care, or for other capital purposes terest expense on an amount of the related to patient care, interest ex- outside borrowing up to the amount of pense paid by the general fund to the the funded depreciation that should funded depreciation account is not an have been available would be dis- allowable cost. Providers are expected allowed as unnecessary. to use the funded depreciation for these (C) Such loans shall be considered in- purposes. vestments of the provider’s funded de- (ii) Loans from funded depreciation preciation, but the requirement that to the general fund are considered in- funded depreciation be invested in vestments of funded depreciation, but readily marketable investments as re- do not have to meet the readily mar- quired in paragraph (e) of this section ketable test described in paragraph (e) is waived for such loans. of this section. Loans made from fund- (D) The funded depreciation account ed depreciation are subject to the re- must earn interest on such loans at a quirement that funded depreciation rate that does not exceed the rate that must be available for the acquisition of would be charged for a comparable loan depreciable assets used to furnish pa- from an independent lending institu- tient care, or for other capital purposes tion. This investment income will not related to patient care. Costs incurred be used to reduce the provider’s inter- to secure lines of credit from lending est expense if all the other conditions institutions to ensure such availability in paragraph (e) of this section are are not allowable costs. met. If the entity borrowing the funds (iii) Funding of depreciation from is another provider participating in the general funds will not be recognized to Medicare program, the interest expense the extent of any outstanding loans incurred on such loans would be allow- from the funded depreciation account able if the loan meets all of the inter- to the general fund. Deposits from the est expense requirements specified in general fund into the funded deprecia- § 413.153. (For purposes of tion account must be first applied to § 413.153(b)(3)(ii), such loans are not reduce any loans outstanding from the considered to be with a related lender.) funded depreciation to the general (f) Gains and losses on disposal of as- fund. When the loans are repaid in full, sets—(1) General. Depreciable assets general funds deposited in the funded may be disposed of through sale, scrap- depreciation account are considered as ping, trade-in, exchange, demolition,

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abandonment, condemnation, fire, scrapping refers to the physical re- theft, or other casualty. moval from the provider’s premises of (i) Disposal of an asset before December tangible personal properties that are 1, 1997. If disposal of a depreciable no longer useful for their intended pur- asset, including the sale or scrapping of pose and are only salable for their an asset before December 1, 1997, re- scrap or junk value. sults in a gain or loss, an adjustment is (ii) If the total amount of gains or necessary in the provider’s allowable losses realized from bona fide sales or cost. scrapping does not exceed $5,000 within (A) The amount of a gain included in the cost reporting period or if the pro- the determination of allowable cost is vider’s cumulative utilization under limited to the amount of depreciation the Medicare program is less than 5 previously included in Medicare allow- percent, the net amount of gains or able costs. losses realized from sale or scrapping (B) The amount of a loss to be in- will be allowed as a depreciation ad- cluded is limited to the undepreciated justment in the period of disposal. For basis of the asset permitted under the purposes of this paragraph (f)(2)(ii), the program. provider’s cumulative Medicare utiliza- (C) The treatment of the gain or loss tion precentage is determined by com- depends upon the manner of disposition paring the cumulative total of the of the asset, as specified in paragraphs Medicare inpatient days for all report- (f)(2) through (6) of this section. ing periods in which depreciation on (D) The gain or loss on the disposi- the asset disposed of was claimed under tion of depreciable assets has no retro- the Medicare program to the cumu- active effect on a proprietary pro- lative total of inpatient days of the vider’s equity capital for years prior to participating provider for the same re- the year of disposition. porting periods. (ii) Disposal of an asset on or after De- (iii) If the conditions specified in cember 1, 1997. No gain or loss is recog- paragraph (f)(2)(ii) of this section are nized on either the sale or scrapping of not met, the adjustment to reimburs- an asset that occurs on or after Decem- able cost in the reporting period of ber 1, 1997, regardless of whether the asset disposition is calculated as fol- asset is sold incident to a provider’s lows: change of ownership, or otherwise sold or scrapped as an asset of a Medicare (A) The total amount of gains or participating provider. Gains or losses losses shall be allocated to all report- on dispositions other than sales or ing periods under the Medicare pro- scrapping are recognized to the same gram, based on the ratio of the depre- extent as prior to December 1, 1997. ciation allowed on the assets in each (2) Bona fide sale or scrapping before reporting period to the total deprecia- December 1, 1997. For the bona fide sale tion allowed under the Medicare pro- or scrapping of depreciable assets be- gram. fore December 1, 1997, the following (B) The results of this allocation are apply: multiplied by the ratio of Medicare re- (i) Except as specified in paragraph imbursable cost to total allowable cost (f)(3) of this section, gains and losses for each reporting period. realized from the bona fide sale or (C) The results of this multiplication scrapping of depreciable assets are in- are then added. cluded in the determination of allow- (D) Effective for cost reporting peri- able cost only if the sale or scrapping ods beginning on or after October 1, occurs while the provider is partici- 1991, no adjustment will be made for pating in Medicare. The extent to the portion of gains or losses allocated which such gains and losses are in- to inpatient hospital services for which cluded is calculated by prorating the the hospital was paid under the fully basis for depreciation of the asset in prospective payment methodology as accordance with the proportion of the described in § 412.340 of this chapter or asset’s useful life for which the pro- under the hold-harmless methodology vider participated in Medicare. For based on the Federal rate as described purposes of this paragraph (f)(2)(i), in § 412.344(a)(1) of this chapter for new

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capital costs or in § 412.344(a)(2) of this limited to the lower of its list price or chapter. fair market value. (iv) If a provider sells more than one (5) Demolition or abandonment. (i) For asset for a lump sum sales price, the purposes of this section, the term gain or loss on the sale of each depre- ‘‘abandonment’’ means the permanent ciable asset must be determined by al- retirement of an asset for any future locating the lump sum sales price purpose, not merely the provider’s among all the assets sold, in accord- ceasing to use the asset for patient ance with the fair market value of each care purposes. To claim an abandon- asset as it was used by the provider at ment under the Medicare program, the the time of sale. If the buyer and seller provider must have relinquished all cannot agree on an allocation of the rights, title, claim, and possession of sales price, or if they do agree but the asset with the intention of never there is insufficient documentation of reclaiming it or resuming its owner- the current fair market value of each ship, possession, or enjoyment. asset, the contractor for the selling (ii) If losses resulting from the demo- provider will require an appraisal by an lition or abandonment of depreciable independent appraisal expert to estab- assets do not exceed $5,000 within the lish the fair market value of each asset cost-reporting period, the losses are to and will make an allocation of the be allowed in the period of disposal. sales price in accordance with the ap- (iii) If losses exceed $5,000 and, at the praisal. date of disposition, the demolished or abandoned assets are at least 80 per- (3) Sale within 1 year after termination. cent depreciated as computed under Gains and losses realized from a bona the straight-line method, such losses fide sale of depreciable assets within 1 are includable in the determination of year immediately following the date on allowable cost under the Medicare pro- which the provider terminates partici- gram in the period of disposal and the pation in the Medicare program are procedure provided in paragraph also included in the determination of (f)(2)(iii) of this section must be used in allowable cost, in accordance with the determining the adjustment to reim- procedure specified in paragraph (f)(2) bursable cost. of this section. However, if several as- (iv) Losses in excess of $5,000 result- sets are sold for a lump sum sales ing from the demolition or abandon- price, the determination of fair market ment of assets, which at the date of value must be based on the appraised disposition are not 80 percent depre- value of the assets as they were last ciated as computed under the straight- used by the provider while partici- line method, must be capitalized as a pating in the Medicare program. deferred charge and amortized as fol- (4) Exchange, trade-in or donation. lows: Gains or losses realized from the ex- (A) If the State Health Planning and change, trade-in, or donation of depre- Development Agency (SHPDA) des- ciable assets are not included in the de- ignated under section 1521 of the Public termination of allowable cost. When Health Service Act approves the demo- the disposition of an asset is by means lition or abandonment of a depreciable of exchange or trade-in, the historical asset as being consistent with the cost of the new asset is the sum of the health systems plan of the health serv- undepreciated cost of the asset dis- ice area in which the provider is lo- posed of and the additional cash or cated, the net loss realized shall be other assets transferred (or to be trans- capitalized as a deferred charge and ferred) to acquire the new asset. How- amortized over the remaining life of ever, if the asset disposed of was ac- the demolished or abandoned asset, or quired by the provider before its par- at the rate of $5,000 per year, whichever ticipation in the Medicare program and is greater. If no SHPDA exists or if the sum of the undepreciated cost and such agency is unable or unwilling to the cash or other assets transferred (or perform this function, the provider to be transferred) exceed the list price must submit a request for approval to or fair market value of the new asset, the contractor. The contractor, after the historical cost of the new asset is reviewing this request and before

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issuing the approval, will submit the replaced. However, losses resulting request along with its recommendation from a provider’s imprudent manage- to the appropriate Regional Office for ment of its depreciable assets, such as its approval. the failure to obtain proper insurance (B) If a provider fails to obtain ap- coverage, are not included in the deter- proval as specified in paragraph mination of allowable cost. (f)(5)(iv)(A) of this section, a loss is not (ii) The net allowable loss from invol- allowable unless the demolished or untary conversion must consist of the abandoned asset is replaced. If the undepreciated cost of unrecovered book asset is replaced, the loss resulting value of the asset, less amounts re- from the unapproved demolition or ceived from insurance proceeds gifts, abandonment must be capitalized as a and grants received from local, State, deferred charge and amortized over the or Federal government, or any other estimated useful life of the replace- source as a result of the involuntary ment asset or at the rate of $5,000 per conversion. year, whichever is greater. (iii) If the asset is replaced and the (v) If a loss resulting from the demo- net allowable loss in any cost-reporting lition or abandonment is deferred and period does not exceed $5,000, the entire amortized and the provider terminates amount must be included in allowable its participation in the Medicare pro- cost in the period in which the loss is gram or ceases to use a replacement incurred. If the asset is replaced and asset in the provision of patient care the net allowable loss in any cost-re- services, the unamortized deferred porting period exceeds $5,000, the loss charge remaining at that time must must be capitalized as a deferred not be included in determining allow- charge and amortized over the useful able cost under the Medicare program. life of the replacement or restored (vi) Losses on demolition must in- asset. If a replaced or restored asset clude the demolition cost incurred by ceases to be used in the provision of pa- the provider for razing and removal of tient care services or the provider ter- the asset, less any salvage value recov- minates its participation in the Medi- ered by the provider. However, if a pro- care program, the unamortized de- vider demolishes a depreciable asset for the purpose of preparing land for future ferred charge remaining at that time sale, the net demolition cost incurred will not be included in determining al- by the provider (razing and removal lowable cost under the Medicare pro- costs less salvage recovered) is consid- gram. ered a capital expenditure and added to (iv) If the provider fails to replace or the historical basis of the land. restore an involuntarily converted (vii) If a provider purchases land on asset, the loss is not included in deter- which there is a building, no deprecia- mining allowable cost. However, if the tion will be allowed under the Medicare provider intends to replace or restore program unless the building is used in the asset but is unable to do so because providing patient care. If the building the designated SHPDA finds such re- is demolished, the entire purchase placement or restoration to be incon- price and demolition cost shall be consistent with the health systems plan of sidered the historical cost of the land. the provider’s health service area, the If the building is used for patient care, loss is allowable so long as the provider but demolished within 5 years of pur- continues to participate in Medicare. chase, the entire purchase price, less In this case, the loss must be capital- allowed depreciation, plus demolition ized as a deferred charge and amortized cost will be considered the historical over the remaining life of the involun- cost of the land. tarily converted asset, or at the rate of (6) Involuntary conversion. (i) Losses $5,000 per year, whichever is greater. resulting from the involuntary conver- (v) If a gain is realized from an invol- sion of depreciable assets, such as con- untary conversion of depreciable as- demnation, fire, theft, or other cas- sets, the net amount realized reduces ualty, are generally included in the de- the basis of the restored or replace- termination of allowable cost on a de- ment asset. If the asset is not restored ferred basis if the asset is restored or or replaced, the gain is to be treated in

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accordance with paragraph (f)(2) of this tion to the limitations specified in section. paragraph (g)(1) of this section, the (7) Effect on equity capital. The unre- cost basis of the depreciable assets may covered loss entered on the books of not exceed the current reproduction the provider as a deferred charge, in ac- cost depreciated on a straight-line cordance with paragraphs (f) (5) and (6) basis over the life of the asset to the of this section, is not includable in the time of the sale. computation of equity capital under (3) Assets acquired by hospitals and § 413.157. SNFs on or after July 18, 1984 and not (8) Sale of replacement or restored as- subject to an enforceable agreement en- sets. If a provider sells a replacement or tered into before that date. Subject to restored asset while participating in paragraphs (b)(1)(ii) (B) through (G) the Medicare program or within 1 year and (b)(1)(iii) of this section, historical immediately following the date on cost may not exceed the lowest of the which it terminates its participation in following: the Medicare program, the unrecovered (i) The allowable acquisition cost of loss entered on the books of the pro- the asset to the owner of record as of vider as a deferred charge in accord- July 18, 1984 (or, in the case of an asset ance with paragraphs (f) (5) and (6) of not in existence as of July 18, 1984, the this section will not be included in de- first owner of record of the asset); termining the gain or loss realized (ii) The acquisition cost to the new from the sale of the replacement or re- owner; or stored asset. However, if the sale of (iii) The fair market value of the such asset is made to a related organi- asset on the date of acquisition. zation, as defined in § 413.17, and the (4) Assets acquired by all providers on purchasing organization continues as a or after December 1, 1997. Subject to the provider in the Medicare program, the provisions of paragraph (b)(1)(i)(A) of remaining deferred charge representing this section, the historical cost may the unrecovered depreciable basis of not exceed the historical cost of the the demolished, abandoned or de- asset, as recognized under the Medicare stroyed asset must continue to be am- program, less depreciation allowed, to ortized over the remaining expected the owner of record as of August 5, 1997 useful life of the replacement or re- (or for an asset not in existence as of stored asset. If the sale is made to an August 5, 1997, the first owner of record unrelated organization, further amorti- after August 5, 1997). zation of the deferred charge is not al- (5) Transactions other than bona fide. lowed. If the purchaser cannot demonstrate (g) Establishment of cost basis on pur- that the sale was bona fide, in addition chase of facility as an ongoing oper- to the limitations specified in para- ation—(1) Assets acquired after July 1, graph (g)(1), (2), and (3) of this section, 1966 and before August 1, 1970. The cost the purchaser’s cost basis may not ex- basis for the assets of a facility pur- ceed the seller’s cost basis, less accu- chased as an ongoing operation after mulated depreciation. July 1, 1966, and before August 1, 1970, (h) Sale and leaseback agreements and is the lowest of the— other lease transactions. (1) For sale and (i) Total price paid for the facility by leaseback agreements for all providers, the purchaser, as allocated to the indi- and for sale and leaseback agreements vidual assets of the facility; for hospitals and SNFs entered into be- (ii) Total fair market value of the fa- fore October 23, 1992, a provider may in- cility at the time of the sale, as allo- clude in its allowable costs incurred cated to the individual assets; or rental charges, as specified in a sale (iii) Combined fair market value of and leaseback agreement with a non- the individually identified assets at the related purchaser involving plant fa- time of the sale. cilities or equipment, only if— (2) Assets acquired after July 31, 1970 (i) The rental charges are reasonable and, for hospitals and SNFs, before July based on consideration of rental 18, 1984. For depreciable assets acquired charges of comparable facilities and after July 31, 1970 and, for hospitals market conditions in the area; the and SNFs, before July 18, 1984, in addi- type, expected life, condition, and

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value of the facilities or equipment annual costs of ownership, the provider rented; and other provisions of the may carry forward amounts of rental rental agreement; or lease costs that were not included in (ii) Adequate alternate facilities or allowable costs in the early years of equipment that would serve the pur- the lease due to the costs of ownership pose are not or were not available at limitation, and include these amounts lower cost; and in allowable costs in the years of the (iii) The leasing was based on eco- lease when the annual rental or lease nomic and technical considerations. costs are less than the annual costs of (2) If the conditions of paragraph ownership. In any given year the (h)(1) of this section are not met, the amount of actual annual rental or amount a provider may include in its lease costs plus the amount carried for- allowable costs as rental or lease ex- ward to that year may not exceed the pense under a sale and leaseback agree- amount of the costs of ownership for ment may not exceed the amount that that year. the provider would have included in its (iii) In the aggregate, the amount of allowable costs had the provider re- rental or lease costs included in allow- tained legal title to the facilities or able costs may not exceed the amount equipment such as interest expense on of the costs of ownership that the pro- mortgages, taxes, depreciation, and in- vider could have included in allowable surance costs. costs had the provider retained legal (3) For hospitals and SNFs entering title to the asset. into sale and leaseback agreements on (4) For lease transactions of all pro- or after October 23, 1992, the amount a viders entered into before October 23, provider may include in its allowable 1992, a lease that meets the following costs as rental or lease expense may conditions establishes a virtual pur- not exceed the amount that the pro- chase: vider would have included in its allow- (i) The rental charge exceeds rental able costs had the provider retained charges of comparable facilities or legal title to the facilities or equipment, such as interest expense on equipment in the area. mortgages, taxes, depreciation, and in- (ii) The term of the lease is less than surance costs (the costs of ownership). the useful life of the facilities or equip- This limitation applies both on an an- ment. nual basis and over the useful life of (iii) The provider has the option to the asset. renew the lease at a significantly re- (i) If in the early years of the lease, duced rental, or the provider has the the annual rental or lease costs are less right to purchase the facilities or than the annual costs of ownership, but equipment at a price that appears to be in the later years of the lease the an- significantly less than what the fair nual rental or lease costs are more market value of the facilities or equip- than the annual costs of ownership, in ment would be at the time acquisition the years that the annual rental or by the provider is permitted. lease costs are more than the costs of (5)(i) If a lease is a virtual purchase ownership the provider may include in under paragraph (h)(4) of this section, allowable costs annually the actual the rental charge is includable in al- amount of rental or lease costs. The lowable costs only to the extent that it aggregate rental or lease costs included does not exceed the amount that the in allowable costs may not exceed the provider would have included in allow- aggregate costs of ownership that able costs if it had legal title to the would have been included in allowable asset (the cost of ownership), such as costs over the useful life of the asset straight-line depreciation, insurance, had the provider retained legal title to and interest. For purposes of com- the asset. puting the limitation on allowable (ii) If in the early years of the lease, rental cost in this paragraph, a pro- the annual rental or lease costs exceed vider may not include accelerated de- the annual costs of ownership, but in preciation. the later years of the lease the annual (ii) The difference between the rental or lease costs are less than the amount of rent paid and the amount of

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rent allowed as rental expense is con- (7)(i) If a lease is a virtual purchase sidered a deferred charge and must be under paragraph (h)(6) of this section, capitalized as part of the historical the rental charge is includable in al- cost of the asset when the asset is pur- lowable costs only to the extent that it chased. does not exceed the amount that the (iii) If an asset is returned to the provider would have included in allow- owner instead of being purchased, the able costs if it had legal title to the deferred charge may be expensed in the asset (the costs of ownership), such as year the asset is returned. straight-line depreciation, insurance, (iv) If the term of the lease is ex- and interest. For purposes of com- tended for an additional period of time puting the limitation on allowable at a reduced lease cost and the option rental cost as described in this para- to purchase still exists, the deferred graph, a provider may not include ac- charge may be expensed to the extent celerated depreciation in its allowable of increasing the reduced rental to an costs. amount not in excess of the cost of (ii) The difference between the ownership. amount of rent paid and the amount of (v) If the term of the lease is ex- rent allowed as rental expense is con- tended for an additional period of time sidered a deferred charge and is cap- at a reduced lease cost and the option italized as part of the historical cost of the asset when the asset is purchased. to purchase no longer exists, the de- (iii) If an asset is returned to the ferred charge may be expensed to the owner instead of being purchased, the extent of increasing the reduced rental deferred charge may be expensed in the to a fair rental value. year the asset is returned. (6) For lease transactions entered (iv) If the term of the lease is ex- into on or after October 23, 1992, a lease tended for an additional period of time that meets any one of the following at a reduced lease cost and the option conditions establishes a virtual pur- to purchase still exists, the deferred chase: charge may be expensed to the extent (i) The lease transfers title of the fa- of increasing the reduced rental to an cilities or equipment to the lessee dur- amount not in excess of the cost of ing the lease term. ownership. (ii) The lease contains a bargain pur- (v) If the term of the lease is ex- chase option. tended for an additional period of time (iii) The lease term is 75 percent or at a reduced lease cost and the option more of the useful life of the facilities to purchase no longer exists, the de- or equipment. This provision is not ap- ferred charge may be expensed to the plicable if the lease begins in the last extent of increasing the reduced rental 25 percent of the useful life of the fa- to a fair rental value. cilities or equipment. (vi) If the lessee becomes the owner (iv) The present value of the min- of the leased asset (either by operation imum lease payments (that is, pay- of the lease or by other means), the ments to be made during the lease amount considered as depreciation, for term, including bargain purchase op- the purpose of having computed the tion, guaranteed residual value, or pen- limitation expressed in paragraph alties for failure to renew) equals 90 (h)(7)(i) of this section, must be used in percent or more of the fair market calculating the limitation on adjust- value of the leased property. This pro- ments to depreciation for the purpose vision is not applicable if the lease be- of determining any gain or loss upon gins in the last 25 percent of the useful disposal of an asset under paragraph (f) life of the facilities or equipment. The of this section. present value is computed using the (i) Intergovernmental transfer of facili- lessee’s incremental borrowing rate, ties. The basis for depreciation of assets unless the interest rate implicit in the transferred under appropriate legal au- lease is known and is less than the les- thority from one governmental entity see’s incremental borrowing rate, in to another is as follows: which case, the interest rate implicit (1) The historical cost incurred by in the lease is used. the present owner in acquiring the

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asset under a bona fide sale. The his- (2) Assets used or depreciated under the torical cost may not exceed the lower Medicare program. If an asset has been of current reproduction cost adjusted used or depreciated under the Medicare for straight-line depreciation over the program and is donated to a provider, life of the asset to the time of the pur- the basis for the purpose of calculating chase of fair market value at the time depreciation and equity capital (if ap- of the purchase. plicable) is the lesser of— (2) The fair market value at the time (i) The fair market value at the time of donation under a bona fide donation of donation; or of the asset (subject to the limitations (ii) The net book value in the hands set forth under paragraph (i) of this of the owner last participating in the section). An asset is considered do- Medicare program. nated when a governmental entity ac- (3) Transfers of State hospitals to non- quires the asset without assuming the profit corporations without monetary con- functions for which the transferor used sideration. If a State transfers a hos- the asset or making any payment for it pital to a nonprofit corporation within the form of cash, property, or serv- out monetary consideration on or after ices. July 18, 1984, the depreciable basis of (3) If neither paragraph (h) (1) nor (2) the assets to the new owner is the net of this section applies, for example, the book value of the assets as recorded on transfer was solely to facilitate admin- the State’s books at the time of the istration or to reallocate jurisdictional transfer. For purposes of this section, responsibility, or the transfer con- monetary consideration includes cash, stituted a taking over in whole or in new debt, and assumed debt. part of the function of one governmental entity by another govern- (k) Transactions involving a provider’s mental entity, the basis for deprecia- capital stock—(1) Acquisition of capital tion is— stock of a provider. If the capital stock (i) With respect to an asset on which of a provider is acquired, the provider’s the transferor has claimed depreciation assets may not be revalued. For exam- under the Medicare program, the trans- ple, if Corporation A purchases the cap- feror’s basis under the Medicare pro- ital stock of Corporation B, the program prior to the transfer. The method vider, Corporation B continues to be of depreciation used by the transferee the provider after the purchase and may be the same as that used by the Corporation A is merely the stock- transferor, or the transferee may holder. Corporation B’s assets may not change the method, as permitted under be revalued. paragraph (d)(2) of this section; or (2) Statutory merger. A statutory (ii) With respect to an asset on which merger is a combination of two or more the transferor has not claimed depre- corporations under the corporation ciation under the Medicare program, laws of the State, with one of the cor- the cost incurred by the transferor in porations surviving. The surviving cor- acquiring the asset (not to exceed the poration acquires the assets and liabil- basis that would have been recognized ities of the merged corporation(s) by had the transferor participated in the operation of State law. The effect of a Medicare program) less depreciation statutory merger upon Medicare reim- calculated on the straight-line basis bursement is as follows: over the life of the asset to the time of (i) Statutory merger between unrelated transfer. parties. If the statutory merger is be- (j) Basis of assets donated to a pro- tween two or more corporations that vider—(1) Assets not used or depre- are unrelated (as specified in § 413.17), ciated under the Medicare program. If the assets of the merged corporation(s) an asset has never been used or depre- acquired by the surviving corporation ciated under the Medicare program and may be revalued in accordance with is donated to a provider, the basis for paragraph (g) of this section. If the the purpose of calculating depreciation merged corporation was a provider be- and equity capital (if applicable) is the fore the merger, then it is subject to fair market value of the asset at the the provisions of paragraphs (d)(3) and time of donation. (f) of this section concerning recovery

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of accelerated depreciation and the re- fied in § 413.17), no revaluation of pro- alization of gains and losses. The basis vider assets is permitted. of the assets owned by the surviving [51 FR 34793, Sept. 30, 1986, as amended at 56 corporation are unaffected by the FR 43456, Aug. 30, 1991; 57 FR 3017, Jan. 27, transaction. An example of this type of 1992; 57 FR 39830, Sept. 1, 1992; 57 FR 43919, transaction is one in which Corpora- Sept. 23, 1992; 58 FR 17528, Apr. 5, 1993; 59 FR tion A, a nonprovider, and Corporation 45401, Sept. 1, 1994; 63 FR 1382, Jan. 9, 1998; 65 FR 8662, Feb. 22, 2000; 82 FR 38515, Aug. 14, B, the provider, are combined by a 2017] statutory merger, with Corporation A being the surviving corporation. In § 413.139 Depreciation: Optional allow- such a case the assets of Corporation B ance for depreciation based on a acquired by Corporation A may be re- percentage of operating costs. valued in accordance with paragraph (a) Principle. With respect to all as- (g) of this section. sets acquired before 1966, the provider, (ii) Statutory merger between related at its option, may choose an allowance parties. If the statutory merger is be- for depreciation based on a percentage tween two or more related corporations of operating costs. The operating costs (as specified in § 413.17), no revaluation to be used are the provider’s 1965 oper- of assets is permitted for those assets ating costs or the provider’s current year’s allowable costs, whichever are acquired by the surviving corporation. the lower. The percentage to be applied An example of this type of transaction is 5 percent starting with the year 1966– is one in which Corporation A purchase 67, with such percentage being uni- the capital stock of Corporation B, the formly reduced by one-half percent provider. Immediately after the acqui- each succeeding year. The allowance sition of the capital stock of Corpora- based on operating costs is in addition tion B, there is a statutory merger of to regular depreciation on assets ac- Corporation B and Corporation A, with quired after 1965; however, if the op- Corporation A being the surviving cor- tional allowance is selected, the com- poration. Under these circumstances, bined amount of such allowance on pre- at the time of the merger the trans- 1966 assets and the straight-line depre- action is one between related parties ciation on assets acquired after 1965 and is not a basis for revaluation of the (including the estimated depreciation provider’s assets. on assets held on a rental basis during (3) Consolidation. A consolidation is the current year) may not exceed 6 per- the combination of two or more cor- cent of the provider’s allowable cost for porations resulting in the creation of a the current year. (b) Definitions—(1) Operating costs. Op- new corporate entity. If at least one of erating costs are the total costs in- the original corporations is a provider, curred by the provider in operating the the effect of a consolidation upon institution or facility. Medicare reimbursement for the pro- (2) Allowable costs. Allowable costs vider is as follows: are the costs of a provider that are in- (i) Consolidation between unrelated cludable under the principles for cost parties. If the consolidation is between reimbursement. Through application of two or more corporations that are un- apportionment methods to the total related (as specified in § 413.17), the as- amount of such allowable costs, the sets of the provider corporation(s) may share of a provider’s total cost that is be revalued in accordance with para- attributable to covered services for graph (g) of this section. beneficiaries is determined. (ii) Consolidation between related par- (c) Application. If a provider has inad- ties. If the consolidation is between two equate historical cost records for pre- or more related corporations (as speci- 1966 depreciable assets, the provider may elect to receive an allowance for depreciation on such assets based on a percentage of operating costs. The optional allowance for depreciation for such assets may be used, however, whether or not a provider has records

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of the cost of pre-1966 depreciable as- tional allowance for depreciation based sets currently in use. on operating costs. (d) Allowance based on a percentage of Example No. 1. The provider keeps its operating costs. (1) The allowance for records on a calendar year basis. The current depreciation based on a percentage of year’s actual allowable cost and the actual operating costs is to be computed by operating cost for 1965 do not include any ac- applying a specified percentage to a tual depreciation or rentals on depreciable- base amount equal to the provider’s type assets. The current year’s allowable 1965 total operating costs, without ad- cost also does not include any allowance in justments to these principles or the lieu of specific recognition of other costs or current year’s allowable operating return on equity capital. costs, whichever is lower. The percent- YEAR 1966 age to be applied is five for the report- Current year’s allowable cost ...... $1,100,000 ing period that starts before or during 1966–67, four and one-half for the re- Operating cost for 1965 1 ...... $1,000,000 porting period that begins during 1967– Percent for determining the allowance ...... 5 68, and continues to decline annually Allowance ...... $50,000 by equal amounts to become zero in 1 1965 Operating cost was used in computing the allowance 1976–77. for depreciation based on a percentage of operating costs because it was lower than 1966 allowable cost. (2) If used as a base for determining the optional allowance for deprecia- YEAR 1967 tion, neither the 1965 operating costs Current year’s allowable cost ...... $1,200,000 nor the current year’s allowable costs are to include any actual depreciation, Operating cost for 1965 1 ...... $1,000,000 estimated depreciation on rented de- Percent for determining the allowance 2 ...... 5 preciable-type assets, allowance in lieu Allowance ...... $50,000 of specific recognition of other costs, 1 1965 Operating cost was used in computing the allowance for depreciation based on a percentage of operating costs be- or return on equity capital. Such ex- cause it was lower than 1967 allowable cost. clusions are to be made only for the 2 Since the reporting period began during the year 1966– 1967 (July 1, 1966–June 30, 1967) 5 percent is the percent- purpose of computing the allowance for age to be used. depreciation based on operating costs. For other purposes, the excluded YEAR 1968 amounts are recognized in determining Operating cost for 1965 ...... $1,000,000 allowable costs and for computing the costs of services furnished to Medicare Current year’s allowable cost 1 ...... $900,000 Percent for determining the allowance 2 ...... 41⁄2 beneficiaries during the reporting period. Allowance ...... $40,500 (e) Change to actual depreciation. (1) A 1 The current year’s allowable cost was used in computing the allowance for depreciation based on percentage of oper- provider that elects this allowance ating costs because it was lower than 1965 operating cost. may at any time before 1976 change to 2 Since the reporting period began during the year 1967– 1968 (July 1, 1967–June 30, 1968) 41⁄2 percent is the per- actual depreciation on all pre-1966 de- centage to be used. preciable assets. In such case, this op- Example No. 2. When the provider pays rent tion is eliminated and the provider can for depreciable-type assets rented prior to no longer elect to receive an allowance 1966, the estimated depreciation on such as- for depreciation based on a percentage sets must be deducted from the allowance. of operating costs. The following illustration demonstrates how (2) If the provider desires to change the allowance is determined. to actual depreciation but either has The provider keeps its records on a cal- no historical cost records or has incom- endar year basis. The current year’s actual plete records, the determination of his- allowable cost and the actual operating cost for 1965 did not include any actual deprecia- torical cost may be made through ap- tion, allowance in lieu of specific recognition propriate means involving expert con- of other costs, or return on equity capital. sultation with the determination being However, such costs have been adjusted to subject to review and approval by the exclude estimated depreciation on rented de- contractor. preciable-type assets. (f) Determination of optional allowance based on percentage of operating costs il- YEAR 1966 lustrated. The following illustrates how Adjusted current year’s allowable cost ...... $1,100,000 the provider would determine the op- Adjusted operating cost for 1965 1 ...... $1,000,000 921

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YEAR 1966—Continued YEAR 1966—Continued Percent for determining the allowance ...... 5 [The provider keeps its records on a calendar year basis. The current year’s actual allowable cost and the actual operating Allowance ...... $50,000 cost for 1965 have been adjusted to exclude actual depre- Less estimated depreciation for depreciable- ciation, the estimated depreciation on rented depreciable- type assets rented prior to 1966 on which type assets, allowance in lieu of specific recognition of other rental is paid in 1966 ...... $3,000 costs, and return on equity capital.] In 1966 assets were acquired which produce Adjusted allowance ...... $47,000 a straight-line depreciation of ...... $18,000 1 1965 operating cost was used in computing the allowance Estimated depreciation on assets rented in for depreciation based on a percentage of operating costs be- 1966 ...... $2,000 cause it was lower than 1966 allowable cost. Adjusted allowable operating cost for 1966 .... $1,100,000 CALCULATION OF ALLOWANCE FOR DEPRECIATION BASED ON A (g) Limitation on depreciation if op- PERCENTAGE OF OPERATING COSTS tional allowance is used. This optional Gross allowance allowance only is subject to a limita- 5 percent times adjusted 1965 operating tion based on the provider’s total al- costs ($1,000,000) ...... $50,000 Estimated depreciation on assets rented in lowable operating cost for the current 1966 ...... 2,000 year. To determine this limitation, Straight-line depreciation on post-1965 assets 18,000 compute the sum of the actual depre- Total ...... 70,000 ciation claimed, the allowance based 6 percent of adjusted 1966 allowable oper- on a percentage of operating costs, and ating cost ...... 66,000 the estimated straight-line depreciation on depreciable-type assets rented Reduction in allowance ...... 4,000 after 1965. If this sum exceeds six per- Allowance ...... 50,000 cent of the provider’s current year’s al- Reduction ...... 4,000 lowable cost (exclusive of any actual Adjusted allowance ...... 46,000 depreciation claimed, estimated depreciation on rented depreciable-type as- Total depreciation allowance for sets, allowance in lieu of specific rec- 1966 ($18,000 actual depreciation plus $46,000 allow- ognition of other costs, and return on ance based on operating cost) 64,000 equity capital), the allowance for de- Assume in this illustration that the pro- preciation based on a percentage of op- vider had elected to use the declining bal- erating costs is reduced by the amount ance method in computing its allowable de- of excess. In applying this limitation, if preciation and the rental expense for depre- the actual depreciation claimed is on ciable-type assets was $3,500. In that case, it an accelerated basis, it must be con- would include in its 1966 allowable cost not verted to a straight-line basis only for only the $46,000 allowance based on operating use in calculating this limitation. It is costs but also $36,000 (in this instance 2 × presumed that pre-1966 assets will not straight-line rate is used) in actual depreciation and the rental expense of $3,500—or a be retired at a greater than normal total of $85,500 covering all its depreciable rate, and the limitation of six percent, assets. as it affects the availability of the allowance, is designed as a safeguard if § 413.144 Depreciation: Allowance for the presumption is not borne out. If depreciation on fully depreciated or the provider does not elect to use the partially depreciated assets. optional allowance, the combined al- (a) Principle. Depreciation on assets lowance for depreciation based on costs being used by a provider at the time it of pre-1966 assets and those subse- enters into the Medicare program is al- quently acquired is not subject to the lowed. This principle applies even six percent limitation. though such assets may be fully or par- Example No. 1. The following illustration tially depreciated on the provider’s demonstrates how this limitation would be books. determined. (b) Application. Depreciation is allowable on assets being used at the time YEAR 1966 the provider enters into the program. [The provider keeps its records on a calendar year basis. The This applies even though such assets current year’s actual allowable cost and the actual operating cost for 1965 have been adjusted to exclude actual depre- may be fully depreciated on the pro- ciation, the estimated depreciation on rented depreciable- vider’s books or fully depreciated with type assets, allowance in lieu of specific recognition of other costs, and return on equity capital.] respect to other third-party payers. So Adjusted operating cost for 1965 ...... $1,000,000 long as an asset is being used, its use- Percent for determining the allowance ...... 5 ful life is considered not to have ended, 922

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and consequently the asset is subject tion of payment of depreciation to pro- to depreciation based upon a revised es- vide funds that make it possible to timate of the asset’s useful life as de- maintain the assets and preserve the termined by the provider and approved capital employed in the production of by the contractor. Correction of prior services. Therefore, irrespective of the years’ depreciation to reflect revision source of financing of an asset, if it is of estimated useful life should be made used in the providing of services for in the first year of participation in the beneficiaries of the program, payment program unless the provider has used for depreciation of the asset is, in fact, the optional method (§ 413.139), in a cost of the production of those serv- which case the correction should be ices. Moreover, recognition of this cost made at the time of discontinuing the is necessary to maintain productive cause of that method. If an asset has be- pacity for the future. An incentive for come fully depreciated under Medicare, funding of depreciation is provided in further depreciation is not appropriate these principles by the provision that or allowable, even though the asset investment income on funded deprecia- may continue in use. tion is not treated as a reduction of al- (c) Example of an allowance for a fully- lowable interest expense under depreciated asset. For example, if a 50- § 413.153(a). year-old building is in use at the time the provider enters into the program, § 413.153 Interest expense. depreciation is allowable on the build- (a)(1) Principle. Necessary and proper ing even though it has been fully depre- interest on both current and capital in- ciated on the provider’s books. Assum- debtedness is an allowable cost. How- ing that a reasonable estimate of the ever, interest costs are not allowable if asset’s continued life is 20 years (70 incurred as a result of— years from the date of acquisition), the provider may claim depreciation over (i) Judicial review by a Federal court the next 20 years—if the asset is in use (as described in § 413.64(j)); that long—or a total depreciation of as (ii) An interest assessment on a de- much as twenty-seventieths of the as- termined overpayment (as described in set’s historical cost. § 405.377 of this chapter); or (d) Corrections to depreciation. If the (iii) Interest on funds borrowed to asset is disposed of before the expira- repay an overpayment (as described in tion of its estimated useful life, the de- § 413.64(j) or § 405.378 of this chapter), up preciation would be adjusted to the ac- to the amount of the overpayment, un- tual useful life. Likewise, a provider less the provider had made a prior com- may not have fully depreciated other mitment to borrow funds for other pur- assets it is using and finds that it has poses (for example, capital improve- incorrectly estimated the useful lives ments). of those assets. In such cases, the pro- (2) Exception. In those cases of admin- vider may use the corrected useful istrative or judicial reversal, interest lives in determining the amount of de- paid on funds borrowed to repay an preciation, provided such corrections overpayment is an allowable cost, in have been approved by the contractor. accordance with this section. (b) Definitions—(1) Interest. Interest is § 413.149 Depreciation: Allowance for the cost incurred for the use of bor- depreciation on assets financed rowed funds. Interest on current in- with Federal or public funds. debtedness is the cost incurred for (a) Principle. Depreciation is allowed funds borrowed for a relatively short on assets financed with Hill-Burton or term. This is usually for such purposes other Federal or public funds. as working capital for normal oper- (b) Application. Like other assets (in- ating expenses. Interest on capital including other donated depreciable as- debtedness is the cost incurred for sets), assets financed with Hill-Burton funds borrowed for capital purposes, or other Federal or public funds be- such as acquisition of facilities and come a part of the provider institu- equipment, and capital improvements. tion’s plant and equipment to be used Generally, loans for capital purposes in furnishing services. It is the func- are long-term loans.

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(2) Necessary. Necessary interest is in- edness established with lenders or lend- terest that meets the following re- ing organizations not related through quirements: control, ownership, or personal rela- (i) It is incurred on a loan made to tionship to the borrower. Presence of satisfy a financial need of the provider. any of these factors could affect the Loans that result in excess funds or in- ‘‘bargaining’’ process that usually ac- vestments are not considered nec- companies the making of a loan, and essary. could thus be suggestive of an agree- (ii) It is incurred on a loan made for ment on higher rates of interest or of a purpose reasonably related to patient unnecessary loans. Loans should be care. made under terms and conditions that (iii) It is reduced by investment in- a prudent borrower would make in come except income from— armslength transactions with lending (A) Gifts, grants, and endowments, institutions. The intent of this provi- whether held separately or pooled with sion is to assure that loans are legiti- other funds; mate and needed, and that the interest (B) Funded depreciation that meets rate is reasonable. Thus, interest paid the program’s qualifying criteria; by the provider to partners, stock- (C) The provider’s qualified pension holders, or related organizations of the funds; provider would not be allowable. If the (D) The provider’s deferred com- owner uses his own funds in a business, pensation funds that meet the pro- it is reasonable to treat the funds as gram’s qualifying criteria; and invested funds or capital, rather than (E) The provider’s self-insurance borrowed funds. Therefore, if interest trust funds that meet the program’s on loans by partners, stockholders, or qualifying criteria. related organizations is disallowed as a (iv) It is not reduced by interest re- cost solely because of the relationship ceived as a result of judicial review by factor, the principal of such loans is a Federal court (as described in treated as invested funds in the com- § 413.64(j)). putation of the provider’s equity cap- (3) Proper. Proper requires that inter- ital under § 413.157. est be— (i) Incurred at a rate not in excess of (2) Exceptions to the general rule re- what a prudent borrower would have garding interest on loans from con- had to pay in the money market exist- trolled sources of funds are made in the ing at the time the loan was made; and following circumstances. Interest on (ii) Paid to a lender not related loans to providers by partners, stock- through control or ownership, or per- holders, or related organizations made sonal relationship to the borrowing or- prior to July 1, 1966, is allowable as ganization. However, interest is allow- cost, provided that the terms and con- able if paid on loans from the pro- ditions of payment of such loans have vider’s donor-restricted funds, the been maintained in effect without funded depreciation account, or the modification subsequent to July 1, 1966. provider’s qualified pension fund. If the general fund of a provider ‘‘bor- (4) Zero coupon bonds. Zero coupon rows’’ from a donor-restricted fund and bonds are issued by government agen- pays interest to the restricted fund, cies, corporations, and banks at a price this interest expense is an allowable substantially below the face value. The cost. The same treatment is accorded difference between the purchase price interest paid by the general fund on and the face value reflects the actual money ‘‘borrowed’’ from the funded de- amount of interest and is neither a dis- preciation account of the provider or count nor an adjustment to the inter- from the provider’s qualified pension est rate as with other bonds. Interest is fund. In addition, if a provider operated paid at maturity when the bond is re- by members of a religious order bor- deemed at face value. rows from the order, interest paid to (c) Borrower-lender relationship. (1) the order is an allowable cost. Except as described in paragraph (c)(2) (3) If funded depreciation is used for of this section, to be allowable, inter- purposes other than improvement, re- est expense must be incurred on indebt- placement, or expansion of facilities or

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equipment related to patient care, al- vestments, and the provisions of para- lowable interest expense is reduced to graph (b)(2)(iii) of this section are ap- adjust for offsets not made in prior plied. years for earnings on funded deprecia- (e) Zero coupon bonds—(1) Interest on tion. A similar treatment is accorded bonds issued on or after August 15, 1996. deposits in the provider’s qualified pen- For zero coupon bonds issued on or sion fund if such deposits are used for after August 15, 1996, interest expense other than the purpose for which the incurred to provide funds for patient fund was established. care-related costs is an allowable ex- (d) Loans not reasonably related to pa- pense, and interest income earned for tient care. (1) The following types of investment purposes is an allowable loans are not considered to be for a offset, in the cost reporting period in purpose reasonably related to patient which the interest accrues. care: (2) Interest income offset. Interest in- (i) For loans made to finance acquisi- come from zero coupon bonds must be tion of a facility, that portion of the offset against allowable interest ex- cost that exceeds— pense as prescribed in paragraph (b)(2) (A) Historical cost as determined of this section and in § 413.130(g)(2). If under § 413.134(b); or zero coupon bonds are purchased with (B) The cost basis determined under the proceeds of an advanced refunding § 413.134(g); and of debt, offset of the investment in- (ii) Loans made to finance capital come is required under stock acquisitions, mergers, or consoli- § 413.153(b)(2)(iii), but the investment dations for which revaluation of assets income is not prorated under is not allowed under § 413.134(k). § 413.130(g)(2). (2) In determining whether a loan (3) Use of effective interest method. (i) was made for the purpose of acquiring Interest expense and interest income a facility, we apply any owner’s invest- from zero coupon bonds that are re- ment or funds first to the tangible as- ported as they accrue must be amor- sets, then to the intangible assets tized using the effective interest meth- other than goodwill, and lastly to the od. This method recognizes the actual goodwill. If the owner’s investment or accrual of interest expense or income funds are not sufficient to cover the for each interest computation period cost allowed for tangible assets, we (as specified by the bond instrument) apply funds borrowed to finance the ac- throughout the life of the bond. quisition to the portion of the allowed (ii) A constant effective yield rate is cost of the tangible assets not covered determined and applied to the book by the owner’s investment, then to the value (outstanding loan balance includ- intangible assets other than goodwill, ing prior accrued interest) of the bond and lastly to the goodwill. Repayments at the beginning of each period to de- of the funds borrowed are applied first termine the total interest for the pe- to the borrowing related to the tan- riod. gible assets, then to the borrowing re- (iii) If the interest computation pe- lated to the intangible assets other riod involves portions of more than one than goodwill, and lastly to the bor- cost reporting period, the amount of rowing related to the goodwill. interest for that computation period (3) When a provider borrows funds, shall be apportioned to each cost re- but only some of the funds are nec- porting period. essary, repayments of the loan (prin- (iv) An example of the computation cipal and interest portions) are applied of interest using the effective interest first to pay for the necessary portion of method follows: the loan. Only after all of the necessary portion of the loan (principal Facts and interest) has been repaid are any repayments applied to the unnecessary Life of zero coupon bond: 15 years. portion of the loan. Repayments to- Value at maturity: $50,000. ward non-allowable borrowing per- Bondholder pays $6,996 for the bond. taining to assets or activities not re- Annual interest rate is 13.5506% com- lated to patient care are considered in- pounded semi-annually.

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From the table below, interest for porting period or portion thereof cov- the first year would be $980.11 ($474.00 ered under the program. plus $506.11). (2) Rate of return for inpatient hospital services furnished by proprietary hos- Col 1 Col 2 Col. 3 Col. 4 pitals. The rate used in determining the Six- Book value be- Effective Book value end month ginning of pe- interest* of period (col- return for inpatient hospital services is periods riod umns 2 + 3) a percentage of the average of the rates 1 $6,996.00 $474.00 $7,470.00 of interest described in paragraph (b)(1) 2 7,470.00 506.11 7,976.11 of this section. The percentages appli- 3 7,976.11 540.40 8,516.51 cable to inpatient hospital services are 4 8,516.51 577.02 9,093.53 as follows: 29 43,855.94 2,971.37 46,827.31 (i) 150 percent for cost reporting peri- 30 46,827.31 3,172.69 50,000.00 ods beginning before April 20, 1983. *Computed by multiplying the book value at the beginning (ii) 100 percent for cost reporting pe- of each period (Column 2) by 6.7753% (the annual interest rate of 13.5506% 2 = 6.7753%). riods beginning on or after April 20, 1983 and before October 1, 1986. [51 FR 34793, Sept. 30, 1986, as amended at 56 (iii) 75 percent for cost reporting pe- FR 43457, Aug. 30, 1991; 59 FR 45402, Sept. 1, riods beginning on or after October 1, 1994; 61 FR 37014, July 16, 1996; 61 FR 63748, 1986 and before October 1, 1987. 63479, Dec. 2, 1996; 65 FR 8662, Feb. 22, 2000] (iv) 50 percent for cost reporting periods beginning on or after October 1, § 413.157 Return on equity capital of proprietary providers. 1987 and before October 1, 1988. (v) 25 percent for cost reporting peri- (a) Definitions. For purposes of this ods beginning on or after October 1, section— 1988 and before October 1, 1989. Proprietary provider means a provider (vi) Zero percent for cost reporting that is organized and operated with the periods beginning on or after October 1, expectation of earning a profit for its 1989. owners (as distinguished from a pro- (3) Rate of return related to proprietary vider that is organized and operated on SNFs. (i) For cost reporting periods be- a nonprofit basis). Proprietary pro- ginning on or after October 1, 1985, the viders may be sole proprietorships, rate used in determining the return for partnerships, or corporations. Effective SNF services furnished before October for cost reporting periods beginning on 1, 1993, is a percentage equal to the av- or after July 6, 1987, the term applies erage of the rates of interest described only to proprietary hospitals and in paragraph (b)(1) of this section. SNFs. (ii) There is no allowance for return (b) General rule. A reasonable return for SNF services furnished on or after on equity capital invested and used in October 1, 1993. the provision of patient care is paid as (4) Rate of return related to outpatient an allowance in addition to the reason- hospital services. (i) For cost reporting able cost of covered services furnished periods beginning on or after October 1, to beneficiaries by proprietary pro- 1985, the rate used in determining the viders. return for outpatient hospital services (1) Rate of return applicable to propri- furnished before January 1, 1988 is a etary providers for cost reporting periods percentage equal to the average of the beginning before July 6, 1987. Except as rates of interest described in paragraph provided in paragraphs (b)(2), (b)(3), (b)(1) of this section. and (b)(4) of this section, the amount (ii) There is no allowance for return allowable on an annual basis, for cost for outpatient hospital services fur- reporting periods beginning before July nished on or after January 1, 1988. 6, 1987, is determined by multiplying (5) Rate of return for proprietary serv- the provider’s equity capital by a per- ices of all nonhospital and non-SNF pro- centage equal to one and one-half viders. (i) For cost reporting periods be- times the average of the rates of inter- ginning on or after October 1, 1985, but est on special issues of public debt obli- before July 6, 1987, the rate used in de- gations issued for purchase by the termining the return for services of all Medicare Part A Trust Fund for each of nonhospital and non-SNF providers is a the months during the provider’s re- percentage equal to the average of the

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rates of interest described in paragraph equity capital to the extent that it is (b)(1) of this section. reasonable except that the cumulative (ii) For cost reporting periods begin- allowable return for such excess may ning on or after July 6, 1987, there is no not exceed 100 percent of such excess. allowance for return on equity capital For purposes of this section, the cumu- for nonhospital and non-SNF providers. lative allowable return means the sum (c) Application—(1) Computation of eq- of the allowable rate of return on equity capital. For purposes of computing uity capital for all months starting the allowable return, the provider’s eq- from August 1, 1970. For example, if the uity capital means— allowable rates of return on equity cap- (i) The provider’s investment in ital for a provider are 9 percent for the plant, property, and equipment related first year (and such year started Au- to patient care (net of depreciation) gust 1, 1970), 8.5 percent for the second and funds deposited by a provider who year, and 10.5 percent for the third leases plant, property, or equipment re- year, the cumulative allowable return lated to patient care and is required by at the end of the third year would be 28 the terms of the lease to deposit such percent. After the cumulative allow- funds (net of noncurrent debt related able return equals 100 percent, the in- to such investment or deposited funds); clusion in equity capital of the excess and is no longer allowable. (ii) Net working capital maintained (4) Computation of return on equity for necessary and proper operation of capital. For purposes of computing the patient care activities. However, debt allowable return, the amount of equity representing loans from partners, capital is the average investment dur- stockholders, or related organizations ing the reporting period. The rate of re- on which interest payments would be turn allowed, as derived from time to allowable as costs but for the provi- time based upon interest rates in ac- sions of § 413.153(b)(3)(ii), is not sub- cordance with this principle, is deter- tracted in computing the amount of eq- mined by CMS and communicated uity capital in order that the proceeds through contractors. Return on invest- from such loans be treated as part of ment as an element of allowable costs the provider’s equity capital. In com- is subject to apportionment in the puting the amount of equity capital same manner as other elements of al- upon which a return is allowable, in- lowable costs. vestment in facilities is recognized on Example of calculation of cumulative allow- the basis of the historical cost, or able return. X purchased a provider on July 1, other basis, used for depreciation and 1969, paying $100,000 in excess f the fair mar- other purposes under Part A of Medi- ket value of the assets acquired. Provider X care. files its cost report on a calendar-year basis. (2) Acquisitions after July 1970. With The allowable rate of return on equity cap- respect to a facility or any tangible as- ital for August 1, 1970-December 31, 1970 (4.538 percent), is obtained by multiplying the al- sets of a facility acquired on or after lowable rate of return for the period ending August 1, 1970, the excess of the price December 31, 1970 (10.891) by 5⁄12 (a fraction of paid for such facility or such tangible which the numerator is the number of assets over the historical cost, as de- months from August 1, 1970, to the end of the fined in § 413.134(b), or the cost basis, as cost-reporting period and the denominator is determined under § 413.134(g) (which- the number of months in the cost-reporting ever is appropriate), is not includable period). The cumulative allowable return for in equity capital, and loans made to fi- Provider X for the period August 1, 1970-De- cember 31, 1973, (32.367 percent) is computed nance such excess portion of the cost of as follows: such acquisitions (see § 413.153(d)) are excluded in computing equity capital. Rate of return on (3) Acquisitions prior to August 1970. Cost reporting year ending equity With respect to a facility or any tan- capital gible assets of a facility acquired be- (percent) fore August 1970, the excess of the price Dec. 31, 1970 ...... 4.538 paid for such facility or assets over the Dec. 31, 1971 ...... 8.969 Dec. 31, 1972 ...... 8.891 fair market value of tangible assets at Dec. 31, 1973 ...... 9.969 the time of purchase is includable in

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Rate of § 413.171 Definitions. return on Cost reporting year ending equity For purposes of this subpart, the fol- capital (percent) lowing definitions apply: Base rate. The average payment Total ...... 32.367 amount per-treatment, standardized to remove the effects of case-mix and area (The $100,000 paid in excess of the fair mar- wage levels and further reduced for ket value of the assets acquired is included budget neutrality and the outlier per- in equity capital until the sum of the allow- centage. The base rate is the amount able rate of return on equity capital equals to which the patient-specific case-mix 100 percent. Of course, no portion of the $100,000 may be amortized as an allowable adjustments and any ESRD facility ad- cost or is otherwise allowable for any pro- justments, if applicable, are applied. gram reimbursement purposes other than for Composite Rate Services. Items and determining the provider’s equity capital. services used in the provision of outpatient maintenance dialysis for the [51 FR 34793, Sept. 30, 1986, as amended at 52 FR 21225, June 4, 1987; 52 FR 23398, June 19, treatment of ESRD and included in the 1987; 52 FR 32921, Sept. 1, 1987; 53 FR 12017, composite payment system established Apr. 12, 1988; 57 FR 39830, Sept. 1, 1992; 59 FR under section 1881(b)(7) and the basic 26960, May 25, 1994] case-mix adjusted composite payment system established under section Subpart H—Payment for End- 1881(b)(12) of the Act. Stage Renal Disease (ESRD) ESRD facility. An ESRD facility is an independent facility or a hospital- Services and Organ Procure- based provider of services (as described ment Costs in § 413.174(b) and (c) of this chapter), including facilities that have a self- SOURCE: 62 FR 43668, Aug. 15, 1997, unless care dialysis unit that furnish only otherwise noted. self-dialysis services as defined in § 494.10 of this chapter and meets the § 413.170 Scope. supervision requirements described in This subpart implements sections part 494 of this chapter, and that fur- 1881(b)(2), (b)(4), (b)(7), and (b)(12) nishes institutional dialysis services through (b)(14) of the Act by— and supplies under § 410.50 and § 410.52 of (a) Setting forth the principles and this chapter. authorities under which CMS is au- New ESRD facility. A new ESRD facil- thorized to establish a prospective pay- ity is an ESRD facility (as defined ment system for outpatient mainte- above) that is certified for Medicare nance dialysis services in or under the participation on or after January 1, supervision of an ESRD facility that 2011. meets the conditions of coverage in Pediatric ESRD Patient. A pediatric part 494 of this chapter and as defined ESRD patient is defined as an indi- in § 413.171(c). vidual less than 18 years of age who is receiving renal dialysis services. (b) Providing procedures and criteria Renal dialysis services. Effective Janu- under which a pediatric ESRD facility ary 1, 2011, the following items and (an ESRD facility with at least a 50 services are considered ‘‘renal dialysis percent pediatric patient mix as speci- services,’’ and paid under the ESRD fied in § 413.184 of this subpart) may re- prospective payment system under sec- ceive an exception to its prospective tion 1881(b)(14) of the Act: payment rate prior to January 1, 2011; (1) Items and services included in the and composite rate for renal dialysis serv- (c) Establishing procedures that a fa- ices as of December 31, 2010; cility must follow to appeal its pay- (2) Erythropoiesis stimulating agents ment amount under the prospective and any oral form of such agents that payment system. are furnished to individuals for the [62 FR 43668, Aug. 15, 1997, as amended at 70 treatment of ESRD; FR 70330, Nov. 21, 2005; 73 FR 20474, Apr. 15, (3) Other drugs and biologicals that 2008; 75 FR 49198, Aug. 12, 2010] are furnished to individuals for the

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treatment of ESRD and for which pay- have payment made under the provi- ment was (prior to January 1, 2011) sions of this part. made separately under Title XVIII of (c) CMS publishes the methodology the Act (including drugs and used to establish payment rates and biologicals with only an oral form), the changes specified in § 413.196(b) in (4) Diagnostic laboratory tests and the FEDERAL REGISTER. other items and services not described [62 FR 43668, Aug. 15, 1997, as amended at 73 in paragraph (1) of this definition that FR 20474, Apr. 15, 2008; 75 FR 49198, Aug. 12, are furnished to individuals for the 2010] treatment of ESRD. (5) Renal dialysis services do not in- § 413.174 Prospective rates for hos- clude those services that are not essen- pital-based and independent ESRD tial for the delivery of maintenance di- facilities. alysis. (a) Establishment of rates. CMS estab- Separately billable items and services. lishes prospective payment rates for Items and services used in the provi- ESRD facilities using a methodology sion of outpatient maintenance dialy- that— sis for the treatment of individuals (1) Differentiates between hospital- with ESRD that were or would have based providers of services and inde- been, prior to January 1, 2011, sepa- pendent ESRD facilities for items and rately payable under Title XVIII of the services furnished prior to January 1, Act and not included in the payment 2009; systems established under section (2) Does not differentiate between 1881(b)(7) and section 1881(b)(12) of the hospital-based providers of services and Act. independent ESRD facilities for items [75 FR 49198, Aug. 12, 2010] and services furnished on or after Jan- uary 1, 2009; and § 413.172 Principles of prospective (3) Requires the labor share be based payment. on the labor share otherwise applied to (a) Payment for renal dialysis serv- independent ESRD facilities when ap- ices as defined in § 413.171 and home di- plying the geographic index to hos- alysis services as defined in § 413.217 of pital-based ESRD providers of services, this chapter are based on payment on or after January 1, 2009. rates set prospectively by CMS. (b) Determination of independent facil- (b) All approved ESRD facilities ity. For purposes of rate-setting and must accept the prospective payment payment under this section, CMS con- rates established by CMS as payment siders any facility that does not meet in full for covered renal dialysis serv- all of the criteria of a hospital-based ices as defined in § 413.171 or home di- facility to be an independent facility. alysis services. Approved ESRD facility A determination under this paragraph means— (b) is an initial determination under (1) Any independent ESRD facility or § 498.3 of this chapter. hospital-based provider of services (as (c) Determination of hospital-based fa- defined in § 413.174(b) and § 413.174(c) of cility. A determination under this para- this part) that has been approved by graph (c) is an initial determination CMS to participate in Medicare as an under § 498.3 of this chapter. CMS deter- ESRD supplier; or mines that a facility is hospital-based (2) Any approved independent facility if the— with a written agreement with the Sec- (1) Facility and hospital are subject retary. Under the agreement, the inde- to the bylaws and operating decisions pendent ESRD facility agrees— of a common governing board. This (i) To maintain compliance with the governing board, which has final ad- conditions for coverage set forth in ministrative responsibility, approves part 494 of this chapter and to report all personnel actions, appoints medical promptly to CMS any failure to do so; staff, and carries out similar manage- and ment functions; (ii) Not to charge the beneficiary or (2) Facility’s director or adminis- any other person for items and services trator is under the supervision of the for which the beneficiary is entitled to hospital’s chief executive officer and

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reports through him or her to the gov- methodology specified in § 405.517 of erning board; this chapter. Effective January 1, 2006, (3) Facility personnel policies and and prior to January 1, 2011, payment practices conform to those of the hos- for drugs and biological furnished by pital; independent ESRD facilities is based (4) Administrative functions of the on the methodology specified in facility (for example, records, billing, § 414.904 of this chapter. laundry, housekeeping, and pur- (5) Effective January 1, 2011, except chasing) are integrated with those of as provided below, payment to an the hospital; and ESRD facility for renal dialysis service (5) Facility and hospital are finan- drugs and biologicals as defined in cially integrated, as evidenced by the § 413.171, furnished to ESRD patients on cost report, which reflects allocation of or after January 1, 2011 is incorporated overhead to the facility through the re- within the prospective payment system quired step-down methodology. rates established by CMS in § 413.230 (d) Nondetermination of hospital-based and separate payment will no longer be facility. In determining whether a facil- provided. ity is hospital-based, CMS does not (6) Effective January 1, 2025, payment consider— to an ESRD facility for renal dialysis (1) An agreement between a facility service drugs and biologicals with only and a hospital concerning patient re- an oral form furnished to ESRD pa- ferral; tients is incorporated within the pro- (2) A shared service arrangement be- spective payment system rates estab- tween a facility and a hospital; or lished by CMS in § 413.230 and separate (3) The physical location of a facility payment will no longer be provided. on the premises of a hospital. [62 FR 43668, Aug. 15, 1997, as amended at 70 (e) Add-on amounts. If all the physi- FR 70330, Nov. 21, 2005; 73 FR 69935, Nov. 19, cians furnishing services to patients in 2008; 75 FR 49198, Aug. 12, 2010; 78 FR 72252, an ESRD facility elect the initial Dec. 2, 2013; 79 FR 66262, Nov. 6, 2014; 80 FR method of payment (as described in 69076, Nov. 6, 2015] § 414.313(c) of this chapter), the prospec- § 413.176 Amount of payments. tive rate (as described in paragraph (a) of this section) paid to that facility is For items and services, for which increased by an add-on amount as de- payment is made under section scribed in § 414.313. 1881(b)(7), section 1881(b)(12), and sec- (f) Additional payment for separately tion 1881(b)(14) of the Act: billable drugs and biologicals. Prior to (a) If the beneficiary has incurred the January 1, 2011, CMS makes additional full deductible applicable under Part B payment directly to an ESRD facility of Medicare before the dialysis treat- for certain ESRD-related drugs and ment, Medicare pays the ESRD facility biologicals furnished to ESRD patients. 80 percent of its prospective rate. (1) Only on an assignment basis, di- (b) If the beneficiary has not incurred rectly to the facility which must ac- the full deductible applicable under cept, as payment in full, the amount Part B of Medicare before the dialysis that CMS determines; treatment, CMS subtracts the amount (2) Subject to the Part B deductible applicable to the deductible from the and coinsurance; ESRD facility’s prospective rate and (3) For drugs furnished prior to Janu- pays the facility 80 percent of the re- ary 1, 2006, payment is made to hos- mainder, if any. pital-based ESRD providers of services [75 FR 49199, Aug. 12, 2010] on a reasonable cost basis. Effective January 1, 2006, and prior to January 1, § 413.177 Quality incentive program 2011, payment for drugs furnished by a payment. hospital-based ESRD provider of serv- (a) With respect to renal dialysis ice is based on the methodology speci- services as defined under § 413.171, in fied in § 414.904 of this chapter. the case of an ESRD facility that does (4) For drugs furnished prior to Janu- not earn enough points under the pro- ary 1, 2006, payment is made to inde- gram described at § 413.178 to meet or pendent ESRD facilities based on the exceed the minimum total performance

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score (as defined at § 413.178(a)(8)) es- ical measure during the baseline period tablished by CMS for a payment year that applies to the measure for a pay- (as defined at § 413.178(a)(10)), payments ment year. otherwise made to the facility under (8) Minimum total performance score § 413.230 for renal dialysis services dur- (mTPS) means, with respect to a paying the payment year will be reduced ment year, the total performance score by up to 2 percent as follows: that an ESRD facility would receive if, (1) For every 10 points that the total during the baseline period, it per- performance score (as defined at formed at the 50th percentile of na- § 413.178(a)(14)) earned by the ESRD fa- tional ESRD facility performance on cility falls below the minimum total all clinical measures and the median of performance score, the payments oth- national ESRD facility performance on erwise made will be reduced by 0.5 per- all reporting measures. cent. (9) Payment reduction means the re- (2) [Reserved] duction, as specified by CMS, to each (b) Any payment reduction will apply payment that would otherwise be made only to the payment year involved and to an ESRD facility under § 413.230 for a will not be taken into account in com- calendar year based on the TPS earned puting the single payment amount by the ESRD facility for the cor- under this subpart for services provided responding payment year that is lower in a subsequent payment year. than the mTPS score established for [76 FR 646, Jan. 5, 2011, as amended at 83 FR that payment year. 57068, Nov. 14, 2018] (10) Payment year means the calendar year for which a payment reduction, if § 413.178 ESRD quality incentive program. applicable, is applied to the payments otherwise made to an ESRD facility (a) Definitions. As used in this sec- under § 413.230. tion: (11) Performance period means the (1) Achievement threshold means the time period during which data are col- 15th percentile of national ESRD facil- lected for the purpose of calculating an ity performance on a clinical measure ESRD facility’s performance on meas- during the baseline period for a pay- ures with respect to a payment year. ment year. (2) Baseline period means, with re- (12) Performance standards are, for a spect to a payment year, the time pe- clinical measure, the performance lev- riod used to calculate the performance els used to award points to an ESRD standards, benchmark, improvement facility based on its performance on threshold and achievement threshold the measure, and are, for a reporting that apply to each clinical measure for measure, the levels of data submission that payment year. and completion of other actions speci- (3) Benchmark means, with respect to fied by CMS that are used to award a payment year, the 90th percentile of points to an ESRD facility on the national ESRD facility performance on measure. a clinical measure during the baseline (13) Reporting measure means a meas- period that applies to the measure for ure that is scored for a payment year that payment year. using the methodology described in (4) Clinical measure means a measure paragraph (e)(1)(vi) of this section. that is scored for a payment year using (14) Total performance score (TPS) the methodology described in para- means the numeric score ranging from graphs (e)(1)(i) through (v) of this sec- 0 to 100 awarded to each ESRD facility tion. based on its performance under the (5) End-Stage Renal Disease (ESRD) ESRD QIP with respect to a payment Quality Incentive Program (QIP) means year. the program authorized under section (b) Applicability of the ESRD QIP. The 1881(h) of the Social Security Act. ESRD QIP applies to ESRD facilities as (6) ESRD facility means an ESRD fa- defined at § 413.171 beginning the first cility as defined in § 413.171. day of the month that is 4 months after (7) Improvement threshold means an the facility CMS Certification Number ESRD facility’s performance on a clin- (CCN) effective date.

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(c) ESRD QIP measure selection. CMS cumstances Exception request form, specifies measures for the ESRD QIP which is available on the QualityNet for a payment year and groups the website (https://www.qualitynet.org/), to measures into domains. The measures CMS via email to the ESRD QIP mail- for a payment year include, but are not box at [email protected]. Facili- limited to: ties must provide the following infor- (1) Measures on anemia management mation on the form: that reflect the labeling approved by (i) Facility CCN. the Food and Drug Administration for (ii) Facility name. such management. (iii) CEO name and contact informa- (2) Measures on dialysis adequacy. tion. (3) To the extent feasible, a measure (iv) Additional contact name and (or measures) of patient satisfaction. contact information. (4) To the extent feasible, measures (v) Reason for requesting an excep- on iron management, bone mineral me- tion. tabolism, and vascular access (includ- (vi) Dates affected. ing for maximizing the placement of (vii) Date the facility will start sub- arterial venous fistula). mitting data again, with justification (5) Beginning with the 2016 payment for this date. year, measures specific to the condi- (viii) Evidence of the impact of the tions treated with oral-only drugs and extraordinary circumstances, including that are, to the extent feasible, out- but not limited to photographs, news- comes-based. paper, and other media articles. (d) Data submission requirement. (1) (5) CMS will not consider an excep- Except as provided in paragraph (d)(3) tion request unless the facility request- and (4) of this section, and for a paying such exception has complied with ment year, facilities must submit to the requirements in paragraph (d)(4) of CMS data on each measure specified by this section. CMS under paragraph (c) of this sec- (6) CMS may grant exceptions to fa- tion. Facilities must submit these data cilities without a request if it deter- in the form, manner, and at a time mines that one or more of the fol- specified by CMS. lowing has occurred: (2) For purposes of paragraph (d)(1) of (i) An extraordinary circumstance af- this section, the baseline period that fects an entire region or locale. applies to the 2023 payment year is cal- (ii) An unresolved issue with a CMS endar year 2019 for purposes of calcu- data system affected the ability of a fa- lating the achievement threshold, cility to submit data in accordance benchmark and minimum total per- with paragraph (d)(1) of this section formance score, and calendar year 2020 and CMS was unable to provide the fa- for purposes of calculating the im- cility with an alternative method of provement threshold, and the perform- data submission. ance period that applies to the 2023 (7) With the exception of first and payment year is calendar year 2021. Be- second quarter 2020 ESRD QIP data for ginning with the 2024 payment year, which CMS granted an exception under the performance period and cor- paragraph (d)(6) of this section, a facil- responding baseline periods are each ity that has been granted an exception advanced 1 year for each successive to the data submission requirements payment year. under paragraph (d)(6) of this section (3) A facility may request and CMS may notify CMS that it will continue may grant exceptions to the reporting to submit data under paragraph (d)(1) requirements under paragraph (d)(1) of of this section by sending an email this section for one or more calendar signed by the CEO or another des- days, when there are certain extraor- ignated contact to the ESRD QIP mail- dinary circumstances beyond the con- box at [email protected]. Upon re- trol of the facility. ceipt of an email under this clause, (4) A facility may request an excep- CMS will notify the facility in writing tion within 90 days of the date that the that CMS is withdrawing the exception extraordinary circumstances occurred it previously granted to the facility. by submitting the Extraordinary Cir- With respect to fourth quarter 2019

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ESRD QIP data for which CMS granted porting measure based on the degree to an exception under paragraph (d)(6) of which, during the applicable perform- this section, a facility is deemed to ance period, the ESRD facility reports have met the requirements of this data and completes other actions speci- paragraph if the facility actually sub- fied by CMS with respect to that meas- mitted the data by the March 31, 2020 ure. submission deadline but did not notify (2) CMS calculates the TPS for an CMS that it would do so. ESRD facility for a payment year as (e) Performance scoring under the follows: ESRD QIP. (1) CMS will award points to (i) CMS calculates a domain score for an ESRD facility based on its perform- each domain based on the total number ance on each clinical measure for of points the ESRD facility has earned which the ESRD facility reports the under paragraph (e)(1) of this section applicable minimum number of cases for each measure in the domain and the during the performance period for a payment year, and based on the degree weight that CMS has assigned to each to which the ESRD facility submits measure. data and completes other actions speci- (ii) CMS weights each domain score fied by CMS for a reporting measure in accordance with the domain weight during the performance period for a that CMS has established for the pay- payment year. ment year. (i) CMS will award from 1 to 9 points (iii) The sum of the weighted domain for achievement on a clinical measure scores is the ESRD facility’s TPS for to each ESRD facility whose perform- the payment year. ance on that measure during the appli- (f) Public availability of ESRD QIP per- cable performance period meets or ex- formance information. (1) CMS will ceeds the achievement threshold but is make information available to the pub- less than the benchmark specified for lic regarding the performance of each that measure. ESRD facility under the ESRD QIP on (ii) CMS will award 0 points for the Dialysis Facility Compare website, achievement on a clinical measure to including the facility’s TPS and scores each ESRD facility whose performance on individual measures. on that measure during the applicable (2) Prior to making the information performance period falls below the described in paragraph (f)(1) of this sec- achievement threshold specified for tion available to the public, CMS will that measure. provide ESRD facilities with an oppor- (iii) CMS will award from 0 to 9 tunity to review that information, points for improvement on a clinical technical assistance to help them un- measure to each ESRD facility whose derstand how their performance under performance on that measure during the ESRD QIP was scored, and an op- the applicable performance period portunity to request and receive re- meets or exceeds the improvement sponses to questions that they have threshold but is less than the bench- about the ESRD QIP. mark specified for that measure. (iv) CMS will award 0 points for im- (3) CMS will provide each ESRD fa- provement on a clinical measure to cility with a performance score certifi- each ESRD facility whose performance cate on an annual basis that describes on that measure during the applicable the TPS achieved by the facility with performance period is below the im- respect to a payment year. The per- provement threshold specified for that formance score certificate must be measure. posted by the ESRD facility within 15 (v) CMS will award 10 points to each business days of the date that CMS ESRD facility whose performance on a issues the certificate to the ESRD fa- clinical measure during the applicable cility, with the content unaltered, in performance period meets or exceeds an area of the facility accessible to pa- the benchmark specified for that meas- tients. ure. (g) Limitation on review. There is no (vi) CMS will award from 0 to 10 administrative or judicial review of the points to each ESRD facility on a re- following:

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(1) The determination of the amount as determined by CMS to be needed to of the payment reduction under section adjudicate each type of exception. CMS 1881(h)(1) of the Act. may audit any cost report or other in- (2) The specification of measures formation submitted. The materials under section 1881(h)(2) of the Act. submitted to CMS must— (3) The methodology developed under (1) Separately identify elements of section 1881(h)(3) of the Act that is cost contributing to costs per treat- used to calculate TPSs and perform- ment in excess of the facility’s pay- ance scores for individual measures. ment rate; (4) The establishment of the perform- (2) Show that the facility’s costs, in- ance standards and the performance pe- cluding those costs that are not di- riod under section 1881(h)(4) of the Act. rectly attributable to the exception [83 FR 57068, Nov. 14, 2018, as amended at 84 criteria, are allowable and reasonable FR 60803, Nov. 8, 2019; 85 FR 54872, Sept. 2, under the reasonable cost principles set 2020] forth in this part; (3) Show that the elements of exces- § 413.180 Procedures for requesting ex- sive cost are specifically attributable ceptions to payment rates. to one or more conditions specified in (a) Outpatient maintenance dialysis § 413.182; payments. All payments for outpatient (4) Specify the amount of additional maintenance dialysis furnished at or payment per treatment the facility be- by facilities are made on the basis of lieves is required for it to recover its prospective payment rates. justifiable excess costs; and (b) Criteria for requesting an exception. (5) Specify that the facility has com- If a pediatric ESRD facility projects on pared its most recently completed cost the basis of prior year costs and utili- report with cost reports from (at least zation trends that it has an allowable 2) prior years. The facility must ex- cost per treatment higher than its pro- plain any material statistical data or spective rate set under § 413.174, and if cost changes, or both, and include an these excess costs are attributable to explanation with the documentation one or more of the factors in § 413.182, supporting the exception request. the facility may request, in accordance (f) Completion of requirements and cri- with paragraph (e) of this section, that teria. The facility must demonstrate to CMS approve an exception to that rate CMS’s satisfaction that the require- and set a higher prospective payment ments of this section and the criteria rate. in § 413.182 are fully met. The burden of (c) Application of deductible and coin- proof is on the facility to show that surance. The higher payment rate is one or more of the criteria are met and subject to the application of deductible that the excessive costs are justifiable and coinsurance in accordance with under the reasonable cost principles set § 413.176. forth in this part. (d) Payment rate exception request. Ef- (g) Approval of an exception request. fective October 1, 2002, CMS may ap- An exception request is deemed approve exceptions to a pediatric ESRD proved unless it is disapproved within facility’s updated prospective payment 60 working days after it is filed with its rate, if the pediatric ESRD facility did contractor. not have an approved exception rate as (h) Determination of an exception re- of October 1, 2002. A pediatric ESRD fa- quest. In determining the facility’s pay- cility may request an exception to its ment rate under the exception process, payment rate at any time after it is in CMS excludes all costs that are not operation for at least 12 consecutive reasonable or allowable under the rea- months. sonable cost principles set forth in this (e) Documentation for a payment rate part. exception request. If the facility is re- (i) Period of approval: Payment excep- questing an exception to its payment tion request. A prospective exception rate, it must submit to CMS its most payment rate approved by CMS applies recently completed cost report as re- for the period from the date the com- quired under § 413.198 and whatever sta- plete exception request was filed with tistics, data, and budgetary projections its contractor until 30 days after the

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contractor’s receipt of the facility’s (5) For ESRD facilities that, in ac- letter notifying the contractor of the cordance with § 413.239(b) of this part, facility’s request to give up its excep- elect to be paid for renal dialysis serv- tion rate and be subject to the basic ices provided during the transition case-mix adjusted composite payment based on 100 percent of the payment rate methodology. ESRD facilities amount determined under § 413.220, any electing to retain their nonpediatric or existing exceptions for isolated essen- pediatric exception rates (including tial facilities, self dialysis training self-dialysis training) do not need to costs, atypical service intensity (pa- notify their contractors. Once a facil- tient mix) and pediatric facilities are ity notifies its contractor in writing terminated for ESRD services fur- that it cannot retain its current excep- nished on or after January 1, 2011. tion rate, that decision cannot be sub- [62 FR 43668, Aug. 15, 1997, as amended at 70 sequently reversed. FR 70331, Nov. 21, 2005; 75 FR 49199, Aug. 12, (j) Denial of an exception request. CMS 2010] denies exception requests submitted without the documentation specified in § 413.182 Criteria for approval of exception requests. § 413.182 and the applicable regulations cited there. (a) CMS may approve exceptions to a (k) Criteria for refiling a denied excep- pediatric ESRD facility’s prospective tion request. A pediatric ESRD facility payment rate if the pediatric ESRD fa- that was denied an exception request cility did not have an approved exception rate as of October 1, 2002. may immediately file another excep- (b) The pediatric ESRD facility must tion request. Any subsequent exception demonstrate, by convincing objective request must address and document the evidence, that its total per treatment issues cited in CMS’ denial letter. costs are reasonable and allowable (l) Periods of exceptions. (1) Prior to under the relevant cost reimbursement December 31, 2000, an ESRD facility principles of part 413 and that its per may receive an exception to its com- treatment costs in excess of its pay- posite payment rate for isolated essen- ment rate are directly attributable to tial facilities, self dialysis training any of the following criteria: costs, atypical service intensity (pa- (1) Pediatric patient mix, as specified tient mix) and pediatric facilities. in § 413.184. (2) Effective December 31, 2000, an (2) Self-dialysis training costs in pe- ESRD facility not subject to paragraph diatric facilities, as specified in (l)(3), is no longer granted any new ex- § 413.186. ception to the composite payment rate [70 FR 70331, Nov. 21, 2005] as defined in § 413.180(1). (3) Effective April 1, 2004 through § 413.184 Payment exception: Pediatric September 27, 2004, and on an annual patient mix. basis, an ESRD facility with at least 50 (a) Qualifications. To qualify for an percent pediatric patient mix as speci- exception to its prospective payment fied in § 413.184 of this part, that did not rate based on its pediatric patient mix have an exception rate in effect as of a facility must demonstrate that— October 1, 2002, may apply for an excep- (1) At least 50 percent of its patients tion to its composite payment rate. are individuals under 18 years of age; (4) For ESRD facilities that are paid (2) Its nursing personnel costs are al- a blended rate for renal dialysis serv- located properly between each mode of ices provided during the transition de- care; scribed in § 413.239 of this part, any ex- (3) The additional nursing hours per isting exceptions for isolated essential treatment are not the result of an ex- facilities, self dialysis training costs, cess number of employees; atypical service intensity (patient mix) (4) Its pediatric patients require a and pediatric facilities are used as the significantly higher staff-to-patient payment amount in place of the com- ratio than typical adult patients; and posite rate, and will be terminated for (5) These services, procedures, or sup- ESRD services furnished on or after plies and their per treatment costs are January 1, 2014. clearly prudent and reasonable when

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compared to those of pediatric facili- § 413.186 Payment exception: Self-di- ties with a similar patient mix. alysis training costs in pediatric fa- (b) Documentation. (1) A pediatric cilities. ESRD facility must submit a listing of (a) Qualification. To qualify for an ex- all outpatient dialysis patients (includ- ception to the prospective payment ing all home patients) treated during rate based on self-dialysis training the most recently completed and filed costs, the pediatric ESRD facility must cost report (in accordance with cost re- establish that it incurs per treatment porting requirements under § 413.198) costs for furnishing self-dialysis and showing— home dialysis training that exceed the (i) Age of patients and percentage of facility’s payment rate for the training patients under the age of 18; sessions. (ii) Individual patient diagnosis; (b) Justification. To justify its excep- (iii) Home patients and ages; tion request, a facility must— (iv) In-facility patients, staff-as- (1) Separately identify those ele- sisted, or self-dialysis; ments contributing to its costs in ex- (v) Diabetic patients; and cess of the composite training rate; and (vi) Patients isolated because of con- (2) Demonstrate that its per treat- tagious disease. ment costs are reasonable and allowable. (2) The facility also must— (c) Criteria for determining proper cost (i) Submit documentation on costs of reporting. CMS considers the pediatric nursing personnel (registered nurses, ESRD facility’s total costs, cost find- licensed practical nurses, technicians, ing and apportionment, including its and aides) incurred during the most re- allocation of costs, to determine if cently completed fiscal year cost re- costs are properly reported by treat- port showing— ment modality. (A) Amount each employee was paid; (d) Limitation of exception requests. Ex- (B) Number of personnel; ception requests for a higher training (C) Amount of time spent in the di- rate are limited to those cost compo- alysis unit; and nents relating to training such as tech- (D) Staff-to-patient ratio based on nical staff, medical supplies, and the total hours, with an analysis of produc- special costs of education (manuals and tive and nonproductive hours. education materials). These requests (ii) Submit documentation on supply may include overhead and other indi- costs incurred during the most re- rect costs to the extent that these cently completed fiscal or calendar costs are directly attributable to the year cost report showing— additional training costs. (A) By modality, a complete list of (e) Documentation. The pediatric supplies used routinely in a dialysis ESRD facility must provide the fol- treatment; lowing information to support its ex- (B) The make and model number of ception request: each dialyzer and its component cost; (1) A copy of the facility’s training and program. (C) That supplies are prudently pur- (2) Computation of the facility’s cost chased (for example, that bulk dis- per treatment for maintenance sessions counts are used when available). and training sessions including an ex- (iii) Submit documentation on over- planation of the cost difference be- head costs incurred during the most re- tween the two modalities. cently completed fiscal or calendar (3) Class size and patients’ training year cost reporting year showing— schedules. (A) The basis of the higher overhead (4) Number of training sessions re- costs; quired, by treatment modality, to train patients. (B) The impact on the specific cost (5) Number of patients trained for the components; and current year and the prior 2 years on a (C) The effect on per treatment costs. monthly basis. [62 FR 43668, Aug. 15, 1997, as amended at 70 (6) Projection for the next 12 months FR 70331, Nov. 21, 2005] of future training candidates.

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(7) The number and qualifications of (iii) Training status (completed, not staff at training sessions. completed, being retrained, or in the (f) Accelerated training exception. (1) A process of being trained). pediatric ESRD facility may bill Medi- (7) The total treatments from the pa- care for a dialysis training session only tient list must be the same as the total when a patient receives a dialysis treatments reported on the cost report treatment (normally 3 times a week for filed with the request. hemodialysis). Continuous cycling [70 FR 70331, Nov. 21, 2005] peritoneal dialysis (CCPD) and continuous ambulatory peritoneal dialysis § 413.194 Appeals. (CAPD) are daily treatment modali- (a) Appeals under section 1878 of the ties; ESRD facilities are paid the Act. (1) A facility that disputes the equivalent of three hemodialysis treat- amount of its allowable Medicare bad ments for each week that CCPD and debts reimbursed by CMS under CAPD treatments are provided. § 413.89(h)(3) may request review by the (2) If a pediatric ESRD facility elects contractor or the Provider Reimburse- to train all its patients using a par- ment Review Board (PRRB) in accord- ticular treatment modality more often ance with subpart R to part 405 of this than during each dialysis treatment chapter. and, as a result, the number of billable (2) A facility must request and obtain training dialysis sessions is less than a final agency decision prior to seeking the number of actual training sessions, judicial review of a dispute regarding the amount of allowable Medicare bad the facility may request a composite debts. rate exception, limited to the lesser of (b) Other appeals. (1) A facility that the— has requested higher payment per (i) Facility’s projected training cost treatment in accordance with § 413.180 per treatment; or may request review from the con- (ii) Cost per treatment the facility tractor or the PRRB if CMS has denied receives in training a patient if it had the request in whole or in part. In such trained patients only during a dialysis a case, the procedure in subpart R of treatment, that is, three times per part 405 of this chapter is followed to week. the extent that it is applicable. (3) An ESRD facility may bill a max- (2) The PRRB has the authority to imum of 25 training sessions per pa- review the action taken by CMS on the tient for hemodialysis training and 15 facility’s requests. However, the sessions for CCPD and CAPD training. PRRB’s decision is subject to review by (4) In computing the payment the Administrator under § 405.1875 of amount under an accelerated training this chapter. exception, CMS uses a minimum num- (3) A facility must request and obtain ber of training sessions per patient (15 a final agency decision, in accordance for hemodialysis and 5 for CAPD and with paragraph (b)(1) of this section, CCPD) when the facility actually pro- prior to seeking judicial review of the vides fewer than the minimum number denial, in whole or in part, of the ex- of training sessions. ception request. (c) Procedure. (1) The facility must re- (5) To justify an accelerated training quest review within 180 days of the exception request, an ESRD facility date of the decision on which review is must document that a significant num- sought. ber of training sessions for a particular (2) The facility may not submit to modality are provided during a shorter the reviewing entity, whether it is the but more condensed period. contractor or the PRRB, any addi- (6) The facility must submit with the tional information or cost data that exception request a list of patients, by had not been submitted to CMS at the modality, trained during the most re- time CMS evaluated the exception recent cost report period. The list must quest. include each beneficiary’s— (d) Determining amount in controversy. (i) Name; For purposes of determining PRRB ju- (ii) Age; and risdiction under subpart R of part 405

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of this chapter for the appeals de- (c) Effective for items and services scribed in paragraph (b) of this sec- furnished on or after January 1, 2011 tion— and before January 1, 2012, CMS adjusts (1) The amount in controversy per the composite rate portion of the basic treatment is determined by sub- case-mix adjusted composite payment tracting the amount of program pay- system described in § 413.220 by the ment from the amount the facility re- ESRD bundled market basket percent- quested under § 413.180; and age increase factor. (2) The total amount in controversy (d) Effective for items and services is calculated by multiplying the furnished on or after January 1, 2012, amount in controversy per treatment CMS updates on an annual basis the by the projected number of treatments following: for the exception request period. (1) The per-treatment base rate and [62 FR 43668, Aug. 15, 1997, as amended at 81 the composite rate portion of the basic FR 77965, Nov. 4, 2016] case-mix adjusted composite payment system described in § 413.220 by the § 413.195 Limitation on Review. ESRD bundled market basket percent- Administrative or judicial review age increase factor minus a produc- under section 1869 of the Act, section tivity adjustment factor. 1878 of the Act, or otherwise of the fol- (2) The wage index using the most lowing is prohibited: The determina- current hospital wage data. tion of payment amounts under section (3) The fixed dollar loss amount as 1881(b)(14)(A) of the Act, the establish- defined in § 413.237 of this part to en- ment of an appropriate unit of pay- sure that outlier payments continue to ment under section 1881(b)(14)(C) of the be 1.0 percent of total payments to Act, the identification of renal dialysis ESRD facilities. services included in the bundled payment, the adjustments under section [62 FR 43668, Aug. 15, 1997, as amended at 75 1881(b)(14)(D) of the Act, the applica- FR 49199, Aug. 12, 2010] tion of the phase-in under section § 413.198 Recordkeeping and cost re- 1881(b)(14)(E) of the Act, and the estab- porting requirements for outpatient lishment of the market basket percent- maintenance dialysis. age increase factors under section 1881(b)(14)(F) of the Act. (a) Purpose and Scope. This section implements section 1881(b)(2)(B)(i) of [75 FR 49199, Aug. 12, 2010] the Act by specifying recordkeeping and cost reporting requirements for § 413.196 Notification of changes in ESRD facilities under part 494 of this rate-setting methodologies and payment rates. chapter. The records and reports will enable CMS to determine the costs in- (a) CMS or the facility’s contractor curred in furnishing outpatient main- notifies each facility of changes in its tenance dialysis as defined in payment rate. This notice includes § 413.170(a). changes in individual facility payment (b) Recordkeeping and reporting re- rates resulting from corrections or revisions of particular geographic labor quirements. (1) Each facility must keep cost adjustment factors. adequate records and submit the appro- (b) Changes in payment rates result- priate CMS-approved cost report in ac- ing from incorporation of updated cost cordance with §§ 413.20 and 413.24, which data or general revisions of geographic provide rules on financial data and re- labor cost adjustment factors are an- ports, and adequate cost data and cost nounced by notice published in the finding, respectively. FEDERAL REGISTER without oppor- (2) The cost reimbursement prin- tunity for prior comment. Revisions of ciples set forth in this part (beginning the rate-setting methodology are pub- with § 413.134, Depreciation, and exclud- lished in the FEDERAL REGISTER in ac- ing the principles listed in paragraph cordance with the Department’s established rulemaking procedures.

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(b)(4) of this section), apply in the de- § 413.200 Payment of independent termination and reporting of the allow- organ procurement organizations able cost incurred in furnishing out- and histocompatibility laboratories. patient maintenance dialysis treat- (a) Principle. Covered services fur- ments to patients dialyzing in the fa- nished after September 30, 1978 by cility, or incurred by the facility in organ procurement organizations furnishing home dialysis service, sup- (OPOs) and histocompatibility labora- plies, and equipment. tories in connection with kidney acqui- (3) Allowable cost is the reasonable sition and transplantation will be re- cost related to dialysis treatments. imbursed under the principles for de- Reasonable cost includes all necessary termining reasonable cost contained in and proper expenses incurred by the fa- this part. Services furnished by free- cility in furnishing the dialysis treat- standing OPOs and histocompatibility ments, such as administrative costs, laboratories, that have an agreement maintenance costs, and premium pay- with the Secretary in accordance with ments for employee health and pension paragraph (c) of this section, will be re- plans. It includes both direct and indi- imbursed by making an interim pay- rect costs and normal standby costs. ment to the transplant hospitals using Reasonable cost does not include costs these services and by making a retro- that— active adjustment, directly with the (i) Are not related to patient care for OPO or laboratory, based upon a cost outpatient maintenance dialysis; report filed by the OPO or laboratory. (The reasonable costs of services fur- (ii) Are for services or items specifi- nished by hospital based OPOs or lab- cally not reimbursable under the pro- oratories will be reimbursed in accord- gram; ance with the principles contained in (iii) Flow from the provision of lux- §§ 413.60 and 413.64.) ury items or servicess (items or serv- (b) Definitions. For purposes of this ices substantially in excess of or more section: expensive than those generally consid- Freestanding refers to an OPO or a ered necessary for the provision of histocompatibility laboratory that is needed health services); or not— (iv) Are found to be substantially out (1) Subject to the control of the hos- of line with other institutions in the pital with respect to the hiring, firing, same area that are similar in size, training, and paying of employees; and scope of services, utilization, and other (2) Considered as a department of the relevant factors. hospital for insurance purposes (includ- (4) The following principles of this ing malpractice insurance, general li- part do not apply in determining ad- ability insurance, worker’s compensa- justments to allowable costs as re- tion insurance, and employee retire- ported by ESRD facilities: ment insurance). (i) Section 413.157, Return on equity Histocompatibility laboratory means a capital of proprietary providers; laboratory meeting the standards and (ii) Section 413.200, Reimbursement of providing the services for kidneys or OPAs and histocompatibility labora- other organs set forth in § 413.2171(d) of tories; this chapter. (iii) Section 413.9, Cost related to pa- OPO means an organization defined tient care (except for the principles in § 486.302 of this chapter. stated in paragraph (b)(3) of this sec- (c) Agreements with independent OPOs tion); and and laboratories. (1) Any freestanding OPO or histocompatibility laboratory (iv) Sections 413.64, Payments to pro- that wishes to have the cost of its viders, and §§ 413.13, 413.30, 413.35, 413.40, pretransplant services reimbursed 413.74, and §§ 415.55 through 415.70, under the Medicare program must file § 415.162, and § 415.164 of this chapter, an agreement with CMS under which Principles of reimbursement for serv- the OPO or laboratory agrees— ices by hospital-based physicians. (i) To file a cost report in accordance [62 FR 43668, Aug. 15, 1997, as amended at 73 with § 413.24(f) within 5 months after FR 20474, Apr. 15, 2008] the end of each fiscal year;

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(ii) To permit CMS to designate an (4) Information on the interim rate contractor to determine the interim re- for all freestanding OPOs and imbursement rate payable to the trans- histocompatibility laboratories shall plant hospitals for services provided by be disseminated to all transplant hos- the OPO or laboratory and to make a pitals and contractors. determination of reasonable cost based (e) Retroactive adjustment—(1) Cost re- upon the cost report filed by the OPO ports. Information provided in cost re- or laboratory; ports by freestanding OPOs and (iii) To provide such budget or cost histocompatibility laboratories must projection information as may be re- meet the requirements for cost data quired to establish an initial interim and cost finding specified in paragraphs reimbursement rate; (a) through (e) of § 413.24. These cost re- (iv) To pay to CMS amounts that ports must provide a complete account- have been paid by CMS to transplant ing of the cost incurred by the agency hospitals and that are determined to be or laboratory in providing covered in excess of the reasonable cost of the services, the total number of Medicare services provided by the OPO or labora- beneficiaries who received those serv- tory; and ices, and any other data necessary to (v) Not to charge any individual for enable the contractor to make a deter- items or services for which that indi- mination of the reasonable cost of cov- vidual is entitled to have payment ered services provided to Medicare made under section 1861 of the Act. beneficiaries. (2) The initial cost report due from (2) Audit and adjustment. A cost re- an OPO or laboratory is for its first fis- port submitted by a freestanding OPO cal year during any portion of which it had an agreement with the Secretary or histocompatibility laboratory will under paragraphs (c) (1) and (2) of this be reviewed by the contractor and a section. The initial cost report covers new interim reimbursement rate for only the period covered by the agree- the succeeding fiscal year will be es- ment. tablished based upon this review. A ret- (d) Interim reimbursement. (1) Hos- roactive adjustment in the amount pitals eligible to receive Medicare repaid under the interim rate will be imbursement for renal transplantation made in accordance with § 413.64(f). If will be paid for the pretransplantation the determination of reasonable cost services of a freestanding OPO or reveals an overpayment or under- histocompatibility laboratory that has payment resulting from the interim re- an agreement with the Secretary under imbursement rate paid to transplant paragraph (c) of this section, on the hospitals, a lump sum adjustment will basis of an interim rate established by be made directly between that con- an contractor for that OPO or labora- tractor and the OPO or laboratory. tory. (f) For services furnished on or after (2) The interim rate will be based on April 1, 1988, no payment may be made the average cost per service incurred for services furnished by an OPO that by an OPO or laboratory, during its does not meet the requirements of part previous fiscal year, associated with 486, subpart G of this chapter. procuring a kidney for transplantation. (g) Appeals. Any OPO or This interim rate may be adjusted if histocompatibility laboratory that dis- necessary for anticipated cost changes. agrees with a contractor’s cost deter- If there is not adequate cost data to de- mination under this section is entitled termine the initial interim rate, it will to an contractor hearing, in accordance be determined according to the OPO’s with the procedures contained in or laboratory’s estimate of its pro- §§ 405.1811 through 405.1833, if the jected costs for the fiscal year. amount in controversy is $1,000 or (3) Payments made on the basis of more. the interim rate will be reconciled directly with the OPO or laboratory after [62 FR 43668, Aug. 15, 1997, as amended at 71 the close of its fiscal year, in accord- FR 31046, May 31, 2006; 81 FR 57272, Aug. 22, ance with paragraph (e) of this section. 2016]

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§ 413.202 Organ procurement organiza- ficiaries to the total number of usable tion (OPO) cost for kidneys sent to organs applied to reasonable costs. foreign countries or transplanted in patients other than Medicare bene- § 413.210 Conditions for payment ficiaries. under the end-stage renal disease An OPO’s total costs for all kidneys (ESRD) prospective payment sys- is reduced by the costs associated with tem. procuring kidneys sent to foreign Except as noted in § 413.174(f), items transplant centers or transplanted in and services furnished on or after Jan- patients other than Medicare bene- uary 1, 2011, under section 1881(b)(14)(A) ficiaries. OPOs, as defined in § 486.302 of of the Act and as identified in § 413.217 this chapter, must separate costs for of this part, are paid under the ESRD procuring kidneys that are sent to for- prospective payment system described eign transplant centers and kidneys in § 413.215 through § 413.235 of this part. transplanted in patients other than (a) Qualifications for payment. To Medicare beneficiaries from Medicare qualify for payment, ESRD facilities allowable costs prior to final settle- must meet the conditions for coverage ment by the Medicare fiscal contrac- in part 494 of this chapter. tors. Medicare costs are based on the (b) Payment for items and services. ratio of the number of usable kidneys CMS will not pay any entity or sup- transplanted into Medicare bene- plier other than the ESRD facility for ficiaries to the total number of usable covered items and services furnished to kidneys applied to reasonable costs. a Medicare beneficiary. The ESRD fa- Certain long-standing arrangements cility must furnish all covered items that existed before March 3, 1988 (for and services defined in § 413.217 of this example, an OPO that procures kidneys part either directly or under arrange- at a military transplant hospital for ments. transplant at that hospital), will be [75 FR 49199, Aug. 12, 2010] deemed to be Medicare kidneys for cost reporting statistical purposes. The § 413.215 Basis of payment. OPO must submit a request to the contractor for review and approval of (a) Except as otherwise provided these arrangements. under § 413.235 or § 413.174(f) of this part, effective January 1, 2011, ESRD facili- [62 FR 43668, Aug. 15, 1997, as amended at 71 ties receive a predetermined per treat- FR 31046, May 31, 2006] ment payment amount described in § 413.230 of this part, for renal dialysis § 413.203 Transplant center costs for organs sent to foreign countries or services, specified under section transplanted in patients other than 1881(b)(14) of the Act and as defined in Medicare beneficiaries. § 413.217 of this part, furnished to Medi- (a) A transplant center’s total costs care Part B fee-for-service bene- for all organs is reduced by the costs ficiaries. associated with procuring organs sent (b) In addition to the per-treatment to foreign transplant centers or trans- payment amount, as described in para- planted in patients other than Medi- graph (a) of this section, the ESRD fa- care beneficiaries. Organs are defined cility may receive payment for bad in § 486.302 (only covered organs will be debts of Medicare beneficiaries as spec- paid for on a reasonable cost basis). ified in § 413.89(h)(3). (b) Transplant center hospitals must [75 FR 49200, Aug. 12, 2010, as amended at 81 separate costs for procuring organs FR 77965, Nov. 4, 2016] that are sent to foreign transplant centers and organs transplanted in pa- § 413.217 Items and services included tients other than Medicare bene- in the ESRD prospective payment ficiaries from Medicare allowable costs system. prior to final cost settlement by the The following items and services are Medicare fiscal contractors. included in the ESRD prospective pay- (c) Medicare costs are based on the ment system effective January 1, 2011: ratio of the number of usable organs (a) Renal dialysis services as defined transplanted into Medicare bene- in § 413.171; and

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(b) Home dialysis services, support, patient-level adjustments applicable to and equipment as identified in § 410.52 the case as described in § 413.231 of this chapter. through § 413.235 of this part. (4) Outlier percentage. CMS reduces [75 FR 49200, Aug. 12, 2010] the per treatment base rate by 1 per- § 413.220 Methodology for calculating cent to account for the proportion of the per-treatment base rate under the estimated total payments under the ESRD prospective payment sys- the ESRD prospective payment system tem effective January 1, 2011. that are outlier payments as described (a) Data sources. The methodology for in § 413.237 of this part. determining the per treatment base (5) Budget neutrality. CMS adjusts the rate under the ESRD prospective pay- per treatment base rate so that the ag- ment system utilized: gregate payments in 2011 are estimated (1) Medicare data available to esti- to be 98 percent of the amount that mate the average cost and payments would have been made under title for renal dialysis services. XVIII of the Social Security Act if the (2) ESRD facility cost report data ESRD prospective payment system de- capturing the average cost per treat- scribed in section 1881(b)(14) of the Act ment. were not implemented. (3) The lowest per patient utilization (6) First 4 Years of the ESRD prospec- calendar year as identified from Medi- tive payment system. During the first 4 care claims is calendar year 2007. years of ESRD prospective payment (4) Wage index values used to adjust system (January 1, 2011 to December for geographic wage levels described in 31, 2013), CMS adjusts the per-treat- § 413.231 of this part. ment base rate in accordance with (5) An adjustment factor to account § 413.239(d). for the most recent estimate of in- [75 FR 49200, Aug. 12, 2010] creases in the prices of an appropriate market basket of goods and services § 413.230 Determining the per treat- provided by ESRD facilities. ment payment amount. (b) Determining the per treatment base The per-treatment payment amount rate for calendar year 2011. Except as is the sum of: noted in § 413.174(f), the ESRD prospec- (a) The per treatment base rate es- tive payment system combines pay- tablished in § 413.220, adjusted for wages ments for the composite rate items and as described in § 413.231, and adjusted services as defined in § 413.171 of this for facility-level and patient-level part and the items and services that, characteristics described in §§ 413.232 prior to January 1, 2011, were sepa- and 413.235 of this part; rately billable items and services, as (b) Any outlier payment under defined in § 413.171 of this part, into a § 413.237; single per treatment base rate devel- (c) Any training adjustment add-on oped from 2007 claims data. The steps under § 413.235(c); to calculating the per-treatment base (d) Any transitional drug add-on pay- rate for 2011 are as follows: ment adjustment under § 413.234(c); and (1) Per patient utilization in CY 2007, (e) Any transitional add-on payment 2008, or 2009. CMS removes the effects adjustment for new and innovative of enrollment and price growth from equipment and supplies under total expenditures for 2007, 2008 or 2009 § 413.236(d). to determine the year with the lowest per patient utilization. [75 FR 49200, Aug. 12, 2010, as amended at 84 (2) Update of per treatment base rate to FR 60803, Nov. 8, 2019] 2011. CMS updates the per-treatment base rate under the ESRD prospective § 413.231 Adjustment for wages. payment system in order to reflect es- (a) CMS adjusts the labor-related timated per treatment costs in 2011. portion of the base rate to account for (3) Standardization. CMS applies a re- geographic differences in the area wage duction factor to the per treatment levels using an appropriate wage index base rate to reflect estimated increases (established by CMS) which reflects the resulting from the facility-level and relative level of hospital wages and

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wage-related costs in the geographic (e) Except as provided in paragraph area in which the ESRD facility is lo- (f) of this section and unless extraor- cated. dinary circumstances justify an excep- (b) The application of the wage index tion, to receive the low-volume adjust- is made on the basis of the location of ment an ESRD facility must provide an the ESRD facility in an urban or rural attestation statement, by November area as defined in this paragraph (b). 1st of each year preceding the payment (1) Urban area means a Metropolitan year, to its Medicare Administrative Statistical Area or a Metropolitan di- Contractor that the facility meets all vision (in the case where a Metropoli- the criteria established in this section, tan Statistical Area is divided into except that, for calendar year 2012, the Metropolitan Divisions), as defined by attestation must be provided by Janu- OMB. ary 3, 2012, for calendar year 2015, the (2) Rural area means any area outside attestation must be provided by De- an urban area. cember 31, 2014, and for calendar year 2016, the attestation must be provided [75 FR 49200, Aug. 12, 2010] by December 31, 2015. (f) The low-volume adjustment ap- § 413.232 Low-volume adjustment. plies only for dialysis treatments pro- (a) CMS adjusts the base rate for low- vided to adults (18 years or older). volume ESRD facilities, as defined in (g) To receive the low-volume adjust- paragraph (b) of this section. ment, an ESRD facility must include (b) Definition of low-volume facility. A in their attestation provided pursuant low-volume facility is an ESRD facility to paragraph (e) of this section a state- that, as determined based on the document that the ESRD facility meets the mentation submitted pursuant to para- definition of a low-volume facility in graph (g) of this section: paragraph (b) of this section. To deter- (1) Furnished less than 4,000 treat- mine eligibility for the low-volume ad- ments in each of the 3 cost reporting justment, the Medicare Administrative years (based on as-filed or final settled Contractor (MAC) on behalf of CMS re- 12-consecutive month cost reports, lies upon as filed or final settled 12- whichever is most recent) preceding consecutive month cost reports for the the payment year; and 3 cost reporting years preceding the (2) Has not opened, closed, or repayment year to verify the number of ceived a new provider number due to a treatments, except that: change in ownership (except where the (1) In the case of a hospital-based change in ownership results in a ESRD facility as defined in § 413.174(c), change in facility type) in the 3 cost re- the MAC relies upon the attestation porting years (based on as-filed or final submitted pursuant to paragraph (e) of settled 12-consecutive month cost re- this section and may consider other ports, whichever is most recent) pre- supporting data in addition to the total ceding the payment year. treatments reported in each of the 12- (c) For the purpose of determining consecutive month cost reports for the the number of treatments under para- 3 cost reporting years preceding the graph (b)(1) of this section, the number payment year to verify the number of of treatments considered furnished by treatments that were furnished by the the ESRD facility shall equal the ag- individual hospital-based ESRD facil- gregate number of treatments fur- ity seeking the adjustment; and nished by the ESRD facility and the (2) In the case of an ESRD facility number of treatments furnished by that has undergone a change of owner- other ESRD facilities that are both: ship wherein the ESRD facility’s Medi- (1) Under common ownership with, care billing number does not change or and changes due to a reclassification of fa- (2) Five (5) road miles or less from cility type, the MAC relies upon the at- the ESRD facility in question. testation and if the change results in (d) Common ownership means the two non-standard cost reporting peri- same individual, individuals, entity, or ods (less than or greater than 12 con- entities, directly, or indirectly, own 5 secutive months) does one of the fol- percent or more of each ESRD facility. lowing for the 3 cost reporting years

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preceding the payment year to verify section 351 of the Public Health Service the number of treatments: Act, commercially available, have an (i) Combines the two non-standard HCPCS application submitted in ac- cost reporting periods of less than 12 cordance with the official Level II months to equal a full 12-consecutive HCPCS coding procedures, and des- month period; and/or ignated by CMS as a renal dialysis (ii) Combines the two non-standard service under § 413.171. Oral-only drugs cost reporting periods that in combina- are excluded until January 1, 2025. tion may exceed 12-consecutive months Oral-only drug. A drug or biological and prorates the data to equal a full 12- product with no injectable equivalent consecutive month period. or other form of administration other (3) In the case of an ESRD facility than an oral form. that has changed its cost reporting pe- (b) Drug designation process. New riod, the MAC relies on the attestation renal dialysis drugs or biological prod- and does one or both of the following ucts are included in the ESRD PPS for the 3-cost reporting years preceding bundled payment using the following the payment year to verify the number drug designation process: of treatments: (1) If the new renal dialysis drug or (i) Combines the two non-standard biological product is used to treat or cost reporting periods of less than 12 manage a condition for which there is months to equal a full 12-consecutive an ESRD PPS functional category, the month period; and/or new renal dialysis drug or biological (ii) Combines the two non-standard product is considered included in the cost reporting periods that in combina- ESRD PPS bundled payment and the tion may exceed 12-consecutive months following steps occur: and prorates the data to equal a full 12- (i) The new renal dialysis drug or bio- consecutive month period. logical product is added to an existing [75 FR 49200, Aug. 12, 2010, as amended at 76 ESRD PPS functional category. FR 70314, Nov. 10, 2011; 79 FR 66262, Nov. 6, (ii) Except as provided in paragraph 2014; 80 FR 69076, Nov. 6, 2015; 83 FR 57069, (e) of this section, the new renal dialy- Nov. 23, 2018] sis drug or biological product is paid for using the transitional drug add-on § 413.233 Rural facility adjustment. payment adjustment described in para- CMS adjusts the base rate for facili- graph (c)(1) of this section. ties in rural areas, as defined in (2) If the new renal dialysis drug or § 413.231(b)(2). biological product is used to treat or [80 FR 69077, Nov. 6, 2015] manage a condition for which there is not an ESRD PPS functional category, § 413.234. Drug designation process. the new renal dialysis drug or biologi- (a) Definitions. For purposes of this cal product is not considered included section, the following definitions in the ESRD PPS bundled payment and apply: the following steps occur: ESRD PPS functional category. A dis- (i) An existing ESRD PPS functional tinct grouping of drugs or biological category is revised or a new ESRD PPS products, as determined by CMS, whose functional category is added for the end action effect is the treatment or condition that the new renal dialysis management of a condition or condi- drug or biological product is used to tions associated with ESRD. treat or manage; New renal dialysis drug or biological (ii) The new renal dialysis drug or bi- product. An injectable, intravenous, ological product is paid for using the oral or other form or route of adminis- transitional drug add-on payment ad- tration drug or biological product that justment described in paragraph (c)(2) is used to treat or manage a condi- of this section; and tion(s) associated with ESRD. It must (iii) The new renal dialysis drug or be approved by the Food and Drug Ad- biological product is added to the ministration (FDA) on or after Janu- ESRD PPS bundled payment following ary 1, 2020, under section 505 of the Fed- payment of the transitional drug add- eral Food, Drug, and Cosmetic Act or on payment adjustment.

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(c) Transitional drug add-on payment ment the ESRD PPS base rate will be adjustment. A new renal dialysis drug modified, if appropriate, to account for or biological product is paid for using a the new renal dialysis drug or biologi- transitional drug add-on payment ad- cal in the ESRD PPS bundled payment. justment, which is based on 100 percent (ii) [Reserved] of average sales price (ASP). If ASP is (d) Oral-only drug determination. An not available then the transitional oral-only drug is no longer considered drug add-on payment adjustment is oral-only if an injectable or other form based on 100 percent of wholesale ac- of administration of the oral-only drug quisition cost (WAC) and, when WAC is is approved by the Food and Drug Ad- not available, the payment is based on ministration. the drug manufacturer’s invoice. Not- (e) Exclusion criteria for the transi- withstanding the provisions in para- tional drug add-on payment adjustment. graphs (c)(1) and (2) of this section, if A new renal dialysis drug used to treat CMS does not receive a full calendar or manage a condition for which there quarter of ASP data for a new renal di- is an ESRD PPS functional category is alysis drug or biological product within not eligible for payment using the 30 days of the last day of the 3rd cal- transitional drug add-on payment ad- endar quarter after we begin applying justment described in paragraph (c)(1) the transitional drug add-on payment of this section if the drug is approved adjustment for the product, CMS will by FDA under section 505(j) of the Fed- no longer apply the transitional drug eral Food, Drug, and Cosmetic Act add-on payment adjustment for that (FD&C Act) or the new drug applica- product beginning no later than 2-cal- tion (NDA) for the drug is classified by endar quarters after we determine a FDA as Type 3, 5, 7, or 8, Type 3 in full calendar quarter of ASP data is combination with Type 2 or Type 4, or not available. If CMS stops receiving Type 5 in combination with Type 2, or the latest full calendar quarter of ASP Type 9 when the parent NDA is a Type data for a new renal dialysis drug or bi- 3, 5, 7 or 8 as described in paragraphs ological product during the applicable (e)(1) through (7) of this section, re- time period specified in paragraph spectively: (c)(1) or (2) of this section, CMS will no (1) Type 3 NDA—New Dosage Form. longer apply the transitional drug add- (i) A Type 3 NDA is for a new dosage on payment adjustment for the product form of an active ingredient that has beginning no later than 2-calendar been approved or marketed in the quarters after CMS determines that United States (U.S.) by the same or an- the latest full calendar quarter of ASP other applicant but in a different dos- data is not available. age form. The indication for the drug (1) A new renal dialysis drug or bio- product does not need to be the same logical product that is considered in- as that of the already marketed drug cluded in the ESRD PPS base rate is product. Once a new dosage form has paid the transitional drug add-on pay- been approved for an active ingredient, ment adjustment for 2 years. subsequent applications for the same (i) Following payment of the transi- dosage form and active ingredient tional drug add-on payment adjust- should be classified as a Type 5 NDA, as ment the ESRD PPS base rate will not described in paragraph (e)(2) of this be modified. section. (ii) [Reserved] (ii) [Reserved] (2) A new renal dialysis drug or bio- (2) Type 5 NDA—New Formulation or logical product that is not considered Other Differences. included in the ESRD PPS base rate is (i) A Type 5 NDA is for a product, paid the transitional drug add-on pay- other than a new dosage form, that dif- ment adjustment until sufficient fers from a product already approved or claims data for rate setting analysis marketed in the U.S. because of one of for the new renal dialysis drug or bio- the following: logical product is available, but not for (A) The product involves changes in less than 2 years. inactive ingredients that require either (i) Following payment of the transi- bioequivalence studies or clinical stud- tional drug add-on payment adjust- ies for approval and is submitted as an

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original NDA rather than as a supple- keted combination. A Type 5 NDA, as ment by the applicant of the approved described in paragraph (e)(2) of this product; section, would generally be submitted (B) The product is a duplicate of a by an applicant other than the holder drug product by another applicant of the approved application for the ap- (same active ingredient, same dosage proved product. A similar change in an form, same or different indication, or approved product by the applicant of same combination), and the approved product would usually be (1) Requires bioequivalence testing submitted as a supplemental applica- (including bioequivalence studies with tion. clinical endpoints), but is not eligible (F) The product differs in bio- for submission as a section 505(j) of the availability (for example, FD&C Act application; or superbioavailable or different con- (2) Requires safety or effectiveness trolled-release pattern) and, therefore, testing because of novel inactive ingre- is ineligible for submission as an abbre- dients; or viated new drug application (ANDA) (3) Requires full safety or effective- under section 505(j) of the FD&C Act. ness testing because it is: (G) The product involves a new plas- (i) Subject to exclusivity held by an- tic container that requires safety stud- other applicant, or ies beyond limited confirmatory test- (ii) A product of biotechnology and ing (see 21 CFR 310.509, Parenteral drug its safety and/or effectiveness are not products in plastic containers). assessable through bioequivalence test- (ii) [Reserved] ing, or (3) Type 7 NDA—Previously Mar- (iii) A crude natural product, or keted But Without an Approved NDA. (iv) Ineligible for submission under (i) A Type 7 NDA is for a drug product section 505(j) of the FD&C Act because that contains an active moiety that it differs in bioavailability (for exam- has not been previously approved in an ple, products with different release pat- application, but has been marketed in terns); or the U.S. This classification applies (4) The applicant has a right of ref- only to the first NDA approved for a erence to the application. drug product containing this (these) (C) The product contains an active active moiety(ies). Type 7 NDAs in- ingredient or active moiety that has clude, but are not limited to: been previously approved or marketed in the U.S. only as part of a combina- (A) The first post-1962 application for tion. This applies to active ingredients an active moiety marketed prior to previously approved or marketed as 1938. part of a physical or chemical com- (B) The first application for an active bination, or as part of a mixture de- moiety first marketed between 1938 and rived from recombinant 1962 that is identical, related or similar deoxyribonucleic acid technology or (IRS) to a drug covered by a Drug Effi- natural sources. cacy Study Implementation notice. (D) The product is a combination Regulation at 21 CFR 310.6(b)(1) states product that differs from a previously that an identical, related, or similar marketed combination by the removal drug includes other brands, potencies, of one or more active ingredients or by dosage forms, salts, and esters of the substitution of a new ester or salt or same drug moiety as well as any of other noncovalent derivative of an ac- drug moiety related in chemical struc- tive ingredient for one or more of the ture or known pharmacological prop- active ingredients. In the latter case, erties. the NDA would be classified as a com- (C) The first application for an IRS bination of a Type 2 NDA as described drug product first marketed after 1962. in paragraph (e)(5)(i) of this section, (D) The first application for an active with a Type 5 NDA as described in para- moiety that was first marketed with- graph (e)(2) of this section. out an NDA after 1962. (E) The product contains a different (ii) [Reserved] strength of one or more active ingredi- (4) Type 8 NDA—Prescription to ents in a previously approved or mar- Over-the-Counter (OTC).

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(i) A Type 8 NDA is for a drug product (B) If the active ingredient is a single intended for OTC marketing that con- enantiomer and a racemic mixture contains an active ingredient that has taining that enantiomer has been pre- been approved previously or marketed viously approved by FDA or marketed in the U.S. only for dispensing by pre- in the U.S., or if the active ingredient scription (OTC switch). A Type 8 NDA is a racemic mixture containing an may provide for a different dosing regi- enantiomer that has been previously men, different strength, different dos- approved by FDA or marketed in the age form, or different indication from U.S., the NDA will be classified as a the product approved previously for Type 2 NDA. prescription sale. (ii) Type 4 NDA—New Combination. (ii) If the proposed OTC switch will (A) A Type 4 NDA is for a new drug- apply to all indications, uses, and drug combination of two or more ac- strengths of an approved prescription tive ingredients. An application for a dosage form (leaving no prescription- new drug-drug combination product only products of that particular dosage may have more than one classification form on the market), the application code if at least one component of the holder should submit the change as a combination is an NME or a new active supplement to the approved applica- ingredient. The new product may be a tion. If the applicant intends to switch physical or chemical (for example, co- only some indications, uses, or valent ester or noncovalent derivative) strengths of the dosage form to OTC combination of two or more active status (while continuing to market moieties. other indications, uses, or strengths of (B) A new physical combination may the dosage form for prescription-only be two or more active ingredients com- sale), the applicant should submit a bined into a single dosage form, or two new NDA for the OTC products, which or more drugs packaged together with would be classified as a Type 8 NDA. combined labeling. When at least one (5) Combination of Type 3 NDA. Type 3 of the active moieties is classified as NDA, as described in paragraph (e)(1) of an NME, the NDA is classified as a this section, in combination with a combination of a Type 1 NDA, as de- Type 2 NDA, as described in paragraph scribed in paragraph (e)(5)(ii)(B)(1) of (e)(5)(i) of this section, or in combina- this section, with a Type 4 NDA, as de- tion with a Type 4 NDA, as described in scribed in paragraph (e)(5)(ii) of this paragraph (e)(5)(ii) of this section; section. When none of the active (i) Type 2 NDA—New Active Ingre- moieties is an NME, but at least one is dient. a new active ingredient, the NDA is (A) A Type 2 NDA is for a drug prod- classified as a combination of a Type 2 uct that contains a new active ingre- NDA, as described in paragraph (e)(5)(i) dient, but not a new molecular entity of this section, with a Type 4 NDA, as (NME). A new active ingredient in- described in paragraph (e)(5)(ii) of this cludes those products whose active section. moiety has been previously approved or (1) Type 1 NDA—New Molecular Enti- marketed in the U.S., but whose party. ticular ester, salt, or noncovalent de- (i) A Type 1 NDA is for a drug product rivative of the unmodified parent mol- that contains an NME. An NME is an ecule has not been approved by FDA or active ingredient that contains no ac- marketed in the U.S., either alone, or tive moiety that has been previously as part of a combination product. Simi- approved by FDA in an application sub- larly, if any ester, salt, or noncovalent mitted under section 505 of the FD&C derivative has been marketed first, the Act or has been previously marketed as unmodified parent molecule would also a drug in the U.S. A pure enantiomer be considered a new active ingredient, or a racemic mixture is an NME only but not an NME. The indication for the when neither has been previously ap- drug product does not need to be the proved or marketed. same as that of the already marketed (ii) An NDA for a drug product con- product containing the same active taining an active moiety that has been moiety. marketed as a drug in the U.S., but

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never approved in an application sub- described in paragraph (e)(3) of this mitted under section 505 of the FD&C section or a Type 8 NDA as described in Act, would be considered a Type 7 NDA paragraph (e)(4) of this section. as described in paragraph (e)(3) of this (i) Type 9 NDA—New Indication or section, not a Type 1 NDA. Claim, Drug Not to be Marketed under (iii) An NDA for a drug-drug combina- Type 9 NDA after Approval. tion product containing an active moi- (A) A Type 9 NDA is for a new indica- ety that is an NME in combination tion or claim for a drug product that is with another active moiety that had currently being reviewed under a dif- already been approved by FDA would ferent NDA (the ‘‘parent NDA’’), and be classified as a new combination con- the applicant does not intend to mar- taining an NME (that is, Type 1,4 NDA, ket this drug product under the Type 9 as described in paragraph (e)(5)(ii) of NDA after approval. Generally, a Type this section). For example, a drug-drug 9 NDA is submitted as a separate NDA combination can include a fixed-com- so as to be in compliance with the bination drug product or a co-packaged guidance for industry on Submitting drug product with two or more active Separate Marketing Applications and moieties. Clinical Data for Purposes of Assessing (iv) An active moiety in a radio- User Fees. pharmaceutical (or radioactive drug (B) When the Type 9 NDA is sub- product) which has not been approved mitted, it will be given the same NDA by the FDA or marketed in the U.S. is classification as the pending NDA. classified as an NME. When one application is approved, the (v) In addition, if a change in isotopic other will be reclassified as Type 9 re- form results in an active moiety that gardless of whether it was the first or has never been approved by the FDA or second NDA actually submitted. After marketed in the U.S., the active ingre- the approval of a Type 9 NDA, FDA will dient is classified as an NME. ‘‘administratively close’’ the Type 9 (C) An NDA for an active ingredient NDA and thereafter only accept sub- that is a chemical combination of two or missions to the ‘‘parent’’ NDA. more previously approved or marketed active moieties that are linked by an (ii) [Reserved] ester bond is classified as a combina- [80 FR 69077, Nov. 6, 2015, as amended at 83 tion of a Type 2 NDA as described in FR 57070, Nov. 14, 2018; 84 FR 60803, Nov. 8, paragraph (e)(5)(i) of this section, with 2019] a Type 4 NDA as described in paragraph (e)(5)(ii) of this section, if the active § 413.235 Patient-level adjustments. moieties have not been previously mar- Adjustments to the per-treatment keted or approved as a physical com- base rate may be made to account for bination. If the physical combination variation in case-mix. These adjust- has been previously marketed or ap- ments reflect patient characteristics proved, however, such a product would that result in higher costs for ESRD fa- no longer be considered a new combina- cilities. tion and the NDA would thus be classi- (a) CMS adjusts the per treatment fied as a Type 2 NDA, as described in base rate for adults to account for pa- paragraph (e)(5)(i) of this section. tient age, body surface area, low body (6) Combination of Type 5 NDA. Type 5 mass index, onset of dialysis (new pa- NDA, as described in paragraph (e)(2) of tient), and co-morbidities, as specified this section, in combination with a by CMS. Type 2 NDA, as described in paragraph (b) CMS adjusts the per treatment (e)(5)(i) of this section. base rate for pediatric patients in ac- (7) Type 9 NDA when the parent NDA is cordance with section 1881(b)(14) a Type 3, Type 5, Type 7, or a Type 8. A (D)(iv)(I) of the Act, to account for pa- Type 9 NDA, as described in paragraph tient age and treatment modality. (e)(7)(i) of this section when the parent (c) CMS provides a wage-adjusted NDA is a Type 3 NDA as described in add-on per treatment adjustment for paragraph (e)(1) of this section or a home and self-dialysis training. Type 5 NDA as described in paragraph (e)(2) of this section or Type 7 NDA as [75 FR 49201, Aug. 12, 2010]

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§ 413.236 Transitional add-on payment supply must occur by September 1 adjustment for new and innovative prior to the particular calendar year. equipment and supplies. (d) Transitional add-on payment ad- (a) Basis. This section establishes an justment for new and innovative equip- add-on payment adjustment to support ment and supplies. A new and innovative ESRD facilities in the uptake of new renal dialysis equipment or supply will and innovative renal dialysis equip- be paid for using a transitional add-on ment and supplies under the ESRD pro- payment adjustment for new and inno- spective payment system under the au- vative equipment and supplies based on thority of section 1881(b)(14)(D)(iv) of 65 percent of the MAC-determined the Social Security Act. price, as specified in paragraph (e) of (b) Eligibility criteria. For dates of this section. service occurring on or after January 1, (1) The transitional add-on payment 2020, CMS provides for a transitional adjustment for new and innovative add-on payment adjustment for new equipment and supplies is paid for 2- and innovative equipment and supplies calendar years. (as specified in paragraph (d) of this (2) Following payment of the transi- section) to an ESRD facility for fur- tional add-on payment adjustment for nishing a covered equipment or supply new and innovative equipment and sup- only if the item: plies, the ESRD PPS base rate will not (1) Has been designated by CMS as a be modified and the new and innovative renal dialysis service under § 413.171; renal dialysis equipment or supply will (2) Is new, meaning it is granted mar- be an eligible outlier service as pro- keting authorization by the Food and vided in § 413.237. Drug Administration (FDA) on or after (e) Pricing of new and innovative renal January 1, 2020; dialysis equipment and supplies. (1) The (3) Is commercially available by Jan- Medicare Administrative Contractors uary 1 of the particular calendar year, (MACs) on behalf of CMS will establish meaning the year in which the pay- prices for new and innovative renal di- ment adjustment would take effect; alysis equipment and supplies that (4) Has a Healthcare Common Proce- meet the eligibility criteria specified dure Coding System (HCPCS) applica- in paragraph (b) of this section using tion submitted in accordance with the verifiable information from the fol- official Level II HCPCS coding proce- lowing sources of information, if avail- dures by September 1 of the particular able: calendar year; (i) The invoice amount, facility (5) Is innovative, meaning it meets charges for the item, discounts, allow- the criteria specified in § 412.87(b)(1) of ances, and rebates; this chapter and related guidance; and (ii) The price established for the item (6) Is not a capital-related asset that by other MACs and the sources of in- an ESRD facility has an economic information used to establish that price; terest in through ownership (regardless (iii) Payment amounts determined by of the manner in which it was ac- other payers and the information used quired). to establish those payment amounts; (c) Announcement of determinations and and deadline for consideration of new (iv) Charges and payment amounts renal dialysis equipment or supply appli- required for other equipment and sup- cations. CMS will consider whether a plies that may be comparable or other- new renal dialysis supply or equipment wise relevant. meets the eligibility criteria specified (2) [Reserved] in paragraph (b) of this section and an- nounce the results in the FEDERAL [84 FR 60805, Nov. 8, 2019] REGISTER as part of its annual updates and changes to the ESRD prospective § 413.237 Outliers. payment system. CMS will only con- (a) The following definitions apply to sider a complete application received this section. by CMS by February 1 prior to the par- (1) ESRD outlier services are the fol- ticular calendar year. FDA marketing lowing items and services that are in- authorization for the equipment or cluded in the ESRD PPS bundle:

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(i) Renal dialysis drugs and biologi- (6) Outlier Percentage: This term has cal products that were or would have the meaning set forth in § 413.220(b)(4). been, prior to January 1, 2011, sepa- (b) Eligibility for outlier payments—(1) rately billable under Medicare Part B; Adult beneficiaries. An ESRD facility (ii) Renal dialysis laboratory tests will receive an outlier payment for a that were or would have been, prior to treatment furnished to an adult bene- January 1, 2011, separately billable ficiary if the ESRD facility’s per-treat- under Medicare Part B; ment imputed MAP amount for ESRD (iii) Renal dialysis medical/surgical outlier services exceeds the adult pre- supplies, including syringes, used to dicted ESRD outlier services MAP administer renal dialysis drugs and bi- amount plus the adult fixed dollar loss ological products that were or would amount. To calculate the ESRD facili- have been, prior to January 1, 2011, separately billable under Medicare Part B; ty’s per-treatment imputed MAP (iv) Renal dialysis drugs and biologi- amount for an adult beneficiary, CMS cal products that were or would have divides the ESRD facility’s monthly been, prior to January 1, 2011, covered imputed MAP amount of providing under Medicare Part D, including renal ESRD outlier services to the adult ben- dialysis oral-only drugs effective Janu- eficiary by the number of dialysis ary 1, 2025; and treatments furnished to the adult bene- (v) Renal dialysis equipment and sup- ficiary in the relevant month. A bene- plies that receive the transitional add- ficiary is considered an adult bene- on payment adjustment as specified in ficiary if the beneficiary is 18 years old § 413.236 after the payment period has or older. ended. (2) Pediatric beneficiaries. An ESRD fa- (vi) As of January 1, 2012, the labora- cility will receive an outlier payment tory tests that comprise the Auto- for a treatment furnished to a pediatric mated Multi-Channel Chemistry panel beneficiary if the ESRD facility’s per- are excluded from the definition of treatment imputed MAP amount for outlier services. ESRD outlier services exceeds the pedi- (2) Adult predicted ESRD outlier serv- atric predicted ESRD outlier services ices Medicare allowable payment (MAP) MAP amount plus the pediatric fixed amount means the predicted per-treat- dollar loss amount. To calculate the ment case-mix adjusted amount for ESRD facility’s per-treatment imputed ESRD outlier services furnished to an MAP amount for a pediatric bene- adult beneficiary by an ESRD facility. (3) Pediatric predicted ESRD outlier ficiary, CMS divides the ESRD facili- services Medicare allowable payment ty’s monthly imputed MAP amount of (MAP) amount means the predicted per- providing ESRD outlier services to the treatment case-mix adjusted amount pediatric beneficiary by the number of for ESRD outlier services furnished to dialysis treatments furnished to the a pediatric beneficiary by an ESRD fa- pediatric beneficiary in the relevant cility. month. A beneficiary is considered a (4) Adult fixed dollar loss amount is the pediatric beneficiary if the beneficiary amount by which an ESRD facility’s is under 18 years old. imputed per-treatment MAP amount (c) Outlier payment amount: CMS pays for furnishing ESRD outlier services to 80 percent of the difference between: an adult beneficiary must exceed the (1) The ESRD facility’s per-treat- adult predicted ESRD outlier services ment imputed MAP amount for the MAP amount to be eligible for an ESRD outlier services, and outlier payment. (2) The adult or pediatric predicted (5) Pediatric fixed dollar loss amount is ESRD outlier services MAP amount the amount by which an ESRD facili- plus the adult or pediatric fixed dollar ty’s imputed per-treatment MAP loss amount, as applicable. amount for furnishing ESRD outlier services to a pediatric beneficiary must [75 FR 49201, Aug. 12, 2010, as amended at 76 exceed the pediatric predicted ESRD FR 70314, Nov. 10, 2011; 78 FR 72252, Dec. 2, outlier services MAP amount to be eli- 2013; 79 FR 66262, Nov. 6, 2014; 80 FR 69077, gible for an outlier payment. Nov. 6, 2015; 84 FR 60806, Nov. 8, 2019]

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§ 413.239 Transition period. (b) One-time election. Except as provided in paragraph (b)(2) of this sec- (a) Duration of transition period and tion, ESRD facilities may make a one- composition of the blended transition pay- time election to be paid for renal dialy- ment. ESRD facilities not electing sis services provided during the transi- under paragraph (b) of this section to tion based on 100 percent of the pay- be paid based on the payment amount ment amount determined under determined under § 413.230 of this part, § 413.215 of this part, rather than based will be paid a per-treatment payment on the payment amount determined amount for renal dialysis services (as under paragraph (a) of this section. defined in § 413.171 of this part) and home dialysis, provided during the (1) Except as provided in paragraph transition as follows— (b)(3) of this section, the election must be received by each ESRD facility’s (1) For services provided on and after Medicare administrative contractor January 1, 2011 through December 31, (MAC) by November 1, 2010. Requests 2011, a blended rate equal to the sum received by the MAC after November 1, of: 2010, will not be accepted regardless of (i) 75 percent of the payment amount postmarks, or delivered dates. MACs determined under the ESRD payment will establish the manner in which an methodology in effect prior to January ESRD facility will indicate their inten- 1, 2011 in accordance with section tion to be excluded from the transition 1881(b)(12) of the Act and items and and paid entirely based on payment services separately paid under Part B; under the ESRD PPS. Once the elec- and tion is made, it may not be rescinded. (ii) 25 percent of the payment amount (2) If the ESRD facility fails to sub- determined in accordance with section mit an election, or the ESRD facility’s 1881(b)(14) of the Act; election is not received by their MAC (2) For services provided on and after by November 1, 2010, payments to the January 1, 2012 through December 31, ESRD facility for items and services 2012, a blended rate equal to the sum provided during the transition will be of: based on the payment amounts deter- (i) 50 percent of the payment amount mined under paragraph (a) of this sec- determined under the ESRD payment tion. methodology in effect prior to January (3) ESRD facilities that become cer- 1, 2011 in accordance with section tified for Medicare participation and 1881(b)(12) of the Act and items and begin to provide renal dialysis services, services separately paid under Part B; as defined in § 413.171 of this part, be- and tween November 1, 2010 and December (ii) 50 percent of the payment rate de- 31, 2010, must notify their designated termined in accordance with section MAC of their election choice at the 1881(b)(14) of the Act; time of enrollment. (3) For services provided on and after (c) Treatment of new ESRD facilities. January 1, 2013 through December 31, For renal dialysis services as defined in 2013, a blended rate equal to the sum § 413.171, furnished during the transi- of: tion period, new ESRD facilities as de- (i) 25 percent of the payment amount fined in § 413.171, are paid based on the determined under the ESRD payment per-treatment payment amount deter- methodology in effect prior to January mined under § 413.215 of this part. 1, 2011 in accordance with section 1881(b) (12) of the Act and items and (d) Transition budget-neutrality adjust- services separately paid under Part B; ment. During the transition, CMS ad- and justs all payments, including payments under this section, under the ESRD (ii) 75 percent of the payment amount prospective payment system so that determined in accordance with section the estimated total amount of payment 1881(b)(14) of the Act; equals the estimated total amount of (4) For services provided on and after payments that would otherwise occur January 1, 2014, 100 percent of the pay- without such a transition. ment amount determined in accordance with section 1881(b)(14) of the Act. [75 FR 49201, Aug. 12, 2010]

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§ 413.241 Pharmacy arrangements. gical supplies for which a separate Effective January 1, 2011, an ESRD charge is not customarily made. It does facility that enters into an arrange- not include the costs of ancillary serv- ment with a pharmacy to furnish renal ices, capital-related costs, or, where dialysis service drugs and biologicals appropriate, return on equity. must ensure that the pharmacy has the Rural area means any area outside an capability to provide all classes of urban area in a census region. renal dialysis service drugs and Urban area means— biologicals to patients in a timely (1) Prior to October 1, 2004, a Metro- manner. politan Statistical Area (MSA), or New [75 FR 49202, Aug. 12, 2010] England County Metropolitan Area (NECMA), as defined by the Office of Subpart I—Prospectively Deter- Management and Budget, or a New mined Payment Rates for England county deemed to be an urban area as listed in § 412.62(f)(1)(ii)(B) of Low-Volume Skilled Nursing this chapter. Facilities, for Cost Reporting (2) Effective October 1, 2004, a Metro- Periods Beginning Prior to July politan Statistical Area (MSA), as de- 1, 1998 fined by the Office of Management and Budget, or a New England county SOURCE: 60 FR 37594, July 21, 1995, unless deemed to be an urban area as specified otherwise noted. under § 412.64. § 413.300 Basis and scope. [60 FR 37594, July 21, 1995, as amended at 69 (a) Basis. This subpart implements FR 49265, Aug. 11, 2004] section 1888(d) of the Act, which provides for optional prospectively deter- § 413.304 Eligibility for prospectively determined payment rates. mined payment rates for qualified SNFs. (a) General rule. An SNF is eligible to (b) Scope. This subpart sets forth the receive a prospectively determined eligibility criteria an SNF must meet payment rate for a cost reporting pe- to qualify, the process governing elec- riod if it had fewer than 1,500 Medicare tion of prospectively determined pay- covered inpatient days as reported on a ment rates, and the basis and method- Medicare cost report in its imme- ology for determining prospectively de- diately preceding cost reporting period. termined payment rates. This criterion applies even if the SNF received a prospectively determined § 413.302 Definitions. payment rate during the preceding cost For purposes of this subpart— reporting period. Area wage level means the average (b) Less than a full cost reporting pe- wage per hour for all classifications of riod. If the cost reporting period that employees as reported by health care precedes an SNF’s request for prospec- facilities within a specified area. tively determined payment is not a full Census region means one of the 9 cen- cost reporting period, the SNF is eligi- sus divisions, comprising the 50 States ble to receive prospectively determined and the District of Columbia, established by the Bureau of the Census for payment rates only if the average daily statistical and reporting purposes. Medicare census for the period (Medi- Routine capital-related costs means the care inpatient days divided by the total capital-related costs, allowable for number of days in the cost reporting Medicare purposes (as described in sub- period) is not greater than 4.1. part G of this part), that are allocated (c) Newly-participating SNFs. An SNF to the SNF participating inpatient rou- is eligible to receive prospectively de- tine service cost center as reported on termined payment rates for its first the Medicare cost report. cost reporting period for which it is ap- Routine operating costs means the cost proved to participate in Medicare. of regular room, dietary, and nursing services, and minor medical and sur-

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§ 413.308 Rules governing election of (b) Payment in full. The payment rate prospectively determined payment represents payment in full for routine rates. services as described in § 413.314 (sub- (a) Requirements. An SNF must notify ject to applicable coinsurance as de- its contractor at least 30 calendar days scribed in subpart G of part 409 of this before the beginning of the cost report- title), and for routine capital costs. ing period for which it requests to re- Payment is made in lieu of payment on ceive such payment that it elects pro- a reasonable cost basis for routine spectively determined payment rates. services and for routine capital costs. A separate request must be made for each cost reporting period for which an § 413.312 Methodology for calculating rates. SNF seeks prospectively determined payment. A newly participating SNF (a) Data used. (1) To calculate the with no preceding cost reporting period prospectively determined payment must make its election within 30 days rates, CMS uses: of its notification of approval to par- (i) The SNF cost data that were used ticipate in Medicare. to develop the applicable routine serv- (b) Contractor notice. After evaluating ice cost limits; an SNF’s request for prospectively de- (ii) A wage index to adjust for area termined payment rates, the con- wage differences; and tractor notifies the SNF in writing as (iii) The most recent projections of to whether the SNF meets any of the increases in the costs from the SNF eligibility criteria described in § 413.304 market basket index. and the timely election requirements (2) In the annual schedule of rates under § 413.308(a). The contractor must published in the FEDERAL REGISTER notify the SNF of its initial and final under the authority of § 413.320, CMS determinations within 10 working days announces the wage index and the an- after it receives all the data necessary nual percentage increases in the mar- to make each determination. The con- ket basket used in the calculation of tractor’s determination is limited to the rates. one cost reporting period. (b) Calculation of per diem rate—(1) (c) Prohibition against revocation. An Routine operating component of rate—(i) SNF may not revoke its request after Adjusting cost report data. The SNF it has received the initial determina- market basket index is used to adjust tion of eligibility from the contractor the routine operating cost from the and the cost reporting period has SNF cost report to reflect cost in- begun. creases occurring between cost report- (d) Revocation by contractor. If an SNF ing periods represented in the data col- is given tentative approval to receive a lected and the midpoint of the initial prospectively determined payment cost reporting period to which the pay- rate, and, after the start of the applica- ment rates apply. ble cost reporting period, the con- (ii) Calculating a per diem cost. For tractor determines that the SNF does each SNF, an adjusted routine oper- not meet the eligibility criteria, the ating per diem cost is computed by di- contractor must revoke the prospec- viding the adjusted routine operating tively determined payment option. cost (see paragraph (b)(1)(i) of this section) by the SNF’s total patient days. § 413.310 Basis of payment. (iii) Adjusting for wage levels. (A) The (a) Method of payment. Under the pro- SNF’s adjusted per diem routine oper- spectively determined payment rate ating cost calculated under paragraph system, a qualified SNF receives a per (b)(1)(ii) of this section is then divided diem payment of a predetermined rate into labor-related and nonlabor-related for inpatient services furnished to portions. Medicare beneficiaries. Each SNF’s (B) The labor-related portion is ob- routine per diem payment rate is deter- tained by multiplying the SNF’s ad- mined according to the methodology justed per diem routine operating cost described in § 413.312 and is based on by a percentage that represents the various components of SNF costs. labor-related portion of cost from the

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market basket. This percentage is pub- § 413.314 Determining payment lished when the revised rates are pub- amounts: Routine per diem rate. lished as described in § 413.320. (a) General rule. An SNF that elects (C) The labor-related portion of each to be paid under the prospectively de- SNF’s per diem cost is divided by the termined payment rate system, and wage index applicable to the SNF’s ge- qualifies for such payment, is paid a ographic location to arrive at the ad- per diem rate for inpatient routine justed labor-related portion of routine services. This rate is adjusted to reflect cost. area wage differences and the cost re- (iv) Group means. SNFs are grouped porting period beginning date (if nec- by urban or rural location by census essary) and is subject to the limitation region. Separate means of adjusted specified in paragraph (d) of this sec- labor-related and nonlabor routine option. erating costs for each SNF group are (b) Per diem rate. The prospectively established in accordance with the determined payment rate for each SNF’s region and urban or rural loca- urban and rural area in each census re- tion. For each group, the mean labor- gion is comprised of the following: (1) A routine operating component, related and mean nonlabor-related per which is divided into: diem routine operating costs are multi- (i) A labor-related portion adjusted plied by 105 percent. by the appropriate wage index; and (2) Computation of routine capital-re- (ii) A nonlabor-related portion. lated cost. (i) The SNF routine capital- (2) A routine capital-related cost por- related cost for both direct and indi- tion. rect capital costs allocated to routine (3) For proprietary SNFs only, a por- services, as reported on the Medicare tion that is based on the return on cost report, is obtained for each SNF in owner’s equity related to routine cost, the data base. applicable only for services furnished (ii) For each SNF, the per diem cap- before October 1, 1993. ital-related cost is calculated by divid- (c) Adjustment for cost reporting period. ing the SNF’s routine capital costs by (1) If a facility has a cost reporting pe- its inpatient days. riod beginning after the beginning of (iii) SNFs are grouped by urban and the Federal fiscal year, the contractor rural location by census region, and increases the labor-related and mean per diem routine capital-related nonlabor-related portions of the pro- cost is determined for each group. spective payment rate that would oth- (iv) Each group mean per diem cap- erwise apply to the SNF by an adjust- ital-related cost is multiplied by 105 ment factor. Each factor represents the percent. projected increase in the market bas- (3) Computation of return on owner’s ket index for a specific 12-month pe- equity for services furnished before Octo- riod. The factors are used to account ber 1, 1993. (i) Each proprietary SNF’s for inflation in costs for cost reporting Medicare return on equity is obtained periods beginning after October 1. Ad- justment factors are published in the from its cost report and the portion at- annual notice of prospectively deter- tributable to the routine service cost is mined payment rates described in determined as described in § 413.157. § 413.320. (ii) For each proprietary SNF, per (2) If a facility uses a cost reporting diem return on equity is calculated by period that is not 12 months in dura- dividing the routine cost related return tion, the contractor must obtain a spe- on equity determined under paragraph cial adjustment factor from CMS for (b)(3)(i) of this section by the SNF’s the specific period. total Medicare inpatient days. (d) Limitation of prospectively deter- (iii) Separate group means are com- mined payment rate. The per diem pro- puted for per diem return on equity of spectively determined payment rate proprietary SNFs, based on regional for an SNF, excluding capital-related and urban or rural classification. costs and excluding return on equity (iv) Each group mean is multiplied by for services furnished prior to October 105 percent. 1, 1993, may not exceed the individual

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SNF’s routine service cost limit. Under § 413.330 Basis and scope. § 413.30, the routine service cost limit is (a) Basis. This subpart implements the limit determined without regard to exemptions, exceptions, or retroactive section 1888(e) of the Act, which pro- adjustments, and is the actual limit in vides for the implementation of a pro- effect when the provider elects to be spective payment system for SNFs for paid a prospectively determined pay- cost reporting periods beginning on or ment rate. after July 1, 1998. (b) Scope. This subpart sets forth the § 413.316 Determining payment framework for the prospective payment amounts: Ancillary services. system for SNFs, including the meth- Ancillary services are paid on the odology used for the development of basis of reasonable cost in accordance payment rates and associated adjust- with section 1861(v)(1) of the Act and ments, the application of a transition § 413.53. phase, and related rules.

§ 413.320 Publication of prospectively § 413.333 Definitions. determined payment rates or As used in this subpart— amounts. Case-mix index means a scale that At least 90 days before the beginning measures the relative difference in re- of a Federal fiscal year to which resource intensity among different vised prospectively determined pay- groups in the resident classification ment rates are to be applied, CMS pub- system. lishes a notice in the FEDERAL REG- Market basket index means an index ISTER: that reflects changes over time in the (a) Establishing the prospectively de- prices of an appropriate mix of goods termined payment rates for routine and services included in covered skilled services; and nursing services. (b) Explaining the basis on which the Resident classification system means a prospectively determined payment rates are calculated. system for classifying SNF residents into mutually exclusive groups based § 413.321 Simplified cost report for on clinical, functional, and resource- SNFs. based criteria. For purposes of this sub- SNFs electing to be paid under the part, this term refers to the current prospectively determined payment rate version of the resident classification system may file a simplified cost re- system, as set forth in the annual pub- port. The cost report contains a sim- lication of Federal prospective pay- plified method of cost finding to be ment rates described in § 413.345. used in lieu of cost methods described Rural area means, for services pro- in § 413.24(d). This method is specified vided on or after July 1, 1998, but before in the instructions for Form CMS– October 1, 2005, an area as defined in 2540S, contained in sections 3000–3027.3 § 412.62(f)(1)(iii) of this chapter. For of Part 2 of the Provider Reimburse- services provided on or after October 1, ment Manual. This form may not be 2005, rural area means an area as de- used by hospital-based SNFs or SNFs fined in § 412.64(b)(1)(ii)(C) of this chap- that are part of a health care complex. ter. Those SNFs must file a cost report Urban area means, for services pro- that reflects the shared services and vided on or after July 1, 1998, but before administrative costs of the hospital October 1, 2005, an area as defined in and any other related facilities in the § 412.62(f)(1)(ii) of this chapter. For health care complex. services provided on or after October 1, 2005, urban area means an area as de- Subpart J—Prospective Payment fined in §§ 412.64(b)(1)(ii)(A) and for Skilled Nursing Facilities 412.64(b)(1)(ii)(B) of this chapter. [63 FR 26309, May 12, 1998; 63 FR 53307, Oct. 5, SOURCE: 63 FR 26309, May 12, 1998, unless 1998, as amended at 73 FR 46440, Aug. 8, 2008; otherwise noted. 82 FR 36633, Aug. 4, 2017]

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§ 413.335 Basis of payment. source utilization of different resident types; and (a) Method of payment. Under the pro- (v) Medicare Part B SNF claims data spective payment system, SNFs receive reflecting amounts payable under Part a per diem payment of a predetermined B for covered SNF services (other than rate for inpatient services furnished to those services described in § 411.15(p)(2) Medicare beneficiaries. The per diem of this chapter) furnished during SNF payments are made on the basis of the cost reporting periods beginning in fis- Federal payment rate described in cal year 1995 to individuals who were § 413.337 and, during a transition period, residents of SNFs and receiving Part A on the basis of a blend of the Federal covered services. rate and the facility-specific rate de- (b) Methodology for calculating the per scribed in § 413.340. These per diem pay- diem Federal payment rates—(1) Deter- ment rates are determined according to mining SNF costs. In calculating the ini- the methodology described in §§ 413.337 tial unadjusted Federal rates applica- and 413.340. ble for services provided during the pe- (b) Payment in full. (1) The payment riod beginning July 1, 1998 through rates represent payment in full (sub- September 30, 1999, CMS determines ject to applicable coinsurance as de- each SNF’s costs by summing its al- scribed in subpart G of part 409 of this lowable costs for the cost reporting pe- chapter) for all costs (routine, ancil- riod beginning in fiscal year 1995 and lary, and capital-related) associated its estimate of Part B payments (de- with furnishing inpatient SNF services scribed in paragraphs (a)(1)(i) and to Medicare beneficiaries other than (a)(1)(v) of this section). costs associated with approved edu- (2) Use of market basket index. The cational activities as described in SNF market basket index is used to ad- § 413.85. just the SNF cost data to reflect cost (2) In addition to the Federal per increases occurring between cost re- diem payment amounts, SNFs receive porting periods represented in the data payment for bad debts of Medicare and the initial period (beginning July beneficiaries, as specified in § 413.89 of 1, 1998 and ending September 30, 1999) this part. to which the payment rates apply. For each year, the cost data are updated by [63 FR 26309, May 12, 1998, as amended at 73 a factor equivalent to the annual mar- FR 46440, Aug. 8, 2008] ket basket index percentage minus 1 § 413.337 Methodology for calculating percentage point. the prospective payment rates. (3) Calculation of the per diem cost. For each SNF, the per diem cost is com- (a) Data used. (1) To calculate the puted by dividing the cost data for prospective payment rates, CMS uses— each SNF by the corresponding number (i) Medicare data on allowable costs of Medicare days. from freestanding and hospital-based (4) Standardization of data for vari- SNFs for cost reporting periods begin- ation in area wage levels and case-mix. ning in fiscal year 1995. SNFs that re- The cost data described in paragraph ceived ‘‘new provider’’ exemptions (b)(2) of this section are standardized under § 413.30(e)(2) are excluded from to remove the effects of geographic the data base used to compute the Fed- variation in wage levels and facility eral payment rates. In addition, allow- variation in case-mix. The cost data able costs related to exceptions pay- are standardized for geographic vari- ments under § 413.30(f) are excluded ation in wage levels using the wage from the data base used to compute the index. The cost data are standardized Federal payment rates; for facility variation in case-mix using (ii) An appropriate wage index to ad- the case-mix indices and other data just for area wage differences; that indicate facility case-mix. (iii) The most recent projections of (5) Calculation of unadjusted Federal increases in the costs from the SNF payment rates. CMS calculates the na- market basket index; tional per diem unadjusted payment (iv) Resident assessment and other rates by urban and rural classification data that account for the relative re- in the following manner:

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(i) By computing the average per vious fiscal year increased by a factor diem standardized cost of freestanding equal to the SNF market basket index SNFs weighted by Medicare days. percentage change for the fiscal year (ii) By computing the average per involved minus 0.5 percentage points. diem standardized cost of freestanding (v) For each subsequent fiscal year, and hospital-based SNFs combined the unadjusted Federal payment rate is weighted by Medicare days. equal to the rate computed for the pre- (iii) By computing the average of the vious fiscal year increased by a factor amounts determined under paragraphs equal to the SNF market basket index (b)(5)(i) and (b)(5)(ii) of this section. percentage change for the fiscal year (c) Calculation of adjusted Federal pay- involved, except as provided in para- ment rates for case-mix and area wage graphs (d)(1)(vi) and (vii) of this sec- levels. The Federal rate is adjusted to tion. account for facility case-mix using a (vi) For fiscal year 2018, the resident classification system and asso- unadjusted Federal payment rate is ciated case-mix indices that account equal to the rate computed for the pre- for the relative resource utilization of vious fiscal year increased by a SNF different patient types. This classifica- market basket index percentage tion system utilizes the resident as- change of 1 percent (after application sessment instrument completed by of paragraphs (d)(2) and (3) of this sec- SNFs as described at § 483.20 of this tion). chapter, according to the assessment (vii) For fiscal year 2019, the schedule described in § 413.343(b). The unadjusted Federal payment rate is Federal rate is also adjusted to account equal to the rate computed for the pre- for geographic differences in area wage vious fiscal year increased by a SNF levels using an appropriate wage index. market basket index percentage (d) Annual updates of Federal change of 2.4 percent (after application unadjusted payment rates. CMS updates of paragraphs (d)(2) and (3) of this sec- the unadjusted Federal payment rates tion). on a fiscal year basis. (2) Forecast error adjustment. Begin- (1) Update formula. The unadjusted ning with fiscal year 2004, an adjust- Federal payment rate shall be updated ment to the annual update of the pre- as follows: vious fiscal year’s rate will be com- (i) For the initial period beginning on puted to account for forecast error. July 1, 1998, and ending on September The initial adjustment (in fiscal year 30, 1999, the unadjusted Federal pay- 2004) to the update of the previous fis- ment rate is equal to the rate com- cal year’s rate will take into account puted under paragraph (b)(5)(iii) of this the cumulative forecast error between section increased by a factor equal to fiscal years 2000 and 2002. Subsequent the SNF market basket index percent- adjustments in succeeding fiscal years age change for such period minus 1.0 will take into account the forecast percentage point. error from the most recently available (ii) For fiscal year 2000, the fiscal year for which there is final data. unadjusted Federal payment rate is The forecast error adjustment applies equal to the rate computed for the ini- whenever the difference between the tial period described in paragraph forecasted and actual percentage (d)(1)(i) of this section increased by a change in the SNF market basket factor equal to the SNF market basket index exceeds the following threshold: index percentage change for that pe- (i) 0.25 percentage points for fiscal riod minus 1.0 percentage point. years 2004 through 2007; and (iii) For fiscal year 2001, the (ii) 0.5 percentage points for fiscal unadjusted Federal payment rate is year 2008 and subsequent fiscal years. equal to the rate computed for the pre- (3) Multifactor productivity (MFP) ad- vious fiscal year increased by a factor justment. For fiscal year 2012 and each equal to the SNF market basket index subsequent fiscal year, the SNF mar- percentage change for the fiscal year. ket basket index percentage change for (iv) For fiscal years 2002 and 2003, the the fiscal year (as modified by any ap- unadjusted Federal payment rate is plicable forecast error adjustment equal to the rate computed for the pre- under paragraph (d)(2) of this section)

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shall be reduced by the MFP adjust- for certain high cost patients will no ment described in section longer be applicable. 1886(b)(3)(B)(xi)(II) of the Act. The re- (f) Adjustments to payment rates under duction of the market basket index the SNF Value-Based Purchasing Pro- percentage change by the MFP adjust- gram. Beginning with payment for serv- ment may result in the market basket ices furnished on October 1, 2018, the index percentage change being less adjusted Federal per diem rate (as de- than zero for a fiscal year, and may refined in § 413.338(a)(2)) otherwise appli- sult in the unadjusted Federal payment cable to a SNF for the fiscal year is re- rates for a fiscal year being less than duced by the applicable percent (as de- such payment rates for the preceding fined in § 413.338(a)(3)). The resulting fiscal year. amount is then adjusted by the value- (4) Penalty for failure to report quality based incentive payment amount (as data. For fiscal year 2018 and subse- defined in § 413.338(a)(14)) based on the quent fiscal years— SNF’s performance score for that fiscal (i) In the case of a SNF that does not year under the SNF Value-Based Pur- meet the requirements in § 413.360, for a chasing Program, as calculated under fiscal year, the SNF market basket § 413.338. index percentage change for the fiscal [63 FR 26309, May 12, 1998, as amended at 66 year (as specified in paragraph (d)(1)(v) FR 39600, July 31, 2001; 68 FR 46070, Aug. 4, of this section, as modified by any ap- 2003; 76 FR 48539, Aug. 8, 2011; 82 FR 36633, plicable forecast error adjustment Aug. 4, 2017; 83 FR 39289, Aug. 8, 2018] under paragraph (d)(2) of this section, reduced by the MFP adjustment speci- § 413.338 Skilled nursing facility value- fied in paragraph (d)(3) of this section, based purchasing program. and as specified for FY 2018 in section (a) Definitions. As used in this sec- 1888(e)(5)(B)(iii) of the Act), is further tion: reduced by 2.0 percentage points. (1) Achievement threshold (or achieve- (ii) The application of the 2.0 per- ment performance standard) means the centage point reduction specified in 25th percentile of SNF performance on paragraph (d)(4)(i) of this section to the the SNF readmission measure during SNF market basket index percentage the baseline period for a fiscal year. change may result in such percentage (2) Adjusted Federal per diem rate being less than zero for a fiscal year, means the payment made to SNFs and may result in payment rates for under the skilled nursing facility pro- that fiscal year being less than such spective payment system (as described payment rates for the preceding fiscal under section 1888(e)(4)(G) of the Act). year. (3) Applicable percent means for FY (iii) Any 2.0 percentage point reduc- 2019 and subsequent fiscal years, 2.0 tion applied pursuant to paragraph percent. (d)(4)(i) of this section will apply only (4) Baseline period means the time pe- to the fiscal year involved and will not riod used to calculate the achievement be taken into account in computing threshold, benchmark and improve- the payment amount for a subsequent ment threshold that apply for a fiscal fiscal year. year. (e) Pursuant to section 101 of the (5) Benchmark means, for a fiscal Medicare, Medicaid, and SCHIP Bal- year, the arithmetic mean of the top anced Budget Refinement Act of 1999 decile of SNF performance on the SNF (BBRA) as revised by section 314 of the readmission measure during the base- Medicare, Medicaid, and SCHIP Bene- line period for that fiscal year. fits Improvement and Protection Act (6) Logistic exchange function means of 2000 (BIPA), using the best available the function used to translate a SNF’s data, the Secretary will issue a new performance score on the SNF readmis- regulation with a newly refined case- sion measure into a value-based incen- mix classification system to better active payment percentage. count for medically complex patients. (7) Improvement threshold (or improve- Upon issuance of the new regulation, ment performance standard) means an the temporary increases in payment individual SNF’s performance on the

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SNF readmission measure during the (14) Value-based incentive payment applicable baseline period. amount is the portion of a SNF’s ad- (8) Performance period means the time justed Federal per diem rate that is at- period during which performance on tributable to the SNF VBP Program. the SNF readmission measure is cal- (15) Value-based incentive payment ad- culated for a fiscal year. justment factor is the number that will (9) Performance standards are the lev- be multiplied by the adjusted Federal els of performance that SNFs must per diem rate for services furnished by meet or exceed to earn points under a SNF during a fiscal year, based on its the SNF VBP Program for a fiscal performance score for that fiscal year, year, and are announced no later than and after such rate is reduced by the 60 days prior to the start of the per- applicable percent. formance period that applies to the (16) Low-volume SNF means a SNF SNF readmission measure for that fis- with fewer than 25 eligible stays in- cal year. Beginning with the perform- cluded in the SNF readmission measure ance standards that apply to FY 2021, if denominator during the performance CMS discovers an error in the perform- period for a fiscal year. ance standard calculations subsequent (17) Eligible stay means, for purposes to publishing their numerical values of the SNF readmission measure, an for a fiscal year, CMS will update the index SNF admission that would be in- numerical values to correct the error. cluded in the denominator of that If CMS subsequently discovers one or measure. more other errors with respect to the (b) Applicability of the SNF VBP Pro- same fiscal year, CMS will not further gram. The SNF VBP Program applies to update the numerical values for that SNFs, including facilities described in fiscal year. section 1888(e)(7)(B). (10) Ranking means the ordering of (c) Process for reducing the adjusted SNFs based on each SNF’s performance Federal per diem rate and applying the score under the SNF VBP Program for value-based incentive payment adjustment a fiscal year. factor under the SNF VBP Program—(1) (11) SNF readmission measure means, General. CMS will make value-based in- prior to October 1, 2019, the all-cause centive payments to each SNF based all-condition hospital readmission on its performance score for a fiscal measure (SNFRM) or the all-condition year under the SNF VBP Program risk-adjusted potentially preventable under the requirements and conditions hospital readmission rate (SNFPPR) specified in this paragraph. specified by CMS for application in the (2) Value-based incentive payment SNF Value-Based Purchasing Program. amount—(i) Total amount available for a Beginning October 1, 2019, the term fiscal year. The total amount available SNF readmission measure means the all- for value-based incentive payments for cause all-condition hospital readmis- a fiscal year is at least 60 percent of sion measure (SNFRM) or the all-con- the total amount of the reduction to dition risk-adjusted potentially pre- the adjusted SNF PPS payments for ventable hospital readmission rate that fiscal year, as estimated by CMS, (Skilled Nursing Facility Potentially and will be increased as appropriate for Preventable Readmissions after Hos- each fiscal year to account for the as- pital Discharge measure) specified by signment of a performance score to CMS for application in the SNF Value- low-volume SNFs under paragraph Based Purchasing Program. (d)(3) of this section. (12) Performance score means the nu- (ii) Calculation of the value-based in- meric score ranging from 0 to 100 centive payment amount. The value- awarded to each SNF based on its per- based incentive payment amount is formance under the SNF VBP Program calculated by multiplying the adjusted for a fiscal year. Federal per diem rate by the value- (13) SNF Value-Based Purchasing based incentive payment adjustment (VBP) Program means the program re- factor, after the adjusted Federal per quired under section 1888(h) of the So- diem rate has been reduced by the ap- cial Security Act. plicable percent.

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(iii) Calculation of the value-based in- the adjusted Federal per diem rate (as centive payment adjustment factor. The defined in paragraph (a)(2) of this sec- value-based incentive payment adjust- tion) that would apply to the SNF for ment factor is calculated by esti- the fiscal year without application of mating Medicare spending under the § 413.337(f). skilled nursing facility prospective (4)(i) A SNF may request and CMS payment system to estimate the total may grant exceptions to the SNF amount available for value-based in- Value-Based Purchasing Program’s re- centive payments, ordering SNFs by quirements under this section for one their SNF performance scores, then as- or more calendar months when there signing an adjustment factor value for are certain extraordinary cir- each performance score subject to the cumstances beyond the control of the limitations set by the exchange func- SNF. tion. (ii) A SNF may request an exception (iv) Reporting of adjustment to SNF payments. CMS will inform each SNF of within 90 days of the date that the ex- the value-based incentive payment ad- traordinary circumstances occurred by justment factor that will be applied to sending an email to its adjusted Federal per diem rate for [email protected] that in- services furnished during a fiscal year cludes a completed Extraordinary Cir- at least 60 days prior to the start of cumstances Request form (available on that fiscal year. the SNF VBP section of QualityNet at (d) Performance scoring under the SNF https://www.qualitynet.org/) and any VBP Program. (1) CMS will award available evidence of the impact of the points to SNFs based on their perform- extraordinary circumstances on the ance on the SNF readmission measure care that the SNF furnished to pa- applicable to a fiscal year during the tients, including, but not limited to, performance period applicable to that photographs, newspaper, and other fiscal year as follows: media articles. (i) CMS will award from 1 to 99 points (iii) Except as provided in paragraph for achievement to each SNF whose (d)(4)(iv) of this section, CMS will not performance meets or exceeds the consider an exception request unless achievement threshold but is less than the SNF requesting such exception has the benchmark. complied fully with the requirements (ii) CMS will award from 0 to 90 in this paragraph (d). points for improvement to each SNF (iv) CMS may grant exceptions to whose performance exceeds the im- SNFs without a request if it deter- provement threshold but is less than mines that an extraordinary cir- the benchmark. cumstance affects an entire region or (iii) CMS will award 100 points to a locale. SNF whose performance meets or ex- (v) CMS will calculate a SNF per- ceeds the benchmark. formance score for a fiscal year for a (iv) CMS will not award points for SNF for which it has granted an excep- improvement to a SNF that has fewer than 25 eligible stays during the base- tion request that does not include its line period. performance on the SNF readmission (2) The highest of the SNF’s achieve- measure during the calendar months ment, improvement and benchmark affected by the extraordinary cir- score will be the SNF’s performance cumstance. score for the fiscal year. (e) Confidential feedback reports and (3) If CMS determines that a SNF is public reporting. a low-volume SNF with respect to a fis- (1) Beginning October 1, 2016, CMS cal year, CMS will assign a perform- will provide quarterly confidential ance score to the SNF for the fiscal feedback reports to SNFs on their per- year that, when used to calculate the formance on the SNF readmission value-based incentive payment amount measure. SNFs will have the oppor- (as defined in paragraph (a)(14) of this tunity to review and submit correc- section), results in a value-based incen- tions for these data by March 31st fol- tive payment amount that is equal to lowing the date that CMS provides the

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reports, for reports issued prior to Oc- (ii) If CMS determines that a SNF is tober 1, 2019. Beginning with the per- a low-volume SNF with respect to a fis- formance period quality measure quar- cal year and assigns a performance terly report issued on or after October score to the SNF under paragraph (d)(3) 1, 2019 that contains the performance of this section, CMS will not publicly period measure rate and all of the un- report the SNF’s performance period derlying claim information used to cal- SNF readmission measure rate, culate the measure rate that applies achievement score or improvement for the fiscal year, SNFs will have 30 score for the fiscal year; and days following the date that CMS pro- (iii) If CMS determines that a SNF vides these reports to review and sub- has zero eligible cases during the permit corrections for the data contained formance period with respect to a fis- in these reports. Beginning with the cal year, CMS will not publicly report baseline period quality measure quar- any information for that SNF for that terly report issued on or after October fiscal year. (f) Limitations on review. There is no 1, 2020 that contains the baseline period administrative or judicial review of the measure rate and all of the underlying following: claim information used to calculate (1) The methodology used to deter- the measure rate that applies for the mine the value-based incentive pay- fiscal year, SNFs will have 30 days fol- ment percentage and the amount of the lowing the date that CMS provides value-based incentive payment under these reports to review and submit cor- section 1888(h)(5) of the Act. rections for the data contained in these (2) The determination of the amount reports. Any such correction requests of funding available for value-based in- must be accompanied by appropriate centive payments under section evidence showing the basis for the cor- 1888(h)(5)(C)(ii)(III) of the Act and the rection. payment reduction under section (2) Beginning not later than 60 days 1888(h)(6) of the Act. prior to each fiscal year, CMS will pro- (3) The establishment of the perform- vide SNF performance score reports to ance standards under section 1888(h)(3) SNFs on their performance under the of the Act and the performance period. SNF VBP Program for a fiscal year. (4) The methodology developed under SNFs will have the opportunity to re- section 1888(h)(4) of the Act that is view and submit corrections to their used to calculate SNF performance SNF performance scores and ranking scores and the calculation of such contained in these reports for 30 days scores. following the date that CMS provides (5) The ranking determinations under the reports. Any such correction re- section 1888(h)(4)(B) of the Act. quests must be accompanied by appro- [82 FR 36633, Aug. 4, 2017, as amended at 83 priate evidence showing the basis for FR 39289, Aug. 8, 2018; 85 FR 47633, Aug. 5, the correction. 2020] (3) CMS will publicly report the information described in paragraphs § 413.340 Transition period. (e)(1) and (2) of this section on the (a) Duration of transition period and Nursing Home Compare website or a proportions for the blended transition successor website. Beginning with in- rate. Beginning with an SNF’s first cost formation publicly reported on or after reporting period beginning on or after October 1, 2019, the following excep- July 1, 1998, there is a transition period tions apply: covering three cost reporting periods. (i) If CMS determines that a SNF has During this transition phase, SNFs re- fewer than 25 eligible stays during the ceive a payment rate comprising a baseline period for a fiscal year but has blend of the adjusted Federal rate and 25 or more eligible stays during the a facility-specific rate. For the first performance period for that fiscal year, cost reporting period beginning on or CMS will not publicly report the SNF’s after July 1, 1998, payment is based on baseline period SNF readmission meas- 75 percent of the facility-specific rate ure rate and improvement score for and 25 percent of the Federal rate. For that fiscal year; the subsequent cost reporting period,

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the rate is comprised of 50 percent of cost reporting period is equal to the fa- the facility-specific rate and 50 percent cility-specific rate for the first cost re- of the Federal rate. In the final cost reporting period (described in paragraph porting period of the transition, the (a) of this section) updated by the mar- rate is comprised of 25 percent of the ket basket index. facility-specific rate and 75 percent of (1) For a subsequent cost reporting the Federal rate. For all subsequent period beginning in fiscal years 1998 cost reporting periods, payment is and 1999, the facility-specific rate is based entirely on the Federal rate. equal to the facility-specific rate for (b) Calculation of facility-specific rate the previous cost reporting period up- for the first cost reporting period. The fa- dated by the applicable market basket cility-specific rate is computed based index percentage minus one percentage on the SNF’s Medicare allowable costs point. from its fiscal year 1995 cost report (2) For a subsequent cost reporting plus an estimate of the amounts pay- period beginning in fiscal year 2000, the able under Part B for covered SNF facility-specific rate is equal to the fa- services (other than those services de- cility-specific rate for the previous scribed in § 411.15(p)(2) of this chapter) cost reporting period updated by the furnished during fiscal year 1995 to in- applicable market basket index per- dividuals who were residents of SNFs centage. and receiving Part A covered services. (e) SNFs excluded from the transition Allowable costs associated with excep- period. SNFs that received their first tions, as described in § 413.30(f), are in- payment from Medicare, under present cluded in the calculation of the facil- or previous ownership, on or after Oc- ity-specific rate. Allowable costs asso- tober 1, 1995, are excluded from the ciated with exemptions, as described in transition period, and payment is made § 413.30(e)(2), are included in the cal- according to the Federal rates only. culation of the facility-specific rate but only to the extent that they do not § 413.343 Resident assessment data. exceed 150 percent of the routine cost (a) Submission of resident assessment limit. Low Medicare volume SNFs that data. SNFs are required to submit the were paid a prospectively determined resident assessment data described at rate under § 413.300 for their cost re- § 483.20 of this chapter in the manner porting period beginning in fiscal year necessary to administer the payment 1995 will utilize that rate as the basis rate methodology described in § 413.337. for the allowable costs of routine (oper- This provision includes the frequency, ating and capital-related) expenses in scope, and number of assessments re- determining the facility-specific rate. quired. Each SNF’s allowable costs are up- (b) Assessment schedule. In accordance dated to the first cost reporting period with the methodology described in to which the payment rates apply § 413.337(c) related to the adjustment of using annual factors equal to the SNF the Federal rates for case-mix, SNFs market basket percentage minus 1 per- must submit assessments according to centage point. an assessment schedule. This schedule (c) SNFs participating in the Multistate must include performance of an initial Nursing Home Case-Mix and Quality Medicare assessment with an assess- Demonstration. SNFs that participated ment reference date that is set for no in the Multistate Nursing Home Case- later than the 8th day of posthospital Mix and Quality Demonstration in a SNF care, and such other interim pay- cost reporting period that began in cal- ment assessments as the SNF deter- endar year 1997 will utilize their allow- mines are necessary to account for able costs from that cost reporting pe- changes in patient care needs. riod, including prospective payment (c) Noncompliance with assessment amounts determined under the dem- schedule. CMS pays a default rate for onstration payment methodology. the Federal rate when a SNF fails to (d) Update of facility-specific rates for comply with the assessment schedule subsequent cost reporting periods. The fa- in paragraph (b) of this section. The de- cility-specific rate for a cost reporting fault rate is paid for the days of a pa- period that is subsequent to the first tient’s care for which the SNF is not in

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compliance with the assessment sched- periodic interim payments (PIP) for ule. Part A SNF services under the PIP [63 FR 26309, May 12, 1998, as amended at 64 method subject to the provisions of FR 41682, July 30, 1999; 84 FR 38832, Aug. 7, § 413.64(h). To be approved for PIP, the 2019] SNF must meet the qualifying requirements in § 413.64(h)(3). Moreover, as § 413.345 Publication of Federal pro- provided in § 413.64(h)(5), contractor ap- spective payment rates. proval is conditioned upon the contrac- CMS publishes information per- tor’s best judgment as to whether pay- taining to each update of the Federal ment can be made under the PIP meth- payment rates in the FEDERAL REG- od without undue risk of its resulting ISTER. This information includes the in an overpayment to the provider. standardized Federal rates, the resi- (2) Frequency of payment. The con- dent classification system that pro- tractor estimates an SNF’s prospective vides the basis for case-mix adjust- payments net of estimated beneficiary ment, and the factors to be applied in coinsurance and makes biweekly pay- making the area wage adjustment. ments equal to 1⁄26 of the total esti- This information is published before mated amount of payment for the year. May 1 for the fiscal year 1998 and be- If an SNF has payment experience fore August 1 for the fiscal years 1999 under the prospective payment system, and after. the contractor estimates PIP based on [82 FR 36634, Aug. 4, 2017] that payment experience, adjusted for projected changes supported by sub- § 413.348 Limitation on review. stantiated information for the current Judicial or administrative review year. Each payment is made 2 weeks under sections 1869 or 1878 of the Act or after the end of a biweekly period of otherwise is prohibited with regard to service as described in § 413.64(h)(6). The the establishment of the Federal rates. interim payments are reviewed at least This prohibition includes the method- twice during the reporting period and ology used in the computation of the adjusted if necessary. Fewer reviews Federal standardized payment rates, may be necessary if an SNF receives the case-mix methodology, and the de- interim payments for less than a full velopment and application of the wage reporting period. These payments are index. This prohibition on judicial and subject to final settlement. administrative review also extends to (3) Termination of PIP—(i) Request by the methodology used to establish the the SNF. An SNF receiving PIP may facility-specific rates but not to deter- convert to receiving prospective pay- minations related to reasonable cost in ments on a non-PIP basis at any time. the fiscal year 1995 cost reporting pe- (ii) Removal by the contractor. An con- riod used as the basis for these rates. tractor terminates PIP if the SNF no longer meets the requirements of § 413.350 Periodic interim payments for skilled nursing facilities receiv- § 413.64(h). ing payment under the skilled nurs- (c) Interim payments for Medicare bad ing facility prospective payment debts and for Part A costs not paid under system for Part A services. the prospective payment system. For (a) General rule. Subject to the excep- Medicare bad debts and for costs of an tions in paragraphs (b) and (c) of this approved education program and other section, SNFs receiving payment under costs paid outside the prospective pay- the PPS for Part A services do not re- ment system, the contractor deter- ceive interim payments during the cost mines the interim payments by esti- reporting year, and receive payment mating the reimbursable amount for only following submission of a bill. the year based on the previous year’s Paragraph (d) of this section provides experience, adjusted for projected for accelerated payments in certain changes supported by substantiated in- circumstances. formation for the current year, and (b) Periodic interim payments. (1) An makes biweekly payments equal to 1⁄26 SNF receiving payment under the proof the total estimated amount. Each spective payment system may receive payment is made 2 weeks after the end

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of a biweekly period of service as de- no later than the first day of the cal- scribed in § 413.64(h)(6). The interim endar quarter subsequent to 30 days payments are reviewed at least twice after the date on its CMS Certification during the reporting period and ad- Number (CCN) notification letter, justed if necessary. Fewer reviews may which designates the SNF as operating be necessary if an SNF receives interim in the CMS designated data submission payments for less than a full reporting system. For purposes of this section, a period. These payments are subject to program year is the fiscal year in final cost settlement. which the market basket percentage (d) Accelerated payments—(1) General described in § 413.337(d) is reduced by rule. Upon request, an accelerated pay- two percentage points if the SNF does ment may be made to an SNF that is not report data in accordance with receiving payment under the prospec- paragraph (b) of this section. tive payment system and is not receiv- (b) Data submission requirement. (1) ing PIP under paragraph (b) of this sec- Except as provided in paragraph (c) of tion if the SNF is experiencing finan- this section, and for a program year, cial difficulties because of the fol- SNFs must submit to CMS data on lowing: measures specified under sections (i) There is a delay by the contractor 1899B(c)(1) and 1899B(d)(1) of the Social in making payment to the SNF. Security Act and standardized resident (ii) Due to an exceptional situation, assessment data in accordance with there is a temporary delay in the section 1899B(b)(1) of the Social Secu- SNF’s preparation and submittal of rity Act, in the form and manner, and bills to the contractor beyond its nor- at a time, specified by CMS. mal billing cycle. (2) CMS will consider a SNF to have (2) Approval of payment. An SNF’s re- complied with paragraph (b)(1) of this quest for an accelerated payment must section for a program year if the SNF be approved by the contractor and reports: 100 percent of the required CMS. data elements on at least 80 percent of (3) Amount of payment. The amount of the MDS assessments submitted for the accelerated payment is computed that program year. as a percentage of the net payment for (3) CMS may remove a quality meas- unbilled or unpaid covered services. ure from the SNF QRP based on one or (4) Recovery of payment. Recovery of more of the following factors: the accelerated payment is made by (i) Measure performance among SNFs recoupment as SNF bills are processed is so high and unvarying that meaning- or by direct payment by the SNF. ful distinctions in improvements in [64 FR 41682, July 30, 1999] performance can no longer be made. (ii) Performance or improvement on § 413.355 Additional payment: QIO re- a measure does not result in better imbursement for cost of sending resident outcomes. records electronically or by photo- (iii) A measure does not align with copy and mailing. current clinical guidelines or practice. An additional payment is made to a (iv) The availability of a more broad- skilled nursing facility in accordance ly applicable (across settings, popu- with § 476.78 of this chapter for the lations, or conditions) measure for the costs of sending requested patient particular topic. records to the QIO in electronic for- (v) The availability of a measure that mat, by facsimile, or by photocopying is more proximal in time to desired and mailing. resident outcomes for the particular [85 FR 59025, Sept. 18, 2020] topic. (vi) The availability of a measure § 413.360 Requirements under the that is more strongly associated with Skilled Nursing Facility (SNF) desired resident outcomes for the par- Quality Reporting Program (QRP). ticular topic. (a) Participation start date. Beginning (vii) Collection or public reporting of with the FY 2018 program year, a SNF a measure leads to negative unintended must begin reporting data in accord- consequences other than resident ance with paragraph (b) of this section harm.

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(viii) The costs associated with a tion for a program year will receive a measure outweigh the benefit of its notification of non-compliance sent continued use in the program. through at least one of the following (c) Exception and extension requests. (1) methods: The CMS designated data A SNF may request and CMS may submission system, the United States grant exceptions or extensions to the Postal Service, or via an email from reporting requirements under para- the Medicare Administrative Con- graph (b) of this section for one or tractor (MAC). A SNF may request re- more quarters, when there are certain consideration no later than 30 calendar extraordinary circumstances beyond days after the date identified on the the control of the SNF. letter of non-compliance. (2) A SNF may request an exception (2) Reconsideration requests must be or extension within 90 days of the date submitted to CMS by sending an email that the extraordinary circumstances to occurred by sending an email to [email protected] [email protected] containing all of the following infor- that contains all of the following information: mation: (i) SNF CCN. (i) SNF CMS Certification Number (ii) SNF Business Name. (CCN). (iii) SNF Business Address. (ii) SNF Business Name. (iv) CEO or CEO-designated personnel (iii) SNF Business Address. contact information including name, (iv) CEO or CEO-designated personnel telephone number, title, email address, contact information including name, and mailing address. (The address must telephone number, title, email address, be a physical address, not a post office and mailing address. (The address must box.) be a physical address, not a post office (v) CMS identified reason(s) for non- box.) compliance stated in the non-compli- (v) SNF’s reason for requesting the ance letter. exception or extension. (vi) Reason(s) for requesting recon- (vi) Evidence of the impact of ex- sideration, including all supporting traordinary circumstances, including, documentation. (3) CMS will not consider a reconsid- but not limited to, photographs, news- eration request unless the SNF has paper, and other media articles. complied fully with the requirements (vii) Date when the SNF believes it in paragraph (d)(2) of this section. will be able to again submit SNF QRP (4) CMS will notify SNFs, in writing, data and a justification for the proof its final decision regarding any re- posed date. consideration request through at least (3) Except as provided in paragraph one of the following methods: CMS des- (c)(4) of this section, CMS will not con- ignated data submission system, the sider an exception or extension request United States Postal Service, or via unless the SNF requesting such excep- email from the CMS Medicare Adminis- tion or extension has complied fully trative Contractor (MAC). with the requirements in this para- (e) Appeals. A SNF that is dissatisfied graph (c). with CMS’ decision on a request for re- (4) CMS may grant exceptions or ex- consideration may file an appeal with tensions to SNFs without a request if the Provider Reimbursement Review it determines that one or more of the Board (PRRB) under 42 CFR part 405, following has occurred: subpart R. (i) An extraordinary circumstance affects an entire region or locale. [82 FR 36634, Aug. 4, 2017, as amended at 83 (ii) A systemic problem with one of FR 39290, Aug. 8, 2018; 84 FR 38832, Aug. 7, CMS’s data collection systems directly 2019] affected the ability of a SNF to submit data in accordance with paragraph (b) Subpart K—Payment for Acute of this section. Kidney Injury (AKI) Dialysis (d) Reconsideration. (1) SNFs that do not meet the re- SOURCE: 81 FR 77965, Nov. 4, 2016, unless quirements in paragraph (b) of this sec- otherwise noted.

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§ 413.370 Scope. § 413.374 Renal dialysis services in- This subpart implements section cluded in the AKI dialysis payment 1834(r) of the Act by setting forth the rate principles and authorities under which (a) The AKI dialysis payment rate CMS is authorized to establish a pay- applies to renal dialysis services (as de- ment amount for renal dialysis services fined in subparagraph (B) of section furnished to beneficiaries with an 1881(b)(14) of the Act) furnished under acute kidney injury in or under the su- Part B by a renal dialysis facility or pervision of an ESRD facility that provider of services paid under section meets the conditions of coverage in 1881(b)(14) of the Act. part 494 of this chapter and as defined (b) Other items and services fur- in § 413.171. nished to beneficiaries with AKI that § 413.371 Definition. are not considered to be renal dialysis services as defined in § 413.171, but that For purposes of the subpart, the following definition applies: are related to their dialysis treatment Individual with acute kidney injury. as a result of their AKI, would be sepa- The term individual with acute kidney rately payable, that is, drugs, injury means an individual who has biologicals, laboratory services, and acute loss of renal function and does supplies that ESRD facilities are cer- not receive renal dialysis services for tified to furnish and that would other- which payment is made under section wise be furnished to a beneficiary with 1881(b)(14) of the Act. AKI in a hospital outpatient setting.

§ 413.372 AKI dialysis payment rate. § 413.375 Notification of changes in The amount of payment for AKI di- rate-setting methodologies and pay- alysis services shall be the base rate ment rates. for renal dialysis services determined (a) Changes to the methodology for for such year under section 1881(b)(14), payment for renal dialysis services fur- that is, the ESRD base rate as set forth nished to beneficiaries with AKI as in § 413.220, updated by the ESRD bun- well as any adjustments to the AKI dled market basket percentage in- payment rate other than wage index crease factor minus a productivity ad- will be adopted through notice and justment as set forth in § 413.196(d)(1), comment rulemaking. adjusted for wages as set forth in (b) Annual updates in the AKI dialy- § 413.231, and adjusted by any other sis payment rate as described in amounts deemed appropriate by the Secretary under § 413.373. § 413.372 that do not include those changes described in paragraph (a) of § 413.373 Other adjustments to the AKI this section are announced by notice dialysis payment rate published in the FEDERAL REGISTER The payment rate for AKI dialysis without opportunity for public com- may be adjusted by the Secretary (on a ment. budget neutral basis for payments (c) Effective for cost reporting peri- under section 1834(r)) by any other ad- ods beginning on or after January 1, justment factor under subparagraph 2017, on an annual basis CMS updates (D) of section 1881(b)(14) of the Act. the AKI dialysis payment rate.

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