[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR413.9]

[Page 536-537]
 
                         TITLE 42--PUBLIC HEALTH
 
                    CHAPTER IV--CENTERS FOR MEDICARE
                          & MEDICAID SERVICES,
                        DEPARTMENT OF HEALTH AND
                             HUMAN SERVICES
 
 PART 413_PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
 
                Subpart A_Introduction and General Rules
 
Sec. 413.9  Cost related to patient care.

    (a) Principle. All payments to providers of services must be based 
on the reasonable cost of services covered under Medicare and related to 
the care of beneficiaries. Reasonable cost includes all necessary and 
proper costs incurred in furnishing the services, subject to principles 
relating to specific items of revenue and cost. However, for cost 
reporting periods beginning after December 31, 1973, payments to 
providers of services are based on the lesser of the reasonable cost of 
services covered under Medicare and furnished to program beneficiaries 
or the customary charges to the general public for such services, as 
provided for in Sec. 413.13.
    (b) Definitions--(1) Reasonable cost. Reasonable cost of any 
services must be determined in accordance with regulations establishing 
the method or methods to be used, and the items to be included. The 
regulations in this part take into account both direct and indirect 
costs of providers of services. The objective is that under the methods 
of determining costs, the costs with respect to individuals covered by 
the program will not be borne by individuals not so covered, and the 
costs with respect to individuals not so covered will not be borne by 
the program. These regulations also provide for the making of suitable 
retroactive adjustments after the provider has submitted fiscal and 
statistical reports. The retroactive adjustment will represent the 
difference between the amount received by the provider during the year 
for covered services from both Medicare and the beneficiaries and the 
amount determined in accordance with an accepted method of cost 
apportionment to be the actual cost of services furnished to 
beneficiaries during the year.
    (2) Necessary and proper costs. Necessary and proper costs are costs 
that are appropriate and helpful in developing and maintaining the 
operation of patient care facilities and activities. They are usually 
costs that are common and accepted occurrences in the field of the 
provider's activity.
    (c) Application. (1) It is the intent of Medicare that payments to 
providers of services should be fair to the providers, to the 
contributors to the Medicare trust funds, and to other patients.
    (2) The costs of providers' services vary from one provider to 
another and the variations generally reflect differences in scope of 
services and intensity of care. The provision in Medicare for payment of 
reasonable cost of services is intended to meet the actual costs, 
however widely they may vary from one institution to another. This is 
subject to a limitation if a particular institution's costs are found to 
be substantially out of line with other institutions in the same area 
that are similar in size, scope of services, utilization, and other 
relevant factors.
    (3) The determination of reasonable cost of services must be based 
on cost related to the care of Medicare beneficiaries. Reasonable cost 
includes all necessary and proper expenses incurred in furnishing 
services, such as administrative costs, maintenance costs, and premium 
payments for employee health and pension plans. It includes both direct 
and indirect costs and normal standby costs. However, if the provider's 
operating costs include amounts not related to patient care, 
specifically not reimbursable under the program, or flowing from the 
provision of luxury items or services (that is, those items or services 
substantially in excess of or more expensive than those

[[Page 537]]

generally considered necessary for the provision of needed health 
services), such amounts will not be allowable. The reasonable cost basis 
of reimbursement contemplates that the providers of services would be 
reimbursed the actual costs of providing quality care however widely the 
actual costs may vary from provider to provider and from time to time 
for the same provider.

[51 FR 34795, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986]