Opinion ID: 3023610
Heading Depth: 3
Heading Rank: 3

Heading: Cost Allocation

Text: The home office of a chain of commonly-owned health care providers is not a Medicare provider and cannot directly receive Medicare reimbursement. See 42 U.S.C. § 1395cc. Nevertheless, inasmuch as home offices may perform certain centralized services for a provider subsidiary, Medicare treats those support services as though “obtained from [the provider] itself.” 42 C.F.R. § 413.17(c)(2). The Secretary’s interpretive rules, found in the Provider Reimbursement Manual, CMS Pub. 15-1 (“PRM”), address how a provider may obtain reimbursement for home office support functions. To obtain reimbursement for home office support functions related to the care of Medicare patients, the provider’s home office files a cost statement, which identifies the allowable home office costs and how they are allocated among each of its subsidiary companies (also called “components”). See PRM § 2150.3. First, the home office totals all of its own costs, including those that it incurred on behalf of its subsidiary companies, and deletes from that total all unallowable costs. See id. at § 2150.3(A). Second, the home office uses “direct allocation” to allocate as many of its costs as possible. Direct allocation accounts for home office costs that are for the benefit of, or directly attributable to, its Medicare subsidiary or its other subsidiaries. See id. at § 2150.3(B). Third, the home office must allocate as many of the remaining costs as possible on a “functional basis.” See id. at § 2150.3(C). After the home office allocates as many home office costs as possible to its subsidiaries by direct and functional allocation, a “pool” of allowable costs for general management or administrative services remains (“pooled costs”). See id. at § 2150.3(D). If the chain consists of companies providing health care services and other types of companies, all the companies “share in the pooled home office costs in the same proportion that the total costs of each 4 component (excluding home office costs) bear to the total costs of all components in the chain.” Id. at § 2150.3(D)(2)(b). Thus, the CMSprescribed default methodology for allocating pooled costs is a costto-total cost allocation methodology. If a home office has higher costs for one of its non-Medicare providers, but performs few services for that company, the home office may use a more sophisticated alternative allocation method to allocate the pooled costs more precisely. See id. at § 2150.3(D)(2)(b). The PRM specifies the procedure the home office should follow if it wants to use an alternative allocation method: If evidence indicates that the use of a more sophisticated allocation basis would provide a more precise allocation of pooled home office costs to the chain components, such basis can be used in lieu of allocating on the basis of either inpatient days or total costs. However, intermediary approval must be obtained before any substitute basis can be used. The home office must make a written request with its justification to the intermediary responsible for auditing the home office cost for approval of the change . . . . Where the intermediary approves the home office request, the change must be applied to the accounting period for which the request was made, and to all subsequent home office accounting periods, unless the intermediary approves a subsequent change for the home office. Id.