| not be used as a precedent in other cases
unless the facts and circumstances are substantially the same. Organizations,
whether proprietary or nonprofit, are considered to be related through
control to their directors in common.
(4) Costs applicable to services, equipment, facilities,
leases, or supplies furnished to the contracted provider by organizations
related to the provider by common ownership or control are includable
in the allowable cost of the provider at the cost to the related organization.
However, the cost must not exceed the price of comparable services,
equipment, facilities, leases, or supplies that could be purchased
or leased elsewhere. The purpose of this principle is twofold: to
avoid the payment of a profit factor to the contracted provider through
the related organization (whether related by common ownership or control),
and to avoid payment of artificially inflated costs which may be generated
from less than arm's-length bargaining. The related organization's
costs include all actual reasonable costs, direct and indirect, incurred
in the furnishing of services, equipment, facilities, leases, or supplies
to the provider. The intent is to treat the costs incurred by the
supplier as if they were incurred by the contracted provider itself.
Therefore, if a cost would be unallowable if incurred by the contracted
provider itself, it would be similarly unallowable to the related
organization. The principles of reimbursement of contracted provider
costs described throughout this title will generally be followed in
determining the reasonableness and allowability of the related organization's
costs, where application of a principle in a nonprovider entity would
be clearly inappropriate.
(5) An exception is provided to the general rule applicable
to related organizations. The exception applies if the contracted
provider demonstrates by convincing evidence to the satisfaction of
HHSC that certain criteria have been met. If all of the conditions
of this exception are met, then the charges by the supplier to the
contracted provider for such services, equipment, facilities, leases,
or supplies are allowable costs. If Medicare has made a determination
that a related party situation does not exist or that an exception
to the related party definition was granted, HHSC will review the
determination made by Medicare to determine if it is applicable to
the current situation of the contracted provider and in compliance
with this subsection (relating to related party transactions). In
order to have the Medicare determination considered for approval by
HHSC, a copy of the applicable Medicare determination must accompany
each written exception request submitted to HHSC, along with evidence
supporting the Medicare determination for the current cost-reporting
period. If the exception granted by Medicare no longer is applicable
due to changes in circumstances of the contracted provider or because
the circumstances do not apply to the contracted provider, HHSC may
choose not to consider the Medicare determination. Written requests
for an exception to the general rule applicable to related organizations
must be submitted for approval to the HHSC Provider Finance Department
no later than 45 days prior to the due date of the cost report in
order to be considered for that year's cost report. Each request must
include documentation supporting that the contracted provider meets
each of the four criteria listed in subparagraphs (A) - (D) of this
paragraph. Requests that do not include the required documentation
for each criteria will not be considered for that year's cost report.
(A) The supplying organization is a bona fide separate
organization. This means that the supplier is a separate sole proprietorship,
partnership, joint venture, association or corporation and not merely
an operating division of the contracted provider organization.
(B) A majority of the supplying organization's business
activity of the type carried on with the contracted provider is transacted
with other organizations not related to the contracted provider and
the supplier by common ownership or control and there is an open,
competitive market for the type of services, equipment, facilities,
leases, or supplies furnished by the organization. In determining
whether the activities are of similar type, it is important also to
consider the scope of the activity. The requirement that there be
an open, competitive market is merely intended to assure that the
item supplied has a readily discernible price that is established
through arm's-length bargaining by well-informed buyers and sellers.
(C) The services, equipment, facilities, leases, or
supplies are those which commonly are obtained by entities such as
the contracted provider from other organizations and are not a basic
element of contracted client care ordinarily furnished directly to
clients by such entities. This requirement means that entities such
as the contracted provider typically obtain the services, equipment,
facilities, leases, or supplies from outside sources, rather than
producing them internally.
(D) The charge to the contracted provider is in line
with the charge of such services, equipment, facilities, leases, or
supplies in the open, competitive market and no more than the charge
made under comparable circumstances to others by the organization
for such services, equipment, facilities, leases, or supplies.
(6) Disclosure of all related-party information on
the cost report is required for all costs reported by the contracted
provider, including related-party transactions occurring at any level
in the provider's organization, (e.g., the central office level, and
the individual contracted provider level). The contracted provider
must make available, upon request, adequate documentation to support
the costs incurred by the related party. Such documentation must include
an identification of the related person's or organization's total
costs, the basis of allocation of direct and indirect costs to the
contracted provider, and other business entities served. If a contracted
provider fails to provide adequate documentation to substantiate the
cost to the related person or organization, then the reported cost
is unallowable. For further guidelines regarding adequate documentation,
refer to §355.105(b)(2) of this title (relating to General Reporting
and Documentation Requirements, Methods, and Procedures).
(7) When calculating the cost to the related organization,
the cost-determination guidelines specified in this section and in §355.103
of this title apply.
(j) Cost allocation. Direct costing must be used whenever
reasonably possible. Direct costing means that allowable costs, direct
or indirect, (as defined in subsection (f)(3) - (4) of this section)
incurred for the benefit of, or directly attributable to, a specific
business component must be directly charged to that particular business
component. For example, the payroll costs of a direct care employee
who works across cost areas within one contracted program would be
directly charged to each cost area of that program based upon that
employee's continuous daily time sheets and the costs of a direct
care employee who works across more than one service delivery area
would also be directly charged to each service delivery area based
upon that employee's continuous daily time sheets. Health insurance
premiums, life insurance premiums, and other employee benefits must
be direct costed.
(1) If cost allocation is necessary for cost-reporting
purposes, contracted providers must use reasonable methods of allocation
and must be consistent in their use of allocation methods for cost-reporting
purposes across all program areas and business entities.
(A) The allocation method should be a reasonable reflection
of the actual business operations. Allocation methods that do not
reasonably reflect the actual business operations and resources expended
toward each unique business entity are not acceptable. Allocated costs
are adjusted if HHSC considers the allocation method to be unreasonable.
An indirect allocation method approved by some other department, program,
or governmental entity is not automatically approved by HHSC for cost-reporting
purposes.
(B) HHSC reviews each cost-reporting allocation method
on a case-by-case basis in order to ensure that the reported costs
fairly and reasonably represent the operations of the contracted provider.
If in the course of an audit it is determined that an existing or
approved allocation method does not fairly and reasonably represent
the operations of the contracted provider, then an adjustment to the
allocation method will be made consistent with subsection (f)(3) -
(4) of this section. A contracted provider may request an informal
review, and subsequently an appeal, of a decision concerning its allocation
methods in accordance with §355.110 of this title (relating to
Informal Reviews and Formal Appeals).
(C) Any allocation method used for cost-reporting purposes
must be consistently applied across all contracted programs and business
entities in which the contracted provider has an interest.
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