1. (a) General requirements. Cost reports pertaining to providers' fiscal years ending in calendar year 1996, or modeled costs used for reimbursement determination, will be governed by the information in this section, and the information in §355.201(b) of this title (relating to General Specifications and Methodology).
2. (b) General. DHS will reimburse qualified Texas Medicaid contracted providers for waiver services provided to individuals who meet the criteria for alternatives to nursing facility care. Additionally, DHS will reimburse qualified Texas Medicaid contracted providers for a pre-enrollment assessment of potential waiver participants. The pre-enrollment assessment covers care planning for the participant and is reimbursed by a one-time administrative expense fee which is not included in the waiver services but will be paid from Medicaid administrative funds.

3. (c) Reimbursement determination based on a cost-reporting process. If DHS deems it appropriate to require cost reporting, the cost reports pertaining to providers' fiscal year ending in 1996 will be governed by the information in this subsection. The cost-reporting process is as follows:

   1. (1) Excused from submission of cost reports. All contracted providers must submit a cost report prescribed by DHS, or on facsimiles which are formatted according to DHS specifications and are preapproved by DHS staff, unless:

      1. (A) the number of days between the date the first Community-based Alternatives (CBA) client received services and the provider's fiscal year end is 30 days or fewer; or
      2. (B) circumstances beyond the control of the provider make cost report completion impossible, such as the loss of records due to natural disasters or removal of records from the provider's custody by any governmental entity.
   2. (2) Requests to be excused from submitting a cost report. Requests to be excused from submitting a cost report must be received by the Rate Analysis Department before the due date of the cost report.

   3. (3) Exclusion of cost reports.

      1. (A) Providers are responsible for reporting only allowable costs on the cost report, except where cost report instructions indicate that other costs are to be reported in specific lines or sections. Only allowable cost information is used to determine recommended reimbursement. DHS excludes from reimbursement determination any unallowable expenses included in the cost report and makes the appropriate adjustments to expenses and other information reported by providers. The purpose is to ensure that the database reflects costs and other information which are necessary for the provision of services and are consistent with federal and state regulations.

      2. (B) Individual cost reports may not be included in the database used for reimbursement determination if:

         1. (i) there is reasonable doubt as to the accuracy or allowability of a significant part of the information reported; or
         2. (ii) an auditor determines that reported costs are not verifiable.
      3. (C) When material pertinent to proposed reimbursements is made available to the public, the material will include the number of cost reports eliminated from reimbursement determination for the reason stated in subparagraph (B)(i) of this paragraph.

   4. (4) Cost-reporting requirements.

      1. (A) Cost report due date. Provider agencies must submit cost reports no later than 90 days following receipt of the cost report forms.
      2. (B) Extension of due date. DHS may grant extensions of due dates for good cause. A good cause is defined as one that the provider agency could not reasonably be expected to control. The provider agency must submit requests for extensions in writing to DHS before the cost report due date. Rate analysis staff respond to requests within ten workdays of receipt.
      3. (C) Reporting period. The provider agency must prepare the cost report to reflect the activities of the provider agency during its previous fiscal year. Cost reports may be required for other periods at the discretion of DHS.
      4. (D) Failure to file an acceptable cost report. Failure to file a cost report according to all applicable rules and instructions constitutes an administrative contract violation. In the case of an administrative contract violation, procedural guidelines and informal reconsideration and/or appeal processes are specified in §355.111 of this title (relating to Administrative Contract Violations).
      5. (E) Accounting requirements. The provider agency must ensure that financial and statistical information submitted in cost reports is based upon the accrual method of accounting, except for governmental institutions operated on the cash method of accounting. The provider agency's treatment of financial or statistical items must reflect the application of the generally accepted accounting principles (GAAP) approved by the American Institute of Certified Public Accountants.
      6. (F) Allocation methods. If allocation of cost is necessary, provider agencies must use an allocation method that meets generally accepted accounting principles approved by the American Institute of Certified Public Accountants and is a recommended method by DHS rate analysis staff. DHS adjusts allocated costs if DHS considers the allocation method to be unreasonable. The provider agency must retain workpapers supporting allocations.
      7. (G) Cost report certification. Provider agencies must certify the accuracy of cost reports submitted to DHS in the format specified by DHS. Provider agencies may be liable for civil and/or criminal penalties in the case of intentionally misrepresented or falsified information.
      8. (H) Cost report supplements. DHS may at times require additional financial and statistical information other than the information contained in the cost report.
      9. (I) Reviews and field audits of cost reports. DHS performs desk reviews or field audits of cost reports of contracted providers. The frequency and nature of the field audit are determined by DHS to ensure the fiscal integrity of the program. Desk reviews and field audits will be conducted in accordance with §355.106 of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports), and providers will be notified of the results of a desk review or a field audit in accordance with §355.107 of this title (relating to Notification of Exclusions and Adjustments). Providers may request an informal review and, if necessary, an administrative hearing to dispute an action taken by DHS under §355.110 of this title (relating to Informal Reviews and Formal Appeals).
      10. (J) Record keeping requirements. Provider agencies must maintain records according to the requirements stated in 40 TAC §69.205 (Record Retention Requirements). Provider agencies must ensure that records are accurate and sufficiently detailed to support the financial and statistical information reported in cost reports.
      11. (K) Failure to maintain adequate records. Failure to maintain adequate records to support the financial and statistical information reported in cost reports constitutes an administrative contract violation. In the case of an administrative contract violation, procedural guidelines and informal reconsideration and/or appeal processes are specified in §355.111 of this title (relating to Administrative Contract Violations).

4. (d) Factors affecting allowable costs. This subsection applies when a cost report is required. To be allowable under this program, the provider must ensure that costs are:

   1. (1) necessary and reasonable for the proper and efficient administration of the program to deliver services for which DHS has contracted;
   2. (2) authorized or not prohibited under state or local laws or regulations;
   3. (3) consistent with any limitations or exclusions described in this section, federal or state laws, or other governing limitations as to types or amounts of cost items;
   4. (4) consistent with policies, regulations, and procedures that apply uniformly to both the Community-based Alternatives Waiver Programs and other activities of the organization of which the provider is a part;
   5. (5) treated consistently using generally accepted accounting principles appropriate to the circumstances;
   6. (6) not allocable to or included as a cost of any other program in either the current or a prior period; and
   7. (7) the net of all applicable credits.

5. (e) Definition of reasonableness. This subsection applies when a cost report is required. A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by an ordinarily prudent person in the conduct of competitive business. In determining the reasonableness of a given cost, the department considers the following:

   1. (1) whether the cost is of a type generally recognized as ordinary and necessary for the operation of the business or the performance under the contract;
   2. (2) the restraints or requirements imposed by generally accepted sound business practices, arm's length bargaining, federal and state laws and regulations, and contract terms and specifications; and
   3. (3) the action that a prudent person would take in the circumstances, considering his responsibilities to the public, the government, his employees, clients, shareholders, or members, and the fulfillment of the purpose for which the business was organized.

6. (f) Definition of necessary. This subsection applies when a cost report is required. Necessary refers to the relationship of the cost to provision of waiver services. To qualify as a necessary expense, a cost must be one that is usual and customary in the operation of waiver services and must meet the following requirements.

   1. (1) The expenditure was not for personal or other activity not specifically related to the provision of waiver services.
   2. (2) The cost does not appear on the list of specific unallowable costs and is not unallowable under other federal, state, or local laws or regulations.
   3. (3) The cost bears a significant relationship to the provision of waiver services. The test of significance is whether elimination of the expenditure would adversely affect the delivery of waiver services.
   4. (4) The expense was incurred in the purchase of materials, supplies, or services provided directly to the clients or staff of the program in the conduct of normal business operations.
   5. (5) Allowable costs for cost reporting purposes should result from arms-length transactions involving unrelated parties. However, in related-party transactions the allowable cost to the waiver services program is limited to the lesser of the actual cost to the related party (excluding markups and profit margins) or the cost to the contracted waiver service provider. Such allowable cost must not exceed the usual and customary charges for comparable goods or services in an arms-length transaction. A related party is a natural person or organization related to the provider entity by blood/marriage, or common ownership, or any association which permits either entity to exert power or influence, either directly or indirectly, over the other.

7. (g) Allowable and unallowable costs. This subsection applies when a cost report is required. Allowable and unallowable costs are defined to identify expenses which are and are not reasonable and necessary to provide waiver services to clients by a prudent and cost-effective operation. Only allowable cost information is used to compile the reimbursement determination database. Cost reporting by providers should be consistent with generally accepted accounting principles (GAAP). In cases where DHS cost reporting rules conflict with GAAP, Internal Revenue Service, or other authorities, DHS rules take precedence for cost reporting purposes.

   1. (1) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

      1. (A) Allowable costs. Refer to subsections (d), (e), and (f) of this section.
      2. (B) Unallowable costs. Those expenses that are not reasonable or necessary for the provision of waiver services and the initial assessment. Unallowable costs are not included in the data base used to determine recommended reimbursements and fees.

   2. (2) Allowable costs. The following list of allowable costs is not comprehensive, but rather serves as a general guide and identifies certain key expense areas. The absence of a particular cost does not necessarily mean that it is not an allowable cost.

      1. (A) Compensation of waiver services staff. Compensation will be given only to those staff who provide waiver services directly to the clients or in support of staff of the waiver services in the normal conduct of operations relating to the provision of waiver services. This includes:

         1. (i) wages and salaries.
         2. (ii) payroll taxes and insurance. Federal Insurance Contributions Act (FICA or social security), unemployment compensation insurance, workman's compensation insurance.

         3. (iii) employee benefits. Employer-paid health, life, accident, liability, and disability insurance for employees; contributions to employee retirement fund; and deferred compensation limited to the dollar amount the employer contributes. The expense:

            1. (I) must represent a clearly enumerated liability of the employer to individual employees;
            2. (II) must not be incurred as a benefit to employees who do not provide services directly to the clients or staff of the waiver services program; and
            3. (III) must not represent any form of profit sharing.
      2. (B) Compensation of staff outside of the waiver program who provide services directly to the clients or in support of staff of the program. Allowable compensation is limited to the pro rata portion of the actual working time spent on behalf of the program.
      3. (C) Compensation of outside consultants. Compensation of outside consultants providing services directly to the clients or in support of staff of the program is an allowable cost.
      4. (D) Materials and supplies. Materials and supplies, including office supplies, housekeeping supplies, medical, and other supplies are allowable costs.
      5. (E) Utilities. Utilities, including electricity, natural gas, fuel oil, water, waste water, garbage collection, telephone, and telegraph are allowable costs.
      6. (F) Buildings, equipment, and capital used by the waiver provider or in support of the waiver services staff, and not for personal business. If these costs are shared with other program operations, the portion of the costs relating directly to waiver services may be allowed on a pro rata basis if the proportion of use for waiver services is documented.

      7. (G) Depreciation and amortization expense. Property owned by the provider entity and improvements to owned, leased, or rented property used by the waiver provider that are valued at more than $500 at the time of purchase must be depreciated or amortized using the straight line method. The minimum usable lives to be assigned to common classes of depreciable property are as follows:

         1. (i) buildings: 30 years, with a minimum salvage value of 10%; and
         2. (ii) transportation equipment used for the transport of clients, materials and supplies, or staff providing waiver services: a minimum of three years for passenger automobiles and five years for light trucks and vans, all with a minimum salvage value of 10%.
      8. (H) Provider-owned property. Property owned by the provider entity and improvements to property owned, leased, or rented by the provider that are valued at less than $500 at the time of purchase may be treated as ordinary expenses.
      9. (I) Rental and lease expense. This includes rental and lease expenses for buildings, building equipment, transportation equipment, and other equipment, and related materials, and supplies used by the waiver provider. Rental or lease expense paid to a related party is limited to the allowable cost as determined according to subsection (d)(1)(B)(v) of this section.
      10. (J) Transportation expense. This includes mileage claimed at the allowable reimbursement per mile set by the state legislature for state employees.

      11. (K) Interest expense. Interest expense is allowable on loans for the acquisition of allowable items, subject to:

          1. (i) all of the requirements for allowable costs;
          2. (ii) written evidence of the loan; and
          3. (iii) the provider entity being named as maker or comaker of the note. Allowable interest is limited to the lesser of the cost to the related party or the prevailing national average prime interest rate for the year in which the loan contract was executed.
      12. (L) Tax expense. This includes real and personal property taxes, motor vehicle registration fees, sales taxes, Texas corporate franchise taxes, and organization filing fees.
      13. (M) Insurance expense. This includes facility fire and casualty, professional liability and malpractice, and transportation insurance.
      14. (N) Contract waiver services provided by outside vendors to persons enrolled in the CBA program.
      15. (O) Business and professional association dues limited to associations devoted primarily to services for which DHS has contracted.
      16. (P) Outside training costs. Limited to direct costs (transportation, meals, lodging, and registration fees) for training provided to personnel rendering services directly to the clients or staff of the waiver provider. The training must be directly related to the services for which DHS has contracted.

   3. (3) Unallowable costs. Unallowable costs are those expenses that are not reasonable or necessary for the provision of waiver services. Unallowable costs are not included in the reimbursement determination database used to determine recommended reimbursements. The following list is not intended to be comprehensive, but rather to serve as a general guide and identify certain key expense areas that are not allowable. The absence of a particular cost does not necessarily mean that it is an allowable cost.

      1. (A) Compensation in the form of salaries, benefits, or any form of compensation given to individuals who do not provide waiver services either directly to clients or in support of staff;
      2. (B) Personal expenses not directly related to the provision of waiver services;
      3. (C) Client room and board expenses, except for those related to respite care;
      4. (D) Management fees paid to a related party that are not derived from the actual cost of materials, supplies, or services provided directly to the program;
      5. (E) Advertising expenses other than those for yellow pages advertising, advertising for employee recruitment, and advertising to meet any statutory or regulatory requirement;
      6. (F) Business expenses not directly related to the provision of waiver services;
      7. (G) Political contributions;
      8. (H) Depreciation and amortization of unallowable costs, including amounts in excess of those resulting from the straight line depreciation method, capitalized lease expenses in excess of the actual lease payment, and goodwill or any excess above the actual value of the physical assets at the time of purchase;
      9. (I) Trade discounts of all types, such as returns, allowances, and refunds;
      10. (J) Donated facilities, materials, supplies, and services including the values assigned to the services of unpaid workers and volunteers;
      11. (K) Dues to all types of political and social organizations, and to professional associations not directly and primarily concerned with the provision of waiver services;
      12. (L) Entertainment expenses except those incurred for entertainment provided to the staff of the waiver provider as an employee benefit;
      13. (M) Boards of directors' fees and travel expenses;
      14. (N) Fines and penalties for violations of regulations, statutes, and ordinances of all types; penalties for late payments;
      15. (O) Fund raising, promotional and public relations expenses;
      16. (P) Expenses incurred in the purchase of goods and services with revenues from gifts, donations, endowments, and trusts;
      17. (Q) Interest expenses on loans pertaining to unallowable items and on that portion of interest paid which is reduced or offset by interest income;
      18. (R) Insurance premiums pertaining to items of unallowable cost;
      19. (S) Accrued expenses that are not a legal obligation of the provider or are not clearly enumerated as to dollar amount. This includes any form of profit sharing and the accrued liabilities of deferred compensation plans;
      20. (T) Planning and evaluation expenses for the purchase of depreciable assets, except where purchases are actually made and the assets are put into service in providing waiver services;
      21. (U) Mileage expense which exceeds the current reimbursement rate set by the Texas Legislature for state employee travel or expenses exceeding actual cost of public transportation;
      22. (V) Costs of purchases from a related party which exceed the allowable cost as determined according to subsection (f)(5) of this section;
      23. (W) Out-of-state travel expenses, except for provision of waiver services that may include training and quality assurance functions;
      24. (X) Legal and other costs associated with litigation between a provider and state or federal agencies, unless the litigation is decided in the provider's favor;
      25. (Y) Contributions to self-insurance funds which do not represent payments based on current liabilities;
      26. (Z) Physicians's fees for completion of physician orders;
      27. (AA) Allowances for bad debts or other similar accounts;
      28. (BB) Corporate headquarters expense that are not directly involved in providing services or supplies used by the CBA contracted provider in providing care for which DHS has contracted;
      29. (CC) Franchise fees;
      30. (DD) Expenses for life insurance premiums where the beneficiary is the provider organization unless the life insurance is a requirement of a loan agreement and the loan is related to client care;
      31. (EE) Any expense incurred because of imprudent business practices;
      32. (FF) Expenses which cannot be adequately documented;
      33. (GG) Expenses not reported according to the cost report instructions;
      34. (HH) Expenses not allowable under other pertinent federal, state, or local laws and regulations;
      35. (II) Federal, state, and local income taxes; and
      36. (JJ) actual cost of adaptive aids and minor home modifications are not allowable. Any item purchased for participants in this program and reimbursed through a voucher payment system is unallowable.
8. (h) Other sources of cost information. If DHS has determined that there is not sufficient reliable cost report data from which to set waiver services, reimbursements and reimbursement ceilings will be developed by using available data from surveys; cost report data from other similar programs; consultation with other service providers, and/or professionals experienced in delivering contracted services; and other sources.

9. (i) Waiver reimbursement determination methodology. Recommended reimbursements are determined in the following manner.

   1. (1) Unit of service reimbursement. Reimbursement for personal assistance services, nursing, physical therapy, occupational therapy, speech pathology, and in-home respite care services will be determined on a fee-for-service basis in the following manner.

      1. (A) Total allowable costs for each provider will be determined by analyzing the allowable historical costs reported on the cost report.
      2. (B) Total allowable costs are reduced by the amount of the pre-enrollment expense fee, requisition fee, and reassessment fee revenues accrued for the reporting period.
      3. (C) Each provider's total reported allowable costs, excluding depreciation and mortgage interest, are projected from the historical cost-reporting period to the prospective reimbursement period as described in §355.108 of this title (relating to Determination of Inflation Indices). The prospective reimbursement period is the period of time that the reimbursement is expected to be in effect.
      4. (D) Payroll taxes and employee benefits are allocated to each salary line item on the cost report on a pro rata basis based on the portion of that salary line item to the amount of total salary expense for the appropriate group of staff. Employee benefits will be charged to a specific salary line item if the benefits are reported separately. The allocated payroll taxes are Federal Insurance Contributions Act (FICA) or Social Security, Medicare Contributions, Workers' Compensation Insurance (WCI), the Federal Unemployment Tax Act (FUTA), and the Texas Unemployment Compensation Act (TUCA).
      5. (E) Allowable administrative and facility costs are allocated or spread to each waiver service cost component on a pro rata basis based on the portion of each waiver services' service units reported to the amount of total waiver service units reported.
      6. (F) An allowable cost per unit of service is calculated for each contracted provider for each service or cost area. The allowable costs per unit of service for each contracted provider are arrayed. The units of service for each contracted provider in the array are summed until the median unit of service is reached. The corresponding expense to the median unit of service is determined and is multiplied by 1.044.

   2. (2) Per day reimbursement.

      1. (A) The reimbursement for Adult Foster Care (AFC), Assisted Living/Residential Care (AL/RC) and out-of-home respite care provided in AFC and AL/RC settings, will be determined as a per day reimbursement using a method based on modeled projected expenses which are developed by using data from surveys; cost report data from other similar programs; consultation with other service providers and/or professionals experienced in delivering contracted services; and other sources. The room and board payments for AFC and AL/RC Services are not covered in these reimbursements and will be paid to providers from the client's Supplemental Security Income, less a personal needs allowance.
      2. (B) The reimbursement for out-of-home respite care provided in a nursing facility will be based on the amount determined for the Texas Index of Level of Effort (TILE) for the CBA participant.
   3. (3) Monthly reimbursement ceiling. The reimbursement for emergency response, will be determined as monthly reimbursement ceiling based on the ceiling amount determined for the Emergency Response Services Program.
   4. (4) Requisition fees. Requisition fees are reimbursements paid to the CBA home and community support services contracted providers for their efforts in acquiring adaptive aids and minor home modifications for CBA participants. Reimbursement for adaptive aids and minor home modifications will vary based on the actual cost of the adaptive aid and minor home modification. Reimbursements are determined using a method based on modeled projected expenses which are developed by using data from surveys; cost report data from similar programs; consultation with other service providers and/or professionals experienced in delivering contracted services; and/or other sources.
   5. (5) Reassessment fees. Reassessment fees are reimbursements paid to CBA home and community support services contracted providers for performing annual reassessments. Reimbursements are determined using a method based on modeled projected expenses which are developed by using data from surveys; cost report data from similar programs; consultation with other service providers and/or professionals experienced in delivering contracted services; and/or other sources.
   6. (6) Pre-enrollment expense fee. Reimbursement for pre-enrollment assessment is determined using a method based on modeled projected expenses which are developed by using data from surveys; cost report data from other similar programs, consultation with other service providers and/or professionals experienced in delivering contracted services; and other sources.
   7. (7) Exceptions to the reimbursement determination methodology. DHS may adjust reimbursement to compensate for anticipated future changes in the program requirements in accordance with §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs).
   8. (8) Authority to determine reimbursement. The authority to determine reimbursement is specified in §355.101 of this title (relating to Introduction).

Source Note:The provisions of this §355.502 adopted to be effective September 1, 1996, 21 TexReg 7890; transferred effective September 1, 1997, as published in the Texas Register October 17, 1997, 22 TexReg 10311; amended to be effective June 21, 1998, 23 TexReg 6197.