Medicare Financial Management Manual 
Chapter 8  Contractor Procedures for Provider Audits 
 
 
Table of Contents 
(Rev. 153, 06-12-09) 
 
Transmittals for Chapter 8 
 
Introduction 
10  Receipt and Acceptance of Cost Reports 
10.1  Contractors Responsibility Prior to Submission of Cost Reports 
10.2  Contractors Responsibility If the Provider Fails to File a Cost Report Timely or 
the Cost Report is Rejected 
10.3  Acceptance of Medicare Cost Report 
10.4  Submission of Cost Report Data to CMS 
10.5  Initial/Tentative Retroactive Adjustments (a.k.a. Tentative Settlements) 
10.6  Autoload Program in STAR, System Tracking for Audit and 
Reimbursement 
20  Desk Reviews 
  20.1  Definition 
  20.2  Components of the Uniform Desk Review (UDR) 
  20.3  Desk Review Exceptions Resolution Process 
  20.4  Wage Index Review 
30  Field and In-House Audits 
  30.1  Definition of Field and In-House Audits 
  30.2  Purpose of Field and In-House Audits 
40  Field Audit Planning and Management (Global Scoping) Field and In-House Audits 
  40.1  Cost Reports and Auditing Multiple Provider Institution 
  40.2  Audit Priority Considerations 
50  Scoping/Planning of Individual Field and In-House Audits 
  50.1  Establishing the Objective/Scope of the Field and In-House Audit 
  50.2  Tailoring of the Audit Program 
60  Field and In-House Audit Process 
  60.1  Audit Confirmation Letter (a.k.a. Engagement Letter) 
60.1.1-Audit Confirmation Letter for Field Audit 
60.1.2-Audit Confirmation Letter for In-House Audit 
  60.2  Entrance Conference 
60.2.1-Entrance Conference for Field Audit 
60.2.2-Entrance Conference for In-House Audit 
  60.3  Tests of Internal Control  
  60.4  Reliance on Work Done by Other Auditors 
  60.5  Coordination of Activities During Field and In-House Audits 
  60.6  Designing Tests/Sampling  
  60.7  Evidence     60.8  Working Papers 
  60.9  Documentation Standards 
  60.10  Pre-Exit Conference 
  60.11  Finalization of Audit Adjustments 
  60.12  Exit Conference 
   60.13  Supervision During the Audit Process 
70 Reporting Standards 
  70.1  Content and Structure of the Medicare Cost Report Audit Report  
  70.2  Form of Report if Medicare Cost Report Was Not Audited 
  70.3  Reporting of Indication of Illegal Acts 
  70.4  Audit Adjustment Report 
  70.5  Medicare Cost Report and All Related Documents 
80  Standards for Performing Medicare Audits 
  80.1  Qualifications 
  80.2  Independence 
  80.3  Due Professional Care 
  80.4  Internal Quality Control 
90  Final Settlement of the Cost Report 
  90.1  Submission of Settled Cost Report Data to CMS 
100  Cost Report Reopenings 
110  Audit Responsibility When Provider Changes Contractors  
120  Audits of Home Offices 
120.1  Audit Responsibility for Home Office Costs of Chain Organizations   
120.2  Responsible/Designated Contractors Responsibility if the Home Office 
Fails to File a Cost Statement 
  120.3  Planning/Scoping the Home Office Audit 
  120.4  Timing and Completion of Home Office Audits 
120.5  Distribution of the Audited Home Office Cost Statement and Results of 
the Audit  
120.6  Standards for Issuance of an Audit Report for a Home Office 
  120.7  Audit Responsibility When Responsible/Designated Contractor Changes 
120.8  Acceptance of Home Office Cost Statements 
130  Provider Permanent File 
140  Fraud & Abuse 
  140.1  Definitions 
  140.2  Contractor Responsibility in Suspected Fraud or Abuse Cases 
150  Access to Books, Documents, and Records of Providers Subcontractors 
  150.1  General 
  150.2  Definitions 
  150.3  Types of Contracts Covered by Access Provisions 
  150.4  Monetary Criteria 
  150.5  Access Clause not in Contract 
  150.6  Reasons for Seeking Access 
  150.7  Access Request Procedures 
  150.8  Subcontractor Response Requirements 
  150.9  Refusal of Subcontractor to Furnish Access    150.10  Freedom of Information Act (FOIA) Requests 
160  Audit Subcontracts 
  160.1  Routing of Audit Subcontracts 
  160.2  Required Documentation 
  160.3  Competition 
170  Exhibits 
  Exhibit I  Summary of Uniform Desk Review Issues 
  Exhibit II a  Audit Confirmation Letter  Field Audit 
Exhibit II b  Audit Confirmation Letter  In-House Audit 
  Exhibit III  Entrance Conference Agenda 
  Exhibit IV  Internal Control Questionnaire 
  Exhibit V  Pre-Exit Conference Format 
  Exhibit VI  Audit Adjustment Report 
  Exhibit VII   Form of Report on Audit of Medicare Cost Report 
Exhibit VIII  Form of Report for Medicare Cost Report That Has not Been 
Audited 
Exhibit IX   Personal Impairments Statement 
Exhibit X - Model Audit Subcontract Form 
Exhibit XI - addendum to Subcontract   
Introduction 
(Rev. 27, 12-19-03) 
 
This chapter explains the procedures to be applied/implemented by contractors to ensure 
that acceptable cost reports are submitted by providers in a timely manner, that they are 
appropriately reviewed, and are properly settled. 
 
10  Receipt and Acceptance of Cost Reports 
(Rev. 27, 12-19-03) 
 
10.1  Contractors Responsibility Prior to Submission of Cost Reports 
(Rev. 153, Issued: 06-12-09, Effective: 07-13-09, Implementation: 07-13-09) 
For cost reports ending prior to January 31, 2009 
 
In accordance with the Provider Reimbursement Manual, Part II (PRM-II),  104, 
providers that continue to participate in the Program and are required to submit a cost 
report must do so within 5 months of their cost reporting fiscal year end or 30 days after 
receipt of valid Provider Statistical and Reimbursement (PS&R) reports from the 
contractor, whichever date is later. Exceptions to this due date for no Medicare 
utilization cost reports are addressed in PRM-II, 110.A. 
 
If the provider fails to file the cost report by the last day of the fourth month following 
the close of its cost reporting period, the contractor is required to send a reminder letter to 
the provider to help ensure that the cost report will be filed timely. (This letter may be 
sent sooner if the contractor wishes to send it at the time it sends the PS&R summary 
reports.) The reminder letter informs the provider of the due date for filing the cost report 
and the penalty for not filing the cost report timely. Furthermore, the reminder letter 
should include a statement that if the cost report cannot be submitted by the due date, the 
provider may request a reduced payment suspension rate of 50 percent during a grace 
period of 60 days. The reminder letter should specify that this request should be 
submitted before the due date of the cost report. Also, either in the reminder letter or the 
letter transmitting the PS&R summary report, the contractor shall notify each provider 
that all submitted cost reports are subject to a desk review and/or an audit. 
 
If the contractor receives a request for a reduction in the rate of suspension either because 
the cost report will not be filed timely or because the submitted cost report was rejected 
and believes that the request should be approved, the contractor should recommend to the 
Regional Office (RO) that the providers suspension rate be reduced to 50 percent (or a 
different rate if appropriate because of unique circumstances) for a 60-day grace period. 
The contractor should maintain a copy of the ROs approval/disapproval of this request in 
the providers file. 
 
PRM-II, 104.A.3 and 104.B.2 specify that the provider must receive the PS&R report 
on or before the 120th day following the close of a providers cost reporting period. 
Therefore, the contractor is required to furnish each provider with a copy of the year- to-date summary PS&R reports by the 120th day after the end of the providers cost 
reporting period. These PS&R reports (by type) should split the summary data into 
appropriate portions of the providers cost reporting period as dictated by the Medicare 
reimbursement policies (e.g., federal payments need to be split as specified in PRM-II, 
3 630 in order to calculate the indirect medical education and disproportionate share 
hospital payments). A split may also be necessary because of the providers unique 
situation. Having the split PS&R reports will enable the provider to file the cost report 
accurately. (See Chapter 9 of this manual for detailed description of the PS&R reports.) 
 
If a provider requests detailed PS&R data (e.g., payment reconciliation report) to 
reconcile their records with your records, furnish an annual detailed PS&R reports at no 
cost to the provider. If a provider requests interim (other than annual) detailed PS&R 
report data, provide the detailed data at intervals requested by the provider as long as they 
are reasonable. You may charge the provider a fee for this extra service. The fee should 
be reasonably related to costs you incur for the added service and be commensurate with 
your charge to all other providers for similar data. 
 
Furnish the PS&R reports on electronic media, when cost effective, or on paper. The 
provider is expected to make reasonable efforts to process electronic media. 
 
For cost reports ending on or after January 31, 2009 
In accordance with the Provider Reimbursement Manual, Part II (PRM-II),  104, 
providers that continue to participate in the Program and are required to submit a cost 
report must do so within 5 months of their cost reporting fiscal year end. Exceptions to 
this due date for no Medicare utilization cost reports are addressed in PRM-II, 
110.A. 
 
The Redesigned PS&R system (PS&R Redesign) shall be utilized for all cost reports 
with fiscal years ending January 31, 2009 and later.  The PS&R Redesign allows 
providers to obtain their own PS&R reports needed to file the cost report.  The 
contractor is not required to send the provider their PS&R reports, unless the provider 
cannot access the system, and informs the contractor of the issue. 
 
If the provider has not already filed its cost report by the last day of the third month 
following the close of its cost reporting period, the contractor is required to send a 
reminder letter to the provider to help ensure that the cost report will be filed timely. The 
reminder letter shall: 
 
  Inform the provider of the due date for filing the cost report and the penalty for 
not filing the cost report timely, 
 
  Include a statement that if the cost report cannot be submitted by the due date, the 
provider may request a reduced payment suspension rate of 50 percent during a 
grace period of 60 days, 
 
  Specify that this request should be submitted before the due date of the cost  report, 
 
  Include a reminder to the provider that they must obtain their own PS&R reports 
needed to file to the cost report, and if they are unable to obtain their reports, 
they should contact their contractor immediately or run the risk of payment 
suspension for lack of timely filing, and 
 
  Notify each provider that all submitted cost reports are subject to a desk review 
and/or an audit. 
 
If the contractor receives a request for a reduction in the rate of suspension either 
because the cost report will not be filed timely or because the submitted cost report was 
rejected and believes that the request should be approved, the contractor should 
recommend to the Regional Office (RO) that the providers suspension rate be reduced to 
50 percent (or a different rate if appropriate because of unique circumstances) for a 60-
day grace period. The contractor should maintain a copy of the ROs 
approval/disapproval of this request in the providers file. 
 
If the provider is unable to obtain access to the PS&R system, or cannot obtain their 
PS&R reports, and they contact their contractor for assistance, the contractor shall 
instruct the provider how to obtain their reports.  The contractor may assist the 
provider by supplying them with the needed reports. Note that failure by the provider to 
contact the contractor in a timely manner does not warrant an automatic extension of 
the cost report due dates and could result in the providers inability to file the cost 
report timely and thus be subjected to payment suspension. 
 
The year-to-date summary PS&R reports needed by the provider (by type) should split 
the summary data into appropriate portions of the providers cost reporting period as 
dictated by the Medicare reimbursement policies (e.g., federal payments need to be split 
as specified in PRM-II, 3630 in order to calculate the indirect medical education and 
disproportionate share hospital payments). A split may also be necessary because of the 
providers unique situation. Having the split PS&R reports will enable the provider to 
file the cost report accurately. PS&R Users may enter any date range in the PS&R 
system to accommodate these splits.  (See Chapter 9 of this manual for detailed 
description of the PS&R reports.) 
 
The provider may also request detailed PS&R data (e.g. payment reconciliation report) 
to reconcile their records.  The request is input by the provider using the PS&R 
Redesign, but due to the sensitive data contained within these reports, the contractor 
must approve the request, and send the reports to the provider via secure media (i.e. 
password protected CD).  The contractor shall furnish a requested detailed PS&R report 
annually at no cost to the provider.  If a provider requests interim (other than annual) 
detailed PS&R report data, provide the detailed data at intervals requested by the provider 
as long as they are reasonable. You may charge the provider a fee for this extra service. 
The fee should be reasonably related to costs you incur for the added service and be 
commensurate with your charge to all other providers for similar data.   
10.2  Contractors Responsibility If the Provider Fails to File a Cost 
Report Timely or the Cost Report is Rejected 
(Rev. 27, 12-19-03) 
 
If the provider fails to submit a cost report timely (see PRM-II, 104.A.4 and Chapter 3, 
30.1.A of this manual,) or if the cost report is rejected because it is not acceptable, the 
contractor should suspend payments in accordance with 42 CFR 405.371. (See PRM-II, 
130.4 for explanation of a grace period for suspension of payments applicable to cost 
reports that were filed early but were subsequently rejected.) Terminated providers 
should immediately have 100 percent of their payments suspended for failure to file a 
cost report in a timely manner. If other than a terminated provider submitted a request for 
reduction in the rate of suspension (see 10.1 of this chapter) and it was approved, the 
contractor should suspend 50 percent (or a percentage approved by the RO) of the 
providers payment for the first 60 days that the cost report is late.  If an acceptable cost 
report has not been filed on the 61st day after the due date, the contractor should change 
the rate of suspension to 100 percent.  If the provider did not request a reduction in the 
rate of suspension, or the contractor did not concur with the request for a reduced 
suspension rate, then 100 percent of the providers payments should be suspended if an 
acceptable cost report is not filed by the due date. 
 
If system limitations preclude you from suspending payments based on a reduced 
percentage rate, base the suspension on the dollar amount that results from applying the 
applicable percentage rate to the average payment for the six (6) months prior to the 
suspension. 
 
Prepare a demand letter(s) for all previous payments in accordance with Chapter 4, 10 
and 20 of this manual.  Payment due dates and interest assessments are still based on the 
due date of the cost report. 
 
10.3  Acceptance of Medicare Cost Report 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The contractor is required to make a determination of acceptability within 30 days of 
receipt of the providers cost report.  (See 42 CFR 413.24(f)(5)(iii)).  The Uniform Desk 
Review (UDR) program (see 20.2.A of this chapter) contains Part I Acceptability 
Checklist that can be used to make that determination.  Failure to supply all the following 
items (enumerated in PRM-II, Section 140) will cause the cost report to be rejected. 
 
For all providers filing electronic cost reports (ECRs): 
 
1.  A diskette (or other media as permitted in PRM-II, 130.2) of the ECR utilizing CMS-
approved vendor with the current specification date submitted.  (See PRM-II, 140 
regarding bad or damaged cost report diskette.) 
 
2.  An ECR that passes all Level 1 edits.   
3.  A submitted print image file of the cost report except when using CMS free software. 
 
4.  The certification page (Worksheet S) of the ECR file with the original signature (not a 
facsimile or stamped copy of the signature) of an officer (administrator or chief 
financial officer). 
 
5.  An exact match of the encryption code, date and time for the ECR displayed on the 
certification page to that of the ECR file encryption code, date and time. 
 
6.  An exact match of the encryption code, date and time for the print image displayed on 
the certification page to that of the print image file encryption code, date and time 
except when using CMS free software. 
 
7.  For teaching hospitals, a complete Intern and Resident Information System (IRIS) 
diskette that will pass all IRIS system edits. 
 
8.  The settlement summary on the electronic certification page agrees with the settlement 
summary on the Medicare cost report produced from the electronic file. (Prior to 
rejection confirm that the settlement summary difference is not caused by the 
contractor-automated data reporting (ADR) vendor system.) 
 
9.  A completed Form CMS-339 with an original signature of an officer or administrator. 
 
For all other providers: 
 
1.  A completed and legible cost report on the proper forms that is mathematically 
correct. 
 
2.  A general information and certification page which includes the original signature of 
an officer (administrator or chief financial officer). 
 
3.  A completed Form CMS-339 with an original signature of an officer or administrator. 
 
In addition to the items enumerated above, providers are requested to submit other 
documentation that may be required to complete a desk review.  However, failure to 
supply any or all of those items is not a basis for rejection of the cost report.  Contractors 
previously verified the seven items listed below (also detailed in PRM-II, Section 140) 
were submitted by completing Part II of the Acceptability Checklist.  Completion of Part 
II of the Acceptability Checklist is optional from the date of this change memorandum 
until October 2, 2006.  Effective October 2, 2006, contractors shall no longer complete 
Part II of the Acceptability Checklist. 
 
1.  Correctly updated graduate medical education (GME) per resident amounts, where 
applicable. 
  2. All applicable documentation required in instructions to Form CMS-2552-96 
(hospitals). 
 
3.  All documentation per Form CMS-339 required for the providers type. 
 
4.  Documentation supporting exceptions to level 2 ECR and healthcare cost report 
information system (HCRIS) edits. 
 
5.  A copy of the working trial balance for nonhospital providers (this is covered in Item 
2 for hospitals). 
 
6.  A copy of the audited financial statements, where available. 
 
7.  Supporting documentation for reclassifications, adjustments, related organizations, 
and protested items for nonhospital providers (this documentation is covered in Item 2 for 
hospitals), where applicable. 
 
If you determine you need any of the above information, and it was not submitted with 
the cost report, you shall request the information from the provider allowing at least 
seven (7) work days to submit it. 
 
10.4  Submission of Cost Report Data to CMS 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
You are required to submit an extract of the following Medicare cost reports to CMS in 
accordance with the Healthcare Cost Report Information System (HCRIS) specifications 
within 210 days of the cost reporting period ending date or 60 days after receipt of the 
cost report, whichever is later. 
 
  CMS Form 2552-96, Hospital Cost Report, for cost reporting periods ending 
on or after September 30, 1996 
 
  CMS Form 2540-96, Skilled Nursing Facility Cost Report, for cost reporting 
periods ending on or after June 30, 1996 
 
  CMS Form 1728-94, Home Health Agency Cost Report, for cost reporting 
periods ending on or after December 31, 1994 
 
  CMS Form 265-94, Renal Dialysis Cost Report, for cost reporting periods 
ending on or after December 31, 1994 
 
  CMS Form 1983-99, Hospice Cost Report, for cost reporting periods 
beginning on or after April 1, 1999 
  This submission must pass all level one electronic cost report edits (see 10.3 of this 
chapter) and all HCRIS reject edits. 
 
If the cost report is deemed to be Low Medicare utilization or No Medicare 
utilization, do not submit a HCRIS extract of the as submitted cost report. 
 
10.5  Initial/Tentative Retroactive Adjustments (a.k.a. Tentative 
Settlements) 
(Rev. 27, 12-19-03) 
 
Section 42 CFR 413.64 and the Provider Reimbursement Manual, Part 1 (PRM-I), 
2408.2, stipulate that an initial/tentative retroactive adjustment must be made as quickly 
as possible after the receipt of a cost report from the provider.  Therefore, make such 
adjustments within 60 days of the acceptance of the providers cost report. Prompt 
initial/tentative retroactive adjustments are essential to ensure proper cash flow to 
providers. Reducing or delaying tentative settlements until a final determination could 
jeopardize the financial viability of some providers. 
 
You are not required to make initial/tentative retroactive adjustments where one of the 
conditions listed in 2408.2 of PRM-I applies.  You are also not required to make 
initial/tentative retroactive adjustments for Skilled Nursing Facilities (SNFs) and Home 
Health Agencies (HHAs) when the provider did not receive Periodic Interim Payments 
(PIP) or other interim payments and the cost report does not include a claim for any 
reimbursement (e.g., bad debts, drug expenses) paid outside of the PPS system.  
However, you must complete initial/tentative retroactive adjustments of SNF and HHA 
cost reports when a portion of the providers payment is based on amounts determined 
through the cost report methodology (e.g., bad debts, drug expenses) or when the 
provider received PIP or non-PIP interim payments. 
 
For the purpose of initial/tentative retroactive adjustment, accept costs as reported.  
However, to avoid creating an overpayment, reduce the payment by any amounts 
attributable to obvious errors or inconsistencies in the cost report. Also give consideration 
to amounts owed the program by the provider (e.g., possible adjustments for prior periods 
and current period for unresolved issues, unrecovered overpayment).  If the current years 
tentative settlement results in an underpayment and the provider has existing Medicare 
overpayments, follow the instructions in Chapter 3 of this manual.   In instances where a 
provider is in bankruptcy or is part of bankruptcy proceedings, bankruptcy procedures 
will supersede these instructions. 
 
Cost-to-charge ratios (CCRs) are used in determining outlier payments, payments for 
pass-through devices, and monthly interim transitional corridor payments under the 
outpatient prospective payment system (OPPS).  CCRs are also used to determine 
payments for extraordinarily high cost cases (cost outliers) under the acute care hospitals 
inpatient and long term care hospitals prospective payment systems (IPPS and LTCH 
PPS, respectively). You are required to update the CCRs for providers reimbursed under 
the OPPS, IPPS, and LTCH PPS to reflect cost and charge information from a providers  most recent cost reporting period, whether tentatively settled or final settled.  Therefore, 
immediately after completion of the tentative settlement, calculate the updated CCRs in a 
manner described below and input them into the Outpatient Provider Specific File 
(OPSF) and Provider Specific File (PSF). 
 
  If you made adjustments during the tentative settlement for prior year audit 
adjustments or other changes and these adjustments have an impact of more than 
20% (plus/minus) on the CCRs from the as filed cost report, calculate the 
updated CCRs using the tentative settlement data. 
 
  If the tentative settlement adjustments have an impact of 20% or less on the CCRs 
from the as filed cost report, or if no adjustments to the tentative settlement 
were made, calculate the updated CCRs using the hospitals as filed cost report. 
 
10.6 - Autoload Program in STAR, System Tracking for Audit and 
Reimbursement 
(Rev. 89; Issued: 01-13-06; Effective Date:  10-01-05; Implementation Date:  02-13-
06) 
 
Effective October 1, 2005, contractors shall use the STAR Autoload Program (See 
Chapter 10 of the STAR Manual on how to use this program.) to update screens 6 and 9 
in STAR for any as filed, finalized, or reopened cost reports entered into STAR on or 
after October 1, 2005.  Contractors must ensure that accurate cost report data appears on 
those screens for filed cost reports, the initial Notice of Program Reimbursement (NPR) 
and all revised NPRs, as this information is utilized to estimate audit savings. 
 
When issuing an initial NPR on or after October 1, 2005, contractors must use the 
Autoload Program to update screens 6 and 9 for the filed cost report and for the initial 
NPR. (Note: If Version 8.40 of the Autoload Program was previously used to input 
screens 6 and 9 for the filed cost report, this information does not have to be reloaded.)  
When issuing a revised NPR after on or after October 1, 2005 contractors must use the 
Autoload Program to update screens 6 and 9 for the prior NPR and for the revised NPR 
being issued. (NOTE: If Version 8.40 of the Autoload Program was previously used to 
input screens 6 and 9 for the prior NPR, this information does not have to be reloaded.) 
 
The reimbursement amounts previously reported on screen 5 prior to running Autoload 
Version 8.40 should not change.  If a Version of the STAR Autoload Program 8.40 or 
higher was not used to populate STAR, it will be necessary to re-create a HCRIS file to 
determine if information needs to be re-posted or re-entered on STAR screens 6 and 9.  
When recreating a HCRIS file to update STAR screens 6 and 9, you must verify that the 
previous amounts reported on screen 5 have not changed after creating the new HCRIS 
file.  The new HCRIS file may not match the prior as filed, initial NPR, or all revised 
NPRs on screen 5, because cost reporting vendors may have changed their cost reporting 
software.  Contractors must ensure that the amounts on screen 5 do not change from these 
previous postings.  If after running the Autoload Program the amounts on screen 5 
change, contractors must manually re-enter the previously reported amounts on screen 5.  (Screen 6 and 9 shall reflect the revised amounts based on the Autoload Program but 
screen 5 will not reflect any adjustments.)  This is necessary to ensure that screen 5 
reflects the correct as submitted, NPR, or revised NPR amounts.  Re-entering data on 
screens 6 and 9 will ensure that CMS can compare accurate and consistent cost data to 
estimate audit savings. 
 
20  Desk Reviews 
(Rev. 27, 12-19-03) 
 
20.1  Definition 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The desk review is an analysis of the providers cost report to determine its adequacy, 
completeness, and accuracy and reasonableness of the data contained therein. It is a 
process of reviewing information pertaining to the cost report without detailed 
verification and is designed to identify problems warranting additional review and, where 
appropriate, to resolve some of those problems/exceptions.  The objective of the desk 
review is to determine whether the cost report can be settled without an audit or whether 
an in-house or field audit is necessary. For this purpose, every desk review should contain 
a summary of the review results (see Exhibit I in 170 of this chapter) and a decision as 
to the next step (e.g., settle without additional review, complete desk review exception 
resolution, perform in-house or field audit). If a decision is made to audit the cost report, 
a properly completed desk review is essential for planning the audit and establishing the 
audit objectives. 
 
Desk reviews are required for all providers filing a Medicare cost report except Hospice 
and low/no Medicare utilization providers.  However, if your professional judgment 
dictates, you may perform an appropriate desk review (see 20.2.C-E) on a low 
Medicare utilization cost report.  Use the specific CMS Uniform Desk Review program 
that is in effect at the time you are performing the desk review for each provider. The 
following information, as appropriate, may assist you in completing the specific desk 
review steps and later in planning the audit (see 50.1 of this chapter). 
 
(cid:121)  Permanent File; 
 
(cid:121)  Correspondence Files; 
 
(cid:121)  PS&R; 
 
(cid:121)  Current and Prior Year Medicare Cost Reports; 
 
(cid:121)  Working Trial Balance; 
 
(cid:121)  Financial Statements; 
 
(cid:121)  Provider Cost Report Questionnaire (Form CMS-339);   
(cid:121)  Prior Year Audit Notes; 
 
(cid:121)  Prior Year Audit Adjustment Report; and 
 
Prior Year Audit Working Papers. 
 
20.2  Components of the Uniform Desk Review (UDR) 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The UDR is comprised of an acceptability checklist, a clerical review, selection of 
professional desk review type, either a limited professional desk review or a full 
professional desk review, and a summary of UDR exceptions. 
 
NOTE:  The UDR is issued by CMS separately and is not included in this manual. 
 
A.   Acceptability Checklist 
 
Complete the appropriate Acceptability Checklist for the type of provider submitting the 
cost report for all cost reports received.  The objective of the Acceptability Checklist is to 
determine whether the provider has submitted a complete cost report, Form CMS-339, 
IRIS diskette, if applicable, and that the electronic cost report passes all Level I edits.  
NOTE:  Effective October 2, 2006, Part II of the Acceptability Checklist shall be 
eliminated and only Part I of the Acceptability Checklist is required to be completed by 
the contractor. 
 
Follow the instructions in 10.3 of this chapter pertaining to rejection of a cost report   
and the manner in which to handle missing items that are requested but not required for 
acceptance of the cost report. 
 
Ensure that the completed Acceptability Checklist is given to the individuals responsible 
for completion of the remainder of the UDR.  When all the workpapers prepared to settle 
the cost report are completed, include the completed Acceptability Checklist in your desk 
review workpaper files. Indicate the location, within your working paper files, of the 
documents that the provider submitted with the cost report if they are not included in the 
same section as the Acceptability Checklist. 
 
B.   Clerical Review 
 
A clerical desk review consists of the following: 
 
  Verification of the mathematical accuracy of the submitted cost report 
through footings, cross-footings, and calculations for those cost reports 
that are not filed electronically.  Clerical errors are to be corrected and 
noted in total as adjustments for the purpose of final settlement. If 
extensive clerical errors exist in the cost report that may require a  significant amount of time to correct, the cost report may be returned to 
the provider for correction on the basis that the provider failed to submit 
an acceptable cost report.  (See 10.3 of this chapter.) 
 
  Preparation of a comparative analysis of the cost report data between the 
prior and current year when needed for a full professional desk review. 
 
C.   Selection of Professional Desk Review Type 
 
Selection of the appropriate type of professional desk review is critical in making the 
desk review/audit process more efficient and economical.  Accordingly, select the 
appropriate professional desk review (limited or full) based on provider type and 
thresholds in accordance with the instructions contained in the UDR program. 
 
Currently only a limited professional desk review is required for Skilled Nursing 
Facilities (SNFs) and Home Health Agencies (HHAs).  Thresholds are applied to the cost 
reports of other types of providers to determine whether a limited or full professional 
desk review should be completed. 
 
The thresholds published in the UDR are recommended guidelines that CMS expects the 
contractors to implement.  However, if you believe the published thresholds are 
inappropriate to a specific situation or to a provider group, you may request an approval 
from the CMS regional office to change those thresholds.  Your request must contain a 
justification for the change.  The regional office will either approve or disapprove the 
request in writing. 
 
D.   Limited Professional Desk Reviews 
 
Appropriate limited professional desk review (depending on provider type) is completed 
for cost reports filed by providers other than hospitals that are almost entirely reimbursed 
under PPS or the fee screen.  It may also be completed for cost reports filed by PPS 
hospitals and cost reimbursed providers (including hospitals) that fall below the desk 
review thresholds established by CMS.  (See 20.2.C of this chapter.) 
 
The UDR contains separate limited professional desk review programs for hospitals, 
SNFs, HHAs, and outpatient facilities.  All the areas/issues in these programs must be 
addressed by the contractor because they are limited to only those that are essential in 
those cost reports.  However, these UDRs contain specific thresholds for most of the 
areas/issues, thus all the steps may not have to be completed. 
 
E.   Full Professional Desk Reviews 
 
A full professional desk review is an analysis of the cost report and the providers 
background.  Its completion creates and documents an immediate awareness of changes, 
open issues, and problem areas. 
  The full professional desk review is completed for cost reports filed by providers other 
than SNFs and HHAs if they exceed the desk review thresholds established by CMS.  
(See 20.2.C of this chapter.)  However, you are not prohibited from completing a full 
professional desk review on a cost report for any of those providers even if it falls below 
the desk review thresholds if your professional judgment so dictates.  In this situation, 
you must document the reason for performing a full professional desk review. 
 
The UDR contains separate full professional desk review programs for hospitals and 
outpatient facilities.  These programs contain thresholds for most of the areas/issues 
addressed therein, thus all the steps (even if the area/issue is applicable) may not have to 
be completed.  Furthermore, the individual review steps for each reimbursement issue 
may be expanded or omitted as necessary to address specific circumstances.  However, 
the reasons for omitting steps must be documented.  If expansion is necessary, try to limit 
any changes to the full professional desk review to the information readily available in 
the cost report (including Form CMS-339 Provider Cost Report Reimbursement 
Questionnaire), prior audit files, if any, and the permanent reference file. 
 
F.   Summary of UDR Issues 
 
Use the Uniform Desk Review - Summary of Issues worksheet (see Exhibit I in 170 
of this chapter) to list the exceptions identified through the UDR process.  You may use 
an alternative format if it contains, at a minimum, the information in Exhibit I. 
 
Number each exception in the first column.  This facilitates future cross-referencing of 
issues flowing through audit, settlement, and if applicable the appeals process.  In column 
2 identify the UDR section and the step/question specific to the exception.  If in your 
judgment there are other issues that did not surface as desk review exceptions but need to 
be considered as possible audit issues, list them after the desk review exceptions at the 
bottom of this exhibit.  Continue numbering them in Column 1 as though they are desk 
review exceptions but identify them as other in Column 2.  In Column 3 write a brief 
description of the issue for each item listed in Column 1 (both desk review exceptions 
and other exceptions). 
 
Where applicable, insert the units and/or dollar amounts pertaining to each exception in 
column 4.  Leave column 4 blank in situations where the amount cannot be established at 
the time of the desk review. 
 
Do not transfer mathematical errors (i.e., footing, cross-footing, tracing, calculations) to 
this schedule.  They remain on the appropriate clerical worksheets as exceptions.  (See  
20.2.B and 10.3 of this chapter.) 
 
Use columns 5 through 7 to document the audit selection and scoping process for those 
issues that could not be resolved during the desk review.  Explain the basis for those 
decisions in column 9 (Comments) and reference the working paper(s) documenting the 
decision in Column 10.  For example, if column 5 or 6 was checked, give reason such as 
immaterial, budgetary constraints, etc. in column 9 and in Column 10 reference the  working paper documenting the process used to arrive at that decision.  (See 50.1 of this 
chapter containing instructions for scoping the field audit.)  Where the item is scoped for 
audit, also outline the audit requirements and objectives in column 9. 
 
If an exception was resolved during the desk review explain this in Column 9.  If an 
adjustment resulted from the desk review exception resolution, annotate this in Column 8 
and prepare an adjustment.  Record this adjustment in the audit adjustment report (see 
Exhibit VI in 170 of this chapter). 
 
Identify the audit or desk review exception resolution working paper where the exception 
was addressed in column 10 (UDR Resolution or Audit W/P Ref). 
 
Indicate in the designated boxes at the top of the "UDR Summary of Issues" the decision 
regarding the next step for the cost report (e.g., in-house audit, field audit, settlement 
without further review).  The rationale for the decision should be consistent with the plan 
used to formulate the audit budget for the fiscal year. (See 40ff and 50ff of this 
chapter.) 
 
20.3  Desk Review Exceptions Resolution Process 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Where possible, resolve the exceptions or variances during the desk review by utilizing 
the available information and through inquiry.  Document the conclusions reached on 
these issues in accordance with the standards for documentation required by CMS (see 
60.9) and explain in Column 9 of the Summary of UDR Exceptions that the issue was 
resolved during the desk review.  Where adjustments are made during the desk review, 
follow the instructions in 20.2.F of this chapter for completing the Summary of UDR 
Exceptions. 
 
If you do not have all the information necessary to make an adjustment but it appears that 
an adjustment is required, request the information from the provider before making the 
adjustment.  For example, do not prepare an adjustment if the provider claimed bad debts 
for Medicare deductible and coinsurance sooner than 120 days from the date of the first 
bill without first obtaining information necessary to establish that the patient is not 
indigent. 
 
When additional documentation requests are made to providers as part of the desk review 
process, ensure that the requests do not violate the provisions of the Paperwork Reduction 
Act (PRA) of 1980.  Requests for additional documentation in connection with desk 
reviews are generally not subject to PRA requirements if you adhere to the following 
procedures: 
 
  A specific request for documentation must be made to only one entity, (i.e., the 
provider whose cost report is under review), and 
 
  Questions must be specific to that provider's particular cost report.   
Be considerate of the amount of information you request.  If you do request certain 
information/documentation necessary to resolve a desk review exception(s), inform the 
provider to furnish this information/documentation within 3 weeks of the date of your 
request.  If the provider does not furnish the documentation within that time-period, 
either make an adjustment or consider scoping the issue for audit. 
 
If you make adjustments during the desk review exceptions resolution process, send them 
to the provider and request that the provider notify you in writing, within 2 weeks, of any 
concerns with these adjustments.  Also, inform the provider in writing that these 
adjustments will become final after you make any necessary modification based on the 
written concerns and documentation supporting them. 
 
NOTE:  See 60.13 of this chapter for supervisory review responsibilities pertaining to 
the desk review process. 
 
20.4  Wage Index Review 
(Rev. 27, 12-19-03) 
 
Section 1886 (d)(s)(E) of the Social Security Act, Adjusting for Different Area Wage 
Levels, requires the Secretary to adjust the proportion of hospital costs attributable to 
wages and wage-related costs for area differences in hospital wage levels.  This 
adjustment factor, the wage index, reflects the relative hospital wage level in the 
geographic area of the hospital compared to the national average hospital wage level. 
 
Wage Index reviews must be completed on all cost reports for short-term acute inpatient 
prospective payment system (IPPS) hospitals and hospitals that would otherwise be 
subject to IPPS if they did not have a waiver.  Use the latest wage index desk review 
program released by CMS prior to the due date of the yearly wage index reviews. 
 
Wage index periods follow the federal fiscal period of October 1  September 30.  If a 
hospital has more than one cost report beginning during the wage index period (for 
example, a hospital has two short period cost reports beginning on or after October 1, 
through September 30 of a given year), conduct a desk review on only one of the 
reporting periods.  Select the longest period.   If there is more than one period of that 
length, select the latest period. 
 
30  Field and In-House Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Providers receiving payments under Part A and B of Title XVIII of the Act, as amended 
are subject to audit of payments applicable to services rendered to Medicare 
beneficiaries.  An audit may be done as a field audit or as an in-house audit based on the 
discretion of the contractor. 
 
30.1  Definition of Field and In-House Audits  (Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
A field audit is an on-site examination of financial transactions, accounts, and reports as 
they relate to the Medicare cost report in order to test the providers compliance with 
applicable Medicare laws, regulations, manual instructions, and directives. 
 
An in-house audit is an examination of financial transactions, accounts, and reports as 
they relate to the Medicare cost report to test the providers compliance with applicable 
Medicare laws, regulations, manual instructions, and directives that is performed at the 
contractors location.  The in-house audit usually requires limited records.  An in-house 
audit is subject to the same standards/processes and requires the use of an audit program.  
In general, an in-house audit is the same as a field audit except all work is performed at 
the contractors location. (See Section 60). 
 
In performing Medicare in-house and field audits, the contractor should comply with the 
general, field work, and reporting standards of the Government Auditing Standards 
(GAS) issued by the Comptroller General of the United States as these standards are 
applicable to all audits performed by or for any Federal agency.  If the contractor engages 
auditors under a subcontract (see 160 of this chapter) to perform the Medicare audit, the 
subcontractors auditors must follow the same GAS and other standards that the 
contractor is required to follow.  However, as specified in 60.13.C of this chapter, the 
contractor cannot delegate the performance of a supervisory review of working papers to 
a subcontractor.  CMS holds the contractor responsible for the subcontract work in the 
same manner as if its own employees performed the work. 
 
Contractors may limit the scope of both in-house and field audits to a review of selected 
parts of a provider's cost report and related financial records.  In addition, the audit 
procedures performed on selected areas of the cost report may be limited.  Both the 
selected cost report areas and the related procedures to be applied must be sufficient to 
meet the audit objectives established from the desk review.  When in-house and field 
audits are being performed and additional audit procedures are required, or additional 
findings are discovered which may require additional audit procedures, the contractor 
shall make a prompt evaluation and either approve or disapprove the additional 
expenditure of audit resources. 
 
The audit culminates in the issuance of an audit report.  This report includes an audit 
adjustment report that presents adjustments to the provider's as-filed costs so that the 
audited Medicare cost report reflects costs and data in conformity with the Medicare 
principles of payment. 
 
30.2  Purpose of Field and In-House Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Medicare in-house and field audits are conducted in order to:  (1) provide reasonable 
assurance that program payments are based on Medicare reimbursement principles, and 
(2) develop other information that CMS needs to fulfill its responsibilities.   
In carrying out your audit responsibilities, your primary goal is to arrive at a correct 
settlement of the cost report.  In so doing, preserve the providers interest and rights but 
at the same time apply program policies to specific situations to assure compliance with 
these policies. Your authority does not extend to determining whether program policies 
and procedures are appropriate or should be applied in a given circumstance.  Rather, 
your responsibility is to enforce such policies and procedures.  Take corrective action 
where noncompliance exists. 
 
40  Planning and Management (Global Scoping)-Field and In-House 
Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The audit work plan and selection process is influenced by the budgetary restrictions 
imposed upon you by CMS. Annually, through the budget process and the Budget 
Performance Requirements (BPRs), CMS gives you guidance for managing audit 
resources in terms of areas of concentration and dollars available to accomplish the tasks. 
Develop an audit plan to identify cost reports to be audited and resources to be expended, 
taking into consideration the guidance that CMS gives you in 40.1 of this chapter and 
the BPRs about the types of providers or potential issues to be audited. However, do not 
use these priorities as the sole determining factor in the planning process. The planning 
process is based on your empirical knowledge, past performance of the provider, last time 
audited, and the relative risk associated with the settlement amount calculated from the 
cost report. Generally, select providers for audit that based on your professional 
judgment, represent the greatest risk for incorrect payment. 
 
Effective management of audit resources requires a continual decision-making process. 
As events occur throughout the audit cycle and circumstances come to light, the audit 
plan must be continually evaluated and priorities reassessed. If a greater audit 
requirement becomes evident, do not defer that audit work.  Rather, defer or cancel audit 
work of lesser urgency.  If there is no work of lesser urgency, seek guidance from the 
RO. 
 
Apply the appropriate level of resources for each audit to assure that payments made to a 
provider are not more or less than required under applicable law and regulations to 
achieve CMS's audit objectives.  If you are unable to meet both the quantity and quality 
standards, seek guidance from your regional office (RO) on the extent to which you may 
deviate from your budget/plan while maintaining audit quality. 
 
You are expected to accomplish the goals outlined in the BPRs to the extent that other 
audit needs that are discovered during the year do not outweigh these goals. Use 
professional judgment to communicate workload adjustment needs to your RO.  Monitor 
your progress on BPRs and discuss the impact of any problems that may develop in 
meeting the BPRs with your RO. 
 
40.1  Cost Reports and Auditing of Multiple Provider Institution  (Rev. 27, 12-19-03) 
 
Where an institution certified as a certain type (e.g., hospital, SNF, HHA) has a distinct 
unit certified as another provider type (e.g., a hospital has a SNF, HHA, or a unit 
excluded from inpatient prospective payment system), each such distinct unit (a.k.a. 
subprovider) is, in effect, another department of the provider. Cost finding in such an 
institution involves allocation of the institution's costs between the main provider and 
subproviders (e.g., between the hospital and the SNF, HHA, or excluded unit).  Thus, 
provider complexes with subproviders must file one cost report on the CMS cost 
reporting forms designated for the main provider (e.g., Form CMS-2552 for hospitals).  
Separate cost reports may not be filed for the provider-based components (subproviders). 
 
Therefore, in your audit plan, consider the audit of a multiple provider institution as one 
workload unit but, as appropriate, include audit procedures to review the provider-based 
component(s). 
 
40.2  Audit Priority Considerations 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
One or more of the following audit priority considerations may enter into the process of 
formulating your audit plan. 
 
A  Significance of Total Medicare Program Payments 
 
In a PPS environment, direct specific attention to the following reimbursement areas or 
issues. 
 
  Bad debts. 
 
  Graduate medical education (GME). 
 
  Indirect medical education (IME). 
 
  Organ acquisition costs. 
 
  Disproportionate share hospital (DSH) payments. 
 
  Units excluded from inpatient PPS. 
 
  Allocations between PPS providers and cost-reimbursed subproviders. 
 
  Nursing/Allied Health passthrough payments. 
 
  Outlier payments. 
    Transitional corridor payments under the outpatient PPS (where applicable). 
 
B  Types of Providers 
 
Special attention may be required for certain types of providers because of known or 
anticipated problems or circumstances.  Consider the following in your audit plan. 
 
  New providers. 
 
  Providers reimbursed on a cost basis (e.g., critical access hospitals, cancer 
hospitals). 
 
  End Stage Renal Disease Facilities need to be audited in accordance with the 
Balanced Budget Act requirements. The audit of End Stage Renal Dialysis 
Facilities to be performed for the three year cycle can be either a field audit or a 
desk audit 
 
  Providers receiving significant non-PPS payments. 
 
  Providers that were not audited recently.  
 
C  Conditions and Occurrences at the Provider 
 
  Change of ownership, termination, or change of provider type (e.g., critical access 
hospitals). 
 
  Cost report filed late without a satisfactory explanation. 
 
  Fraud and abuse investigations as directed by the Office of Inspector General 
(OIG) or Department of Justice (DOJ). 
 
50  Scoping/Planning of Individual Field and In-House Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
50.1  Establishing the Objective/Scope of the Field and In-House 
Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Once you make a decision to perform an in-house or field audit on a given cost report by 
considering the Medicare priorities (see 40ff of this chapter), use the results of the desk 
review (see 20.2.F of this chapter), and your empirical knowledge of the provider to 
define the audits objectives and the scope and methodology to achieve those objectives.  
The objectives are what the audit is to accomplish.  They identify the audit subjects and 
performance aspects to be included, as well as the potential finding and reporting 
elements that the auditors expect.  Scope is the boundary of the audit.  It addresses such  things as the depth of review of the issues/areas selected for audit.  The methodology 
comprises the work in data gathering and in analytical methods auditors will use to 
achieve the objectives.  Auditors should design the methodology to provide sufficient, 
competent, and relevant evidence to achieve the objectives of the audit.  Methodology 
includes not only the nature of the auditors procedures, but also their extent (for 
example, sample size). 
 
The desk review process and your knowledge of the provider help you to determine the 
issues/areas to be addressed for each audit.  (See 20.2.F of this chapter.)  If budget 
limitations or other factors prevent you from including all the exceptions in the scope of 
the audit for that cost report, rank the exceptions based on their significance. Significance 
generally relates to the Medicare dollar impact if the provider reports the issue/area 
incorrectly.  This dollar impact should be estimated using appropriate factors (e.g., 
expense amount, Medicare utilization, number of residents and associated per-FTE-
resident amount, number of beds for indirect medical education) that pertain to the 
computation of the Medicare payment for that exception. If this cannot be accomplished, 
use the total Medicare dollar payment for the issue/area (e.g., amount of graduate medical 
education (GME) payment).  Significance can also pertain to a present or future risk if the 
issue is not investigated. 
 
Use this ranking to determine which exceptions can be eliminated from the scope if it is 
not possible to audit them all. Exclude issues/areas starting from the issue ranked the 
lowest until you reach the level of audit resources that you can devote to this specific 
audit.  You must document and support the decision to not audit these issues/areas in 
your separate desk review working papers. However, if in your professional judgment, all 
the issues/areas are significant, consider adjusting your audit plan (see 40ff of this 
chapter) by deferring or canceling other audit work (i.e., audits of other providers) of a 
lesser urgency.  If there is no work of lesser urgency, seek guidance from your RO. 
 
Be specific in documenting the issues/areas that you do scope for audit.  For example, 
instead of listing bad debts as the area to be audited, specify that you intend to review 
the collection effort and 120-day rule only, if this is the case.  Draft the audit 
program as outlined in 50.2 below to determine the extent of review to be performed on 
each issue scoped for further review. 
 
50.2  Tailoring of the Audit Program 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
An audit program provides the audit procedures that auditors must follow to achieve the 
audit objectives. Prepare a specific audit program for each in-house or field audit that you 
perform.  This audit program should reflect the issues/areas contained in the scoping 
document (e.g., the Summary of UDR Exceptions described in 20.2.F of this chapter).  
(Use the CMS hospital, home health agency and skilled nursing facility audit programs in 
effect at the time you prepare the audit program as a guide. These programs are not 
contained in this manual as CMS releases them separately.) 
  Your audit program must: 
 
  Identify your audit objectives; 
 
   Identify the issues, transactions or cost report entries to be audited, reviewed or 
verified; 
 
   Identify the audit steps to be performed; 
 
  Describe the tests to be applied. 
 
60  Field or In-House Audit Process  
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
60.1  Audit Confirmation Letter (a.k.a. Engagement Letter) 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The contractor must send the provider an audit confirmation letter for all in-house or field 
audits.  This document will advise the provider of the items that are required prior to 
starting the audit as well as identifying the major areas the contractor intends to review 
during its audit. 
 
60.1.1  Audit Confirmation Letter (a.k.a. Engagement Letter) - Field 
Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The field audit confirmation letter should give a minimum of 4 weeks and a maximum of 
6 weeks notice of the contractors intent to make an onsite visit for the purpose of 
conducting a field audit (see Exhibit II in 170 of this chapter for a sample letter).  The 
engagement letter should be provider-specific and must include the following: 
 
  A list of the required documents that are to be made available by the provider on 
the first day of the audit. 
 
  Date of the entrance conference.  (Enclose the entrance conference agenda  
Exhibit III in 170 of this chapter.) 
 
  A request that the provider assign a contact person to be the audit liaison. 
 
  A tentative pre-exit conference date set for the last day of fieldwork.  (Enclose the 
pre-exit conference format   Exhibit V in 170 of this chapter.) 
 
  Notice that an exit conference will be tentatively scheduled during the pre-exit 
conference to occur within 8 weeks (or longer if extenuating circumstances arise) 
after all the outstanding documentation is furnished by the provider.   
  Notice to the provider that all documentation and records requested prior to and 
during the fieldwork time must be given to you in a timely manner and that failure 
to produce documentation will result in non-negotiable audit adjustments. 
 
  Notice to the provider that, as a general rule, you will not honor any reopening 
requests for the lack of documentation adjustments.  This policy has no impact 
on the normal provider appeal rights with the Provider Reimbursement Review 
Board. 
 
60.1.2  Audit Confirmation Letter (a.k.a. Engagement Letter) - In-
House Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The in-house audit confirmation letter should give a minimum of 4 weeks and a 
maximum of 6 weeks notice of the contractors intent to conduct an in-house audit (see 
Exhibit II in 170 of this chapter for a sample letter).  The engagement letter should be 
provider-specific and must include the following: 
 
  Identification of the major areas the contractor will review. 
 
  A list of the required documents and the due date that provider must send copies 
of the documentation to the contractor.  The provider should be given at least 3 
weeks to provide the requested documents, and the due date should be at least a 
week prior to the telephone entrance conference. 
 
  Date and time of the telephone entrance conference.  (Enclose the telephone 
entrance conference agenda  Exhibit III in 170 of this chapter). 
 
  A request that the provider assign a contact person to be the audit liaison. 
 
  A tentative pre-exit telephone conference date should be set within a week of the 
anticipated completion date of all audit review work. (Enclose the pre-exit 
conference format  Exhibit V in 170 of this chapter). 
 
  Notice that a telephone exit conference will be conducted once all audit 
adjustments are finalized. 
 
  Notice to the provider that all documentation and records requested must be given 
to you in a timely manner and that failure to produce documentation will result in 
non-negotiable audit adjustments. 
 
Notice to the provider that, as a general rule, you will not honor any reopening requests 
for the lack of documentation adjustments.  This policy has no impact on the normal 
provider appeal rights with the Provider Reimbursement Review Board. 
  60.2  Entrance Conference 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The entrance conference is an important step in the audit process as it sets the tone for the 
entire audit.  The entrance conference serves to enhance communications between the 
contractor and the provider by covering a wide variety of issues.  At a minimum, the 
participants at the entrance conference should consist of the Medicare auditors who will 
perform the audit, all appropriate provider personnel (controller, provider liaison, 
accountants, cost report preparers), and provider consultants (if provider desires). 
 
60.2.1  Entrance Conference for Field Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
During the on-site entrance conference, explain the purpose of the field review and stress 
the need for cooperation especially concerning the release of documentation by the 
provider.  Also, you must inform the provider that if supporting documentation is not 
received, as a general rule, you will disallow the costs and not reopen the cost report after 
the notice of program reimbursement (NPR) is issued.  Additionally, address the 
following during the entrance conference. 
 
  Discuss timeframes for conducting the on-site audit and schedule the pre-exit 
conference. 
 
  Discuss the scope of the on-site audit areas to be reviewed, and the fact that the 
audit may turn up other issues not discussed at the entrance conference; 
 
  Discuss all of the proposed desk review adjustments with the provider; 
 
  Identify the providers liaison and fully discuss the liaison's role to ensure full 
cooperation during the audit; 
 
  Discuss administrative issues such as location of working space for the auditors, 
the hours during which the auditors will have access to this working space, use of 
copiers, need to make long distance telephone calls, if necessary, and access to 
fax machines and files; and 
 
  Encourage the third party cost report preparer to be available during the course of 
the audit and exit conference. 
 
See Exhibit III in 170 of this chapter for a sample of the Entrance Conference agenda. 
 
At the start of the visit (generally after the entrance conference), inventory the provider-
prepared documentation noting any items missing from the initial engagement request.  
Notify the provider in writing of all missing items and request that the items be made 
available as soon as possible.  Follow the same notification policy for any additional 
documentation that is requested during the audit.   
60.2.2  Entrance Conference for In-House Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
During the telephone entrance conference, explain the purpose of the in-house review and 
stress the need for cooperation especially concerning the release of documentation by the 
provider.  Also, you must inform the provider that if supporting documentation is not 
received, as a general rule, you will disallow the costs and not reopen the cost report after 
the notice of program reimbursement (NPR) is issued.  However all reopenings are at the 
discretion of the contractor.  Additionally, address the following during the entrance 
conference. 
 
  Discuss timeframes for conducting the in-house audit and schedule the pre-exit 
conference. 
 
  Discuss the scope of the in-house audit areas to be reviewed, and the fact that the 
audit may turn up other issues not discussed at the entrance conference; 
 
  Discuss all of the proposed desk review adjustments with the provider; 
 
  Identify the providers liaison and fully discuss the liaisons role to ensure full 
cooperation during the audit; 
 
  Encourage the third party cost report preparer to be available by telephone during 
the course of the audit and exit conference. 
 
  Discuss timeframes for additional documentation that is requested during the 
audit.  All requests should be in writing, which could either be e-mailed or faxed 
to the designated providers liaison.  In general, the provider should be given 
three (3) to five (5) working days to supply the requested additional 
documentation. 
 
NOTE:  All contractor requests and provider responses must follow PHI/HIPAA 
requirements when emailing or faxing information. 
 
See Exhibit III in  170 of this chapter for a sample of the Entrance Conference agenda. 
 
60.3  Tests of Internal Control 
(Rev. 127, Issued: 07-13-07, Effective: 10-01-07, Implementation: 10-01-07) 
 
A.   Providers Internal Control Structure 
 
A providers internal control structure consists of the policies and procedures established 
to provide reasonable assurance that the providers objectives are achieved.  The internal 
control structure consists of three elements: 
    Control Environment: The collective effect of various factors on 
establishing, enhancing, or mitigating the effectiveness of specific policies 
and procedures. 
 
  Accounting System:  The methods and records established to identify, 
assemble, analyze, classify, record, and report an entity's transactions and 
to maintain accountability for the related assets and liabilities. 
 
  Control Procedures:  The policies and procedures in addition to the control 
environment and accounting system that management has established to 
provide reasonable assurance that specific entity objectives will be 
achieved. 
 
A provider generally has internal control structure policies and procedures that are not 
relevant to a particular audit and therefore need not be considered for that audit.  For 
example, policies and procedures concerning the effectiveness, economy, and efficiency 
of certain management decision-making processes, while important to the provider, do 
not ordinarily relate to a Medicare audit. 
 
B.   Medicares Policy Regarding Review of Internal Controls 
 
In the Medicare audit environment, a review of and reporting on a providers system of 
internal control is generally not warranted or cost effective.  The auditor may conclude 
that it would be inefficient to evaluate the effectiveness of internal control policies and 
procedures and that the audit can be conducted more efficiently by expanding substantive 
tests. 
 
You may wish to gain an understanding of the providers internal control structure when, 
in your professional judgment, this understanding and assessment of the internal controls 
would significantly affect the scoping of the Medicare audit.  This does not mean or 
require that the internal controls need to be reviewed in every instance. Your 
understanding can be obtained through sources such as the previous period's completed 
internal control questionnaire (see Exhibit IV in 170 of this chapter), current years 
management letter prepared by the providers financial auditors (e.g., CPA firm), 
previous Medicare audit history, and empirical knowledge of the provider. 
 
It is not necessary to test the providers system of internal control for audits of 
specifically selected areas such as intern/resident counts or wage index reviews, or for 
reopenings.  Furthermore, where CMS directs you to perform a special audit, CMS may 
limit, or require no work, in the area of internal control. 
 
If internal controls are not reviewed, the decision should be stated in the scope section of 
the audit report.  In this situation, preparation of a report on internal controls (see 70.1 
of this chapter) is not required. 
 
C.   Obtaining an Understanding of the Internal Control Structure   
If you determine that it is necessary to review internal controls in a given situation (e.g., 
new providers, first audit by the contractor), complete the Internal Control Questionnaire 
(see Exhibit IV in 170 of this chapter).  Since all the aspects of the providers internal 
control structure are not relevant to a Medicare audit, this questionnaire is designed to 
allow you to obtain an understanding of the provider's internal control structure as it 
applies to Medicare audits. Medicare auditors are concerned with the allowability, 
reasonableness, classification, and accumulation of cost report data that must be reported 
in accordance with Medicare principles of payment.  Therefore, the Medicare auditor 
should obtain an understanding of those aspects of the provider's internal control 
structure that affect the reliability of the cost report data that is being audited within the 
parameters of the Medicare audit in accordance with CMS' audit instructions.  This 
understanding is ordinarily obtained by: 
 
  Previous experience with the provider;  
 
  Inquiries of appropriate personnel; 
 
  Observation of the provider's activities and operations; and 
 
  Inspection of the provider's documents and records. 
 
Once the information required by the questionnaire has been obtained and in your 
professional judgment you need to test the internal control structure in subsequent years, 
you may review and update the questionnaire answers and documentation during 
subsequent audits.  Obtain the provider's written concurrence to the answers and 
documentation as a whole or on a question-by-question basis, as appropriate. 
 
Maintain the internal control questionnaire with all related documentation in a separate 
section of the permanent file and cross reference to supporting audit working papers, if 
necessary. 
 
60.4  Reliance on Work Done by Other Auditors 
(Rev. 27, 12-19-03) 
 
A.   General Guidelines 
 
Medicare audits are generally limited to tests of compliance with Medicare 
reimbursement policies and procedures.  In performing these audits, you generally rely on 
the financial statements prepared by independent auditors.  This includes the independent 
auditors review of providers accounting systems. 
 
To the extent that an independent auditor issued an unqualified opinion on a providers 
financial statement and has not identified any material weaknesses in the providers 
internal control structure, rely on the providers system of accounting, including related 
computer systems.  This does not include reliance on records or systems that are  maintained solely for purposes of completing a Medicare cost report.  As mentioned in 
60.3 of this chapter, you may wish to perform substantive tests of the records 
maintained solely for Medicare reimbursement purposes.  
 
If an independent auditor issued a qualified opinion, an adverse opinion, or has identified 
material weaknesses in the internal control structure, evaluate the effect of the auditors 
actions on your audit objective.  If there has been no audit by an independent auditor, 
consider the audit resources available, the audit risk, and the audit objectives in deciding 
if there is a need to review the accounting systems.  (See 60.3 of this chapter.) 
 
Furthermore, you may rely on work of other auditors (i.e., providers internal or 
independent auditors and audit organizations established by the Federal and State 
Governments for programs other than Medicare) in situations where the scope of this 
work relates to issues that you scoped for the Medicare field audit.  However, in this 
situation, you must still satisfy yourself with the quality of the other auditors work by 
performing appropriate tests or by other acceptable methods. 
 
B.   Obtaining Management Letter and/or Documentation Prepared by Provider's 
Independent Auditors 
If you determine that it is necessary to gain an understanding of a provider's internal 
control structure or any other aspect of the accounting system (see 60.3.B of this 
chapter), you may request that the provider furnish you with the management letter or 
other documentation relevant to the Medicare audit that was prepared by an independent 
auditor or certified public accounting (CPA) firm  
 
Under 1815(a) and 1833(e) of the Social Security Act, you or CMS may review any 
documentation it deems necessary to determine whether payment for reasonable cost to a 
particular provider is appropriate.  The implementing regulations at 42 CFR 413.20 and 
413.24 explain this further.  42 CFR 413.20(e) specifically allows suspension of payment 
if the intermediary determines that the provider does not maintain adequate records for 
the determination of reasonable costs.  Additionally, 42 CFR 405.372(a)(2) provides for 
suspension of payment for failure to provide specifically requested information.  
However, when the documentation is maintained by an independent auditor or certified 
public accounting (CPA) firm rather than by a provider, you or CMS must insist that the 
provider obtain the information from that audit entity. Since the law and regulations are 
directed to providers, not their auditors or CPA firms, CMS requires the provider to have 
the independent auditor release the documentation to CMS or the contractor.  The 
independent auditor is at a minimum a de facto agent of the provider and should comply 
with the request.  If the provider is not able to produce the documentation from the 
independent auditor/CPA firm, you may disallow all the providers cost/reimbursement 
associated with the cost report(s) under review or at least suspend payment until the 
documentation is provided if an appropriate determination of payment cannot be made 
without the documentation.  CMS has limited recourse against the independent auditor or 
CPA firm if it refuses to comply. 
  Keep independent auditors management letters or other documentation obtained from a 
provider or the independent auditors in a secure place.  Disclose the contents only to 
those directly involved with the audit.   
 
60.5  Coordination of Activities During the Field and In-House Audits 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
In order to ensure that the in-house or field audit will accomplish its objectives, it is 
important to have the provider designate a staff person to serve in the role of the audit 
liaison. This person assures that issues are addressed as they arise rather than at the 
completion of the audit.  The provider liaison performs an active role during the audit.  
This person either provides requested information or ensures that the appropriate and 
responsible individual(s) on the provider's staff is made aware of the request for 
additional information. 
 
Your principal goal in carrying out the audit responsibilities is to arrive at a correct 
settlement of the cost report.  In doing so preserve both the provider's interest and 
government's interest.  If during the audit you uncover circumstances in which a provider 
disadvantaged itself, advise the provider liaison of the issue(s).  Also, maintain ongoing 
communications during the audit by discussing regularly with the provider liaison to 
handle the following: 
 
  Requests for documentation that were not mentioned in the audit 
confirmation letter and were not requested during the entrance conference; 
 
  Follow up on your requests for additional information.  The provider 
should respond in writing if they cannot comply with the agreed upon 
response date; 
 
  Open audit issues, proposed audit adjustments and/or the general progress 
of the audit.  Provide the audit liaison with the audit adjustments, 
including those being proposed due to lack of documentation, and the 
related working papers (if requested by the provider) during the course of 
the audit. 
 
60.6  Designing Tests/Sampling 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
Design such tests as are necessary to accomplish your audit objectives.  Your tests must 
aid you in reaching conclusions necessary to complete the audit.  Use sampling when this 
would be more efficient in testing the universe of transactions, entries, or statistical data 
within an area of consideration. 
 
Sampling is the application of an audit procedure to less than 100 percent of the items 
within an account balance, class of transactions, or statistics (e.g., count of 
interns/residents) to evaluate some characteristic of the such balance, class, or statistics.   On the basis of facts known to you, decide if all transactions, balances, or statistics that 
pertain to the issue/area being tested need to be reviewed in order to obtain sufficient 
evidence.  In most cases, an auditor will test at a level less than 100 percent. 
 
There are two general sampling approaches, nonstatistical and statistical.  Either 
approach, when properly applied, can provide sufficient evidential data related to the 
design and size of an audit sample, among other factors.  A nonstatistical sample may 
support acceptance of findings, but findings must be scientifically established to support 
adjustments. 
 
Some degree of uncertainty is inherent in applying audit procedures and is referred to as 
ultimate risk.  Ultimate risk includes uncertainties due both to sampling and other factors.  
Sampling risk arises from the possibility that when a compliance or a substantive test is 
restricted to a sample, the auditor's conclusions may be different had the test been applied 
in the same way to all items in the account balance, class of transactions, or statistics. 
 
If you use a sample to test certain issues scoped for audit, you must include a description 
of the sampling technique, all parameters used to select the sample, and confidence level 
in the audit working papers. 
 
A.   Planning Samples 
 
Planning an audit involves a strategy for selecting appropriate sample(s). When planning 
a particular sample, consider: 
 
  The relationship of the sample to the audit objective (e.g., Medicare policies for 
determining the GME and IME FTE counts of residents differ and these 
differences must be considered in the decision whether it is feasible to use one 
sample to test the FTE counts for both purposes); 
 
  Preliminary estimates of materiality levels; 
 
  The allowable risk of incorrect acceptance; and 
 
  Characteristics of the population, i.e., the items comprising the universe. 
 
B.   Selecting a Sampling Approach 
 
Because either nonstatistical or statistical sampling can provide sufficient evidence, 
choose between them after considering their relative cost and effectiveness.  Statistical 
sampling helps to: 
 
  Design an efficient sample;  
 
  Measure the sufficiency of the evidential matter obtained; and 
    Evaluate the results. 
 
By using statistical theory, quantify sampling risk in limiting it to an acceptable level. 
Statistical sampling involves additional costs of designing individual samples to meet the 
statistical requirements and selecting items to be examined.  Where the audit objective 
would be best accomplished by stratifying the universe/population into high and low 
strata (e.g., where Medicare bad debts are being tested), use your judgment in designating 
the threshold for this stratification.  Once determined, review all the items in the high 
strata population and use statistical or nonstatistical sampling to test the low strata. 
 
C.   Sampling Risk 
 
In performing substantive tests of details, consider: 
 
  The risk of incorrect acceptance that the sample supports the conclusion that the 
items are not materially misstated when they are; and  
 
  The risk of incorrect rejection that the sample supports the conclusion that the 
items are materially misstated when they are not. 
 
D.   Using the Test Results 
 
If the results of testing your sample that was selected using a nonstatistical method 
indicate probable errors in the universe of transactions, entries, or statistics, document 
your decision to expand the sample or redesign the sample using a statistical method.   If 
the results of testing your sample that was selected using a statistical method indicate 
probable errors in the universe, document your decision to project the error to the 
universe/population. 
 
If your adjustment pertains only to the error(s) that was identified, you must document 
the reason for not considering the effect of the error(s) on the universe. 
 
60.7  Evidence 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The AICPA fieldwork standard on evidence for a financial related audit states that:  
"Sufficient competent evidential matter is to be obtained through inspection, observation, 
inquiries, and confirmations to afford a reasonable basis for an opinion regarding the 
financial statements under examination." 
 
The GAS fieldwork standard on evidence for a financial related audit states that:  A 
record of the auditors work must be retained in the form of working papers. 
 
While the Medicare auditor does not express an opinion on financial statements, he/she is 
responsible for collecting sufficient and competent evidential data as a basis for drawing 
conclusions about the Medicare cost report. Ensure that evidence obtained during the  course of the in-house or field audit is sufficient to enable the auditor to support 
conclusions, adjustments, and recommendations.  Make sure that there is enough factual 
and convincing evidence so that a prudent person can arrive at the same conclusion of 
fact as the auditor.  In addition, evidence must be competent and relevant.  That is, 
evidence must be valid and reliable and have a logical relationship to the issue/subject 
under review. 
 
A.   Sources and Categories of Evidence 
 
Review all evidence, no matter from what source, with appropriate professional 
skepticism.  The auditor must keep an open mind, but must question the validity of all 
evidence and must determine its application to the situation under review.  In addition, 
evidence uncovered by an auditor that the provider has used in another situation, such as 
a bank loan application, public stock filing, insurance claim, other government reports 
(e.g., tax returns, SEC filings), or reports from an outside agency have greater credibility 
than conflicting or self-serving evidence offered by the provider concerning the audit. 
 
Obtain sufficient, competent evidence to ensure the propriety of costs claimed by the 
provider on its submitted Medicare cost report in order to determine that proper payment 
is made for services provided to Medicare beneficiaries.  The evidence consists of 
physical inspection or observation and corroborating documents such as checks, invoices, 
contracts, vouchers, assignment/rotation schedules for interns and residents, minutes of 
meetings, and written or oral testimony of provider employees. 
 
Base your audit tests on the best evidence available. Consider the probative value of 
evidence offered in context of the hierarchy of order and types of evidence. Never rely on 
evidence of a lower order or type if you can reasonably conclude that evidence of a 
higher order or type is available. Insist that providers produce evidence of the highest 
order and type that you believe is available. 
 
Categories of evidence include: 
 
(cid:121)  Physical Evidence.This is obtained from direct observation or inspection of 
property, equipment, inventory, cash, activities, or events.  However, in certain 
circumstances, physical evidence may not be sufficient, especially if the auditor 
has to rely on personal knowledge to determine the propriety or value. 
 
(cid:121)  Documentary Evidence.This type of evidence is the most commonly used and 
referred to by an auditor.  It is created information such as letters, contracts, 
accounting records, invoices, checks, interns and residents rotation schedules, 
etc. 
 
(cid:121)  Analytical Evidence.This is developed by the auditor through calculations, 
analysis, comparisons, and reasoning.  It can be used to test the provider's 
calculations, account breakdowns, statistics, and allocations. 
  (cid:121)  Testimonial Evidence.This is probably the least reliable type of evidence.  It is 
obtained from others, both inside and outside the provider's organization, through 
responses to inquiries and interviews.  (By itself, this category of evidence is 
unacceptable for Medicare purposes. Therefore, evaluate all such information and 
corroborate with additional evidence.) 
 
In evaluating the effectiveness and usefulness of evidence, consider whether the audit 
objectives have been achieved.  If the audit objectives were not achieved, the evidence 
was either not sufficient or was only sufficient to establish that there was a problem.  
Obtain additional evidence in order to reach a valid conclusion and achieve the audit 
objective. 
 
If there is sufficient and reliable evidence that supports a conclusion that the providers 
reported reimbursement amount for a specific area is incorrect, make an appropriate 
adjustment and document it in the working papers.  Likewise, if the provider does not 
furnish sufficient and reliable evidence to support the reported reimbursement amount for 
a specific area, make an adjustment to disallow the reimbursement in question.  (See 42 
CFR 413.20(a), 42 CFR 413.24(a), and 60.10, 60.11, and 60.12 of this chapter.) 
 
60.8  Working Papers 
(Rev. 27, 12-19-03) 
 
AICPA Standards and GAS require that "a record of the auditors' work should be retained 
in the form of working papers."  An additional working paper standard requires that 
"working papers should contain sufficient information to enable an experienced auditor 
having no previous connection with the audit to ascertain from them the evidence that 
supports the auditors significant conclusions and judgments." 
 
A.   Definition 
 
Working papers contain evidence accumulated throughout the audit to support the work 
performed, the results of the audit, including adjustments made, and the judgment of the 
auditors.  They must stand on their own without the need for supplemental explanation or 
documentation. 
 
Working papers are the records kept by the auditor of the procedures applied, the tests 
performed, the information obtained, and the pertinent conclusions (findings, no findings, 
dollar adjustments) established during the audit.  Examples of working papers are audit 
programs, analyses, memoranda, letters of confirmation and representation, abstracts of 
provider documents, and schedules or commentaries prepared or obtained by the auditor.  
Working papers may be in the form of data stored on tapes, film, or other media. 
 
Prepare and maintain working papers, the form and content of which should be designed 
to meet the circumstances of a particular audit.  The information contained in working 
papers constitutes the principal record of the work that the auditor has done and the 
conclusions that the auditor reached concerning significant matters.     
B.   General Content of Working Papers 
 
Working papers should ordinarily include documentation showing that: 
 
  The work has been adequately planned and supervised. This includes 
consideration of the audit requirements of Medicare and any other payers, which 
are part of a common audit with Medicare. 
 
  The audit evidence obtained, the auditing procedures applied, and the testing 
performed have provided sufficient, competent evidential matter to support the 
auditor's conclusions. 
 
C.   Format of Working Papers 
 
Ensure that the working papers are prepared using the following standards. 
 
Start each individual working paper with the basic mechanical foundation containing: 
 
  Provider name, number, and cost reporting period. 
 
  Preparer's signature or initials. 
 
  Date the work was performed. 
 
  Proper heading, giving basic content of the working paper. 
 
  Working paper number or reference. 
 
  PurposeA brief description of the work to be done on the working paper and the 
objective to be achieved (e.g., a comparison of the contractors PS&R with the as-
filed settlement data to validate the provider's claimed Medicare statistics). 
 
  Source of InformationThis informs the reviewer where the information used on 
the working paper was obtained.  The source can be a description of the 
particulars, e.g., Medical Records Admission Register, or it can be in the form of 
cross-referencing to the cost report, financial statements, or other working papers.  
Cross-referencing is especially important because it enables the reviewer to see at 
a glance exactly where an amount, number etc. comes from.  Copies, or if 
appropriate samples, of the information/ documents examined must be retained in 
the working papers. 
 
  Scope of WorkThe stated scope of work should enable a reviewer to determine if 
an adequate test was performed to meet the scope of the audit purpose. 
    Explanation of Tick Marks Use tick marks to explain and cross-reference the 
work performed. 
 
  ConclusionWhen a working paper is complete, the contractor shall state 
conclusions covering the results of the audit activity. 
 
  EXAMPLE: No exceptions were noted in the test; therefore, the as-filed 
number of full time equivalent (FTE) residents used for GME payment is 
accepted. 
  EXAMPLE: Exceptions were noted in the number of FTE residents used for 
GME payment.  An adjustment is proposed to correct the as-filed GME FTE 
statistic. 
 
Furthermore, the working papers should: 
 
  Be legible, complete, and accurate in order to provide proper support for findings, 
judgments, conclusions, and to document the nature and scope of the work 
conducted 
 
  Contain sufficient information so that supplementary oral explanations are not 
required; 
 
  Include summaries and lead schedules, as appropriate; 
 
  Contain adequate indexing and cross-referencing to the audit program, lead 
summaries, and adjustment report.  (Each audit step that is initialed on the audit 
program should contain a reference to the specific working paper on which this 
step was addressed.  It is not acceptable to just reference the general working 
paper series for an area under each audit step for that area.  For example, include a 
reference to W/P 13-1(a) instead of W/P 13 series.  Also, if you reference a 
specific working paper under the first audit step pertaining to an area/issue, do not 
draw a vertical line from that reference through all other audit steps for that area 
unless all the audit work for all those audit steps was actually detailed on that 
working paper. 
 
  Restrict information to matters that are materially important and relevant to the 
objectives of the audit; 
 
  Contain evidence of supervisory review of the work including initials. 
 
   Include an index to working papers for ease of reference. 
 
  Include the audit program.  However, do not retain pages of a standard audit 
program that are not applicable to the audit. If in the audit program for a specific  provider you retain audit steps from the standard audit program that were not 
scoped, mark them N/A instead of leaving them unmarked. 
 
D.   Ownership and Custody of the Working Papers 
 
Working papers are the property of the auditor.  The auditor's rights of ownership, 
however, are subject to ethical limitations relating to the confidential relationship with 
providers. 
Adopt reasonable procedures for safe custody of working papers in the field as well as in 
your office in accordance with the Health Insurance Portability and Accountability Act 
(HIPAA) and retain them for a sufficient period of time to meet the needs of your 
operation and to satisfy legal requirements of record retention. 
 
When requested, send original working papers to the appropriate CMS component or 
CMS designated agent for review. 
 
60.9  Documentation Standards 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Documentation that the evidence obtained, procedures applied, and tests performed 
provide sufficient, competent, and relevant evidence to support the auditors opinions, 
judgments, conclusions, or recommendations is essential.  After obtaining and testing the 
various types of evidence (e.g., invoices, bills, contracts, statistics such as the FTE 
number of interns and residents) considered necessary in the circumstances, retain at least 
a representative sample of such evidence.  If only a sample of the evidence for each area 
of in-house or field audit is retained, refer to evidence not retained and its relationship to 
the basis for the opinions, judgments, conclusions, or examinations. 
 
Where audit adjustments were made, auditors should include in the working papers, 
copies of provider documents that were reviewed. For those documents not copied, 
auditors may meet GAS requirements by listing voucher numbers or check numbers.  As 
an example, if voucher numbers or check numbers are used as a means of identification, 
sufficient documentation should consist of also listing the respective dates paid, amounts 
paid, and descriptions of the items for which the vouchers or checks were issued. Where 
audit adjustments were not made, auditors must include in the working papers copies of a 
representative sample of documents examined. Where materiality is a factor, define 
"materiality" within the scope and objective of your review/audit. 
 
These documentation standards apply to both the desk review, in-house and field audits. 
 
60.10  Pre-Exit Conference 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Conduct a pre-exit conference on the last day that the audit team is conducting the 
fieldwork or the date established at the entrance conference. Give the provider a copy of 
all the tentative audit adjustments and working papers (where requested by the provider)  including those being proposed due to lack of documentation and discuss all the tentative 
adjustments that the provider wishes to go over.  Also, give the provider a written list of 
any outstanding documentation that you requested but have not received to date.  Inform 
the provider to furnish your audit staff with the additional documentation within 4 weeks.  
Establish an exit conference date that will allow up to 8 weeks (or longer if you can 
document extenuating circumstances) from the end of the 4 week period given to the 
provider to provide additional documentation. 
 
See Exhibit V in 170 of this chapter for a sample pre-exit conference format. 
 
60.11  Finalization of Audit Adjustments 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
Use the time period between the pre-exit conference and exit conference to review any 
additional documentation submitted by the provider in response to your request at the 
pre-exit conference or in support of the proposed audit adjustments that the provider did 
not agree with.  CMS encourages continuing dialogue during this period between you and 
the provider for issues where agreement was not reached at the pre-exit conference.  
However, it is not necessary to consider any documentation that is received after the 
timetable provided at the pre-exit conference unless prior arrangements with the provider 
have been made. 
 
While you should not refuse to accept documentation submitted after the established 
timeframes, you do not need to consider it in the initial NPR issuance.  If a reopening is 
later granted (see 100ff of this chapter) or a timely appeal is made, the late 
documentation may be considered at that time. 
 
At the conclusion of your review of the providers documentation, prepare an audit 
adjustment report (see Exhibit VI in 170 of this chapter) and clearly identify all new or 
modified adjustments that the provider did not see previously by indicating the date of the 
change.  Send this audit adjustment report to the provider with a request to notify you in 
writing, within 2 weeks, of any concerns with the new or modified adjustments. Also, 
inform the provider in writing that the audit adjustments will become final after you make 
any necessary modification based on those written concerns and documentation 
supporting them.  Therefore, any documentation submitted later (e.g., at the exit 
conference) will not be considered for the purpose of issuing the Notice of Amount of 
Program Reimbursement (NPR). 
 
Unless you can document extenuating circumstances, you have up to 12 weeks from the 
pre-exit conference for the finalization of the audit adjustments. This period include the 4 
weeks given to the provider to submit additional documentation and the 2 weeks that 
you must give the provider to review and comment on any audit adjustments not 
presented at the time of the pre-exit conference. 
 
60.12  Exit Conference  (Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Each provider is entitled to an exit conference.  Make the provider aware that if it wishes 
to waive a formal exit conference, it must notify you of this decision in writing (e-mail 
note will suffice) at any time before the scheduled date of the exit conference.  (See 
Exhibit II in 170 of this chapter.) 
 
Persons participating in the exit conference should be those parties authorized to make 
final decisions with respect to the audit. In addition, CMS encourages third party 
preparers of the cost report to participate. 
 
At the start of the exit conference, give the provider all the audit adjustments (including 
those made due to lack of documentation) that were finalized in a manner described in 
60.11 of this chapter.  Also, give the provider copies of requested working papers if they 
were not previously given to the provider.  Since the provider had an opportunity to 
comment on all the audit adjustments during the pre-exit conference and during the 
finalization period, there should be no need to change them during the exit conference. 
 
If additional documentation is submitted during the exit conference, do not refuse it. 
Rather, inform the provider that you do not need to consider this documentation in the 
initial NPR since the documentation was not submitted within the established timeframes 
(see  60.10 and 60.11 of this chapter).  If a reopening is later granted (see 100ff) or a 
timely appeal is made, the late documentation may be considered at that time. 
 
Also, explain during the exit conference that the provider may still appeal any lack of 
documentation or other issues to the Provider Reimbursement Review Board (PRRB). 
 
The exit conference can be performed telephonically. However, include a written record 
of the issues discussed (either telephonically or onsite), including the explanation 
pertaining to the lack of documentation adjustments in your working papers. 
 
60.13  Supervision During the Audit Process 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The Government Auditing Standards related to performance of audits state that: "Staff 
are to be properly supervised." and "Supervision involves directing the efforts of auditors 
and others who are involved in the audit to determine whether the audit objectives are 
being accomplished. Elements of supervision include instructing staff members, keeping 
informed of significant problems encountered, reviewing the work performed, and 
providing effective on-the-job training." 
 
A.   Staff Supervision 
 
Direct supervision of staff during the audit by a qualified supervisor is necessary to 
ensure that the audit is completed in accordance with the audit work plan.  Proper 
supervision must be a constant activity during the desk review process, planning and  completion of the audit, preparation of the audit report, and settlement of the cost report.  
Supervision is required so that each member of the audit team understands the objective 
of each desk review/audit procedure, how to perform and document the completion of the 
audit procedure in the working papers, and how to evaluate the audit evidence.  Establish 
procedures for supervision that are distinct from responsibilities of individuals to 
adequately plan and supervise the work on a particular audit. 
 
Assure that the policies and procedures for planning, performance, and supervision of 
audits meet the GAS standards of quality.  You must provide procedures for planning 
individual audits in accordance with Medicare instructions, such as: 
 
  The development of proposed audit programs; 
 
  The determination of staffing requirements and the need for specialized 
knowledge; and 
 
  The development of estimates of time required to complete the audit. 
 
You must also provide guidelines for maintaining standards of quality for work, such as: 
 
  Guidelines for the form and content of working papers; 
 
  Procedures for resolving differences of professional judgment among members of 
an audit team; and 
 
  Standard forms, checklists, and questionnaires appropriate to assist in the 
performance of audits. 
 
Furthermore, you must provide procedures for reviewing audit working papers and 
reports. 
 
B.   Hiring 
 
Prepare staff job descriptions and policies and procedures for hiring to provide reasonable 
assurance that those employed are able to perform audits competently.  You must: 
 
  Plan for staffing needs at all levels; 
 
  Establish quantified hiring objectives based on current workload, anticipated 
changes in workload, staff turnover, individual advancement and retirement, and 
current Medicare budget; and 
 
  Establish qualifications and guidelines for evaluating potential hires at each 
professional level. 
 
C.   Supervisory Review Standards for Working Papers   
The audit working papers and associated files (e.g., permanent file) are the only evidence 
of the audit procedures you performed to support your decision on the accuracy of the 
final settled Medicare cost report. 
 
An element of supervision is a thorough supervisory review of the audit working papers.  
This may require several levels of review, depending on the size and configuration of the 
audit organization.  For example, in a larger organization, the in-charge auditor is 
responsible for reviewing the work of other auditors on the team, and an independent 
supervisor reviews all work performed during the audit.  While the ideal situation would 
have this second level review performed by an audit supervisor, the individual 
performing that function need not have that title.  Rather, the individual may be a highly 
qualified senior auditor who is not part of the team performing the audit.  In addition, a 
manager may also perform a subsequent higher- level review of the completed work. 
 
Your responsibility to review the audit working papers includes audits performed by all 
your employees and by individuals who are not your employees (i.e., subcontractors) 
regardless of the arrangements under which they perform the audits.  You cannot delegate 
the responsibility to perform independent review of a subcontractor even if the 
subcontractor is another fiscal intermediary. 
 
The supervisory review also satisfies the audit standards requirement for due professional 
care in performing the audit.  The first level of defense to ensure the quality of the 
working papers is the on-site supervision of the audit staff.  The second level of defense 
to ensure the quality of the working papers is the supervisory review.  No improvement in 
the quality of the audit work will occur unless management recognizes the importance of 
the working paper review, as the second most important line of defense in maintaining 
quality working papers.  Proper supervisory review: 
 
  Ensures that the audit is completed in accordance with the audit plan; 
 
  Minimizes contradictions within the audit working papers; 
 
  Minimizes inappropriate or inaccurate interpretation of Medicare policies; and 
 
  Assists in the evaluation and development of staff. 
 
Give the supervisory reviewer adequate time to complete a competent review.  No matter 
how knowledgeable the reviewer is, the effectiveness of the review is directly 
proportionate to the time spent on the review.  The reviewing supervisor must have 
sufficient knowledge and understanding of the following: 
 
  Medicare laws, regulations, and payment policies; 
 
  Medicare cost reporting requirements; 
    GAS and the AICPA SAS; and 
 
  Provider accounting procedures. 
 
D.   General Approach to Supervisory Review of Audit Working Papers 
 
The reviewing supervisor must: 
 
  Be critical and not perfunctory; 
 
  Be methodical, careful, and thorough; 
 
  Ensure that the working papers support the audit objectives; 
 
  Question the stated conclusions and be able to arrive at the same conclusions, 
based on the evidence presented on the working papers; and 
 
  Have a clear understanding of materiality and spend proportionately more time on 
material issues. 
 
E.   Specific Points in the Supervisory Review of Audit Working Papers 
 
While the following points are not all-inclusive, the reviewing supervisor should: 
 
  Obtain an overall understanding of the provider by reviewing its 
correspondence file, permanent file, financial statements, and as-filed cost 
report; 
 
  Understand the audit work plan as determined by the desk review and the 
resulting scope of audit, as detailed in the audit program; 
 
  Discuss the in-house or field audit with the in-charge auditor to determine 
areas in which the auditors had problems; 
 
  Ensure that the audit work plan is completed; 
 
  Ensure that decisions to defer audit steps identified in the initial audit scope 
are adequately documented; 
 
  Ensure that the working papers meet the mechanical and analytical 
requirements for quality working papers (see 60.8 of this chapter); 
 
  Ensure that Medicare payment policies are properly interpreted; 
 
  Ensure that conclusions are supported by sufficient, competent, and relevant 
evidential matter;   
  Ensure that conclusions drawn from the audit procedures are supported by the 
work performed; 
 
  Ensure that the provider has been advised of proposed adjustments and given 
sufficient time to respond; 
 
  Ensure that all the retained adjustments are incorporated in the adjustment 
report; 
 
  Ensure that the aggregate of all adjustments passed as immaterial do not have 
a significant impact on Medicare payment; 
 
  Test calculations which have a direct impact on Medicare payment; 
 
  Look for areas which require more in-depth audit in subsequent audits and 
determine how they were addressed; 
 
  Ensure that notes for future audits are prepared and included in the permanent 
reference file; 
 
  Prepare review notes; 
 
  Make a final check of the working papers after the review notes are cleared;  
 
  Ensure that unnecessary papers are deleted from the working paper file; 
 
Retain supervisory review notes in the working papers. 
 
70  Reporting Standards 
(Rev. 27, 12-19-03) 
 
70.1  Content and Structure of the Medicare Cost Report Audit Report 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Complete the audit report on your letterhead paper specifying the name of the provider or 
provider complex whose Medicare cost report was audited. Include the provider and 
subprovider numbers for all components reported on the Medicare cost report for the 
provider complex. Also, include either a separate notice of program reimbursement 
(NPR) for each provider and subprovider component, or one NPR for the entire complex, 
identifying the provider/subprovider component name, number, and cost reporting period. 
 
In preparing the Medicare audit report, you will:  (cid:121)  Ensure that the audit report complies with Government Auditing Standards (GAS) 
requirements (see Chapter Five of the Government Auditing Standards entitled 
Reporting Standards for Financial Audits); 
(cid:121)  Incorporate statements of positive and negative assurance for compliance with 
Medicare laws, regulations and instructions; 
(cid:121)  Designate those individuals authorized to sign such reports; 
(cid:121)  Incorporate statements referring to your consideration of the provider's internal 
control structure in planning substantive audit tests; 
(cid:121)  Ensure that the audit report contains the following elements: 
 
  A statement that you audited the provider's Medicare cost report; 
 
  A statement that the audit was conducted in accordance with GAS; 
 
  If the report relates to a provider's Medicare cost report, a statement that those 
standards require the contractor to plan and perform the audit to obtain 
reasonable assurance about whether the cost report reflects payment amounts 
and financial data in accordance with Medicare laws, regulations, and 
instructions; 
 
  A statement that the Medicare provider is responsible for compliance with 
Medicare laws, regulations, and instructions. 
 
  Reference the Medicare cost report audit adjustment report.  (See 70.4 of this 
chapter.) 
 
  Refer to areas selected for audit.  ny areas selected for in-house or field audit must 
be listed. 
 
  Include a listing of the applicable internal control policy and procedure categories, 
as they affect Medicare payment. 
 
Use Exhibit VII in 170 of this chapter as an example of a Medicare audit report, 
including the report on the consideration of the internal control structure of the provider. 
 
Edit the audit report to fit the particular circumstances of the audit. or example, if you 
decided that a review of a provider's system of internal control was not applicable, use 
one of the alternative paragraphs to explain the basis for this decision.  In this situation, 
the language pertaining to a review of internal control would not be applicable and should 
not be included in your audit report to the provider.  Conversely, if you did perform a 
review of internal control, do not use the alternative paragraphs.  Instead, use the 
language pertaining to the review of internal control system as appropriate. 
  70.2  Form of Report if Medicare Cost Report was not Audited 
(Rev. 27, 12-19-03) 
 
If the Medicare cost report has been settled without audit, issue a report as part of the cost 
report settlement.  Use Exhibit VIII in 170 of this chapter as a sample. 
 
70.3  Reporting of Indications of Illegal Acts 
(Rev. 27, 12-19-03) 
 
Illegal acts would consist of fraud or abuse against the Medicare program.  Do not issue a 
report for any audit where illegal acts or indications of illegal acts are discovered and a 
fraud or abuse referral is made to the CMS regional office.  Office of the Inspector 
General (OIG) will notify you in writing of the content of the report to be used.  
However, issue a report in situations where for several years you have made recurring 
adjustments, notified the provider, and referred the situation to OIG.  (See 140.2 of this 
chapter.) 
 
70.4 - Audit Adjustment Report 
(Rev. 27, 12-19-03) 
 
The audit adjustment report is a complete listing, in a logical order of presentation, of 
audit adjustments arising from the contractors examination of the cost report.  It contains 
the description of each audit adjustment in sufficient detail to explain the providers 
noncompliance, the adjustment amount, and the Medicare cost report reference where the 
adjustment is to be applied to the revised cost report. 
 
Ensure that the audit adjustment report is prepared in the format of the sample report 
shown in Exhibit VI in 170 of this chapter. 
 
Where no adjustments were made to the cost report as originally submitted by the 
provider, you may include the adjustment forms marked "not applicable" or reflecting "0" 
amounts.  However, these forms may be omitted if the notes to the cost report indicate 
that no adjustments were made. 
 
70.5  Medicare Cost Report and All Related Documents 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
Maintain the following documents (as applicable) related to the Medicare cost report and 
Medicare audit report(s) in your files.  Also, send all the relevant documents detailed 
below to the provider at the time you settle (see 90 of this chapter) the cost report. 
 
  Transmittal letter to the provider; 
 
  Letter of overpayment collection or check disbursement; 
    Notice of Amount of Program Reimbursement (NPR)  (see PRM-1, 2906 for a 
sample format); 
 
(cid:121)  Auditor's report(s) for the audit and, if applicable, for internal control structure or 
a form of report where the cost report was settled without audit; 
 
(cid:121)  Listing of areas selected for audit; 
 
(cid:121)  Listing of the applicable internal control policy and procedure categories, as they 
affect Medicare payment; 
 
(cid:121)  Listing of reportable conditions and material weaknesses (only if reportable 
conditions or material weaknesses were found); 
 
(cid:121)  Management letter, if applicable; 
 
(cid:121)  Cost report adjustment report; and  
 
(cid:121)  Audited or settled without audit Medicare cost report. 
 
80  Standards for Performing Medicare Audits 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
In performing a Medicare audit, comply with the standards outlined in this chapter. 
Although not exact these standards reflect Chapter 3 of the Government Auditing 
Standards (GAS) entitled General Standards.  The American Institute of Certified 
Public Accountants (AICPA) Statements on auditing standards have been adopted and 
incorporated as GAS requirements. 
 
These standards apply to all audit organizations, both government and nongovernmental 
(e.g., public accounting firms), that conduct government audits, unless specifically 
excluded.  The general standards applicable to Medicare audits are: 
  Qualifications; 
  Independence; 
  Due Professional Care; and 
  Quality Control. 
 
80.1  Qualifications 
(Rev. 127, Issued: 07-13-07, Effective: 10-01-07, Implementation: 10-01-07) 
 
The first general standard for government auditing is: 
  "The staff assigned to conduct the audit should collectively possess adequate professional 
proficiency for the tasks required." 
 
Ensure that the Medicare audit is conducted by staff that collectively has the knowledge 
and skills necessary for the audit.  These qualifications apply to the knowledge and skills 
of the contractors organization as a whole, and not necessarily to every individual 
auditor. 
 
A  Continuing Education and Training (CET) 
 
To meet this standard, the contractor shall establish a program to ensure that its staff 
maintains professional proficiency through CET. 
 
The following represent the continuing education responsibilities of an audit organization 
and also reflect additional guidance from CMS to help the contractor. 
 
B  Education Required 
 
All persons responsible for planning, directing, conducting, reviewing, or reporting on 
government audits must receive at least 80 hours of continuing education and training 
(CET) every two years.  For example, auditors who first start conducting audits on 
January 1, 2002, must complete the CET requirements as follows: 
 
  The first 80 hours must be completed by December 31, 2003.  Any excess over 
the 80-hour requirement does not carry forward to the next two-year cycle. 
 
  After CET requirements for the first two-year period (i.e., January 1, 2002, to 
December 31, 2003) have been satisfied, a rolling count is permissible for measuring 
compliance with the requirements.  Under a rolling count, compliance with the CET 
requirements is measured annually using the two most recent years. 
 
  At least 20 hours must be completed in each year of the two-year cycle. 
 
  At least 24 of the 80 hours must be in subjects directly related to government 
environment and to government auditing.  Since the contractor is operating in a 
specific or unique environment, i.e., Medicare, it shall schedule the 24 hours of 
training, noted above, in subjects related to the government environment and to the 
Medicare auditing process. 
 
  Appropriate courses on Medicare and other health care related issues include, but 
are not limited to, GAS, Medicare policy development (how it affects audits), 
preparation and review of Medicare audit working papers, current Medicare audit and 
payment issues, and the AICPA Audit and Accounting Guide:  Providers of Health 
Care Services. 
  For purposes of the 80-hour and the 24-hour requirements, CMS interprets the term 
"conducting" and the phrase "conducting substantial portions of the field work" as 
referring to those individuals who perform substantial portions of the tests and procedures 
necessary to accomplish the audit objectives. An individual is considered to be 
responsible for "conducting substantial portions of the field work," for purposes of the 
CET requirements, when the following conditions are met: 
 
  On a given audit, the individual performs 20 percent or more of the total field 
work; or 
 
  In a given year, the individual's chargeable time to government audits is 20 
percent or more of the individual's total chargeable time. 
 
Staffs who are only involved in performing audit work but not involved in planning, 
directing, or reporting on the audit or attestation engagement and who charges less than 
20 percent of their time to the, desk review, audit and attestation engagement are required 
to take 24 hours of government related.  CET in each 2 year period. However, they are 
not required to comply with the 80-hour CET requirement. 
 
Auditors who have been employed by the audit organization for less than one year of a 
given two-year period are not required to complete a minimum number of CET hours.  
However, entry-level auditors with less than one year with the audit organization must 
receive appropriate training during their first year with the audit organization.  Auditors 
employed by the audit organization for one year, but less than two years, in a given two-
year period, must complete a minimum of 20 hours of CET in the full calendar year.  All 
auditors to whom the CET requirements for 80 hours and 24 hours apply have two years 
to meet the requirements. 
 
Terminated employees must have been trained in accordance with the contractors plan of 
training, at least until a formal notice of termination is received or issued. 
 
Auditors who have not completed the required number of CET hours for any two-year 
period for a legitimate reason will have the two months immediately following the two-
year period to make up the deficiency.  Auditors must make up any deficiency in the 24-
hour requirement first.  The contractor shall not count any CET hours completed towards 
a deficiency toward either the 20-hour requirement in the year in which they are taken, or 
the 80-hour and the 24-hour requirements for the two-year period in which they are 
taken. 
 
C  Employees Covered Under the CET Requirement 
 
Any auditor who is responsible for planning, directing, conducting, reviewing, or 
reporting on government audits is subject to the CET requirements.  Also, anyone whose 
decisions affect the outcome of government audits is covered by CET requirements.  
Since the contractor may use various types of employees in the audit process, the  following is CMS's interpretation of the applicability of CET requirements to certain 
types of employees: 
 
  Junior Auditors  CET requirements extend to junior auditors who perform 
portions of the audit.  "Conducting" is not limited to auditors in a supervisory or 
management role. 
 
  Contract Auditors When the contractor contracts with CPA firms for entire 
audits, or to provide audit staff to work under its supervision, they are subject to 
the same requirements as the contractor.  The contractor shall require compliance 
with the CET requirements as a specific condition of the audit subcontract.  It 
shall obtain written assurance that each person meets CET requirements prior to 
the start of each audit. 
 
  Temporary Auditing Staff  A temporary auditor who is hired for a very 
limited timeframe, not to exceed one quarter at a time or in one year, under the 
contractors direct supervision, is not subject to CET requirements. 
 
  Crossover Staff  Staff members used in multiple functions must meet the 
CET requirements when their decisions could affect the outcome of an audit.  For 
CET purposes employees who are transferred to the Medicare audit department 
are considered new hires, as are employees who are promoted to a professional 
staff level. 
 
  External Consultants and Internal Consultants and Specialists  External 
consultants and internal consultants and specialists must be qualified and must 
maintain their professional proficiency in their area of expertise and 
specialization, but they are not required to meet CET requirements.  For example, 
attorneys the contractor employs, who work in the provider appeals area, are not 
subject to the CET requirements, but they must maintain their professional 
proficiency. 
 
  Clerical and Paraprofessional Staff  Clerical and paraprofessional staff, 
including student interns, are not subject to the CET requirements. 
 
Review all position descriptions to ensure that they accurately reflect the employees' 
duties and responsibilities.  If you have concerns or questions on certain position 
descriptions, submit your questions to your RO for a determination.  These position 
descriptions will be reviewed by CMS and the Office of the Inspector General (OIG) to 
determine the need for compliance with the CET requirements. 
 
D  Contractor Responsibility 
 
Establish and implement a program to ensure that the auditors meet the CET 
requirements.  You must: 
  (cid:121)  Prepare a general plan for training.  Review and revise the plan, as appropriate, and 
allocate resources to ensure that all staff subject to CET requirements receive 
training; and   
 
(cid:121)  Implement the CET program to ensure that for every two-year period the 80-hour and 
24-hour requirements are met, and that at least 20 CET hours are completed in each 
year of the two-year period. 
 
(cid:121)  Retain course information for your employees receiving CET credit for contractor-
sponsored courses.  Maintain records for a five-year period from the completion of 
the two-year period.  Maintain a record for each employee which reflects: 
 
  Record of participation; 
  Course agenda; 
  Course date(s); 
  Location at which the course was given; 
  Name(s) of instructor(s) and related training, education, and experience; 
  Number of CET credit hours; and 
  Copy of course material presented. 
 
(cid:121)  Retain course information for employees receiving CET credit for outside courses.   
Maintain records for a five-year period from the completion of the two-year period.  
Obtain a letter of completion or certificate, and retain a record for each employee 
which reflects: 
 
  Name of course; 
  Course date(s); 
  Location at which the course was given; 
  Course sponsor; and 
  Number of CET credit hours. 
 
(cid:121)  Submit, to the appropriate RO, an annual certification by January 31 following the 
close of any calendar year, stating that it is complying with the CET requirements. 
 
E  General Guidelines for Training Courses 
 
Continuing education and training may include such topics as current developments in 
audit methodology, accounting, assessment of internal controls, principles of 
management and supervision, financial management, statistical sampling, evaluation 
design, and data analysis.  It also includes subjects related to the auditors' specific field of 
work.  The contractor shall consider the following sources when developing a training 
program for auditors: 
 
  Recognition for Courses Needed for CPA Licensing  In meeting the overall 80-
hour requirement, courses approved or recognized by the AICPA or the respective  state licensing board that contribute to the auditors' professional proficiency are 
recognized for purposes of meeting the CET requirements. 
 
  CMS-Sponsored Training  From time to time, CMS may contract with vendors 
to provide training courses and will notify you of their availability.  In addition, 
CMS may offer training in settings such as a national audit conference. 
 
  Contractor-Sponsored Training  The contractor should obtain sponsorship status 
for its training courses through its respective state CPA licensing board.  This will 
help to ensure that the courses will meet the CET requirements.  Also, the courses 
will be recognized for CPAs on your staff that is required to obtain continuing 
professional education credits for CPA licensure.  In the development of in-house 
training, the contractor shall consider the AICPA's Statement of Standards for 
Formal Group and Formal Self-Study Programs.  While in-house training is 
recognized as the most cost-efficient method of training, the contractor should not 
rely solely on this method. 
 
  Credit Hours  A CET credit hour may be given for each 50 minutes of 
participation in programs and activities that qualify.  One-half CET hour 
increments (equal to 25 minutes) may also be given after the first CET hour has 
been earned in a given program or activity.  For example, two 90-minute, two 50-
minute, and three 40-minute presentations equal 400 minutes or 8 CET hours.  
When the total minutes of a presentation are more than 50, but not equally 
divisible by 50, the CET hours should be rounded down to the nearest one-half 
hour. 
 
A conference in which individual segments may be less than 50 minutes is counted as 
one program, rather than several short programs.  The total minutes of all segments will 
be divided by 50 minutes in order to determine the CET hours for the program. 
 
For a college or university course, each unit of credit earned on a semester system will 
equal 15 CET hours. Each unit of credit earned on a quarterly system will equal 10 CET 
hours. 
 
  Credit for Instructor Preparation Time  When an instructor or discussion leader 
serves at a program for which participants receive CET credit, and is at a level 
that increases professional competence, the contractor shall give CET credit for 
preparation and presentation time measured in terms of credit hours.  For the first 
time a program is presented, CET hours will be received for actual preparation 
time, up to two times the class hours.  For example, if a course is rated as eight 
CET hours, the instructor should receive up to 24 hours of CET credit (16 hours 
for preparation and eight hours for class time).  For repeated presentations, the 
instructor should receive no credit unless the subject matter has changed 
sufficiently to require additional study or research.  In addition, the maximum 
credit for preparation should not exceed 50 percent of the total CET credit an 
instructor or discussion leader accumulates in a two-year CET reporting period.   
  Individual Study Programs  Individual study programs that may receive CET 
credit include correspondence courses and courses given through audiocassettes, 
tapes, videotapes, and computers.  (See the AICPA's standards for more detailed 
requirements.) 
 
F  Staff Qualifications 
 
Qualifications for staff members conducting Medicare audits include: 
 
  A knowledge of the methods and techniques applicable to Medicare auditing, and 
the education, skills, and experience to apply such knowledge to the audit being 
conducted; 
 
  A knowledge of the Medicare program; 
 
  Skills to communicate clearly and effectively, both orally and in writing; and 
 
  Skills appropriate for the audit work being conducted. 
 
80.2  Independence 
(Rev. 27, 12-19-03) 
 
The second general standard for government auditing is: 
 
"In all matters relating to the audit work, the audit organization and the individual 
auditors, whether government or public, should be free from personal and external 
impairments to independence, should be organizationally independent, and should 
maintain an independent attitude and appearance." 
 
Maintain independence so that opinions, conclusions, judgments, and recommendations 
are impartial and viewed as impartial by knowledgeable third parties.   
 
Consider the three general classes of impairments to independence: 
 
  Personal  There are circumstances in which auditors are not impartial or are not 
perceived to be impartial. 
 
  External  Factors external to the contractor may restrict the audit or interfere 
with an auditor's ability to form independent and objective opinions and 
conclusions. 
 
  Organizational  A government auditors' independence is affected by their place 
within the structure of the government entity to which they are assigned and also 
by whether they are auditing internally or auditing other entities.  Since the 
contractor audits outside the government entity to which it is assigned (i.e., CMS  is not related to the providers being audited), this is generally not a concern for a 
Medicare audit, unless you are an insurance company that in its private line of 
business makes payment for health care benefits to providers of service that are 
related to or are based on Medicare payment formulas or payment methods. 
 
Establish policies and procedures to provide reasonable assurance that all Medicare audit 
and payment professional staff maintains their independence so as not to impair, or 
appear to impair, your independence in carrying out its Medicare audit responsibilities.   
 
See Exhibit IX in 170 of this chapter for a sample of the Personal Impairment Statement 
to be completed by each individual involved in the desk review, field audit, and 
settlement activities to ensure that he/she is free of personal impairments.  This statement 
can be completed by each individual on an annual basis and be updated during the year if 
circumstances that need to be disclosed arise. 
 
80.3  Due Professional Care 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
The third general standard for government auditing is: 
 
"Due professional care should be used in conducting the audit and preparing related 
reports." 
 
This standard places responsibility on the contractor and on its auditors to follow all 
applicable standards in conducting Medicare audits. 
 
Exercising due professional care means using sound professional judgment in 
establishing the scope, selecting the methodology, and choosing tests and procedures for 
the audit.  Follow the same judgment in conducting the tests and procedures and in 
evaluating and reporting on the audit results. 
 
A  Materiality and Significance 
 
In planning the audit, selecting the methodology, and designing audit tests and 
procedures, consider materiality and significance.  Communicate to your audit staff your 
quantifiable parameters for materiality and significance. 
 
B  Relying on the Work of Others 
 
(See 60.4 of this chapter for discussion on reliance on the work of other auditors.) 
 
C  Audit Follow-Up 
 
Due professional care also includes follow-up on findings and recommendations from 
previous audits that could have an impact on the current audit objectives. Determine  whether prompt and appropriate actions have been taken on findings and 
recommendations by provider officials or other appropriate organizations.  Pay special 
attention to how the provider implemented recommendations you may have given in a 
prior year regarding nonallowable costs or items.  (See 140ff of this chapter.) 
 
D  Audit Scope Impairments 
 
For all audits, auditors should consider whether audit scope impairments adversely affect 
their ability to conduct the audit in accordance with standards outlined within this 
chapter.  Audit scope impairments are factors external to the audit organization that can 
restrict the auditor's ability to render objective opinions and conclusions. 
 
80.4  Internal Quality Control 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
The fourth general standard for government auditing is: 
 
"Audit organizations conducting government audits should have an appropriate internal 
quality control system in place and participate in an external quality control review 
program." 
 
Establish an internal quality control program and provide reasonable assurance that your 
Medicare audit department: 
 
  Has established, and is following, adequate audit policies and procedures; and 
 
  Has adopted, and is following, applicable auditing standards. 
 
A  External Quality Control Review (Review of the Internal Quality Control 
System) 
 
OIG will perform an external review of your internal quality control system.  CMS will 
also review your internal quality review program as part of the Audit Quality Review 
Program (AQRP) or using other review mechanisms.  Any tests of your internal quality 
control system must evaluate: 
 
  The existence of such a system; 
 
  Compliance with the system; and 
 
  The effectiveness of the system. 
 
B  Establishment of an Internal Quality Control System 
  Establish internal quality control policies and procedures for your Medicare audit 
department, i.e., all Medicare audit and payment related activities.  Communicate these 
policies and procedures to Medicare audit personnel.  While the objective of internal 
quality control systems is always the same, the nature and extent of such systems can 
vary based on a number of factors.  Normally, documentation of internal quality control 
policies and procedures would be expected to be more extensive in a larger contractor 
than a smaller contractor, and more extensive in a multi-office contractor than in a single-
office contractor.  Therefore, in developing such a system, consider the following factors: 
 
  The size of its Medicare audit department; 
 
  The degree of operating autonomy allowed to your personnel and audit offices; 
 
  The nature of your work; 
 
  Your organizational structure; and 
 
  The cost effectiveness of an internal quality control system. 
 
C  Elements of Internal Quality Control 
 
In addition to the other elements of Generally Accepted Auditing Standards (GAAS), 
consider each of the elements of internal quality control listed below, to the extent 
applicable to your operating environment, in establishing your internal quality control 
policies and procedures.  The nine elements of internal quality control taken from the 
AICPA Statements of Quality Control Standards are: 
 
  Independence  To be free from financial, business, family, and other 
relationships involving the provider when required by the profession's code of 
conduct.  
 
  Consultation  To have personnel seek assistance, when necessary, from 
competent authorities, so that accounting or auditing issues are resolved properly. 
 
  Assignment of Personnel to Audits  To have personnel on the job who have the 
technical training and competence required for the circumstances. 
 
  Supervision  To determine that work is planned and carried out efficiently and in 
conformity with professional standards. 
 
  Advancement  To have people at all levels of responsibility that are capable of 
handling the responsibilities involved. 
 
  Hiring  To have competent, properly motivated people of integrity involved in 
audits. 
    Professional Development  To provide staff with the training needed to fulfill 
their responsibilities and to keep them abreast of current developments. 
 
  Acceptance and Continuance (fraud and abuse)  To anticipate potential problems 
with providers where fraud or abuse is suspected. 
 
  Inspection  To conduct periodic internal reviews to be sure that the other 
elements of the internal quality control system are working. 
 
D  Application of the Elements of Internal Quality Control to the Medicare 
Environment 
 
(1) Independence 
 
Establish policies and procedures to provide reasonable assurance that all Medicare audit 
and reimbursement professional staff maintain their independence so as not to impair, or 
appear to impair, your independence in carrying out its Medicare audit responsibilities. 
You must: 
 
  Designate an individual or group to provide guidance and to resolve questions of 
independence matters. 
 
  Communicate, in writing, the policies and procedures relating to independence to 
personnel at all levels. 
 
  Obtain the confirmation of independence of firms engaged to perform audits or 
segments of audits.  Obtain a separate representation for each audit. 
 
  Obtain from your personnel periodic, written representations of their 
independence on an annual basis, stating that: 
 
  They are familiar with your independence policies and procedures. 
  Financial interests in providers and related entities are not held and were 
not held during the period.  Any such financial interests must be listed, 
detailing the number of shares or the dollar amounts. 
  Personal, professional, or family relationships with providers and related 
entities do not exist and did not exist during the period.  List any relationships 
with an explanation, including the names of the parties to the transaction. 
  There were no transactions that might impair the extent of inquiry or 
disclosure, or affect audit findings in any way.  List any transactions with an 
explanation, including the names of the parties to the transaction. 
 
(2) Consultation 
  Establish policies and procedures to provide reasonable assurance that staff will seek 
assistance, to the extent necessary, from persons having the appropriate levels of 
knowledge, competence, judgment, and authority.  You must: 
 
  Maintain technical manuals (e.g., SAS) and Medicare manuals. 
 
  Issue memoranda or other pertinent material to staff regarding Medicare payment 
issues. 
 
  Inform staff of procedures to follow in resolving technical problems, including 
referrals to CMS and industry associations. 
 
  Maintain subject files containing the results of consultations for reference and 
research purposes. 
 
(3) Assignment of Personnel to Audits 
 
Establish policies and procedures to provide reasonable assurance that persons who are 
assigned to perform audits have the degree of technical training and competence required 
for the circumstances. 
 
Describe the method used to assign professional personnel to audits, including: 
 
  The basis on which assignments are made; 
 
  How staff are advised of their assignments, whether orally or in writing; 
 
  Who is responsible for making staff assignments on a day-to-day basis; and 
 
  How staff are informed of estimated time requirements and of any special skills or 
experience that a given assignment may demand. 
 
(4) Supervision 
 
Establish procedures for supervision that are distinct from responsibilities of individuals 
to adequately plan and supervise the work on a particular audit. 
 
Assure that the policies and procedures for planning, performance, and supervision of 
audits meet audit standards of quality.  You must: 
 
(cid:121)  Provide procedures for planning individual audits in accordance with 
Medicare instructions, such as: 
 
  The development of proposed audit programs;    The determination of staffing requirements and the need for specialized 
knowledge; and 
  The development of estimates of time required to complete the audit. 
 
(cid:121)  Provide procedures for maintaining standards of quality for work, such as: 
 
  Guidelines for the form and content of working papers; 
  Procedures for resolving differences of professional judgment among 
members of an audit team; and 
  Standard forms, checklists, and questionnaires appropriate to assist in the 
performance of audits. 
  Provide procedures for reviewing audit working papers and reports. 
 
(5) Hiring 
 
Prepare staff job descriptions and policies and procedures for hiring to provide reasonable 
assurance that those employed are able to perform audits competently.  It must: 
 
  Plan for staffing needs at all levels; 
 
  Establish quantified hiring objectives based on current workload, anticipated 
changes in workload, staff turnover, individual advancement and retirement, and 
current Medicare budget; and 
 
  Establish qualifications and guidelines for evaluating potential hires at each 
professional level. 
 
(6) Professional Development 
 
Establish policies and procedures for professional development to provide reasonable 
assurance that staff will have the knowledge required to enable them to fulfill assigned 
responsibilities and to progress within your Medicare audit department. The Professional 
Development Standard of internal quality control addresses the appropriateness of the 
professional education to the achievement of audit quality.  You must: 
 
  Establish a plan for meeting its CET requirements and communicate it to 
Medicare audit staff; and 
 
  Provide for on-the-job training, such as varying assignments among audit staff, 
assigning staff to different supervisors. 
 
(7) Advancement 
  Establish policies and procedures for advancing staff to provide reasonable assurance that 
those selected for advancement have the qualifications necessary for fulfillment of the 
responsibilities assigned.  You must: 
 
  Specify qualifications deemed necessary for the various levels of responsibility 
within its Medicare audit department; and 
 
  Evaluate the performance of personnel and periodically advise staff of their 
progress.  Maintain personnel files containing documentation relating to the 
evaluation process. 
 
(8) Acceptance and Continuance (Fraud and Abuse) 
 
The usual considerations for acceptance and continuance of clients of CPA firms are not 
applicable to the Medicare audit environment.  Although the nature of the relationship 
with the audit subject is materially different from that experienced by a CPA firm, there 
is equivalent concern with a Medicare audit in which fraud and abuse is suspected.  
Accordingly, make a full and immediate disclosure to your CMS RO and to the OIG, as 
appropriate, of suspected or detected fraud, abuse, illegal acts, or material misstatements 
or misrepresentations on the part of any provider, other organization or individual.  (See 
140ff of this chapter.) 
 
(9) Inspection 
 
Establish policies and procedures for inspection to provide reasonable assurance that the 
procedures relating to the other elements of internal quality control are being effectively 
applied.  Monitor the effectiveness of inspection policies and procedures.  Develop the 
procedures for inspection and ensure that inspections are performed by individuals acting 
on behalf of your management.  You must: 
 
  Prepare instructions and review programs for use in conducting inspection 
activities; 
 
  Establish frequency and timing of inspection activities and criteria for selection of 
engagements; and 
 
  Provide for reporting inspection findings to the appropriate management levels 
and for monitoring actions taken or planned. 
 
90  Final Settlement of the Cost Report 
(Rev. 127, Issued: 07-13-07, Effective: 10-01-07, Implementation: 10-01-07) 
 
CMS expects that you settle (i.e., issue a Notice of Amount of Program Reimbursement 
(NPR)) all cost reports that are not scheduled for audit within 12 months of acceptance of 
a cost report unless you have a documented reason why the cost report cannot be settled 
(for example bankruptcy, OIG investigation, DOJ investigation).  If a settlement has been  delayed because a prior year cost report is being audited, that settlement will be 
considered timely if completed within 6 months of the NPR date of the cost report that 
was audited.   If a provider files an amended cost report and that cost report is not going 
to be audited, CMS expects that you settle the cost report within the greater of 5 months 
from the acceptance of the amended cost report, or the time left of the 12 months from 
the acceptance of the initial filed cost report. 
 
If you audit a cost report, issue the NPR to the provider within 60 days of the exit 
conference or within 60 days after the audit adjustments are finalized (using the 
timeframes described in 60.11 of this chapter) if an exit conference is waived. 
 
As a general rule, if proper notification was given to the provider (see 60.1 and 60.2 of 
this chapter) and adjustments were proposed due to the lack of documentation as 
described in 42 CFR 413.20 and 42 CFR 413.24, issue the NPR without considering 
documentation received from the provider after the established timeframes unless there 
are circumstances that you have previously approved. 
 
If the provider used the PS&R settlement data to file the cost report or if you decide to 
use the PS&R data because the providers reported settlement data is not documented 
properly, settle the cost report using a PS&R with a paid through date no earlier than 120 
days prior to the issuance of the final audit adjustment report.  If you do not issue an audit 
adjustment report (e.g., there were no desk review exceptions resolution process 
adjustments or field audit adjustments), use a PS&R with a paid through date that is no 
earlier than 120 days prior to the NPR date.  If you settle the cost report later than 18 
months after the end of the providers fiscal year, use a PS&R with a paid through date 
that is no earlier than 15 months after the end of the providers fiscal year. 
 
90.1  Submission of Settled Cost Report Data to CMS 
(Rev. 27, 12-19-03) 
 
Within 30 days after issuance of the NPR to the provider, submit to CMS an extract of 
the following Medicare cost reports in accordance with the Healthcare Cost Report 
Information System (HCRIS) specifications: 
 
  CMS Form 2552-96, Hospital Cost Report, for cost reporting periods ending on or 
after September 30, 1996 
 
  CMS Form 2540-96, Skilled Nursing Facility Cost Report, for cost reporting 
periods ending on or after September 30, 1996 
 
  CMS Form 1728-94, Home Health Agency Cost Report, for cost reporting 
periods ending on or after September 30, 1994 
 
  CMS Form 265-94, Renal Dialysis Cost Report, for cost reporting periods ending 
on or after December 31, 1994 
    CMS Form 1984-99, Hospice Cost Report, for cost reporting periods beginning 
on or after April 1, 1999 
 
This submission must pass all level one electronic cost report edits (see 10.3 of this 
chapter) and all HCRIS reject edits. 
 
HCRIS requires only one submission of the cost report data for Low or No Medicare 
Utilization providers.  This submission is due within 30 days of the settlement (either 
with or without audit) of the cost report. 
 
The cost report data is contained in the HCRIS database at CMS and is updated on a 
quarterly basis.  This database is available to all users authorized at CMS.  The cost 
report data files in the HCRIS database are also available to the public on the CMS Web 
site. 
 
100  Cost Report Reopenings 
(Rev. 27, 12-19-03) 
 
Instructions that describe the circumstances under which the final determination on a cost 
report can be reopened are contained in 42 CFR 405.1885 and PRM-1, Sections 2931 
through 2932.  In accordance with these instructions, you may reopen a cost report if you 
receive a written request to reopen from the provider within 3 years of the date that the 
Notice of Amount of Program Reimbursement (NPR) was issued.  You may also reopen 
a cost report within the 3-year reopening period based on your own motion or at the 
request of CMS.  However, if fraud or similar fault is involved, you can reopen the cost 
report at any time. 
 
If a provider submits a written reopening request to you before the 3-year reopening 
period expires, you must apply the provisions of PRM-1, 2931.2 when making a 
decision whether the providers request warrants a reopening. You must issue a 
reopening notice or a denial of reopening to the provider in writing. 
 
A single letter may be used as a notice of reopening of some issues and a denial of other 
issues.  However, ensure that all issues that you intend to reopen are listed in the written 
reopening notice. Where you deny the providers reopening request, include in the 
written notification to the provider detailed reasons for the rejection.  Such reasons could 
include: 
 
(cid:121)  Untimely request, with an indication of the dates and documents being used in the 
determination. 
 
(cid:121)  Incomplete request, with an explanation of why it was determined to be 
incomplete. 
 
(cid:121)  Criteria for reopening not met, with an explanation of why the criteria were not 
met.   
Where you grant a providers reopening request and discover that additional information 
is still needed, whether before or after the 3-year reopening period expires, send a written 
notice to the provider requesting that the needed information be submitted within a 
specified time.  In normal circumstances the provider should submit the documentation 
within 60 days of your request.  If the provider fails to submit the requested information, 
you may withdraw the notice of reopening and deny the reopening. 
 
You must also send the provider a written reopening notice detailing the issues when 
reopening the cost report on your own motion or at CMS request.  If you reopen the cost 
report and plan to resolve the issues without a field audit but need additional information, 
send a written notice to the provider requesting that the needed information be submitted 
within a specified time (generally within 60 days of the request).  If the provider fails to 
submit the requested information, adjust the cost report accordingly.  If you determine 
that a field audit is necessary to resolve the reopening issues, follow the instructions in 
60.1, 60.10, 60.11, and 60.12 pertaining to information requests. 
 
Whenever you issue a NPR for a provider that is part of a chain before the home office 
cost statement is finalized, include a reopening letter with the NPR specifying that the 
amount of program reimbursement may be changed upon receipt of finalized home office 
cost statement.  However, do not issue such a reopening notice to a provider that is paid 
entirely under PPS or if the amount of home office cost claimed in the cost report is 
immaterial.  When the home office cost statement is finalized, close the reopening by 
issuing either a revised NPR or a notice that the reopening is being closed. 
 
If issues outside the scope of the reopening notice are discovered during the course of the 
reopening process and reaudit, you may address such issues only if the provider submits 
another reopening request before the expiration of the 3-year reopening period or you 
issue another notice of reopening within the 3-year reopening period. 
 
Issue a revised NPR for all reopened cost reports within 180 days of receipt of all 
information/documentation necessary to resolve the reopening issues. Discuss with the 
RO any situations where unforeseen circumstances prevent you from meeting these 
expectations. 
 
Furthermore, you are required to submit HCRIS extracts to CMS each and every time 
that you issue a revised NPR following a reopening of a cost report.  These submissions 
are due within 30 days after the issuance of the revised NPR.  (See 10.4 and 90.1 for 
details of the type of facility cost reports that are to be submitted.) 
 
110  Audit Responsibility When Provider Changes Contractors 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
If the provider changes contactors, the outgoing contractor is responsible for auditing the 
last cost report that the provider filed while still being serviced by that contractor.  This is 
based upon the contractual functions to be performed by contractors outlined in Article II,  Sections A, B, and C of the Agreement.  These sections require the contractor to make 
determinations of the amounts of payments to be made to providers, to account for funds 
in making such payments, and to audit their records.  This clearly calls for the contractor 
servicing the provider to account for all transactions that have taken place while the 
relationship existed. This includes an audit of the provider's records and determination of 
the final settlement as well as finishing any work related to appeals of cost reports that 
you were responsible for settling. 
 
If you are the outgoing contractor, upon its request, forward to the incoming contractor 
copies of the last as-submitted and settled cost report that you are responsible for and any 
other requested information/documentation. This provides cost report information so the 
incoming contractor can review and, if necessary, adjust the interim rate and perform the 
subsequent years audit.  If you need any of the working papers to complete the work on 
pending appeals that you are responsible for and you did not retain copies of those 
working papers, request that the incoming contractor send you copies at the time you 
need them. 
 
If you are the incoming contractor, you should generally audit the first cost report filed by 
a provider that is new to you as a result of changing contractors unless the provider (e.g., 
SNF or HHA) is paid entirely under the prospective payment methodology or the amount 
of Medicare reimbursement is insignificant.  This gives you a basis from which to review 
and evaluate subsequent years' cost reports.  The audit of a cost report from a provider 
that changed contractors is: 
 
  Limited to those issues, if any, pending from prior cost report examinations in 
the case of the contractor closing its final cost report, or 
 
  Performed to the extent necessary to supplement information received from 
the prior contractor in the case of the contractor examining the provider's first 
cost report. 
 
120  Audits of Home Offices 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
Where a provider is related within the meaning of 42 CFR 413.17 to a chain organization 
and services are furnished to the provider by the home office or other organizational 
entity of the chain, the reasonable costs of the services furnished are includable in the 
provider's costs for reimbursement.  The reasonable costs of home office services are 
determined under guidelines in the PRM, Part I, 2150ff. and other sections relating to 
specific costs. 
 
120.1  Audit Responsibility for Home Office Costs of Chain 
Organizations 
(Rev. 27, 12-19-03) 
  Ordinarily, the contractor responsible for settlement of the providers cost report and, if 
necessary, auditing its records is also responsible for auditing the home office cost 
statement to verify the validity of the costs allocated to the provider.  However, if more 
than one contractor services providers that are members of the chain, this could result in 
duplication of audit expenses and inconvenience to the home office.  Therefore, where 
more than one contractor services the providers of a chain organization, CMS designates 
the contractor that will be responsible for the audit of home office cost statement. 
 
In making this determination, CMS Central Office (CO) may consult with the relevant 
regional offices (ROs) and contractors and consider such factors as geographical location 
of the home office, number of providers serviced by each contractor, total amount of 
reimbursement to the chain by each contractor and other relevant factors. 
 
When CMS CO determines which contractor will be responsible for the home office 
audit, it communicates its decision in writing to all the contractors servicing the providers 
in the chain and relevant ROs.  If the contractors servicing the providers in the chain 
prefer to have a different contractor perform the audit, they may request CMS to assign 
the audit responsibility to another contractor. CMS notifies the contractors, in writing, of 
its final decision. 
 
120.2  Responsible/Designated Contractors Responsibility if the Home 
Office Fails to File a Cost Statement 
(Rev. 27, 12-19-03) 
 
Home office cost statements that are prepared in accordance with PRM-1, 2150ff are to 
be submitted either:  (1) before the last day of the fifth month following the close of the 
fiscal year if the home offices fiscal year ends on the last day of the month, or (2) on or 
before 150 days after the last day of the fiscal year if the home offices fiscal year ends 
on a day other than the last day of the month.  If the chain home office fails to submit a 
cost statement within that time frame and you are the responsible/designated contractor 
for the home office, notify the chain home office of its failure to submit a cost statement.  
If you are the servicing contractor for some of the providers in the chain, issue tentative 
or revised tentative settlements requiring repayment of the home office costs to those 
providers whose cost reports contain significant reimbursement for the related home 
office costs. Also, if applicable, notify all the other contractors servicing the providers in 
the chain to do the same.  The servicing contractors are also required to reduce interim 
payments to reflect the disallowance of any home office costs if those costs make up a 
significant portion of the providers interim payment. 
 
120.3  Planning/Scoping the Home Office Audit 
(Rev. 27, 12-19-03) 
 
The responsibility for completing the desk review and scoping the audit of the home 
office cost statement rests with the responsible/designated contractor.  If more than one 
contractor services the providers in the chain, the responsible/designated contractor may 
request any information its auditors need to scope the audit of the home office cost  statement from other contractors.  However, if you are the responsible/designated 
contractor, do not audit a home office cost statement if all the providers in the chain are 
paid entirely under the prospective payment methodology or the aggregate amount of the 
related Medicare reimbursement for all the providers in the chain is immaterial.  In those 
situations, you do not have to complete the desk review. 
 
If the home office cost statement is scoped for audit, the other contractors forward to the 
responsible contractor the requested information and any other information they have 
related to the providers they service which they consider relevant to the home office 
audit.  This could include aspects of the chain's operations or their experience in their 
relationship with the chain that the responsible/designated contractor should be aware of, 
or should consider during the audit. 
 
If some of the records for an individual provider are maintained at the home office (e.g., 
insurance or loan records), the servicing contractor for that provider may determine 
during the desk review/scoping process that some of those records need to be audited.  
Since the responsibility for auditing any provider records maintained at the home office 
rests with the responsible/designated contractor, the servicing contractor must submit a 
written request to the responsible/designated contractor to audit those records. The 
servicing contractors written request must include: (1) the providers cost report, (2) 
completed desk review, (3) specific areas to be audited, and (4) scope of the audit to be 
performed. 
 
The responsible/designated contractor considers the exceptions identified during the desk 
review of the home office cost statement, the additional information furnished by other 
contractors in response to its request, and the servicing contractors requests for audit of 
provider records maintained at the home office in determining the scope of the home 
office audit. 
 
120.4  Timing and Completion of Home Office Audits 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
Home offices of chain organizations are not providers, thus their costs are not directly 
payable by Medicare.  Home office costs are payable only when they are allocated to the 
providers in the chain and become part of the providers allowable costs.  Since the 
allocation of home office costs usually affects all providers in the chain, the audit of the 
home office cost statement should be performed by the responsible/designated contractor 
as soon as possible after the receipt of the home office cost statement so that the servicing 
contractors can expeditiously finalize the settlement or reopening of provider cost reports 
pending the results of the home office audit. CMS expects that if a home office cost 
statements is not scheduled for an audit, the cost statements should be finalized within 12 
months from the date of acceptance. This is effective for all home office cost statements 
received on or after October 2005. 
  When you as the responsible/designated contractor begin the audit of the home office 
cost statement, notify all the other contractors that service the providers within the chain 
and keep them informed of the progress of the audit and any significant developments.  
Also, notify the servicing contractor(s) if during the audit you identify adjustments that 
may affect other providers within the chain that are not being audited.  After such 
notification, you may need to expand the scope of the home office audit if a servicing 
contractor requests that you audit the issue on site because it is not possible for that 
contractor to resolve it any other way.  In this situation, the servicing contractor should 
assist you in preparing the expanded audit steps and forward to you any working papers 
that you may need. 
 
Any issues relating to the determination and allocation of home office costs are to be 
resolved by the responsible/designated contractor.  If you are the responsible/designated 
contractor, forward the audit results to the other contractors that service providers within 
the chain prior to the finalization of the audit adjustments.  If any of the other servicing 
contractors do not agree with your interpretation and application of a policy on a certain 
issue, that contractor may request that you obtain an interpretation from CMS.  Where 
you do request an interpretation of policy from CMS, delay the resolution of the 
issue/adjustment until you receive a reply from CMS. 
 
120.5  Distribution of the Audited Home Office Cost Statement and 
Results of the Audit 
(Rev. 27, 12-19-03) 
 
At the completion of its audit, the responsible/designated contractor distributes the 
audited home office cost statements and the audit adjustment report to all the contractors 
that service the providers within the chain. 
 
The results of the audit of the home office cost statement are binding upon all the 
servicing contractors. The servicing contractors rely upon this audit to identify the 
allowable portion of the home office costs that can be included in their providers cost 
reports.  They use the audited home office cost statements to make any necessary 
adjustments to the home office costs claimed by those provider(s) before they make a 
final settlement of the related cost reports.  If at the request of the servicing contractor, 
you as the responsible/designated contractor audited the providers records that are 
maintained at the home office for specific issues outside the general audit of the home 
office cost statement, forward the following information related to those issues to the 
servicing contractor. 
 
  The scope of the audit work performed, 
 
  The schedule of audit adjustments with full explanation why they are necessary 
and their effect on the providers cost report, and 
 
  The results of discussions with home office personnel pertaining to the audit 
findings.   
All audit adjustments proposed by the responsible/designated contractor pertaining to the 
audit of provider records maintained at the home office are binding upon the servicing 
contractor.  If the servicing contractor has any questions concerning the audit or its 
results, it should resolve the issues with the responsible/designated contractor before the 
settlement of the providers cost report.  However, when a disagreement cannot be 
resolved, the servicing contractor may request the responsible contractor to obtain an 
interpretation from CMS. 
 
The responsible/designated contractor is reimbursed by the servicing contractor for the 
costs of auditing provider records maintained at the home office and for any assistance in 
preparing appeal position papers.    
 
120.6  Standards for Issuance of an Audit Report for a Home Office 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
The responsible/designated contractor will issue an audit report if it audits a home office 
cost statement. While it is appropriate to use the general format of the sample Form of 
Report on Audit of Medicare Cost Report (see Exhibit VII in 170 of this chapter) for a 
home office cost statement, the contractor should modify the language of the audit report 
to reflect this type of entity.  For example, a home office is not a provider of Medicare 
services receiving direct payment from the Medicare program.  Therefore, the reference 
to payment amounts in the second and fourth paragraphs of the sample audit report is 
inappropriate under these circumstances. Similarly, the contractor should change 
references to "cost report" and provider to "home office cost statement" and home 
office.  Furthermore, the contractor must substitute the following elements in the audit 
report for home office in place to similar elements related to the cost report. 
 
  If the report relates to a home office cost statement, a statement that GAS 
standards require the contractor to plan and perform the audit to obtain 
reasonable assurance about whether the Medicare home office cost 
statement is prepared in accordance with Medicare laws, regulations, and 
instructions, and  
 
  A statement that the Medicare home office is responsible for compliance 
with Medicare laws, regulations, and instructions. 
 
120.7  Audit Responsibility When Responsible/Designated Contractor 
Changes 
(Rev. 27, 12-19-03) 
 
Where the contractor responsible for the home office audit changes, the outgoing 
contractor makes available to the incoming contractor copies of pertinent prior years' 
statements of home office costs, desk reviews, audit reports and audit adjustments, and 
any working papers or documentary material pertinent to the current year's audit. 
  120.8  Acceptance of Home Office Cost Statements 
(Rev. 84, Issued: 11-16-05; Effective Date:  12-05-05; Implementation Date:  12-05-
05) 
 
CMS expects the contractor to make determination of acceptability within 30 days of 
receipt of a home office cost statements. 
 
130  Provider Permanent File 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
The permanent reference files are central files that contain provider information. Where 
appropriate, maintain a current permanent reference file on each provider with pertinent 
information for use during interim rate reviews, desk reviews, and field audits. 
 
Depending on the provider type and payment methodology, the following are examples 
of the information that can be maintained in the permanent reference file. 
 
A.  General Information. 
 
(1)  Accounting Systems and Records 
 
42 CFR 413.20 requires providers to maintain sufficient financial and statistical data for 
proper determination of costs payable under Medicare. Standardized accounting, 
statistics, and reporting practices are followed. In keeping with this requirement, establish 
and maintain surveillance over the provider's capability to maintain records needed to 
reflect accurate cost reporting data and other information capable of verification by 
qualified auditors. Document these determinations and retain them in the permanent files. 
 
(2)  Accounting System 
 
Request any significant modifications to the provider's accounting system as updates to 
the initial system survey performed when the provider entered Medicare. Indicate 
reliance upon the provider's independent accounting firms' opinions by making reference 
to them in the permanent reference files. 
(3)  Provider's Organization 
 
Obtain, or develop with the assistance of the provider, an organizational chart. Update it 
where there are significant changes during any cost reporting period.  
 
Document information for owners and/or partners of providers to include: 
 
  Title of position(s) held by owner and/or partner of provider. 
 
  The same information for officers and members of the board and their stock 
ownership, if any.   
  Duties and responsibilities of all owners, partners, officers, etc., as appropriate, and 
individual qualifications related to the duties performed where compensation for them 
is claimed in the cost report. 
 
  Ownership or interest in other providers participating or not participating in the 
program. 
 
  Ownership or interest in any other entity doing business with the provider. 
 
  Ownership by a chain organization, where applicable, with the name and address of 
the home office, description of costs which flow from the parent organization, and the 
contractor responsible for the home office audit. 
 
  Information for nonprofit organization providers to include: 
 
 Copy of the Internal Revenue Service certificate of nonprofit status under 501(c) 
of the Internal Revenue Code; and  
 Documentation to support the legal and operating name of the sponsoring 
organization(s) or person(s). 
 
  Information for providers requesting multiple-facility status for cost reimbursement 
purposes includes: 
 
 Documentation that the provider consists of several component facilities which 
provide clearly different types of care; and  
 
 Determination that the provider's records have the capability to separate costs and 
revenues between the various entities of the facility. 
 
(4)  Floor Plan of Provider's Facility 
 
If feasible, retain a copy or pertinent extracts of the facility's floor plan. Update 
significant changes. Indicate that the floor plan was tested during an audit or during an 
on-site visit. 
 
(5)  Providers State License and Medicare Tie-In Notice 
 
If you obtain these documents as part of your field audit of the number of beds or 
excluded unit/subprovider costs, retain them in your permanent file.  
 
B  Contracts for Services 
 
(1)  Services Purchased Under Arrangements 
  Where a provider purchases services, such as housekeeping, physical therapy, 
prescription drugs, laboratory tests, etc., obtain a listing of all services furnished by 
outside suppliers. 
 
Where they are performed under contract, document information, the services to be 
furnished and, where applicable, the charge or fee schedule. 
 
(2)  Property-Lease Agreements 
 
  Maintain copies of major lease agreements or extracts for all leased parts of the 
facility. Include major movable equipment or other assets. 
 
  Determine if the lessor is related and/or if the lease agreement constitutes a lease 
purchase contract. Where such circumstances exist, apply policies applicable to 
either related organizations, from PRM-1, Chapter 10 or to lease-purchase 
agreements, PRM-1, 110B. 
 
(3)  Provider-Based Physicians 
 
Obtain a copy of all current written agreements or extracts, or a written summary of oral 
agreements between the provider and physicians which: 
 
  Identifies each department where they work in the provider; 
 
  Lists each physician furnishing services in each department; 
 
  Describes each physician's professional and provider activities; 
 
  Describes all compensation arrangements; 
 
  Lists any fee schedules utilized; and 
 
  Lists billing methods selected by the physicians with detailed information 
pertaining to the specific method selected. 
 
  Maintain amendments or new agreements. Maintain copies of contracts or 
extracts and results of any analyses performed. Have them available for desk 
review personnel and field auditors. 
 
(4)  Management and Consultant Services 
 
Have on file management and consultant agreements to identify the services furnished in 
sufficient detail to determine if these services are necessary and proper for the delivery of 
patient care and that their costs are reasonable. 
 
(5)  Franchise Arrangement   
Maintain a copy of the franchise agreement and your analysis supporting the provider's 
identity and evaluation of specific services furnished and made available by a franchiser, 
for which the provider claims franchise fee expenses; or evidence that the provisions of 
the franchise agreement do not meet the conditions necessary to include franchise 
expenses. 
 
(6)  Provider's Certified Public Accounting Firm 
 
Maintain the name of the provider's certified public accounting firm. 
 
C  Accounting Policies 
 
(1)  Capital-Related Costs 
 
Maintain copies of documents that include the areas of capitalization, relifing of 
depreciable assets, estimated useful lives of depreciable assets and componentized 
depreciation. Review capital-related costs for the following areas: 
 
  Current year assets acquisitions; 
 
  Consistency of capitalization; 
 
  Gain/loss on disposal of assets; and  
 
  Relifing of assets. 
 
(2)  Fixed Assets 
 
Identify provider assets shown on the balance sheet. Usually, a listing of assets by class, 
e.g., land, buildings, equipment, indicating the acquisition date, the cost, useful life, 
method of depreciation, and the annual depreciation for each asset, is sufficient to support 
the asset and depreciation costs shown on the provider's financial statements. 
 
Where such records are extensive, maintain at least a summary of the asset accounts, 
updated as required. Determine if fixed asset accounting is adequate and if depreciation is 
based upon guidelines included in Provider Reimbursement Manual, Part I, Chapter I. 
 
(3)  Loan or Mortgage Documents 
 
Obtain copies (if practical) of all outstanding material loans or mortgages, or bond 
indentures to establish the allowability, necessity, and reasonableness of interest expense. 
 
(4)  Exceptions to Reimbursement Limitations 
  Evaluate provider requests for exceptions to reimbursement limitations (e.g., limitations 
on coverage of costs). Maintain a complete file to support exceptions, exemptions, and 
classification adjustments. 
 
(5)  Education Program Approvals 
 
Approved educational activities means formally organized or planned programs of study 
operated by the staff of the institution. Include current copies of State licenses or 
professional organization recognition, to support the determination of the acceptance of 
graduate medical education, nursing school, and allied health programs. 
 
(6)  Insurance 
 
Document the allowance of insurance costs regardless of whether they are for 
commercial, self-insurance, or alternative forms to provide full coverage. Include copies 
of policies where practical or pertinent extracts, copies of prior pertinent audit working 
papers, and/or a summary of the key provisions which fulfill the conditions for Medicare 
reimbursement. 
 
(7)  Preparation of Cost Reports 
 
Determine whether the provider has the capability of preparing an acceptable cost report. 
Where a provider proposes a change from CMS reporting procedure, determine whether 
it properly reflects Medicare cost reporting requirements and is acceptable to CMS and 
you. 
 
(8)  Deferred Compensation or Pension Plan 
 
Have on file, for each provider having a deferred compensation or pension plan, a copy 
of the written agreement or extract and all amendments existing between the provider and 
participating employees which: 
 
  Describes the method for determining all contributions to the fund; 
 
  Describes the funding mechanism; 
 
  Provides protection for the plan's assets; 
 
  Designates the requirements for vested benefits; 
 
  States the basis for determining the amount of benefits to be paid; 
 
  Describes the treatment of such items as dividends, interest income, capital gains 
or losses in regard to the corpus of the fund; and  
    Designates the handling of loan(s) made from the deferred compensation plan to 
the provider. 
 
140  Fraud & Abuse 
(Rev. 27, 12-19-03) 
 
140.1  Definitions 
(Rev. 27, 12-19-03) 
 
A.   Abuse 
 
An abuse is the administrative violation of agency regulations, which impair the effective 
and efficient execution of the program.  Violations may result in Federal monetary losses 
or in denial or reduction in lawfully authorized benefits to participants.  They do not 
involve fraud. 
 
B.   Fraud 
 
Fraud is obtaining something of value unlawfully, through willful misrepresentation.  It 
embraces theft, embezzlement, false statements, illegal commissions, kickbacks, 
conspiracies, obtaining contracts through collusive arrangements and similar devices. 
 
The following are examples (not all inclusive) of potential fraud or abuse: 
 
  Recording of personal expense items as provider costs for patient care. 
 
  Arrangements by providers with employees, independent contractors, suppliers 
and others which appear to be designed primarily to overcharge the program with 
various devices, e.g., commissions, fee splitting, to siphon off or conceal illegal 
profits. 
 
  A pattern of overutilization of services to inflate charges to increase 
reimbursement. 
 
  Any evidence of payroll entries and disbursements to personnel who provide little 
or no services to the provider. 
 
  Providers' concealment of business activities, which would affect eligibility for, 
or amount of, program reimbursement, e.g., undisclosed change of ownership or 
relationship with a supplying organization. 
 
  Falsifying provider records in order to appear to meet the conditions of 
participation. 
 
  Charging to the program costs not incurred or which are attributable to 
nonchargeable services or nonprogram activities.   
  Billing for supplies or equipment that are clearly unsuitable for the patient's needs 
or are so lacking in quality or sufficiency as to be virtually worthless. 
 
  Duplicate billing which appears to be deliberate.  This includes billing Medicare 
twice or billing both Medicare and the beneficiary for the same services. 
 
  Deliberately providing or receiving Medicare payments on the account of other 
than the proper individual. 
 
  Persistently and deliberately billing beneficiaries rather than Medicare for covered 
services. 
 
  Soliciting, offering, or receiving a kickback, bribe, or rebate. 
 
  An ineffective board of directors and/or audit committee. 
 
  Abuse of internal accounting controls by administrative personnel. 
 
  Indications of personal financial problems of administrators. 
 
  Significant changes in business practices. 
 
  Inadequate working capital or lack of flexibility in debt restrictions such as 
working capital ratios and limitations on additional borrowing. 
 
  A complex corporate structure that does not appear to be warranted by the 
provider's size. 
 
  Frequent changes of legal counsel or of key financial officers such as treasurer or 
controller. 
 
  Premature announcement of profit or loss or of future expectations. 
 
  Significant fluctuations in material account balances, financial interrelationships, 
inventory variances, or inventory turnover rates. 
 
  Unusually large payments in relation to services rendered by lawyers, consultants, 
agents, and others. 
 
  Difficulty in obtaining audit evidence with respect to unusual or unexplained 
entries, incomplete or missing documentation, or alterations in documentation or 
accounts. 
 
  Delays in responses or evasive responses by management to audit inquiries.   
  Deliberately including cost, without disclosing the fact, in the provider cost report 
that specifically is nonreimbursable under the regulations.  This excludes 
instances where the provider discloses that the cost report is filed under protest 
and where the protested issues and their reimbursement effect are disclosed. 
 
140.2  Contractor Responsibility In Suspected Fraud or Abuse Cases 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
It is your responsibility to provide necessary guidance to providers in preparing their cost 
reports. If during your desk review and field audit activities you discover certain items 
(e.g., expenses or allocation statistics for cost-reimbursed providers or cost-reimbursed 
areas of prospective payment system (PPS) providers, count of residents for graduate 
medical education or indirect medical education payments, bad debts,) that are not 
allowable, make the necessary adjustments and inform the provider. Document all such 
adjustments made to the cost report. 
 
If these same nonallowable items appear on a subsequent cost report, tell the provider 
again why they are disallowed.  Confirm this notification in a letter.  In this letter advise 
the provider that further insistence on including the same nonallowable items in the next 
cost report could result in referral to the U. S. Attorney General for consideration of 
criminal and/or civil prosecution.  (If the providers payment system changed in the 
current year (e.g., from cost-reimbursed to (PPS) and the item(s) disallowed in the prior 
year no longer has any reimbursement impact in the current year, do not issue this letter.) 
 
Use the following model language. 
 
On our audit for the period ___________ to _________ certain items for which you 
receive reimbursement through the cost report were disallowed because they were 
determined by our auditors to be nonallowable.  When we audited your cost report for the 
period ___________ to _________ we found the following items which were disallowed 
in the prior period that were included in the computation of your cost report 
reimbursement: 
 
In our last meeting, we advised you which specific items were not allowed and the reason 
for the disallowance.  Your further insistence on including these nonallowable items in 
future cost reports without disclosure as protested items could result in the referral of this 
situation to the U. S. Attorney General for consideration of criminal and/or civil 
prosecution. 
Should you have any questions, please contact (contractor name). 
 
If the provider continues to include these nonallowable items after receipt of the letter, 
follow your policies and procedures on fraud and abuse to refer the case to the Office of 
Program Integrity (OPI) of the responsible regional office. 
  However, if you have some support that even the initial insertion of a nonallowable item 
on the cost report was intended by the provider to defraud the United States government, 
no warning to the provider is required before referring the matter to the Office of the 
Inspector General (OIG) for investigation and possible prosecution. 
 
Where you refer a questionable situation to the OPI or OIG, it is generally appropriate to 
continue the audit while the situation is investigated by the OIG.  Occasionally, 
circumstances may require an audit to be discontinued pending the results of the 
investigation.  These questions are resolved by CMS and the OIG. 
 
Under no circumstances should you discuss a possible fraud or abuse situation with 
the provider, or take any action to disallow or resolve such questionable situation 
prior to receiving instructions from the OIG. 
 
These instructions do not apply in situations where the provider disputes the allowability 
of an item and clearly indicates on the subsequent cost report that the particular item is 
still claimed as a protested item to establish the basis for an appeal. 
 
150  Access to Books, Documents, and Records of Providers 
Subcontractors  
(Rev. 27, 12-19-03) 
 
150.1  General 
(Rev. 27, 12-19-03) 
 
Section 952 of the Omnibus Reconciliation Act of 1980, enacted December 5, 1980, 
amended 1861(v)(1)(I) of the Social Security Act to require that a contract (if its cost or 
value over a 12-month period is $10,000 or more) between a provider and a subcontractor 
must contain a clause allowing the Department of Health and Human Services' (HHS) 
Secretary and the U.S. Comptroller General (or their representatives) access to the 
subcontractor's books, documents, and records that are necessary to verify the nature and 
extent of costs of services furnished under the contract.  This clause must be included in 
the contract in order for the costs of services furnished under the contract to be included 
as costs for Medicare reimbursement.  In addition, the contract must allow access to 
contracts of a similar nature between subcontractors and related organizations of the 
subcontractor, and to their books, documents, and records.  The authorized 
representatives of the HHS Secretary are CMS, CMS Medicare contractors, and the HHS 
Inspector General. In most instances, a contractor will be the entity requesting access. 
 
This legislation (codified at 42 Code of Federal Regulations, Subpart D, 420.300-304) 
applies to contracts entered into or renewed after December 5, 1980; hence, contracts 
renewed after December 5, 1980 must be amended to include the clause.  The clause 
must provide for access to the subcontractor's contract and books, documents, and 
records until 4 years have elapsed after the services are furnished under the contract or 
subcontract. 
  NOTE: A provider's cost of renegotiation with a subcontractor to include the access 
clause in their contract, if it is not excessive and can be adequately justified, is an 
allowable Medicare cost and therefore may be included in the Administrative and 
General cost center. 
 
150.2  Definitions 
(Rev. 27, 12-19-03) 
 
A.   Books, Documents, and Records 
 
All writings, recordings, transcriptions, and tapes of any description necessary to verify 
the nature and extent of the costs of services provided by a subcontractor.  (NOTE:  For 
the sake of brevity, the term "books, documents, and records" is hereinafter shortened to 
"books.") 
 
B.   Common Ownership 
 
An individual(s) who possesses significant ownership or equity in the subcontractor and 
the entity providing the services under the contract. 
 
C.   Control 
 
An individual or organization having the power, directly or indirectly, to significantly 
influence or direct the action or policies of an organization or institution. 
 
D.   Provider 
 
A hospital, skilled nursing facility, home health agency, independent renal dialysis 
facility, hospice, comprehensive outpatient rehabilitation facility, community mental 
health center, independent rural health clinic, or a distinct unit of any of these providers. 
 
E.   Subcontractor 
 
Any entity, including an individual(s), that contracts with a provider to supply a service, 
either to the provider or directly to a beneficiary, for which Medicare reimburses the 
provider the cost of the service.  This includes organizations related to the subcontractor 
that have a contract with the subcontractor for which the cost or value is $10,000 or more 
in a 12-month period. 
 
F.   Related to the Subcontractor 
 
A subcontractor that is, to a significant extent, associated or affiliated with, owns (or is 
owned by), or has control of (or is controlled by), the organization furnishing the 
services, facilities, or supplies.  If a provider contracts for services with a subcontractor, 
and the subcontractor thereafter contracts with a related organization (which will actually  furnish the services), both contracts must contain the access clause if one of the monetary 
criteria, described in 150.4, is met. 
 
G.   Contract for Services 
 
A contract through which a provider obtains the performance of an act(s), as 
distinguished from supplies or equipment.  It includes any contract for both goods and 
services to the extent the value or cost of the service component is $10,000 or more 
within a 12-month period. 
 
150.3  Types of Contracts Covered by Access Provisions 
(Rev. 27, 12-19-03) 
 
The access regulation applies to contracts concerning the purchase of services such 
as: 
 
(cid:121)  Consultations, management, medical care provided by physician groups or 
hospital-based physicians (for which Medicare may reimburse providers on a cost 
basis); 
 
(cid:121)  Linen services (rental of linens); 
 
(cid:121)  Furnishing of meals (as opposed to the direct purchase of food); 
 
(cid:121)  Legal and accounting services; 
 
(cid:121)  Provider management and provider management information systems; and 
 
(cid:121)  Insurance and leases for buildings and equipment. 
 
Subcontracts for public utility services at rates established for uniform applicability to the 
general public are not subject to the regulation because the rates are already a matter of 
public record and are not negotiable.  Similarly, contracts for workers compensation 
insurance are not subject to the regulation since the rates are non-negotiable and are also 
a matter of public record.  Contracts concerning construction of buildings (including 
services of architects, painters, and interior decorators) need not contain the access 
clause; however, if a provider contracts with an interior decorator, painter, or other 
individual/company to perform service work on an existing building, the contract must 
contain the access clause.  When a provider contracts to purchase a product that includes 
a warranty of the product in the price, the contract is not subject to the regulation; 
however, a separately purchased warranty or service-maintenance contract must contain 
the subject clause. 
 
150.4  Monetary Criteria 
(Rev. 27, 12-19-03) 
  There are also monetary criteria to be considered in determining if a contract must 
contain the access clause.  If a contract is subject to the regulation as described in the 
preceding paragraph and one of the following criteria is met, the clause must be included 
in the contract: 
 
(cid:121)  Any contract for services for 12 months or less that is valued at $10,000 or more 
(e.g., a $12,000 contract for services that are completed in 2 months); 
 
(cid:121)  Any series of contracts with a subcontractor for a service(s) that total $10,000 or 
more over a consecutive 12-month period (e.g., two contracts for 6 months each 
that are valued at $8,000 each, or 12 contracts for 1 month each valued at $1,000 
each, or a series of contracts costing $1,000 each for 10 months); 
 
(cid:121)  Any contract that runs for more than 12 months, the apportioned value of which is 
$10,000 or more for a 12-month period (e.g., a contract for 18 months valued at 
$18,000 (the 12-month value is $12,000) or a contract for 24 months valued at 
$20,000, the 12-month value of which is $10,000); or, 
 
(cid:121)  Any contract in which the cost or value of the services or service component is 
not specified, but the provider-projected services' value is $10,000 or more.  (If a 
contract does not contain the cost or value of the services and does not include the 
access clause, and it is subsequently determined by an intermediary (or other 
representative of the HHS Secretary) that the contract is subject to the statute, the 
provider risks not being reimbursed for the cost of the services under Medicare 
unless a good faith showing is made that would permit modification of the 
contract.) 
 
These contracts between providers and subcontractors may be written or oral.  With 
respect to a written contract, the access clause must be made a part of the contract. 
Regarding an oral contract, a provider is required to have a written agreement (with a 
subcontractor) in the form of a letter of understanding that allows access to the pertinent 
books. 
 
Providers are advised in PRM-1, 2440.4 that the following sample access clause 
language (which complies with the regulation) may be used: 
 
"Until the expiration of four years after the furnishing of the services provided 
under this contract, (Name of Subcontractor) will make available to the 
Secretary, U.S. Department of Health and Human Services, and the U.S. 
Comptroller General, and their representatives, this contract and all books, 
documents, and records necessary to certify the nature and extent of the costs of 
those services.  If (Name of Subcontractor) carries out the duties of the contract 
through a subcontract worth $10,000 or more over a 12-month period with a 
related organization, the subcontract will also contain an access clause to permit 
access by the Secretary, Comptroller General, and their representatives to the 
related organization's books and records."   
This language may not be suitable to all contracts.  Therefore, contracting parties may use 
other clause language provided it contains the elements required in the regulation with 
respect to the nature of their contractual arrangement.  Also, in those cases where the 
access provision is contained in a document other than the contract to which it applies, 
the sample clause will have to be modified accordingly. 
 
150.5  Access Clause Not in Contract 
(Rev. 27, 12-19-03) 
 
There may be situations where a provider, after applying the criteria of the regulation to a 
contract, erroneously decides that the contract does not require an access clause.  In such 
unusual situations, if the provider demonstrates satisfactorily that the decision not to 
include the clause was made in good faith with a reasonable basis(es), and the provider 
and subcontractor amends its contract to include an access clause within an acceptable (to 
the contractor) period of time after being advised that such amendment is required, the 
contractor shall treat the contract as meeting the requirements of the regulation.  An 
example of a provider response demonstrating good faith with a reasonable basis is a 
situation where the provider honestly concluded that the cost or value of the service 
component of a goods and services contract was less than $10,000.  With respect to 
contracts where services or services and goods are still being provided, any such 
amendment must make clear that the access clause applies to books, documents, and 
records for the full term of the contract and not just for the period following the date of 
amendment.  If a provider demonstrates satisfactorily that the decision not to include the 
clause was made in good faith with a reasonable basis, but cannot amend the contract 
because the subcontractor is no longer in business, the contractor shall make a 
determination as to the reasonableness of the costs of the subcontractor's services using 
available information.  The contractor shall take appropriate disallowance and/or 
recoupment action with respect to the cost of the services of the subcontractor if either 
the provider or subcontractor refuses to amend the contract, or the provider does not 
demonstrate satisfactorily that the decision not to include the clause was made in good 
faith with a reasonable basis. 
 
There may also be situations in which an individual subcontractor refuses to enter into a 
contract containing the required access clause, or will not agree to the addition of the 
access clause to an existing contract, which becomes necessary because of a contract 
modification.  Providers are instructed in PRM-1, 2441 to contact the CMS Regional 
Administrator in their area if they have difficulty in finding another organization that will 
agree to the clause and offer the needed services at a cost at least as competitive as that of 
the original organization.  (A provider that does not notify the Regional Administrator but 
instead, on its own initiative, contracts with a more expensive subcontractor or omits the 
access clause, risks not being reimbursed for the full cost of the services furnished under 
the contract.)  If the Regional Administrator's efforts to persuade a subcontractor to 
include the required clause are unsuccessful, and no other subcontractor is available that 
will furnish the services at a competitive price and agree to the access provision, a 
provider may find it necessary to contract with another organization willing to accept the  access clause, even though the cost of the services may be greater.  In this situation, 
providers are requested to contact their contractor before entering into a contract to assure 
that the greater cost incurred will be considered during the cost report settlement process; 
this is not intended to be a pre-approval requirement. 
 
150.6  Reasons for Seeking Access 
(Rev. 27, 12-19-03) 
 
If a written accusation (from an HHS or non-HHS party) with suitable evidence against a 
provider or subcontractor of kickbacks, bribes, rebates, or other illegal activities is 
received, the intermediary shall prepare a report of the situation and forward it to the 
regional Office of the Inspector General, HHS.  However, if there is reason to believe that 
the costs claimed by a provider for services of a subcontractor are excessive or 
inappropriate, or evidence of possible nondisclosure of the existence of a related 
organization is discovered, or it is determined that there is insufficient information to 
judge the appropriateness of the cost(s) claimed by a provider for services of a 
subcontractor, it may be necessary to examine the books of the subcontractor.  Before 
requesting the subcontractor's books, the intermediary shall determine if there is a more 
efficient, practical, or economical method of obtaining the necessary information.  If 
there is such a method or other source (e.g., the provider is able to furnish substantiation 
for the cost of the services), the intermediary shall obtain the needed information by that 
means before seeking to gain access to the subcontractor's books.  If there is no alternate 
method or source, the intermediary shall seek access, but shall limit the access request to 
those books germane to the item(s) in question.  It shall not make any unnecessarily 
burdensome or overly intrusive demands on a subcontractor or go on "fishing 
expeditions." 
 
150.7  Access Request Procedures 
(Rev. 27, 12-19-03) 
 
Requests for access must be in writing and contain all of the following elements: 
 
(cid:121)  Reasonable identification of the books to which access is being requested; 
 
(cid:121)  Identification of the subject contract or subcontract; 
 
(cid:121)  Reason(s) why the appropriateness of the costs or value of the services of the 
subcontractor in question cannot be adequately or efficiently determined without 
access to the subcontractor's books; 
 
(cid:121)  Authority in the statute and regulations for the access requested (see 150.1 of 
this chapter); 
 
(cid:121)  If possible, identification of the individual(s) who will visit the subcontractor to 
obtain access to the books. 
  (cid:121)  Time and date of the scheduled visit; and 
 
(cid:121)  Name of the duly authorized intermediary staff member to contact if there are any 
questions. 
 
150.8  Subcontractor Response Requirements 
(Rev. 27, 12-19-03) 
 
  A subcontractor has 30 days from the date of a written request for access to books 
to make them available in accordance with the request. 
 
  If a subcontractor believes a request is inadequate because it does not fully meet 
one or more of the required elements listed in 150.7, it must advise the 
intermediary of the additional information needed within 20 days from the date of 
the request.  Within 20 days from the date of the intermediary's response 
(providing the additional information), the subcontractor must make the books 
available. 
 
(cid:121)  A subcontractor must request (in writing) an extension of time within which to 
comply with an access request if it believes, for good cause, that the requested 
material cannot be made available within the 30 day period (e.g., the requested 
material is located at a home office or in storage and there will be a delay due to 
retrieval time).  If such a request is made, the contractor shall either grant an 
extension for good cause shown or, if no date can be mutually agreed upon for 
making the books available, initiate a delay or denial of reimbursement for the 
cost of the services. 
 
(cid:121)  A subcontractor must make requested material available for inspection and audit 
during its regular business hours. 
 
  NOTE: Since subcontractor books subject to access will contain both information 
germane to the cost item(s) in question as well as other business records (which 
could be sensitive in nature), CMS recommends that these books, or portions 
thereof, not be photocopied or otherwise reproduced.  Instead, the contractor shall 
extract the germane information needed and record it in written working papers.  
If absolutely necessary, the intermediary shall photocopy/reproduce only the 
germane information.) 
 
(cid:121)  If a subcontractor is asked to reproduce books, the contractor shall reimburse the 
subcontractor for the reasonable costs of reproduction from Medicare funds.  
However, if a subcontractor reproduces books as a means of making them 
available, the contractor shall not reimburse the subcontractor for this 
reproduction. 
 
(cid:121)  A subcontractor must, at the request of a contractor, make the originals of any 
requested books available for inspection.   
150.9  Refusal of Subcontractor to Furnish Access 
(Rev. 27, 12-19-03) 
 
If it is determined that a subcontractor's books are necessary for a reimbursement 
determination and, despite all efforts, a subcontractor refuses to make them available, the 
intermediary shall immediately notify the CMS Regional Administrator.  If a 
subcontractor continues to refuse access, legal action may be initiated by CMS against 
that subcontractor.  Also, the Regional Administrator will advise the subject provider that 
its subcontractor has refused access so that the provider may take whatever action it 
considers necessary for its financial protection (e.g., withholding of any balances due the 
subcontractor under the contract). 
 
150.10  Freedom of Information Act (FOIA) Requests 
(Rev. 27, 12-19-03) 
 
If a request is received for release under the FOIA of information obtained from a 
subcontractor through an access to books action, the intermediary shall immediately refer 
the FOIA request to: 
 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard 
Baltimore, MD  21244 
 
NOTE:  The FOIA allows CMS to exempt from mandatory disclosure to requestors 
certain classes of records, such as trade secrets, confidential commercial or financial 
information, and personnel and medical files (see 5 United States Code 552(b).) 
 
160  Audit Subcontracts 
(Rev. 27, 12-19-03) 
 
In accordance with the "Subcontracting and Prior Approval" article of the Contract 
between the Secretary of Health and Human Services and the contractor, any 
subcontracting involving a function or duty requires prior written approval.  Accordingly, 
the subcontract for provider audit requires such approval and should be submitted to the 
appropriate RO. 
 
160.1  Routing of Audit Subcontract 
(Rev. 27, 12-19-03) 
 
The contractor should submit proposed audit subcontracts directly to the RO servicing its 
area.  If its contract responsibilities extend beyond regional boundaries, it should submit 
the proposed subcontracts to the RO servicing the area in which its home office is 
located. (See Exhibits X and XI in 170 of this chapter for samples of a model Audit 
Subcontract Form and Addendum Subcontract, respectively). 
  160.2  Required Documentation 
(Rev. 27, 12-19-03) 
 
The intermediary should submit the model audit subcontract forms along with the 
following. 
 
  Its justification for selecting the proposed audit firm. 
 
  Copies of proposals from one or more additional audit firms. 
 
  A certification by the contractor to read as follows:  our approved budget contains 
or will contain sufficient funds for the amount requested for this subcontract. 
 
  A statement of its estimated percentage of time and costs, if any, to be shared by 
third parties. 
 
160.3  Competition 
(Rev. 27, 12-19-03) 
 
The provisions of the prime contract require the use of competitive proposals to the 
maximum practical extent in the award of subcontracts. The contractor shall obtain 
proposals from small and minority audit firms and consider their proposals in light of the 
factors listed below, to the extent that it finds it to be consistent with the efficient 
performance of the audit function. 
 
The lowest price or lowest cost is the primary deciding factor in source selection, and the 
intermediary must justify a selection other than the low bidder.  However, award of an 
audit subcontract may properly be influenced by the proposal that promises the greatest 
value in terms of: 
 
  Anticipated performance  compliance with Medicare regulations and procedures. 
 
  Ultimate productivity  compliance with terms of the contract. 
 
  Consideration of the existing and potential workload of the prospective audit firm. 
 
  Qualified staff capable of performing Medicare audit. 
 
  Prior performance in Medicare audits. 
 
  Reputation of the audit firm. 
 
  Location of offices.  170  EXHIBITS 
 
 
Exhibit 1  Summary of UDR Issues                                UNIFORM DESK REVIEW 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
  Summary of Issues 
(Instructions are contained in the Financial Management Manual, Chapter 8, 20.2.F) 
   
Provider Name:    Settlement without   
Further Review: 
   
Provider    Desk Review   
Number:  Exception Resolution: 
   
Period  From:    Field Audit:   
   
        To:    In-House Audit:  
   UDR 
Resolution or 
Reference  No Further  Audit  Scoped  Adjusted for  Audit W/P 
No.  (See Instrs.)  Description  Units/$  Action   Deferred  for Audit  Settlement  Comments  Ref. 
     
1  2  3  4  5  6  7  8  9  10 
     
                 
     
                 
     
                 
     
                 
     
                 
     
                 
     
                   
Exhibit II a Audit Confirmation Letter  Field Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Date 
 
 
Addressee 
Address 
City, State Zip Code 
 
Provider________________________________________________________ 
Provider No:_____________________________________________________ 
F.Y.E.:__________________________________________________________ 
 
Dear _________________ 
 
This is to inform you that your facility has been selected by (contractor name) for a field 
audit of your YYYY cost report.  The audit will commence on MM, DD, YYYY, (4 to 6 
weeks from the date of the letter) with an entrance conference to be held the day we 
arrive on site.  Please arrange for a conference room or adequate space for this meeting.  
We ask that at the least the chief financial officer, the person who prepared the cost 
report, and anyone designated as your liaison for the audit is present at the entrance 
conference.  In addition, we ask that the information listed on the attached schedule be 
available on the date we arrive.  This list will enable you to accumulate the necessary 
documentation we will need to begin the audit prior to the entrance conference. 
 
If you need to postpone the audit entrance date, please notify us 2 weeks prior to the 
scheduled audit and we will attempt to accommodate your request.  This is necessary as 
our audit work plan has been set and we will need time to reschedule the audit staff.  
Again all documentation found on the attached list must be available at the entrance 
conference.  This will enable us to review the information and expedite our audit process 
while minimizing the impact on your personnel.  Be aware that this list is not all-
inclusive and that we may request additional documentation necessary to conduct and 
complete our audit.  If the information is not provided, we will make audit adjustments to 
disallow the costs associated with the requests. 
 
Any proposed audit adjustments will be given to you during the course of the audit.  You 
may request the work papers that support the adjustments at any time.  A pre-exit 
conference will be held on the last day of the audit fieldwork which is tentatively planned 
to be on MMDDYY.  In this meeting we will go over outstanding information requests 
and all of the audit adjustments available at that time.  You will have 4 weeks to provide 
any  outstanding  information  or  information  to  refute  any  previously  proposed  audit 
adjustment. (We do not need to consider any additional documentation that you furnish 
after  the  expiration  of  the  4-week  period  in  the  Notice  of  Amount  of  Program 
Reimbursement (NPR)).  We will schedule an exit conference within twelve (12) weeks 
following the pre-exit conference.  Prior to the exit conference, we will provide you with   
new or modified audit adjustments that we propose after the pre-exit conference and 
allow you two (2) weeks to comment on them.  If you wish to waive a formal exit 
conference, please notify (name of contractor) of this decision in writing (e-mail note will 
suffice). 
 
The Notice of the Amount of Program Reimbursement will be issued to you within 60 
days from the exit conference or within 60 days from the date that we finalize the audit 
adjustments if an exit conference is waived. 
 
We believe these time frames and requirements will help expedite the completion of the 
field audit and settlement of your cost report.  These provisions will be uniformly applied 
to all providers.  We believe that with your cooperation we will have better field audits 
and more accurate settlements of cost reports. 
 
If you wish to discuss this matter please contact ____________ at ____________. 
 
 
Sincerely, 
 
 
Signature, Title 
 
Enclosures 
 
cc: 
 
   
Exhibit II b  Audit Confirmation Letter  In-House Audit 
(Rev. 107, Issued:  09-22-06; Effective:  10-01-06; Implementation:  10-02-06) 
 
Date 
 
 
Addressee 
Address 
City, State Zip Code 
 
Provider____________________________________________________________ 
Provider No._________________________________________________________ 
F.Y.E_______________________________________________________________ 
 
Dear_________________: 
 
This is to inform you that your facility has been selected by (contractor name) for an     
in-house audit of your YYYY cost report.  The audit will commence on MM, DD, 
YYYY, (4 to 6 weeks from the date of the letter) with a telephone entrance conference to 
be held (the date and time of the telephone conference).  We ask that at the least the chief 
financial officer, the person who prepared the cost report and anyone designated as your 
liaison for the audit participates during the entrance conference.  In addition, we ask that 
the information listed on the attached schedule be sent to the contractors location one 
week prior to (the date of the telephone entrance conference). 
 
If you need to reschedule the entrance conference, please notify us 2 weeks prior to 
scheduled  audit,  and  we  will  attempt  to  accommodate  your  request.    Again  all 
documentation found on the attached list must be sent one week prior to the telephone 
conference.  This will enable us to review the information and expedite our audit process 
while minimizing the impact on your personnel.  Be aware that this list is not all-
inclusive and that we may request additional documentation necessary to conduct and 
complete our audit.  If the information is not provided, we will make audit adjustments to 
disallow the costs associated with the requests. 
 
Any proposed audit adjustments will be sent to you during the course of the audit.  You 
may request the work papers that support the adjustments at any time.  A pre-exit 
telephone conference will be tentatively planned to be on MMDDYYYY.  During this 
telephone conference, we will go over outstanding information requests and all of the 
audit  adjustments  available  at  that  time.    You  will  have  4  weeks  to  provide  any 
outstanding  information  or  information  to  refute  any  previously  proposed  audit 
adjustment.  (We do not need to consider any additional documentation that you furnish 
after  the  expiration  of  the  4-week  period  in  the  Notice  of  Amount  of  Program 
Reimbursement (NPR)).  We will schedule a telephone exit conference within twelve 
(12) weeks following the pre-exit conference.  Prior to the exit conference, we will 
provide you with new or modified audit adjustments that we propose after the pre-exit 
conference and allow you two (2) weeks to comment on them.  If you wish to waive a   
formal exit conference, please notify (name of contractor) of this decision in writing (e-
mail note will suffice). 
 
The Notice of the Amount of Program Reimbursement will be issued to you within 60 
days from the exit conference or within 60 days from the date that we finalize the audit 
adjustments if an exit conference is waived. 
 
We believe these time frames and requirements will help expedite the completion of the 
in-house audit and settlement of your cost report.  These provisions will be uniformly 
applied to all providers.  We believe that with your cooperation we will have better in-
house audits and more accurate settlements of cost reports. 
 
If you wish to discuss this matter please contact ______________at________________. 
 
 
 
Sincerely, 
 
 
 
Signature, Title 
 
Enclosures 
 
cc:   
Exhibit III  Entrance Conference Agenda 
(Rev. 27, 12-19-03) 
 
Contractor Name:   
 
 
Provider Name: 
________________________________________________________________________ 
 
Provider No.: ___________________ FYE ___________________ 
 
Auditor: _______________________  Date: __________________ 
 
Time: ___________________   Location _____________________ 
 
Provider Representative: 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
Contractor Representative: 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
Other: 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
________________________________________________________________________   
 
 
1. Staff Introductions. 
 
2. Provider designation of "Contact" or "Liaison" person for auditors to work with on 
daily basis. 
 
________________________________________________________________________ 
 
3. Establish a schedule for ongoing communication during the audit to update provider on 
audit progress, possible audit adjustments, documentation still required, and to share 
other information. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
(cid:121)  Establish administrative procedures for such things as: 
 
Use of copy machine__________________________  
Telephone calls ______________________________  
Use of fax machine ____________________________  
Work hours _________________________________  
Parking _____________________________________  
Working space _______________________________  
Other ______________________________________  
 
(cid:121)  Establish procedures for obtaining documents and records and their return when 
the auditors have completed their review. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
6. Review last year's audit adjustments as they relate to or affect the current year's cost 
report/audit. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
7. Discussion of proposed adjustments, if any, to current year's cost report identified 
during the desk review performed by the contractor. 
________________________________________________________________________ 
   
________________________________________________________________________ 
8. Discussion of areas to be audited, steps to be performed and documentation needed as 
requested in the audit confirmation letter. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
9. Discuss the availability of third parties (CPAs, consultants, and other outside parties) 
and their records related to the cost report, for the auditors. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
10. Arranging for tour of provider facility. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
11. Establish a tentative date and time for the pre-exit and exit conferences and discuss 
the proposed agendas for these conferences. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
12.  Discuss  changes  in  organization  ownership,  new  sub-units,  ambulatory  care 
ambulatory care, CORF, SNF, HHA, and Swing Bed. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
 
13. Discuss and update the Internal control Questionnaire, if appropriate. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
   
14. Other questions asked during the entrance conference. 
 
________________________________________________________________________ 
 
________________________________________________________________________ 
 
15. Agenda items from provider (if any). 
________________________________________________________________________ 
 
________________________________________________________________________ 
   
Exhibit IV  Internal Control Questionnaire 
(Rev. 27, 12-19-03) 
 
This questionnaire is effective for audit fieldwork started after November 30, 1990 and 
reflects those elements of internal control structure that are more relevant to the outcome 
of a Medicare audit. 
 
Answer  all  questions  on  the  questionnaire  "Yes,"  "No,"  or  "Not  Applicable,"  as 
appropriate and indicate whether the answer was obtained by inquiry, investigation, or 
both.  Provide both name and title of the person supplying the information.  Answers 
requiring  support  must  include  proper  documentation  or  explanation,  or  be  cross-
referenced  to  the  appropriate  working  paper  in  the  current  audit  file.   If  a  brief 
explanation is sufficient to adequately support the answer, it is not necessary to write an 
overly detailed description of the procedures. 
 
The questionnaire is not all-inclusive and may be supplemented according to the needs of 
the provider being audited. If some internal control procedures other than those stated or 
implied by the questionnaire exist and affect the Medicare audit, include a description or 
explanation on a supporting working paper. 
 
INTERNAL CONTROL QUESTIONNAIRE 
 
Provider Name ___________________________________________ 
 
Provider Number _________________________________________ 
 
Reporting Period: From _________________ To ________________ 
a.  Question  
b.  Source (a = Inquiry, b =Observation, c = Tests)  
c.  Initials  of  person  supplying  information.  (Initials  must  be  explained  and  the 
appropriate title supplied in a supporting working paper)  
d.  Response (Yes, No, N/A)  
e.  W/P Reference 
 
Question  Source Initials Response WP Ref 
I. Control Environment             
 
1.  Was an independent audit of the provider's               
Question  Source Initials Response WP Ref 
financial statements for this cost reporting 
period performed? 
 
2.  If so, what was the audit opinion of the             
independent auditors? 
  
Unqualified opinion 
 
If opinion is qualified, describe the reason 
why. 
 
3.  Has the provider made a written             
representation on whether it received a SAS 
60 report on reportable conditions of 
internal control (whether given on a written 
or oral basis to the provider by the financial 
auditors)? 
 
4.  Describe any reportable conditions in the             
SAS 60 report that are applicable to the 
Medicare audit.  
 
5.  Does the provider have a current             
organization chart defining lines of 
responsibility?  
 
If so, obtain a copy. 
 
6.  Does the provider have an established chart of            
accounts?  
 
If so, obtain a copy. 
 
7.  Are the Board of Directors' meeting             
minutes available for review?  
 
If so, obtain a copy. 
 
 
8.  Does the provider have a policy on bonding            
its employees in positions of financial trust?
 
9.  Does the provider have a policy that               
Question  Source Initials Response WP Ref 
requires employees in positions of financial 
trust to take mandatory vacations? 
 
10.  Does the provider have a policy regarding             
treatment of employees who violate control 
policies? 
 
11.  List the names of employees exercising the             
following functions: 
 
      President             
 
      Administrator             
 
      CFO             
 
      Controller             
      Medicare Reimbursement Manager             
      Internal Auditor             
      Director of Nursing             
   A.    Are any of the above related to each             
other or others working in the organization?
 
B.   If the answer to A. is yes, list the 
positions, incumbents, etc., who are related 
and state the relationships: 
 
 
 
 
                
 
12.  Does the provider have an internal audit             
function? 
 
   A.    If so, does the internal audit function             
report to an executive other than the chief   
Question  Source Initials Response WP Ref 
accounting officer? 
 
   B.    If other than the CEO, specify to             
whom the internal auditor reports: 
 
 
II.  Accounting System 
           
 
1.  Does the provider have adequate written statements            
and explanations of its accounting policies and 
procedures? Do the policies require that: 
 
   A.    Accounting transactions are recorded             
in accordance with generally accepted 
accounting principles (GAAP)? 
 
   B.    Journal entries are approved by a             
designated individual at an appropriate 
level? Specify the individual and title: 
 
   C.    Journal entries require an adequate            
explanation and supporting documentation?  
  
   D.    Monthly reconciliations and timely             
closings are made to the accounting 
records. 
 
2.  Does the provider maintain a policy manual            
covering: 
 
   A.    Approval for financial transactions?             
 
   B.    Guidelines for controlling expenditure             
functions, such as purchasing and travel 
authorization? 
 
   C.    Maintenance of accounting records?             
 
3.  Are the provider's accounting and policies             
and procedures adequately communicated 
to employees? 
   
Question  Source Initials Response WP Ref 
4.  Does the provider use a computer system in            
its accounting operations? 
 
5.  Does the provider have policies and             
procedures that govern the use and 
operation of the computer system? 
 
6.  Have accounting principles been consistent             
with those maintained in the preceding 
year? 
 
7.  Are periodic interim financial statements             
prepared and submitted to management? 
 
8.  Does the provider's accounting system have            
suitable account classifications? 
 
9.  Does the general ledger include accounts of            
related organizations? 
 
   If so, identify the accounts and the related             
organizations. 
  
III. Control Procedures             
 
1.  Statistics  Worksheet S-3 (or equivalent             
worksheet): 
 
   A.    Does the provider have policies and             
procedures for accumulating the following 
census statistics? 
  
If so, obtain a copy. 
 
   1. Patient days (including observation bed             
days).  
 
   2. Patient visits              
 
   3. Number of beds by unit.              
   
Question  Source Initials Response WP Ref 
   B.    Does the provider have written policies            
and procedures for counting its interns and 
residents for both indirect medical 
education and graduate medical education? 
If so, obtain a copy. 
 
1.  Expenses  Worksheet A:             
 
   A.    What is the source document for the             
expenses filed on Worksheet A of the cost 
report? 
 
   B.    Are credits and refunds from vendors             
properly controlled and recorded to ensure 
that expenses are not overstated? 
 
   C.    Payroll expenses:             
 
      1.  Are employees required to punch a 
time clock or equivalent time logging 
system? 
               
              
2.  Is the payroll periodically 
checked against personnel records 
for:  
Continuing employment? 
 
Rate of pay? 
              
3.  Is the payroll checked for 
departmental allocation and time 
worked?  
              
4.  What documentation does 
the provider have to support its 
physicians' salary allocations to the 
provider component, the 
professional component, and the 
teaching component?    
Question  Source Initials Response WP Ref 
              
5.  If an employee works in two 
departments, how is the time split 
supported?  
3.  Cost allocation statistics  Worksheet B-1:             
 
   A.    List each cost allocation statistic.             
              
1.  Obtain a written description 
from the provider describing how 
each type of statistic is accumulated 
and maintained.  
              
2.  If the method for 
accumulating any statistic is 
different from that of prior cost 
reporting periods, obtain a 
description and explanation of the 
change. This includes changing 
from time records to time studies.  
   B.    What are the provider's procedures for             
requisitioning drugs and medical supplies 
from inventory and allocating them to 
departments? 
 
4.  Patient Care Charges  Worksheet C:             
 
   A.    What is the source document for             
reporting charges on Worksheet C of the 
cost report? 
 
   B.    Obtain a copy of the written             
procedures describing how routine, 
intensive care, ancillary, outpatient, and 
other patient care charges are recorded and 
accumulated by the provider. 
              
1.  Does the provider have 
procedures to ensure that the same 
charge is recorded for all classes of 
payers for the same service?    
Question  Source Initials Response WP Ref 
              
2.  Does the provider have 
procedures in place to ensure that all 
charges are properly recorded:  
In accordance with the provider's charge 
schedule? 
 
In the correct department? 
 
As inpatient or outpatient? 
              
3.  Does the provider have 
procedures in place to ensure that 
adjustments to billed charges are 
properly credited to the correct 
department?  
5.  Billing and Collection:             
 
   A.    Medicare as Secondary Payer  Does             
the provider have procedures in place to: 
 
              
1.  Obtain information on 
primary and secondary payers from 
patients on admission or at time of 
outpatient service?  
              
2.  Revise the billing where the 
primary payer is identified 
subsequent to the original billing?  
              
3.  Review credit balances and 
to remit them when they arise from 
subsequent identification of the 
correct primary and secondary 
payers?  
   B.    What is the provider's collection policy            
for unpaid patient bills? 
 
              
1.  Does the provider have the   
Question  Source Initials Response WP Ref 
same collection policy and 
procedures for both Medicare and 
non-Medicare patients?  
              
2.  Does the provider use a 
collection agency?  
   C.    What is the provider's policy in writing            
off Medicare bad debts as uncollectible?  
 
Obtain a copy. 
              
1.  Does the provider have 
policies in place to determine 
indigence?  
              
2.  Are the amounts written off 
as Medicare bad debts related only 
to covered deductible and 
coinsurance amounts?  
   D.    Does the provider have procedures in             
place to identify recoveries of bad debts 
previously written off and charged to the 
Medicare program? 
 
6.  Capital-related costs:             
              
A.  What are the provider's 
formal capitalization and 
depreciation policies?  
Obtain a copy. 
              
B.  Does the hospital directly 
assign capital-related costs to 
departments? If so, what are the 
provider's policies and procedures 
on directly assigned capital costs?  
              
C.  How does the provider 
record additions, transfers, and 
retirements?    
Question  Source Initials Response WP Ref 
              
D.  What follow-up procedures 
exist which ensure the proper 
handling of the gain or loss from the 
sales of assets?  
              
E.  How are records maintained 
for equipment and facilities used by 
the hospital, but owned by others?  
              
F.  At what level does the 
provider require normal 
authorization for new or renewed 
loans?  
           
G.  How does the provider 
ensure that all investment income, 
profits (and losses to the extent 
applicable) arising from funds   
diverted from patient care are 
properly offset against interest 
expense?  
 
 
 
 
 
 
   
EXHIBIT V  Pre-Exit Conference Format 
(Rev. 27, 12-19-03) 
  
Contractor Name: 
________________________________________________________________ 
 
Provider Name: 
________________________________________________________________ 
 
Provider No:_________________________         FYE:_____________________ 
 
Auditor:_____________________________         Date:_____________________ 
 
Time:_______________________________    Location:____________________ 
 
Provider Representative: 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
Contractor Representative: 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
Other: 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
________________________________________________________________ 
 
1. Discussion of proposed adjustments 
__________________________________________________________________ 
 
__________________________________________________________________   
2. Discussion of documentation that is still needed by the auditor to complete his/her 
review. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
3. Define responsibilities for all open items. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
4. Establish timeframes for: 
a. Providing documentation to auditors 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
b. Provider responding to proposed audit adjustments. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
c. Response by contractor to provider once documentation is received. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
d. Receipt of final adjustments. 
__________________________________________________________________ 
 
__________________________________________________________________ 
 
e. Contractor to provide adjustment work papers as requested by provider. 
________________________________________________________________ 
 
__________________________________________________________________ 
 
5. Assure all provider records are returned. 
 
________________________________________________________________ 
 
________________________________________________________________ 
   
Exhibit VI  Audit Adjustment Report 
(Rev. 27, 12-19-03) 
 
Instructions for Completion of the Audit Adjustment Report 
 
A.   Heading 
 
Complete as indicated. 
 
B.   Adjustment Numbers 
 
List adjustments in the order of completion of the cost report; i.e. cost report worksheet 
order and number them consecutively as they are recorded on the adjustment report. 
 
C.   Report Reference 
 
Identify the CMS form, page number or worksheet, line number, and column number to 
which the adjustment applies.  For example, reference to Form CMS-2552-96, Worksheet 
C, Part I, line 37, column 6, Operating Room (the cost center affected by the application 
of the adjustment), would indicate an adjustment to revise/remove total inpatient charges 
reported for the Operating Room. 
 
D.   Explanation of Adjustment 
 
Provide a narrative description of the audit adjustment. The description should be 
adequate enough to identify the item being adjusted and the reason (e.g., decreasing the 
GME FTE count of interns and residents, removing nonallowable cost, reclassifying cost 
or other data).  The narrative description of the audit adjustment should also include 
appropriate reference to law, regulations, or program policy and procedures, and the 
contractors working paper where the adjustment was first proposed. 
 
E.   W/S A Line 
 
For adjustments pertaining to Wkst. A-6 and Wkst. A-8, indicate in this column the Wkst. 
A lines that are affected by the adjustment.  For example, if vending machines expenses 
were included on Line 8 of Wkst. A, any Wkst. A-8 adjustments increasing or reducing 
the those expenses will affect Wkst. A, Line 8.  Thus in the W/S A Line column insert 
8. 
 
F.   CODE 
 
Indicate in this column the letters that are used to identify the Wkst. A-6 reclassification 
adjustments.  For example, the first Wkst. A-6 reclassification adjustment should be 
annotated with the letter that follows the last letter used for reclassifications on the 
submitted Wkst. A-6.  All the subsequent reclassification adjustments should follow 
the letters in the alphabet.  If all the letters of the alphabet are used up and there are other   
reclassification adjustments to be made, double the letters starting with A.  For 
example, use AA as the adjustment that follows Z. 
 
G.   Basis 
 
Insert in this column the type of Wkst. A-8 adjustment.  For cost adjustments use A 
and for income offsets use B. 
 
H.   As Reported or As Adjusted 
 
  As Reported  show the amount included in the unaudited cost report for the cost 
center that will be affected by the adjustment.  For example, where the proposed 
adjustment will change the employee benefits statistical allocation of the 
Administrative & General (A&G) cost center as reported by the provider, the 
amount shown will be the statistic as reported for this cost center on Form CMS-
2552-96, Worksheet B-1, line 6, column 5. 
 
  As Adjusted  where the A&G cost center has previously been adjusted by the 
audit capability, the contractor shall insert in this column the amount shown "As 
Adjusted" for the previous adjustment.  Reference should be made to this previous 
adjustment, e.g., (see adjustment no. 1). 
 
I.   Increase (Decrease) 
 
Insert the amount of the adjustment.  The adjustment amount should be indicated by 
brackets if it represents a (decrease) of the amount in the "As Reported or As Adjusted" 
column. 
 
J.   As Adjusted 
 
This column is the result of adding or subtracting the adjustment amount from the 
previously reported amount. 
 
 
AUDIT ADJUSTMENT REPORT    (Sample Format) 
  
These adjustments will be incorporated in our revised Statement of 
Reimbursable Cost for the period ended ______________. 
  
Provider # _____________________________  
Provider Name _________________________  
Fiscal Year    __________________________ 
Adj.    Pg or      Explanation of  W/S A A-6    As Reported   Increase or  
No.  Form  Sch  Line  Col  Adjustment  Line # Ltr.  Basis or As Adjusted  (Decrease)  As Adjusted 
1  2552-96  S-3  1  4 Hospital Adults & Peds                   34,400               125           34,525    
    Part I  6   ICU                        812               (89)               723  
      7   CCU                        791                 24                815  
                      
          To revise Title XVIII inpatient days to           
          agree to the PS&R paid through             
          12/31/02.  42 CFR 413.64 &             
          CMS 15-I, 2404.  W/P 15-2             
                      
                      
2  2552-96  A-6  1  4 Nonallowable Marketing  Salaries  99.01 Z     $                      $  252,000    $   252,000  
        5 Nonallowable Marketing  Other  99.01                                 153,000         153,000  
        8 Nonallowable Marketing  Salaries  6                               (252,000)       (252,000) 
        9 Nonallowable Marketing  Other  6                               (153,000)       (153,000) 
                      
          To reclassify Marketing Expense to           
          a nonreimbursable cost center, so            
          That it receives its appropriate share           
          of overhead.  42 CFR 413..9 &              
          CMS 15-I, 2136.  W/P 4-3             
                      
                      
3  2552-96  A-8  22  2 Vending Machines  8  B   $                      $  (11,690)   $    (11,690) 
                      
          To offset income earned from              
          vending machines.  42 CFR 413.9 &           
          CMS 15-I, 2102..3.   W/P 4-4B             
                      
                      
4  2552-96  B-1  6  5 Administrative & General         $   5,659,255    $(252,000)   $5,407,255  
      99.01   Nonallowable Marketing                                     252,000         252,000  
                      
          To reflect adjustments made to             
          salaries for the Employee Benefits           
          statistic as the stat is based on             
          Gross salaries.  42 CFR 413.24 &             
          CMS 15-I, 2306.  W/P 11-6             
                      
                      
5  2552-96  C  37  6 Operating Room         $   2,875,965    $  342,105    $3,218,070  
    Part I                   
          To revise Inpatient Operating Room           
          charges to agree to the provider's           
          trial balance.  42 CFR 413.24 &             
          CMS 15-I, 2304.  W/P 15-2             
                        
                      
6  2552-96  D-4  37   Operating Room         $      716,479    $    25,452    $   741,931  
      41   Radiology  Diagnostic                 332,735            3,125         335,860  
      44   Laboratory                 660,777        105,410         766,187  
      50   Physical Therapy                 138,455          36,500         174,955  
                      
          To adjust the Title XVIII Inpatient              
          Charges to agree to the PS&R             
          paid through 12/31/02.              
          42 CFR 413.53 & CMS 15-I, 2204.             
          W/P 15-2              
                      
7  2552-96  E  21  1 Reimbursable Bad Debts         $        33,450    $    (3,200)   $     30,250  
    Part A                   
          To adjust Part A Bad Debts to             
          remove those bad debts written off           
          prior to 120 days.  42 CFR 413.80            
          CMS 15-I:310.2.  W/P 14-1B             
                      
                      
8  2552-96  E-1  1  2 Interim Payments Paid         $   7,121,387    $  125,600    $7,246,987  
      2   Interim Payments Payable                 154,955      (154,955)                      
                      
          To adjust Interim Payments to             
          agree to the PS&R paid through             
          12/31/02.  42 CFR 413.64 &             
          CMS 15-I,2404.  W/P 15-5             
                      
                      
9  2552-96  E-3  3.07  1 Weighted FTE Count for Primary Care Residents   150.55  -2.34        148.21  
    Part IV  3.08   Weighted FTE Count for All Other Residents                 95.40   -1.02          94.38  
      3.11   Weighted Dental & Podiatric FTE Count                   11.00   -0.55          10.45  
                      
          To adjust the GME FTE count to agree to the         
          provider's rotation schedules.  42 CFR 413.86          
          W/P 13-8G             
   
Exhibit VII  Form of Report on Audit of Medicare Cost Report 
(Rev. 60, Issued: 11-26-04, Effective: 10-01-04, Implementation: 01-24-05) 
 
CONTRACTOR LETTERHEAD 
 
  
PROVIDER NAME ___________________________________________ 
 
 
PROVIDER NUMBERS ________________________________________ 
 
 
REPORTING PERIOD FROM__________________TO________________ 
 
We have audited the provider(s) Medicare cost report for the cost reporting period stated 
above. 
 
We conducted our audit in accordance with the directives in CMS Pub. 100-06, Chapter 
8.  They require that we plan and perform the audit to obtain reasonable assurance that 
the cost report settlement reflects payment amounts and financial data in accordance with 
Medicare laws, regulations, and instructions. 
 
A less than full scope audit was made of this cost report in accordance with CMS's audit 
instructions.  The examination was confined to the specific areas selected for audit as 
indicated on the attached listing. 
 
Preparation of the cost report and compliance with Medicare laws, regulations, and 
instructions is the responsibility of the provider(s) management.  As part of obtaining 
reasonable assurance about whether the cost report settlement reflects payment amounts 
and financial data in accordance with Medicare laws, regulations, and instructions, we 
performed tests of compliance with certain provisions of the Medicare laws, regulations, 
and instructions. 
 
In planning and performing our audit of the provider's cost report for the period, we 
considered its internal control structure, as it pertained to those items in the scope of our 
audit of the Medicare cost report, to determine auditing procedures for the purpose of 
expressing our opinion on the cost report and not to provide assurance on the internal 
control structure. 
 
(Select  one  of  the  following  alternative  paragraphs  on  the  consideration  of  the 
internal control structure, if applicable.) 
 
We have concluded that it would be inefficient to evaluate the effectiveness of internal 
control structure policies and procedures and, in accordance with the GAS, we conducted   
the audit more efficiently by expanding substantive audit tests, thus placing little reliance 
on the internal control structure. 
 
or 
 
The objectives of this financial related audit did not require an understanding of the 
internal control structure. 
 
or 
 
The existing internal control structure contained so many weaknesses we had no choice 
but to rely on substantive testing, thus virtually ignoring the internal control structure. 
 
NOTE: This will not be included if the contractor used one of the alternative paragraph 
above. 
 
The provider(s) management is responsible for establishing and maintaining an internal 
control  structure.   In  fulfilling  this  responsibility,  estimates  and  judgments  by 
management are required to assess the expected benefits and related costs of internal 
control policies and procedures.  The objectives of an internal control structure provide 
management with reasonable, but not absolute assurance that assets are safeguarded 
against loss from unauthorized use or disposition, and that transactions are executed in 
accordance  with  generally  accepted  accounting  principles.   Because  of  inherent 
limitations in any internal control structure, errors or irregularities may occur and not be 
detected.  Also, projections of any evaluation of the internal control structure to future 
periods is subject to risk that procedures may become inadequate because of changes in 
conditions or that the effectiveness of the design and operation of policies and procedures 
may deteriorate. 
 
For purposes of this report, we have classified the significant internal control structure 
policies and procedures, as they affect the Medicare audit in the categories listed in the 
attached report.   
 
For the internal control structure categories listed, we obtained an understanding of the 
design  of  relevant  policies  and  procedures  and  whether  they  have  been  placed  in 
operation, and we have assessed control risk. 
 
(If reportable conditions were noted, the contractor incorporates the following statement, 
along with paragraphs describing the reportable conditions.) 
 
We noted certain matters involving the internal control structure and its operation that we 
consider  to  be  reportable  conditions  under  standards  established  by  the  American 
Institute of Certified Public Accountants.  Reportable conditions involve matters coming 
to our attention relating to significant deficiencies in the design or operation of the 
internal control structure that, in our judgment, could adversely affect the entity's ability   
to  record,  process,  summarize,  and  report  financial-related  data  consistent  with  the 
assertions of management in the Medicare cost report. 
 
Our consideration of the internal control structure would not necessarily disclose all 
matters  in  the  internal  control  structure  that  might  be  material  weaknesses  under 
standards  established  by  the  American  Institute  of  Certified  Public  Accountants.   A 
material weakness is a reportable condition in which the design or operation of the 
specific internal control structure elements does not reduce to a relatively low risk that 
errors or irregularities in amounts that would be material in relation to the cost report 
being audited may occur and not be detected within a timely period by employees in the 
normal course of performing their assigned functions. 
 
(If no material conditions or reportable conditions were noted, the contractor incorporates 
the following statement.) 
 
We noted no matters involving the internal control structure and its operation that we 
consider to be material weaknesses as defined above. 
 
(The following paragraph is an optional paragraph under either consideration for items 
that are less than reportable conditions and for general comments.) 
 
However,  we  noted  certain  matters  involving  the  internal  control  structure  and  its 
operation that we have reported to the provider's management in a separate letter dated 
(the contractor inserts the date of the letter). 
 
The results of our tests indicate that, with respect to the items tested, the provider(s) 
complied  in  all  material  respects  with  Medicare  laws,  regulations,  and  instructions, 
except for the items listed in the attached adjustment report.  With respect to items not 
tested, nothing came to our attention that caused us to believe that the provider(s) has not 
complied in all material respects with these provisions. 
 
The attached Medicare cost report has been adjusted for these items of noncompliance in 
accordance with the attached audit adjustment report. 
 
This report is intended for the information of the provider(s) and CMS.  This restriction is 
not intended to limit the distribution of the report, which is a matter of public record, 
unless otherwise restricted by applicable laws. 
 
(Signature) 
 
 
Name and Title 
 
NPR Date 
   
Exhibit VIII  Form of Report for Medicare Cost Report That Has not 
Been Audited 
(Rev. 27, 12-19-03) 
 
CONTRACTOR LETTERHEAD 
  
PROVIDER NAME ___________________________________________ 
 
 
PROVIDER NUMBERS ________________________________________ 
 
REPORTING PERIOD FROM__________________TO________________ 
 
 
 
We have reviewed the provider(s) Medicare cost report for the cost reporting period 
stated above. 
 
Preparation of the cost report and compliance with Medicare laws, regulations, and 
instructions are the responsibility of the provider(s) management. 
 
We have performed a review of the cost report.  The attached Medicare cost report has 
been adjusted, where required, for items of noncompliance discovered during our review, 
which are listed in the attached adjustment report. 
 
This report is intended for the information of the provider(s) and CMS.  This restriction is 
not intended to limit distribution of this report, which is a matter of public record, unless 
otherwise restricted by applicable law. 
 
 
(Signature) 
 
Name and Title 
 
 
 
NPR Date 
 
 
   
Exhibit IX  Personal Impairments Statement 
(Rev. 27, 12-19-03) 
 
I certify that I am free of personal or financial impairments on this assignment/the 
assignments that I will be involved during the fiscal year*.  These personal impairments 
may include, but are not limited to the following: 
 
(cid:121)  Official, professional, personal, or financial relationships that might cause me to 
limit the extent of the inquiry, to limit disclosure, or to weaken or slant audit 
findings in any way. 
 
(cid:121)  Preconceived ideas toward individuals, groups, organizations, or objectives of a 
particular program that could bias the audit. 
 
(cid:121)  Previous responsibility for decision-making or managing the entity that would 
affect current operations of the entity or program being audited. 
 
(cid:121)  Biases  that  result  from  employment  in,  or  loyalty  to,  a  particular  group, 
organization, or level of government. 
 
(cid:121)  Subsequent performance of an audit by myself if, for example, I have previously 
approved invoices, payrolls, claims and other proposed payments of the entity or 
program being audited. 
 
(cid:121)  Concurrent or subsequent performance of an audit by myself, if I had previously 
maintained the official accounting records. 
 
(cid:121)  Financial interest, direct or substantial indirect, in the audited entity or program. 
 
(cid:121)  Job offer received during the engagement. 
 
 
 
          Signature:  ______________________ 
 
        Date:  ______________________ 
 
        Approval:  ______________________ 
 
        Date: ______________________ 
 
 
 
 
*  (Underline the applicable phrase depending whether the impairment statement applies 
to a single assignment or represents an annual impairment statement.)   
Exhibit X  Model Audit Subcontract Form 
(Rev. 27, 12-19-03) 
 
THIS CONTRACT between ____________________________, hereinafter referred to 
as the "Intermediary" and __________________________, hereinafter referred to as the 
"Audit Firm" shall begin on _________________, and shall end on _________________. 
 
ARTICLE I 
Auditing Services 
A. General 
1. To the extent directed by the Intermediary, the Audit Firm shall examine the records of 
those providers of services designated by the Intermediary, and shall report any matters 
noted in the course of the examination which reflect upon the allowability of costs 
reported by the providers.  Such costs are defined in 1861 (v) of the Social Security Act, 
as amended, hereinafter referred to as the "Act," and in the Principles of Reimbursement 
for Provider Costs (42 CFR 405.465 - 405.482 and 42 CFR 413.1 -413.178), hereinafter 
called "Principles." Based on Public Law 94-505, audits performed under the Act must 
adhere to the applicable Standards for Audits of Governmental Organizations, Programs, 
Activities, and Functions issued by the Comptroller General of the United States.  These 
standards are covered in 4112 of CMS Publication 13-4. 
2. The audit for each provider shall commence and be completed within the timeframes 
specified in Appendix B.  A request for an extension of time must be in writing and will 
be allowed only for "good cause" as determined by the Intermediary.  Any delays arising 
out of causes, which are beyond the control and without the fault or negligence of the 
audit firm, shall constitute "good cause" for an extension of time to complete an audit. 
3. The Audit Firm may, with Intermediary approval, undertake preliminary work prior to 
the official commencement of the audit. 
B. The Audit Firm shall audit designated providers as indicated in Appendix B in 
accordance with Generally Accepted Auditing Standards applicable in the circumstances. 
The Intermediary will provide written instructions as to the extent of the audit, as well as 
the maximum number of hours allocated for the audit.  For the purpose of this Article, if 
the Audit Firm is an independent Certified Public Accounting (CPA) Firm it must meet 
the criteria for independence in the Code of Professional Ethics published by the 
American Institute of Certified Public Accountants.  Further, the Audit Firm will 
promptly disclose to the Intermediary, in writing, any auditing or Management Advisory 
Services (MAS) rendered to a provider which the Intermediary directs it to audit. 
C. Where the Audit Firm has conducted an examination, the Audit Firm's report must 
include the following: 
1.  Audit working papers detailing work performed which supports the audit 
findings.   
2.  Audit adjustments prepared in the format required by the Intermediary, as 
prescribed by the Centers for Medicare & Medicaid Services (CMS), to be 
discussed with provider officials.  The Audit Firm will be present at these 
meetings. 
D. The Audit Firm agrees to advise the Intermediary, as soon as possible, of any matters 
coming to its attention during the course of the audit that, in the Audit Firm's opinion, 
indicate the need for additional auditing.  Such advice shall be in sufficient detail so as to 
enable the intermediary to establish the need for additional work.  As time is of the 
essence, the intermediary will respond orally before the end of two business days 
following receipt of such advice and confirm in writing. 
E. Final acceptance for all work called for herein will be made by the Intermediary when 
it determines that all technical requirements under the contract have been satisfactorily 
met.  Any corrections or adjustments necessitated by the Audit Firm's failure to comply 
with the specifications will be made at no additional expense to the United States 
Government. 
F. All audit work to be performed under this Contract shall be performed directly by 
members or employees of the Audit Firm and no functions shall be subcontracted to any 
other person or firm, unless approved in advance, in writing, by the Intermediary and 
CMS.  The Audit Firm agrees not to assist any provider of services for which it is 
performing the Medicare audit under this Contract in the resolution of any dispute 
between the provider of services and the Intermediary or CMS, arising as a result of any 
audit performed under this Contract. 
 
ARTICLE II 
Compensation for Services Performed Under This Contract 
A.  The Intermediary shall compensate the Audit Firm for its direct and indirect audit 
time, travel, and incidental audit expenses.  Direct audit time is defined as the time of 
personnel specifically spent in the conduct of an audit under the terms of this Contract.  
Indirect time is time spent by personnel in relation to audits under this Contract of two or 
more providers which cannot be specifically identified with the audit of either provider. 
The Audit Firm agrees to furnish the total number of hours of audit work at the rate and 
total dollar amount not exceeding those specified in Appendix A, and to audit those 
providers as directed by the Intermediary.  The audit firm shall be paid an hourly rate, 
reasonable incurred travel costs and incidental out-of-pocket expenses, as compensation 
for the work performed under this contract, subject to the limitations of this Article.  The 
Audit Firm shall not be compensated when the total amounts of its charges exceed the 
dollar amount specified in Appendix A.  The Audit Firm shall not be compensated for 
any audit work performed at a provider of services after it has been directed by the 
Intermediary not to initiate that audit or to discontinue audit work in progress.  Audit 
Firms shall not charge training of their staff to this Contract. 
B.  The Intermediary shall reimburse the Audit Firm for all reasonable incurred travel 
costs in accordance with the guidelines for travel in the Federal Acquisition Regulations 
(FAR) 31.205-46, as outlined in subparagraphs 1 and 2 below.  Travel costs are those   
expenses for transportation, lodging, subsistence, and related items incurred by any 
member or employee of the Audit Firm in the performance of functions under this 
Contract.  Such costs may be charged on an actual basis, a per diem or mileage basis in 
lieu of actual costs incurred, or a combination of the two.  The method used shall apply to 
an entire trip and not to selected days of the trip. 
1.  Costs incurred for lodging, meals and incidental expenses shall be considered to 
be reasonable and allowable only to the extent that they do not exceed on a daily 
basis the maximum per diem rates in effect at the time of travel as set forth in the 
Federal Travel Regulations. 
2.  Airfare costs in excess of the lowest customary standard coach, or equivalent 
airfare offered during normal business hours are unallowable except when such 
accommodations require circuitous routing, require travel during unreasonable 
hours, excessively prolong travel, result in increased cost that would offset 
transportation savings, are not reasonably adequate for the physical or medical 
needs of the traveler, or are not reasonably available to meet mission 
requirements. 
C.  The Audit Firm's hourly rates for services to be performed by its members and 
employees under this Contract shall not exceed those specified in Appendix A. 
D.  The Audit Firm shall submit to the Intermediary, at least monthly, billings for total 
services rendered, showing Hourly Rates times the Number of Hours, with separate 
entries for total travel and incidental out-of-pocket expenses.  In addition, the Audit Firm 
shall attach to each monthly billing a listing of the providers to which the billing applies 
and the audit fees associated with each provider, including the corresponding hour(s). 
Included in the listing, as separate items, shall be the cost of indirect time and incidental 
expenses so that the total shown will agree with the total in the monthly billing.  Within 
30 calendar days after the completion or termination of an audit, the Audit Firm will 
submit a summary of the direct time for performing the audit of that provider.  Within 30 
days after the completion of this Contract, the Audit Firm shall submit a summary of 
indirect time for each provider of services audited under this Contract.  The Intermediary 
shall make prompt payment to the Audit Firm, upon receipt of monthly billings, to the 
extent such compensation, travel, and incidental out-of-pocket expenses are supported 
under this Article; however, the Intermediary must be satisfied with the quality of the 
audit before final settlement.   
E.  When the Audit Firm is delinquent in submitting any working papers as required 
under Article I.A., and C., of this Contract, the Intermediary shall have the right to 
suspend all payments to the Audit Firm until such time as the Intermediary determines 
that the Audit Firm is current in processing audits to completion and in submitting 
working papers.  The Audit Firm shall be considered current when it meets the 
requirements of Article I.A.2 regarding the submission of working papers. 
F.  The Audit Firm shall maintain adequate accounting records covering the funds 
received under this Contract.  The Audit Firm agrees that the Intermediary until 3 years 
after final payment for the term of this Contract, shall have access to and the right to 
examine, upon reasonable notice, the records involving transactions related to this 
Contract.   
G.  This contract does not provide for indemnification of the Audit Firm or any of its 
directors, officers or other employees for its wrongful acts or conduct stemming from the 
Medicare audit.  Thus, in the event of a lawsuit or administrative proceeding the Audit 
Firm is totally responsible for any adverse judgments or awards rendered against it and/or 
related costs and legal fees. 
 
ARTICLE III 
Amendments Due to Increases in Charges 
If, during the term of this Contract, the Audit Firm determines or anticipates that its 
charges in carrying out the terms of this Contract will exceed the total amount stated in 
Appendix A, it shall request, in writing, that the Intermediary provide a funding increase 
and shall furnish adequate data to support such request. 
A.  If the requested increase, by itself, does not exceed $10,000, or when added to 
previous Contract increases does not exceed fifteen percent of the total Contract amount, 
the Intermediary shall determine within seven calendar days the extent to which the 
increase will be made.  The Contract will then be amended to reflect the appropriate 
amount of increase.  
B.  If the requested amount of increase exceeds $10,000, or when added to previous 
increases on this Contract exceeds fifteen percent of the total Contract amount, the 
Intermediary shall forward the Contract amendment to CMS for approval. 
 
ARTICLE IV 
Amendments Due to Increase and/or 
Decrease in Number of Providers of Service 
 
A.  The Intermediary and the Audit Firm may at any time agree to increase or decrease 
the number of providers to be audited under this Contract, as specified in Appendix B. 
B.  The Intermediary shall have the right to reduce the number of Audits of providers as 
specified in Appendices A and B, or to direct that audit work in progress be discontinued, 
upon the giving of prior written notice to the Audit Firm.  The reduction or direction to 
discontinue work shall become effective on the date specified in the notice.   
C.  In the event of any increase or decrease in the number of providers to be audited 
under this contract as specified in Appendices A and B, which does not cause a complete 
termination of this Contract, the Audit Firm and the Intermediary agree that the total 
estimated maximum amount stated in Appendix A shall be appropriately adjusted. 
D.  The Intermediary's obligation under the contract is contingent upon the availability of 
appropriated funds from which payment for contract purposes can be made. 
 
   
ARTICLE V 
Questions and Interpretations 
The Audit Firm shall refer questions of interpretation of the Act or Principles of Medicare 
Reimbursement to the Intermediary and the written reply of the Intermediary will be 
considered as conclusive. 
 
ARTICLE VI 
Term of the Contract 
The term of this Contract shall begin and end on the dates cited on page 1.  If the cost 
report for any provider of services is received by the Audit Firm during the term of this 
Contract, at a time when completion of the audit by the ending date of the contract is not 
possible, the Audit Firm will continue to assist in performing the audit under this 
Contract if sufficient audit hours and money are still available.  (See Article II, Paragraph 
A.) 
 
ARTICLE VII 
Termination of Contract 
A.  The Intermediary and the Audit Firm may terminate this Contract at any time by 
mutual consent. 
B.  This Contract shall automatically be terminated when the services described in 
Article I have been completed for all providers of services for which cost reports have 
been received by the Audit Firm during the term of this Contract.  In the event the 
Intermediary reduces the number of audits specified in Appendix B to be performed 
under this contract, the contract shall be terminated upon the completion of all remaining 
audits. 
C.  In the event of any termination under this Article or under any other provision of this 
Contract, the Audit Firm shall, as promptly as possible, but not later than 30 calendar 
days after the date of such termination, submit a summary including the direct time for 
provider audit work performed, travel, incidental out-of-pocket expenses, and any 
indirect time chargeable under this Contract. 
 
ARTICLE VIII 
Disputes 
Except as otherwise provided in this Contract, any dispute concerning a question of fact 
arising under this Contract, which is not disposed of by agreement, shall be decided by an 
official authorized to bind the Intermediary who shall mail or otherwise furnish a copy of 
the decision to the Audit Firm.  
 
   
ARTICLE IX 
Appendices 
Appendix A, Appendix B, and the "Addendum to Subcontracts Under the Health 
Insurance for the Aged and Disabled Act" attached hereto, are made a part of this 
Contract. 
ARTICLE X 
Contract and Amendment Approval 
The Intermediary and the Audit Firm acknowledge that this Contract, and any 
amendments over $10,000 or exceeding fifteen percent of the total contract amount are 
not to be effective until approval, in writing, by the Secretary. 
 
IN WITNESS WHEREOF, the parties hereby execute this agreement this  
 
_______ day of __________ 19 _______. 
 
  ____________________________________________ 
  (Audit Firm) 
  
  ____________________________________________ 
  ____________________________________________ 
  (Address of Audit Firm) 
  
By:  __________________________________________ 
  (Signature)    (Title) 
    
  (Intermediary) 
  
By:  __________________________________________ 
  (Signature)    (Title) 
    
  (Blue Cross/Blue Shield Association) 
  
By:  __________________________________________ 
  (Signature)    (Title) 
 
Approved: 
 
Secretary of Health and Human Services 
 
By :__________________________________  
Signature 
 
 
   
APPENDIX A 
HOURLY RATE OF AUDIT FIRM PERSONNEL 
CATEGORY OF COSTS  HOURLY RATE  HOURS  AMOUNT 
FLAT RATE       
TRAVEL COSTS       
INCIDENTAL COSTS       
TOTAL       
   
APPENDIX B 
 
List of Providers of Services to be Audited 
Name  of  Provider 
Estimated Estimated  Travel  Incidental 
& Estimated Audit  City  FYE 
Hours  Amount  Cost  Costs 
Completion Date 
           
           
           
           
           
           
           
           
           
           
 
(Title) 
 
This____________ day of ____________20____ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Exhibit XI  Addendum to Subcontract 
(Rev. 27, 12-19-03) 
 
Addendum to Subcontract Under the 
Health Insurance for the Aged and Disabled Act 
(42 U.S.C., Chapter 7, Supp., as Amended) 
 
 
The clauses of this Addendum are a part of and are applicable, as indicated, to the 
subcontract by and between ____________________________, hereinafter referred to as 
the "Contractor" and __________________________, hereinafter referred to as 
"Subcontractor."  The term "Secretary" as used herein, means the Secretary of Health and 
Human Services or his delegate unless specified otherwise. 
 
TABLE OF CONTENTS 
Clause No.  Title  Page No.
    
   Section I    
I  Facilities Nondiscrimination Clause 
II  Disclosure of Information 
III  Automatic Termination of Subcontract Clause 
IV  Liquidated Damages in Subcontracts 
V  Privacy Act 
VI  Cost and Pricing Data 
  
   Section II    
VII  Subcontracting of Responsibilities 
VIII  Inspection 
IX  Rights in Data 
X  Subcontractor as Common Subcontractor 
XI  Modification of Subcontract 
XII  Regulations and General Instructions 
XIII  Prohibition Against Billing Services 
  
Section III 
  
Federal Acquisition Regulation Clauses (FAR) 
52.222-26  Equal Opportunity 
Utilization of Small Business Concerns and Small Disadvantaged 
52.219-8 
Business Concerns 
Small Business and Small Disadvantaged Business Subcontracting 
52.219-9 
Plan 
52.220-3  Utilization of Labor Surplus Area Concerns 
  
  Section IV 
52.220-4  Labor Surplus Area Subcontracting Program   
52.222-21  Certification of Nonsegregated Facilities 
52.222-35  Affirmative Action for Special Disabled and Vietnam Era Veterans 
52.222-36  Affirmative Action for Handicapped Workers 
3.502  Fees or Kick-Backs by Subcontractors 
52.219-13  Utilization of Women-Owned Small Businesses 
52.215-1  Examination of Records by Comptroller General 
 
NOTE: If there are any questions by the Subcontractor as to the applicability of the 
above clauses to this subcontract or whether the Subcontractor will be performing under 
this subcontract one of the Medicare "functions" or other responsibilities requiring prior 
approval of the Secretary as provided in the Medicare agreement between the Contractor 
and the Secretary, clarification should be requested from the Contractor in writing prior 
to execution hereof. 
 
SECTION I 
 
The clauses in I are applicable to this subcontract (and to lower tier subcontracts 
hereunder) unless excluded by the virtue of the lead-in language or other provisions 
contained in the body of the individual clauses. 
 
Clause I 
FACILITIES NONDISCRIMINATION CLAUSE 
The following provisions are applicable if this subcontract is for the lease of real estate: 
"As used in this clause, the term "Facility" means stores, shops, restaurants, cafeterias, 
restrooms, and any other facility of a public nature in the building in which the space 
covered by this lease is located." 
"The lessor agrees that he will not discriminate by segregation or otherwise against any 
person or persons because of race, color, religion, sex, or national origin in furnishing or 
by refusing to furnish, to such person or persons, the use of any facility, including any or 
all services, privileges, accommodations, and activities provided thereby.  Nothing herein 
shall require the furnishing to the general public of the use of any facility customarily 
furnished by the lessor solely to tenants, their employees, customers, patients, clients, 
guests and invitees." 
"It is agreed that the lessor's noncompliance with the provisions of this clause shall 
constitute a material breach of this lease.  In the event of such noncompliance, the lessee 
in acquiring substitute space.  Substitute space shall be obtained in as close proximity to 
the lessor's building as is feasible and moving costs will be limited to the actual expenses 
thereof as incurred." 
"The lessor agrees to include, or to require the inclusion of the foregoing provisions of 
this clause (with the terms "lessor" and "lessee" appropriately modified) in every 
agreement or concession pursuant to which any person other than the lessor operates or 
has the right to operate any facility.  Nothing herein contained, however, shall be deemed 
to require the lessor to include or require the inclusion of the foregoing provisions of this 
clause in any existing agreement or concession arrangement or one in which the   
contracting party other than the lessor has the unilateral right to renew or extend the 
agreement or arrangement, until the expiration of the existing agreement or arrangement 
and the unilateral right to renew or extend.  The lessor also agrees that it will take any 
and all lawful actions as expeditiously as possible with respect to any such agreement as 
the contracting agency may direct to enforce this clause, including but not limited to 
termination of the agreement or concessions and institution of court action." 
 
Clause II 
DISCLOSURE OF INFORMATION 
This clause is applicable to this subcontract and to any lower tier subcontract hereunder if 
it provides for the performance of any of the functions required for the administration of 
the Medicare agreement between the Contractor and the Secretary, and to any other 
subcontract where the subcontractor, its agents, officers, or employees might reasonably 
be expected to have access to information within the purview of 1106 of the Social 
Security Act, as amended, and regulations prescribed pursuant thereto. 
"The Subcontractor agrees to establish and maintain procedures and controls so that no 
information contained in its records or obtained from the Contractor and/or the Secretary 
or from others in carrying out the terms of this subcontract shall be used by or disclosed 
by it, its agents, officers, or employees except as provided in 1106 of the Social Security 
Act, as amended, and Regulations prescribed thereunder." 
 
Clause III 
AUTOMATIC TERMINATION OF SUBCONTRACT CLAUSE 
This clause is applicable to this subcontract if its term exceeds the term of the agreement 
between the Secretary and the Contractor, except where the Secretary agrees to its 
omission or if this subcontract is solely for the purchase of supplies and equipment. 
Notwithstanding the following, if the Contractor wishes to continue the subcontract 
relative to its own business after the contract between the Secretary and the Contractor 
has been terminated or nonrenewed, it may do so provided it assures the Secretary in 
writing that the Secretary's obligations will terminate at the time the Medicare contract 
terminates or is nonrenewed subject to the termination cost provisions provided for in the 
contract. 
The clause is as follows: 
"In the event the Medicare contract between the Secretary and the Contractor is 
terminated, the subcontract between the Contractor and the Subcontractor will be 
terminated unless the Secretary and the Contractor agree to the contrary.  Such 
termination shall be accomplished by delivery of written notice to the Subcontractor of 
the date upon which said termination will become effective." 
 
Clause IV   
LIQUIDATED DAMAGES IN SUBCONTRACTS 
The following provisions are applicable to this subcontract if it contains liquidated 
damages provisions which relate solely to Medicare: 
The Secretary, after consultation with the Contractor, shall have the right to determine 
that the specified levels of performance have not been attained by the Subcontractor.  In 
such event, the Secretary may direct the Contractor to notify the Subcontractor of the 
Secretarys determination that liquidated damages apply and to set-off the liquidated 
damages against the Subcontractor. 
 
Clause V 
PRIVACY ACT 
The Privacy Act of 1974, Public Law 93-579, and the Regulations and General 
Instructions issued by the Secretary pursuant thereto, are applicable to this subcontract, 
and to all subcontracts hereunder to the extent that the design, development, operation, or 
maintenance of a system of records as defined in the Privacy Act is involved. 
 
Clause VI 
COST AND PRICING DATA 
This clause is applicable to this subcontract and to any modification thereof, (1) where 
the estimated cost to Medicare exceeds or will exceed $500,000, and (2) the estimated 
cost was not based on adequate price competition, established catalog or market prices of 
commercial items sold in substantial quantities to the general public, or prices set by law 
or regulation. 
The Subcontractor is required to submit written cost or pricing data and certify that the 
data submitted was accurate, complete and current at the time of entry into this 
subcontract or modification in accordance with Subpart 15.804 of the Federal Acquisition 
Regulation and to maintain full and complete accounting records to support cost or 
pricing data submitted.  The Subcontractor must provide for full access by the Contractor, 
the Secretary, and the Comptroller General of the United States for the purpose of 
examining the accuracy of cost or pricing data submitted as aforesaid, and in accordance 
with Subpart 15.804 of the Federal Acquisition Regulation, agrees to a reduction in price 
if the cost or pricing data submitted is found to be defective. 
 
SECTION II 
In addition to the clauses in I, the clauses contained in II are also applicable to this 
subcontract regardless of amount if the subcontract (a) provides for the performance of 
any of the functions required for the administration of the Medicare agreement between 
the Contractor and the Secretary, or (b) involves subcontracting for automated data 
process systems or facilities management services which required the Secretary's prior 
approval.   
 
Clause VII 
SUBCONTRACTING OF RESPONSIBILITIES 
The Subcontractor agrees that it shall not enter into any lower tier subcontract with any 
other party to carry out the primary responsibilities of this subcontract without the prior 
written approval of the Secretary.  In the event such approval is given, the Subcontractor 
further agrees that the substance of these clauses shall be inserted in each such lower tier 
subcontract. 
 
Clause VIII 
INSPECTION 
The Secretary shall have the right, at all reasonable times and upon reasonable notice, to 
inspect or to otherwise evaluate the work performed or being performed under this 
subcontract, and the premises in which it is being performed.  If an inspection or 
evaluation is made, the Subcontractor shall provide all reasonable facilities and assistance 
for the safety and convenience of the Secretary's representatives in the performance of 
their duties.  All inspections and evaluations by the Secretary's representatives shall be 
performed in such a manner as will not unduly delay the work. 
 
Clause IX 
RIGHTS IN DATA 
A.  The Subcontractor agrees that the Secretary shall at such times and in such manner as 
he may prescribe, have access to any data acquired or utilized by it in the development 
and processing of claims or in carrying out its other functions under this subcontract, and 
further, shall have use of such data (other than discrete data such as trade secrets, 
commercial or financial data obtained solely from private business of the Subcontractor).  
The Subcontractor shall also, at such times and in such manner as the Secretary may 
prescribe, furnish to other organizations for use in administering health care or health 
care financing programs under the Act, data acquired or utilized by it in the development 
and processing of claims or other data (other than discrete data such as trade secrets, 
commercial or financial data obtained solely from private business of the Subcontractor) 
acquired by it in carrying out its functions under this subcontract. This does not apply to 
the proprietary data of subcontractors which is utilized by the Contractor for program 
purposes. 
B.  As used in this clause, the term "Subject Data" means writings, sound recordings, 
pictorial reproductions, drawings, designs, or other graphic representations, all systems 
documentation, program logic, operational manuals, forms, diagrams, workflow charts, 
equipment descriptions, data files, data processing or computer programs, all other 
operational methods and procedures involved in the performance of functions under the 
subcontract and works of any similar nature (whether copyrighted or copyrightable) 
which are acquired or utilized by the Subcontractor in carrying out its functions under   
this subcontract, for which more than 50 percent of the cost of development has been paid 
out of Government funds.  The term does not include financial reports, cost analyses, and 
similar information incidental to contract administration. 
C.  Government rights.  Subject only to provisions of (D) below, the Government may 
use, duplicate or disclose in any manner, and for any purpose whatsoever, and have or 
permit others to do so, all Subject Data. 
D.  License to copyright data.  In addition to the Government rights as provided in (C) 
above with respect to any Subject Data which may be copyrighted, the Subcontractor 
agrees to and does hereby grant to the Government a royalty-free, nonexclusive, and 
irrevocable license throughout the world to use, duplicate or dispose of such data in any 
manner and for any purpose whatsoever, and to have or permit others to do so; provided, 
however, that such licenses shall be only to the extent that the Subcontractor now has, or 
prior to completion or final settlement of this subcontract may require, the right to grant 
such license without becoming liable to pay compensation to others solely because of 
such grant. 
E.  Relation to patents.  Nothing contained in this clause shall imply a license to the 
Government under any patent or be construed as affecting the scope of any license or 
other right otherwise granted to the Government under any patent. 
F.  Marking and identification.  The Subcontractor shall not affix any restrictive 
markings upon any Subject Data, and if such markings are affixed, the Government shall 
have the right at any time to modify, remove, obliterate, or ignore any such markings. 
G.  Deferred ordering and delivery of data.  The Government shall have the right to order, 
at any time during the performance of this subcontract, or within two years from either 
acceptance of all items to be delivered under this subcontract or termination of this 
subcontract, whichever is later, any Subject Data, or data generated in performance of the 
subcontract developed with Government funds, and the Subcontractor shall promptly 
prepare and deliver such Subject Data or data as may be required.  When Subject Data is 
delivered pursuant to this paragraph G, payment shall be made for converting the Subject 
Data or data into the prescribed form, reproducing it or preparing it for delivery. The 
Government's right to use data delivered pursuant to this paragraph G shall be the same 
as the rights in Subject Data as provided in (C) above.  The Subcontractor shall be 
relieved of the obligation to furnish Subject Data or data upon the expiration of two years 
from the date it accepts such items. 
H.  The Subcontractor shall retain such data or Subject Data subject to the time limit 
imposed by the Examination of Records clause of this Addendum and the right to 
examine such records by the Comptroller General of the United States and the Secretary 
including their duly authorized representatives). 
 
Clause X 
SUBCONTRACTOR AS COMMON SUBCONTRACTOR 
In the event a systems change, as designated by the Secretary, is required as the result of 
an act of Congress, Regulation, or General Instruction, and it applies to more than one   
Medicare contractor for which the Subcontractor ("Common Subcontractor") provides 
similar services, each contractor shall individually arrange for the common Subcontractor 
to implement such change to its system.  If an increase in cost is sought by the Common 
subcontractor for the modification, the Contractor shall pay a reasonable price, based 
upon certified cost or pricing data submitted by the Common Subcontractor. As soon as 
possible thereafter, the Contractor shall submit the supporting data, along with all other 
pertinent documentation, to the Secretary.  On a basis to be determined by the Secretary, 
a reasonable price shall then be established for the common systems change as 
implemented by all affected contractors and such price shall be divided among those 
contractors.  The cost of any additional modifications needed to meet the specific 
requirements of a particular contractor shall be borne only by that contractor.  Should the 
Secretary determine that the increase in price for the common change or other 
modification is not adequately supported, the Common Subcontractor agrees to refund 
such amount to the Contractor.  In the event the Common Subcontractor refuses to refund 
the above amount, the Secretary may request that the contractor take action to recover 
from the Common Subcontractor that portion of the price which the Secretary finds to be 
unsupported.  The Secretary shall reimburse the Contractor for all reasonable costs 
relating to such action.  The Secretary shall from time-to-time notify the Contractor of the 
identity of other Medicare contractors with common subcontracts. 
 
Clause XI 
MODIFICATION OF SUBCONTRACT 
(a) Neither this subcontract nor any lower tier subcontract under this subcontract shall be 
modified or amended, regardless of amount, without obtaining prior written approval of 
the Secretary if it provides for the performance of any of the functions contained in the 
Medicare agreement between the Contractor and the Secretary. 
(b) If this subcontract does not fall within the purview of paragraph (a) of this clause, the 
Secretary's prior approval shall be obtained for any modification or amendment thereof 
where the estimated cost of such change or changes would result in an increase of the 
costs to Medicare in excess of fifty percent of the Contractor's threshold amount as 
provided in its contract.  
(c) Before this subcontract is renewed or any option herein is exercised, the Secretary's 
approval shall be obtained, unless the Secretary has previously stipulated otherwise in 
writing. 
 
Clause XII 
REGULATIONS AND GENERAL INSTRUCTIONS 
The Contractor is obliged under its contract with the Secretary to comply with all 
Regulations and General Instructions as the Secretary may from time-to-time prescribe 
for the administration of its contract.  To the extent that such Regulations and General 
Instructions affects this subcontract, the Subcontractor shall also comply with such 
Regulations and General Instructions.   
 
Clause XIII 
PROHIBITION AGAINST BILLING SERVICES 
The provisions of this clause are applicable to this subcontract if it provides for facilities 
management services or any electronic data processing which contemplates performance 
of an integral part of the Medicare claims process.  However, such provisions do not 
apply if this subcontract is for the lease or purchase of equipment or supplies. 
The Subcontractor (or a parent, subsidiary, or affiliated organization) shall not perform 
services for providers which involve (1) the preparation or completing of preliminary or 
initial cost reports, or (2) the allocation of expenses to provider cost centers and 
apportionment of such costs between Medicare beneficiary patients and other patients of 
the provider where such data may be used in the preparation of cost reports subsequently 
submitted to the Subcontractor for desk review and audit and which serve as the basis for 
determination of Medicare program payments by the Subcontractor.  The Subcontractor 
(or a parent, subsidiary or affiliated organization) shall not perform, in any jurisdiction in 
which it is serving as a Subcontractor to a Medicare Contractor, billing services for a 
provider where billings by such providers are to be subsequently processed by the 
Subcontractor for Medicare payments.  This does not preclude the Subcontractor from 
offering and operating an automated billing service (software and equipment) for a 
provider as long as operating such a billing service does not require the Subcontractor to 
describe or code the health-care services being billed. 
 
SECTION III 
This subcontract incorporates the following clauses by reference with the same force and 
effect as if they were given in full text.  Upon request, the Secretary will make their full 
text available to the Subcontractor.  
The clauses are applicable to this subcontract or lower tier subcontract to Medicare is 
$10,000 or higher, unless specifically exempted by applicable rules, regulations, or 
Executive Orders.  The term "Contractor" as used therein shall mean the "Subcontractor." 
 
FEDERAL ACQUISITION REGULATION 
(48 CFR, CHAPTER 1) CLAUSES 
52.222-26  Equal Opportunity  (April 1984) 
52.219-8  Utilization of Small Business Concerns and Small Disadvantaged Business 
Concerns  (April 1984) 
52.220-3  Utilization of Labor Surplus Area Concerns  (April 1984) 
52.220-4  Labor Surplus Area Subcontracting Program  (April 1984)   
52.222-21  Certification of Nonsegregated Facilities  (April 1984) 
52.222-35  Affirmative Action for Special Disabled and Vietnam Era Veterans (April 
1984) 
52.222-36  Affirmative Action for Handicapped Workers (April 1984) 
3.502  Fees or Kick-Backs By Subcontractors (Anti-Kickback Act) (41 U.S.C. 51-
54) (April 1984) 
52.219-13  Utilization of Women-Owned Small Businesses (April 1984) 
52.215-1  Examination of Records by Comptroller General (April 1984) 
   
Transmittals Issued for this Chapter 
 
Rev #  Issue Date  Subject  Impl Date  CR# 
R153FM 06/12/2009  Implementation of the Redesigned Provider  07/13/2009 6519 
 
Statistical and Reimbursement (PS&R) 
System 
R127FM 07/13/2007  Instructions for Documenting Scoping  10/01/2007 5661 
 
Decision of Providers Internal Controls; 
Revisions to Continuing Education and 
Training and Revision Regarding Time Frame 
for Settling Cost Reports 
R107FM 09/22/2006  Instructions for Conducting In-House Audits  10/02/2006 5262 
 
and Revision to Part II Acceptability 
Checklist Requirements 
R89FM 01/13/2006  Mandated Use of Autoload Program in STAR, 02/13/2006 4172 
 
System Tracking for Audit and 
Reimbursement 
R84FM 11/16/2005  Revised Instructions on Contractor Procedures 12/05/2005 4060 
 
for Provider Audit, and Clarification of CET 
Requirements for Medicare Auditors 
R83FM 11/04/2005  Revised Instructions on Contractor Procedures 12/05/2005 4060 
 
for Provider Audit, and Clarification of CET 
Requirements for Medicare Auditors - 
Replaced by Transmittal 84 
R60FM 11/26/2004  Revised Instructions on Contractor Procedures 01/24/2005 3492 
 
For Provider Audit and the Provider Statistical 
& Reimbursement Report (PSRR) 
R54FM 09/24/2004  Notification to Providers of Intent to  10/25/2004 3441 
 
Complete a Post-Payment Audit 
R27FM 12/19/2003  Elimination of Focused Review Category of  01/05/2004 2902 
 
Audits 
R08FM 08/30/2002  Initial Publication of Chapter  N/A  N/A 
 
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