[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR413.5]

[Page 658-660]
 
                         TITLE 42--PUBLIC HEALTH
 
                             HUMAN SERVICES
 
 PART 413_PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
 END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT 
 
                Subpart A_Introduction and General Rules
 
Sec.  413.5  Cost reimbursement: General.

    (a) In formulating methods for making fair and equitable 
reimbursement for services rendered beneficiaries of the program, 
payment is to be made on the basis of current costs of the individual 
provider, rather than costs of a past period or a fixed negotiated rate. 
All necessary and proper expenses of an institution in the production of 
services, including normal standby costs, are recognized. Furthermore, 
the share

[[Page 659]]

of the total institutional cost that is borne by the program is related 
to the care furnished beneficiaries so that no part of their cost would 
need to be borne by other patients. Conversely, costs attributable to 
other patients of the institution are not to be borne by the program. 
Thus, the application of this approach, with appropriate accounting 
support, will result in meeting actual costs of services to 
beneficiaries as such costs vary from institution to institution. 
However, payments to providers of services for services furnished 
Medicare beneficiaries are subject to the provisions of Sec.  Sec.  
413.13 and 413.30.
    (b) Putting these several points together, certain tests have been 
evolved for the principles of reimbursement and certain goals have been 
established that they should be designed to accomplish. In general 
terms, these are the tests or objectives:
    (1) That the methods of reimbursement should result in current 
payment so that institutions will not be disadvantaged, as they 
sometimes are under other arrangements, by having to put up money for 
the purchase of goods and services well before they receive 
reimbursement.
    (2) That, in addition to current payment, there should be 
retroactive adjustment so that increases in costs are taken fully into 
account as they actually occurred, not just prospectively.
    (3) That there be a division of the allowable costs between the 
beneficiaries of this program and the other patients of the provider 
that takes account of the actual use of services by the beneficiaries of 
this program and that is fair to each provider individually.
    (4) That there be sufficient flexibility in the methods of 
reimbursement to be used, particularly at the beginning of the program, 
to take account of the great differences in the present state of 
development of recordkeeping.
    (5) That the principles should result in the equitable treatment of 
both nonprofit organizations and profit-making organizations.
    (6) That there should be a recognition of the need of hospitals and 
other providers to keep pace with growing needs and to make 
improvements.
    (c) As formulated herein, the principles given recognition to such 
factors as depreciation, interest, bad debts, educational costs, 
compensation of owners, and an allowance for a reasonable return on 
equity capital (in the case of certain proprietary providers). With 
respect to allowable costs some items of inclusion and exclusion are:
    (1) An appropriate part of the net cost of approved educational 
activities will be included.
    (2) Costs incurred for research purposes, over and above usual 
patient care, will not be included.
    (3) [Reserved]
    (4) The value of services provided by nonpaid workers, as members of 
an organization (including services of members of religious orders) 
having an agreement with the provider to furnish such services, is 
includable in the amount that would be paid others for similar work.
    (5) Discounts and allowances received on the purchase of goods or 
services are reductions of the cost to which they relate.
    (6) Bad debts growing out of the failure of a beneficiary to pay the 
deductible, or the coinsurance, will be reimbursed (after bona fide 
efforts at collection).
    (7) Charity and courtesy allowances are not includable, although 
``fringe benefit'' allowances for employees under a formal plan will be 
includable as part of their compensation.
    (8) A reasonable allowance of compensation for the services of 
owners in profitmaking organizations will be allowed providing their 
services are actually performed in a necessary function.
    (9) Reasonable cost of physicians' direct medical and surgical 
services (including supervision of interns and residents in the care of 
individual patients) furnished in a teaching hospital may be reimbursed 
as a provider cost (as described in Sec.  415.162 of this chapter) if 
elected as provided for in Sec.  415.160 of this chapter.
    (d) In developing these principles of reimbursement for the Medicare 
program, all of the considerations inherent in allowances for 
depreciation were studied. The principles, as presented, provide options 
to meet varied situations. Depreciation will essentially be

[[Page 660]]

on an historical cost basis but since many institutions do not have 
adequate records of old assets, the principles provide an optional 
allowance in lieu of such depreciation for assets acquired before 1966. 
For assets acquired after 1965, the historical cost basis must be used. 
All assets actually in use for production of services for Medicare 
beneficiaries will be recognized even though they may have been fully or 
partially depreciated for other purposes. Assets financed with public 
funds may be depreciated. Although funding of depreciation is not 
required, there is an incentive for it since income from funded 
depreciation is not considered as an offset which must be taken to 
reduce the interest expense that is allowable as a program cost.
    (e) A return on the equity capital of proprietary facilities, as 
described in Sec.  413.157, is an allowance in addition to the 
reasonable cost of covered services furnished to beneficiaries.
    (f) Renal dialysis items and services furnished under the ESRD 
provision are reimbursed and reported under Sec.  Sec.  413.170 and 
413.174 respectively. For special rules concerning health maintenance 
organizations (HMOs), and providers of services and other health care 
facilities that are owned or operated by an HMO, or related to an HMO by 
common ownership or control, see Sec.  Sec.  417.242(b)(14) and 
417.250(c) of this chapter.

[51 FR 34793, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986, as amended at 
52 FR 21225, June 4, 1987; 52 FR 23398, June 19, 1987; 57 FR 39829, 
Sept. 1, 1992; 60 FR 63189, Dec. 8, 1995; 61 FR 63748, Dec. 2, 1996]