§ 413.5 Cost reimbursement: General.

(a) In formulating methods for making fair and equitable reimbursement for services rendered beneficiaries of the program, payment is to be made on the basis of current costs of the individual provider, rather than costs of a past period or a fixed negotiated rate. All necessary and proper expenses of an institution in the production of services, including normal standby costs, are recognized. Furthermore, the share of the total institutional cost that is borne by the program is related to the care furnished beneficiaries so that no part of their cost would need to be borne by other patients. Conversely, costs attributable to other patients of the institution are not to be borne by the program. Thus, the application of this approach, with appropriate accounting support, will result in meeting actual costs of services to beneficiaries as such costs vary from institution to institution. However, payments to providers of services for services furnished Medicare beneficiaries are subject to the provisions of §§ 413.13 and 413.30.

(b) Putting these several points together, certain tests have been evolved for the principles of reimbursement and certain goals have been established that they should be designed to accomplish. In general terms, these are the tests or objectives:

(1) That the methods of reimbursement should result in current payment so that institutions will not be disadvantaged, as they sometimes are under other arrangements, by having to put up money for the purchase of goods and services well before they receive reimbursement.

(2) That, in addition to current payment, there should be retroactive adjustment so that increases in costs are taken fully into account as they actually occurred, not just prospectively.

(3) That there be a division of the allowable costs between the beneficiaries of this program and the other patients of the provider that takes account of the actual use of services by the beneficiaries of this program and that is fair to each provider individually.

(4) That there be sufficient flexibility in the methods of reimbursement to be used, particularly at the beginning of the program, to take account of the great differences in the present state of development of recordkeeping.

(5) That the principles should result in the equitable treatment of both nonprofit organizations and profit-making organizations.

(6) That there should be a recognition of the need of hospitals and other providers to keep pace with growing needs and to make improvements.

(c) As formulated herein, the principles given recognition to such factors as depreciation, interest, bad debts, educational costs, compensation of owners, and an allowance for a reasonable return on equity capital (in the case of certain proprietary providers). With respect to allowable costs some items of inclusion and exclusion are:

(1) An appropriate part of the net cost of approved educational activities will be included.

(2) Costs incurred for research purposes, over and above usual patient care, will not be included.

(3) [Reserved]

(4) The value of services provided by nonpaid workers, as members of an organization (including services of members of religious orders) having an agreement with the provider to furnish such services, is includable in the amount that would be paid others for similar work.

(5) Discounts and allowances received on the purchase of goods or services are reductions of the cost to which they relate.

(6) Bad debts growing out of the failure of a beneficiary to pay the deductible, or the coinsurance, will be reimbursed (after bona fide efforts at collection).

(7) Charity and courtesy allowances are not includable, although “fringe benefit” allowances for employees under a formal plan will be includable as part of their compensation.

(8) A reasonable allowance of compensation for the services of owners in profitmaking organizations will be allowed providing their services are actually performed in a necessary function.

(9) Reasonable cost of physicians' direct medical and surgical services (including supervision of interns and residents in the care of individual patients) furnished in a teaching hospital may be reimbursed as a provider cost (as described in § 415.162 of this chapter) if elected as provided for in § 415.160 of this chapter.

(10) Costs incurred by providers for entertainment, including costs associated with entertainment activities, or that are entertainment in nature, are not allowable costs.

(i) This paragraph (c)(10) includes costs that OPOs incur to engage in public education to increase awareness of organ donation and increase donor registration.

(ii) Non-allowable entertainment costs include, but are not limited to the following:

(A) Tickets, admission fees, or entry to sporting or other events, including national or professional sporting events.

(B) Sponsorship of sporting events, teams or athletes, including race car drivers or motorsports activities.

(C) Sponsorship of floats in large-scale regional and national parades.

(D) Concert, theater, or performing arts events, professional musicians or other entertainers.

(E) Wine tours or alcoholic beverages.

(F) Retreats held at spas or luxury resorts, spa services or treatments.

(G) Golf outings, ski trips, cruises, and similar recreational excursions.

(11) Costs incurred by an OPO to engage in public education within its donation service area (DSA), including public education activities designed to reach a broad audience within its DSA, such as but not limited to, billboards, radio advertisements, and social media campaigns, to increase awareness of organ donation and increase donor registration within its DSA are allowable if they are reasonable and do not violate paragraph (c)(10) of this section.

(12) De minimis or modest costs incurred by providers for employees for purposes of improving employee morale are allowable costs, provided that such costs do not violate the limitations set forth in 42 CFR 413.9(c).

(13) Costs incurred by providers to furnish alcoholic beverages to anyone are not allowable costs.

(14) Costs incurred by OPOs—

(i) For professional education such as meetings, seminars, and presentations on organ donation to acquire all useable organs from potential donors where continuing education credits are not given and where the attendee is clinical staff, non-clinical staff, or contracted staff including, but not limited to, OPO staff, donor hospital staff, and physicians whose role is essential to the OPO's objectives are allowable costs;

(ii) For OPO-sponsored seminars where continuing education credits are given and where the attendee is a member of on the OPO staff are allowable costs to the extent that they are patient care related, reasonable and necessary; and

(iii) For OPO-sponsored seminars where continuing education credits are given and where the attendee is not on the OPO staff, in accordance with § 413.402(d)(2)(v), are not allowable costs.

(15) Costs incurred by a provider—

(i) For employee travel are generally allowable to the extent that they are patient care related, reasonable and necessary;

(ii) To conduct, or send its employees or staff including contracted employees to, patient care related professional education refresher programs, seminars and workshops that increase the quality of patient care or operating efficiency of the provider, are generally allowable costs to the extent that they are patient care related, reasonable, and necessary;

(iii) For entertainment and vacation travel expenses such as travel on cruises or to resorts or spas, or transportation to entertainment or sporting events, are not allowable costs regardless of whether they are or are not incurred in connection with professional educational seminars or continuing education; and

(iv) Related to the personal use of provider vehicles are not allowable costs.

(16) Costs incurred by providers—

(i) For meals sold to visitors, meals for their employees and staff (including executives and management) and non-personnel (including attending physicians) are not allowable costs;

(ii) For de minimis refreshments provided to attendees at educational events, including attendees of OPO-sponsored seminars (with or without continuing education credits) are allowable costs; and

(iii) For meals for employees and contracted staff, whose role is essential to the provider's objectives, when an employee or contracted staff is required to travel away from their primary work location and an overnight stay is required, such as when completing trainings or education, provided such trainings are patient care related are allowable costs.

(17) Costs incurred by providers for drugs sold to other than patients are not related to patient care and are not allowable costs.

(18) Costs incurred by providers for cost of fines or penalties resulting from Federal, State or local laws are not allowable costs.

(19) Costs incurred by providers for operation of a gift shop are not allowable costs.

(d) In developing these principles of reimbursement for the Medicare program, all of the considerations inherent in allowances for depreciation were studied. The principles, as presented, provide options to meet varied situations. Depreciation will essentially be on an historical cost basis but since many institutions do not have adequate records of old assets, the principles provide an optional allowance in lieu of such depreciation for assets acquired before 1966. For assets acquired after 1965, the historical cost basis must be used. All assets actually in use for production of services for Medicare beneficiaries will be recognized even though they may have been fully or partially depreciated for other purposes. Assets financed with public funds may be depreciated. Although funding of depreciation is not required, there is an incentive for it since income from funded depreciation is not considered as an offset which must be taken to reduce the interest expense that is allowable as a program cost.

(e) A return on the equity capital of proprietary facilities, as described in § 413.157, is an allowance in addition to the reasonable cost of covered services furnished to beneficiaries.

(f) Renal dialysis items and services furnished under the ESRD provision are reimbursed and reported under §§ 413.170 and 413.174 respectively. For special rules concerning health maintenance organizations (HMOs), and providers of services and other health care facilities that are owned or operated by an HMO, or related to an HMO by common ownership or control, see §§ 417.242(b)(14) and 417.250(c) of this chapter.

[51 FR 34793, Sept. 30, 1986; 51 FR 37398, Oct. 22, 1986, as amended at 52 FR 21225, June 4, 1987; 52 FR 23398, June 19, 1987; 57 FR 39829, Sept. 1, 1992; 60 FR 63189, Dec. 8, 1995; 61 FR 63748, Dec. 2, 1996; 91 FR 50341, Aug. 4, 2026]