TITLE 1.ADMINISTRATION

Part 15. TEXAS HEALTH AND HUMAN SERVICES COMMISSION

Chapter 353. MEDICAID MANAGED CARE

Subchapter F. SPECIAL INVESTIGATIVE UNITS

1 TAC §§353.501 - 353.505

The Texas Health and Human Services Commission (the Commission) proposes a new Subchapter F, §§353.501-353.505, concerning Special Investigations Unit, mandated by HB2292, 78th Legislature, Regular Session, 2003.

Background and Summary of Factual Basis for the Rules

The 75th Legislature, Regular Session, 1997, through Senate Bill 30, mandated managed care organizations (MCOs) develop and submit to the operating agency for approval by the commission a plan for preventing, detecting, and reporting fraud and abuse. The bill also required MCOs to report any known or suspected acts of fraud or abuse to the operating agency for referral to the commission for investigation.

The 78th Legislature, Regular Session, 2003, through House Bill 2292, expanded on Senate Bill 30 and mandated that, effective September 1, 2004, all MCOs that provide or arrange for the provision of health care services to an individual under a government-funded program, including the Medicaid program, establish and maintain a Special Investigations Unit (SIU) to investigate fraudulent claims and other types of program abuse by recipients and service providers.

The additions and revisions to state statutes passed through SB 30 and HB 2292 are designed to strengthen the state's ability to improve waste, abuse and fraud detection, investigation, criminal referral and prosecution, and recovery of overpayments, damages, and penalties from health and human service providers, recipients, and contractors. The rules provide an increased effort to identify fraud or abuse in managed care.

The proposed rules were developed in conjunction with HHSC's Office of Inspector General (OIG) and HHSC, Medicaid/CHIP Managed Care representatives. The proposed rules were submitted for review and comments to the MCOs currently under contract with the state of Texas.

Section-by-Section Explanation

Proposed new §353.501 generally describes the purpose of the plan to prevent waste, abuse and fraud. It details when the plan is to be submitted to the OIG, when the plan is to be resubmitted if denied, and the requirements of the MCO if it chooses to contract with another entity for the investigation of fraudulent claims and other types of program abuse.

Proposed new §353.502 describes the elements for the MCOs plan to detect and investigate possible acts of waste, abuse and fraud. The description is specific and provides the requirements for detecting and investigating waste, abuse and fraud by providers and recipients.

Proposed new §353.503 outlines the requirements for information that must be submitted to the OIG from the MCO if the MCO contracts with another entity for the investigation of fraudulent claims and other types of programs abuse by recipients and providers. It also provides the timeline for submittal of the information to the OIG.

Proposed new §353.504 contains specific language with regard to the MCOs maintaining and providing records upon request. The proposed rules provides detail language as to which agencies are to receive the records, when the records are to be produced and the records that are to be maintained by the MCO. It also provides general language for possible sanctions if the records request is out of compliance.

Proposed new §353.505 describes the process for the recovery of funds resulting from an investigation conducted by the MCO or the OIG. In addition, the proposed rule describes when the money will be recovered and how the recovered funds will be disbursed.

Public Benefit

Jason Cooke, Associate Commissioner for Medicaid and CHIP, has determined that for each year of the first five years the proposed rules are in effect, the public will benefit from adoption of the proposed rules. The anticipated public benefit as a result of enforcing the proposed rules will be to ensure that Medicaid funds are expended for medically necessary services. Monitoring and investigating suspected fraud and abuse will result in recovered dollars appropriated back to the program.

Small and Micro-business Impact Analysis

Tom Suehs, Deputy Commissioner for Financial Services, has determined that there will be no effect on small businesses or micro-businesses to comply with the rules as proposed. This was determined by interpretation of the rule that small businesses and micro-businesses will not be required to alter their business practices in order to comply with the amendments. There are no anticipated economic costs to persons who are required to comply with the rules as proposed. There is no anticipated negative impact on local employment.

Fiscal Note

Mr. Suehs has also determined that during the first five years the proposed rules are in effect there will not be any fiscal impact to the state for fiscal years 2004 through 2008. Implementation of the proposed rules are not anticipated to result in any fiscal implications for local health and human service agencies. There are no foreseeable fiscal implications for local governments.

Regulatory Analysis

HHSC has determined that the proposed rules are not a "major environmental rule," as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environmental exposure and that may adversely affect, in a material way, the public health and safety of a state or a sector of the state. The proposed rules are not specifically intended to protect the environment or reduce risks to human health from environmental exposure.

Taking Impact Assessment

HHSC has determined that the proposed rules do not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, do not constitute a taking under §2007.043, Government Code.

Public Comment

Comments on the proposed rules may be submitted in writing to Juanita Henry, Office of Inspector General, Texas Health and Human Services Commission, P.O. Box 13247, Austin, Texas 78711-3247 or by e-mail to Juanita.Henry@hhsc.state.ts.us. Comments will be accepted for 30 days following publication of this proposal in the Texas Register .

Statutory authority

The new rules are proposed under the Texas Government Code, §531.033, which provides the Commissioner of HHSC with broad rulemaking authority; the Human Resources Code, §32.021, and the Texas Government Code, §531.021 (a), which provide the Health and Human Services Commission (HHSC) with the authority to administer the federal medical assistance (Medicaid) program in Texas; and Government Code, §2001.006, which allows state agencies to adopt rules in preparation for the implementation of legislation.

The proposed new rules affect the Human Resources Code, Chapter 32, and the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by the proposed new rules.

§353.501.Purpose.

(a) This subchapter implements the Health and Human Services Commission's (HHSC), Office of Inspector General (OIG) authority to approve annually, each managed care organization (MCO) plan to prevent and reduce waste, abuse, and fraud. This authority is granted by Chapter 531, Subchapter C, Government Code, Section 531.113.

(b) An MCO that provides or arranges for the provision of health care services to an individual under the Medical Assistance Program (Medicaid), must arrange for a special investigative unit to investigate fraudulent claims and other types of program abuse by recipients and providers. An MCO may choose to:

(1) Establish and maintain the special investigative unit within the managed care organization; or

(2) Contract with another entity for the investigation.

(c) An MCO must develop a plan to prevent and reduce waste, abuse, and fraud. The plan must be submitted annually to the HHSC-OIG for approval each year the MCO is enrolled with the State of Texas. The plan must be submitted 60 days prior to the start of the State fiscal year.

(d) If the initial plan to prevent and reduce waste, abuse, and fraud is not approved, the MCO must resubmit the plan to HHSC-OIG within 15 working days of receiving the denial letter, which will explain the deficiencies. If the plan is not resubmitted within the time allotted, the MCO will be in default and sanctions may be imposed.

(e) If the MCO elects to contract with another entity for the investigation of fraudulent claims and other types of program abuse as referenced in paragraph (b)(2) of this section, the MCO must adhere to all requirements of Chapter 42, §438.230 of the Code of Federal Regulations.

§353.502.Managed Care Organization's Plans and Responsibilities in Preventing and Reducing Waste, Abuse, And Fraud.

(a) Each managed care organization (MCO) subject to this section must develop a plan to prevent and reduce waste, abuse, and fraud and submit that plan annually to the Health and Human Services Commission (HHSC), Office of Inspector General (OIG) for approval.

(b) The MCO is responsible for investigating possible acts of waste, abuse, or fraud for all services, including those that the MCO subcontracts to outside entities.

(c) The plan submitted to the HHSC-OIG must include the information below to be considered for approval.

(1) A description of the MCO's procedures for detecting possible acts of waste, abuse, or fraud by providers. The description must address each of the following requirements:

(A) Use of audits to monitor compliance and assist in detecting and identifying Medicaid program violations and possible waste, abuse, and fraud overpayments through data matching, analysis, trending and statistical activities;

(B) Monitoring of service patterns for providers, subcontractors, and recipients;

(C) Use of a hotline or another mechanism to report potential or suspected violations;

(D) Use of random payment review of claims submitted by providers for reimbursement to detect potential waste, abuse, or fraud ;

(E) Use of edits or other evaluation techniques to prevent payment for fraudulent or abusive claims; and

(F) Use of routine validation of MCO data.

(2) A description of the MCO's procedures for investigating possible acts of waste, abuse, and fraud by providers. The procedures must satisfy the requirements in subparagraphs (A)-(C) of this paragraph.

(A) MCOs are required to conduct preliminary investigations. The preliminary investigation must be conducted within 15 working days of the identification and/or reporting of suspected and/or potential waste, abuse, or fraud

(B) The requirements for a preliminary investigation include but are not limited to the following:

(i) Determining if the MCO has received any previous reports of incidences of suspected waste, abuse, or fraud or conducted any previous investigations of the provider in question. If so, the investigation should include a review of all materials related to the previous investigations, the outcome of the previous investigations, and a determination of whether the new allegations are the same or relate to the previous investigation.

(ii) Determining if the service provider has received any educational training from the MCO in regard to the allegation.

(iii) Conducting a review of the provider's billing pattern to determine if there are any suspicious indicators

(iv) Reviewing the provider's payment history for the past three years, if available, to determine if there are any suspicious indicators.

(v) Reviewing the policies and procedures for the program type in question to determine if what has been alleged is a violation.

(C) If it is determined that suspicious indicators of possible waste, abuse, or fraud exist, within 15 working days from the conclusion of subparagraphs (A) and (B) of this paragraph, the MCO must select a sample for further review. The sample must consist of a minimum of 50 recipients or 15% of a provider's claims related to the suspected waste, abuse, and fraud.

(i) Within 15 working days of the selection of the sample, request medical records and encounter data for the sample recipients.

(ii) Review the requested medical records and encounter data within 45 working days of receipt of the records to:

(I) validate the sufficiency of service delivery data and to assess utilization and quality of care.

(II) ensure that the encounter data submitted by the provider is accurate.

(III) evaluate if the review of other pertinent records is necessary to determine if waste, abuse, or fraud has occurred. If the review of additional records is necessary then conduct such review.

(3) A description of the MCO's procedures for detecting possible acts of waste, abuse, and fraud by recipients. The description must address the following:

(A) Review of claims when waste, abuse, or fraud is suspected or reported to determine if:

(i) Treatment(s) and/or medication(s) prescribed by more than one provider appears to be duplicative, excessive, or contraindicated; and

(ii) Recipients are using more than one physician to obtain similar treatments and /or medications; and,

(iii) Providers other than the assigned Primary Care Provider (PCP) are treating the recipient, and there is no evidence that the recipient was treated by the assigned PCP for a similar or related condition; and,

(iv) The recipient has a high volume of emergency room visits with a non-emergent diagnosis.

(B) Review medical records for the recipients in question if claims review does not clearly determine if waste, abuse, or fraud has occurred.

(C) Use of edits or other evaluation techniques to identify possible overuse and/or abuse of psychotropic and/or controlled medications by recipients who are allegedly treated at least monthly by two or more physicians. A physician includes but is not limited to: psychiatrists, pain management specialists, anesthesiologists, physical medicine and rehabilitation specialists.

(4) A description of the MCO's procedures for investigating possible acts of waste, abuse, and fraud by recipients. The procedures must satisfy the requirements in subparagraphs (A) and (B) of this paragraph.

(A) MCOs are required to conduct preliminary investigations. The preliminary investigation must be conducted within 15 working days of the identification and/or reporting of suspected and/or potential waste, abuse, or fraud.

(B) The requirements for a preliminary investigation consist of but are not limited to the following:

(i) Review of acute care and emergency room claims submitted by providers for the suspected recipient.

(ii) Analyze pharmacy claim data submitted by providers for the suspected recipient to determine possible abuse of controlled or non-controlled medications. If the MCO does not have the data necessary to conduct the pharmacy claims review, the MCO must request the data within 15 working days of the initial identification and/or reporting of the suspected or potential waste, abuse, or fraud.

(iii) Analyze claims submitted by providers to determine if the diagnosis is appropriate for the medications prescribed.

(5) A description of the MCO's internal procedures for referring possible acts of waste, abuse, or fraud to the MCO's Special Investigative Unit (SIU) and the mandatory reporting of possible acts of waste, abuse, or fraud by providers or recipients to the HHSC-OIG. The procedures must satisfy the requirements in subparagraphs (A)-(E) of this paragraph.

(A) Assign an officer or director the responsibility and authority for reporting all investigations resulting in a finding of possible acts of waste, abuse, or fraud to the OIG. An officer could be but is not limited to a Compliance Officer, a Manager of Government Programs, or a Regulatory Compliance Analyst.

(B) Provide specific and detailed internal procedures for officers, directors, managers, and employees to report possible acts of waste, abuse, and fraud to the MCO's SIU. The procedures must include but are not limited to:

(i) Guidance regarding what information must be reported to the MCO's SIU.

(ii) A requirement that information must be reported to the MCO's SIU within 24 hours of identification or reporting of suspected waste, abuse, and fraud.

(C) Provide specific and detailed internal procedures for the SIU to report investigations resulting in a finding of waste, abuse, or fraud to the assigned officer or director.

(i) Guidance regarding what information must be reported to the assigned officer or director.

(ii) A requirement that possible acts of waste, abuse, or fraud be reported to the assigned officer or director must occur within 15 working days of making the determination.

(D) Utilizing the HHSC-OIG fraud referral form, the assigned officer or director must report and refer all possible acts of waste, abuse or fraud to the HHSC- OIG within 30 working days of receiving the reports of possible acts of waste, abuse or fraud from the SIU. The report and referral must include an investigative reportidentifying the allegation, statutes/regulations violated or considered, and the results of the investigation; copies of program rules and regulations violated for the time period in question; the estimated overpayment identified; a summary of interviews conducted; the encounter data submitted by the provider for the time period in question; and all supporting documentation obtained as the result of the investigation. This requirement applies to all reports of possible acts of waste, abuse, and fraud with the exception of an expedited referral.

(E) An expedited referral is required when the MCO has reason to believe that a delay may result in:

(i) harm or death to patients

(ii) the loss, destruction, or alteration of valuable evidence; or

(iii) a potential for significant monetary loss that may not be recoverable; or

(iv) hindrance of an investigation or criminal prosecution of the alleged offense.

(6) A description of the MCO's procedures for educating recipients and providers and training personnel to prevent waste, abuse, and fraud . The procedures must satisfy the requirements in subparagraphs (A)-(H) of this paragraph.

(A) On an annual basis, the organization shall provide waste, abuse and fraud training to each employee who is directly involved in any aspect of Medicaid. At a minimum, training is required for all individuals responsible for data collection, provider enrollment or disenrollment, encounter data, claims processing, utilization review, appeals or grievances, quality assurance, and marketing.

(B) The training must be specific to the area of responsibility for the staff receiving the training and contain examples of waste, abuse or fraud in their particulararea of interest.

(C) The organization must provide general training to all Medicaid managed care staff that is not directly involved with the areas listed in subparagraph (A) of this paragraph. The general training must provide information about the definition of waste, abuse, and fraud , how to report suspected waste, abuse, and fraud and to whom the suspected waste, abuse, and fraud is reported.

(D) The organization must provide waste, abuse, and fraud training to all new staff that will be directly involved with any aspect of Medicaid within 90 days of the employee's employment date.

(E) Provide updates to all affected areas when changes to policy and/or procedure may affect their area(s). The updates must be provided within 20 working days of the changes occurring.

(F) Educate recipients , providers, and employees about their responsibilities, the responsibility of others, the definition of waste, abuse, and fraud and how and where to report it. Appropriate methods of educating recipients, providers, and employees may include but are not limited to newsletters, pamphlets, bulletins, and provider manuals.

(G) The MCOs will maintain a training log for all training pertaining to waste, abuse, and/or fraud in Medicaid. The log must include the name and title of the trainer, names of all staff attending the training, and the date and length of the training. The log must be provided immediately upon request to the HHSC-OIG, Office of the Attorney General's (OAG)- Medicaid Fraud Control Unit (MFCU) and OAG - Civil Medicaid Fraud Division (CMFD), and the United States Health and Human Services- Office of Inspector General (HHS-OIG).

(H) Written standards of conduct, and written policies and procedures that include a clearly delineated commitment from the MCOs for detecting, preventing and investigating waste, abuse, and fraud.

(7) The name, title, address, telephone number, and fax number of the assigned officer or director responsible for carrying out the plan;

(A) The person carrying out the plan should be but is not limited to a Compliance Officer, a Manager of Government Programs, Regulatory Compliance Analyst, Director of Quality Integrity or a person in senior management.

(B) When the person that is responsible for carrying out the plan changes, the required information is to be reported to HHSC-OIG within 15 working days of the change.

(8) A description, process flow diagram, or chart outlining the organizational arrangement of the MCO's personnel responsible for investigating and reporting possible acts of waste, abuse, or fraud; and,

(9) Advertising and marketing materials utilized by the MCOs must be complete and accurately reflect the information about the MCO. Marketing materials includes any informational materials targeted to recipients.

(d) Each MCO must satisfy the requirements in paragraphs (1)-(3) of this subsection related to investigations of waste, abuse, and fraud conducted by the MCO's SIU.

(1) On a quarterly basis, submit to the HHSC- OIG a report listing all investigations conducted that resulted in no findings of waste, abuse, or fraud. The report shall include the allegation, the suspected recipient's or provider's Medicaid number, the source, the time period in question, and the date of receipt of the identification and or reporting of suspected and/or potential waste, abuse, or fraud.

(2) Maintain a log of all incidences of suspected waste, abuse and fraud, received by the MCO regardless of the source. The log shall contain the subject of the complaint, the source, the allegation, the date the allegation was received, the recipient or providers Medicaid number, and the status of the investigation.

(3) The log should be provided at the time of a reasonable request to the HHSC-OIG, OAG-MFCU, OAG-CMFD, and the HHS-OIG. A reasonable request means a request made during hours that the business or premises is open for business.

(e) MCOs must maintain the confidentiality of any patient information relevant to an investigation of waste, abuse, or fraud.

(f) MCOs must retain records obtained as the result of an investigation conducted by the SIU for a minimum period of five years or until all audit questions, appealed hearings, investigations, or court cases are resolved.

(g) Failure of the provider to supply the records requested by the MCO will result in the provider being reported to the HHSC-OIG as refusing to supply records upon request and the provider may be subject to sanction or immediate payment hold.

§353.503.Managed Care Organization's Contracts.

If a Managed Care Organization (MCO) contracts for the investigation of fraudulent claims and other types of programs abuse by recipients and providers under subsection 353.501(e), within 10 working days of executing the contract the MCO shall file with the Health and Human Services Commission, Office of Inspector General (HHSC-OIG):

(1) A copy of the written contract including any and all attachments.

(2) The names, titles, addresses, telephone numbers, and fax numbers of the principals of the entity with which the MCO has contracted; and

(3) A description of the qualifications of the principals of the entity with which the MCO has contracted to perform the contracted responsibilities.

§353.504.Review of Managed Care Organization's Records.

(a) Immediately upon request, the Health and Human Services Commission, Office of Inspector General (HHSC-OIG), Office of the Attorney General-Medicaid Fraud Control Unit (OAG-MFCU) and OAG, Office of the Attorney General- Civil Medicaid Fraud Division (OAG-CMFD), and the United States Health and Human Services, Office of Inspector General (HHS-OIG) may review the records of a Managed Care Organization (MCO) to determine compliance with this subchapter.

(b) Upon receipt of a record review request from any state or federal agency authorized to conduct compliance, regulatory, or program integrity functions, a MCO must:

(1) Provide the records requested by a properly identified agent of any state or federal agency authorized to conduct compliance, regulatory, or program integrity functions on the provider, person, MCO, or the services rendered by the provider or person within 24 hours of the request.

(2) An exception to the 24 hours stated in paragraph (1) of this subsection may be made when the OIG or another state or federal agency representative reasonably believes that the requested records are about to be altered or destroyed or that the request may be completed at the time of the request and/or in less than 24 hours.

(c) The request for record review includes, but is not limited to:

(1) clinical medical patient records;

(2) other records pertaining to the patient;

(3) any other records of services provided to Medicaid or other health and human services program recipients and payments made for those services;

(4) documents related to diagnosis, treatment, service, lab results, charting;

(5) billing records, invoices, documentation of delivery items, equipment, or supplies;

(6) radiographs;

(7) business and accounting records with backup support documentation;

(8) statistical documentation;

(9) computer records and data;

(10) contracts with providers and subcontractors.

(d) Failure to produce the records or make the records available for the purpose of reviewing, examining, and securing custody of the records may result in HHSC-OIG imposing sanctions against the MCO as described in 1 TAC (Texas Administrative Code), Chapter 371, Subchapter G, §371.1609, Grounds for Fraud Referral and Administrative Sanction.

§353.505.Recovery of Funds.

(a) Upon completion of the investigation and final disposition of any administrative, civil, or criminal action taken by the state or federal government, the Health and Human Service Commission-Office of Inspector General (HHSC-OIG) will determine and direct the collection of any overpayment.

(b) Overpayments collected as a result of an investigation will be distributed to the Managed Care Organization (MCO) unless HHSC-OIG determines that an alternative distribution is indicated.

(c) If the HHSC-OIG determines that an MCO is not entitled to all or any portion of the distribution of funds collected as a result of an overpayment then HHSC-OIG will provide the MCO with a written explanation indicating the rationale for the alternative distribution of funds.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403314

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Chapter 354. MEDICAID HEALTH SERVICES

Subchapter A. PURCHASED HEALTH SERVICES

The Health and Human Services Commission (HHSC or Commission) proposes to amend Chapter 354, Medicaid Health Services, Subchapter A, Purchased Health Services, Division 10, Definitions, §354.1121, General Definitions for Purchased Health Services. In addition, the Health and Human Services Commission (HHSC or Commission) proposes new §354.1187, Responsibilities of Third-Party Billing Vendors, in Division 11 of Chapter 354.

Background and Justification

Section 2.111 of House Bill 2292, 78th Legislature, Regular Session (2003), requires third-party billing vendors to enter into a contract with HHSC prior to submitting claims on behalf of a provider of medical services under the medical assistance program authorizing such activity. The proposed amendments, to the rules are necessary to comply with legislative direction.

Section-by-Section Summary

The proposed amendment to §354.1121 incorporates the definition of a third-party billing vendor into current rule.

Proposed new §354.1187 would require third-party billing vendors to enter into a contract with HHSC prior to submitting claims on behalf of a provider of medical services under the medical assistance program authorizing such activity.

Fiscal Note

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that during the first five years the proposed rules are in effect there will be no fiscal impact to the state. Implementation of the proposed rules will not result in any fiscal implications for local health and human service agencies. There are no foreseeable fiscal implications for local governments.

Small and Micro-business Impact Analysis

Mr. Suehs has also determined that there will be no effect on small businesses or micro-businesses to comply with the rules as proposed. This was determined by interpretation of the rule that small businesses and micro-businesses will not be required to alter their business practices in order to comply with the rules. There are no anticipated economic costs to persons who are required to comply with the rules as proposed. There is no anticipated negative impact on local employment.

Public Benefit

Jason Cooke, Associate Commissioner for Medicaid and CHIP, has determined that for each year of the first five years the rules are in effect, the public will benefit from adoption of the rules. The anticipated public benefit, as a result of enforcing the rules, will be to institute provisions that are designed to prevent fraud and abuse under the medical assistance program related to third-party billing vendors.

Regulatory Analysis

HHSC has determined that the proposed rules are not a "major environmental rule," as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environmental exposure and that may adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of a state or a sector of the state. The proposed amendments are not specifically intended to protect the environment or reduce risks to human health from environmental exposure.

Takings Impact Assessment

HHSC has determined that the proposed rules do not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, do not constitute a taking under §2007.043, Government Code.

Public Comment

Written comments on the proposal may be submitted to Jennifer Stansbury, Senior Policy Analyst, Texas Health and Human Services Commission, 1100 W. 49th Street, MC-H310, Austin, Texas 78756-3199, within 30 days of publication of this proposal in the Texas Register .

Public Hearing

A public hearing is scheduled for June 24, 2004, 1:30 p.m. to 3:00 p.m. The hearing will be held at the Health and Human Services Commission, Brown-Heatly Building, Public Hearing Room, 4900 N. Lamar Boulevard, Austin, Texas.

10. DEFINITIONS

1 TAC §354.1121

Statutory Authority

The amendment is proposed under the Texas Government Code, §531.033, which provides the Commissioner of HHSC with broad rulemaking authority; Human Resources Code, §32.063, and the Texas Government Code, §531.021(a), which provide the Health and Human Services Commission (HHSC) with the authority to administer the federal medical assistance (Medicaid) program in Texas.

The proposed amendment affects the Health Resource Code, Chapter 32, and the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by this rule.

§354.1121.Definitions.

The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) - (35) (No change.)

(36) Third-party billing vendor--A vendor that submits claims to HHSC, or its designee, for reimbursement on behalf of a provider of medical services under the medical assistance program.

(37) [ (36) ] Third-party liability--The resources that an eligible recipient may have which serve as a source of payment for services provided under the Medical Assistance Program.

(38) [ (37) ] Title XIX home health agency--An agency or organization approved as a home health agency under Medicare and which has been designated by the department as a Title XIX home health agency.

(39) [ (38) ] Title XIX hospital--A hospital which is participating as a hospital under Medicare, which has in effect a utilization review plan approved by the department applicable to all eligible recipients to whom it provides services or supplies, and has been designated by the department as a Title XIX hospital or a hospital not meeting all of the requirements listed in this definition but which provides services or supplies for which benefits are provided under Medicare, the Social Security Act, §1814(d), or would have been provided under such section had the recipients to whom the services or supplies are provided been eligible for and enrolled under Part A of Medicare, to the extent of such services and supplies only, and then only if such hospital has been designated by the department as a Title XIX emergency care only hospital, or has been approved by the department to provide emergency hospital services and agrees that the reasonable cost of such services or supplies, as defined in the Social Security Act, §1902(a)(13), will be such hospital's total charge for such services and supplies.

(40) [ (39) ] Title XIX spell of illness--With respect to inpatient hospital services, spell of illness is a continuous period of hospital confinement. Successive periods of hospital confinement are considered to be continuous unless the last date of discharge and the date of readmission are separated by at least 60 consecutive days.

(41) [ (40) ] Utilization review--The methods and procedures related to the review of utilization of covered care and services with respect to medical necessity and to safeguard against inappropriate utilization of care and services.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403315

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


11. GENERAL ADMINISTRATION

1 TAC §354.1187

The new section is proposed under the Texas Government Code, §531.033, which provides the Commissioner of HHSC with broad rulemaking authority; Human Resources Code, §32.063, and the Texas Government Code, §531.021(a), which provide the Health and Human Services Commission (HHSC) with the authority to administer the federal medical assistance (Medicaid) program in Texas.

The proposed new rule affects the Health Resource Code, Chapter 32, and the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by this rule.

§354.1187.Responsibilities of Third-Party Billing Vendors.

A third-party billing vendor who submits a claim to the Health and Human Services Commission, or its designee, for payment on behalf of a provider of medical services under the medical assistance program must enter into a contract with the commission, or its designee, authorizing that activity.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403316

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Chapter 355. MEDICAID REIMBURSEMENT RATES

Subchapter A. COST DETERMINATION PROCESS

1 TAC §§355.101 - 355.111

The Texas Health and Human Services Commission (HHSC) proposes to amend §§355.101-355.111, concerning the cost determination process, in its Medicaid Reimbursement Rates chapter. The purpose of the amendments is to: (1) add references to the Texas Department of Mental Health and Mental Retardation (TDMHMR) and to make these rules applicable to TDMHMR contracted programs that submit cost reports used in rate determination; (2) remove references to the Texas Department of Human Services (DHS) and replace them with references to HHSC where appropriate and to indicate that "Texas Department of Human Services (DHS)" means DHS or its successor agency; (3) increase the limit at which a cost incurred by a provider can be expensed on the cost report in the year purchased instead of being depreciated from $1,000 to $2,500; and (4) make technical and other minor corrections.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed sections are in effect, there are fiscal implications for state government as a result of enforcing or administering the sections. There are no fiscal implications for local governments as a result of enforcing or administering the sections. The effect on state government for the first five-year period the sections are in effect is an estimated additional cost of $0 in fiscal year (FY) 2004; $0 in FY 2005; $594,630 in FY 2006; $594,630 in FY 2007; and $594,630 in FY 2008.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the sections are in effect, the public benefit anticipated as a result of enforcing the sections is that the cost determination process rules will be consistent for all long term care programs for which cost reporting is required and will provide more comprehensive rules and guidelines on cost reporting, allowable and unallowable costs, and record keeping for providers contracted with TDMHMR. The rules will accurately reflect that HHSC manages the rate determination and audit processes. Providers will benefit from being able to expense items costing $2,500 on the cost report in the year of the purchase and will no longer need to depreciate items costing between $1,001 and $2,500, which will reduce some of their record- keeping time and expenses. There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the sections, because the amendments impose no additional requirements on businesses. There is no anticipated economic cost to persons who are required to comply with the proposed sections. There is no anticipated effect on local employment in geographic areas affected by these sections.

Questions about the content of this proposal may be directed to Carolyn Pratt in HHSC's Rate Analysis Department (telephone: (512) 491-1359 or fax: (512) 491-1998)). Written comments on the proposal may be submitted to Ms. Pratt via fax at (512) 491-1998 or mailed to HHSC Rate Analysis, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register .

Under Government Code, §2007.003(b), HHSC has determined that Chapter 2007 of the Government Code does not apply to these rules. The changes these rules make do not implicate a recognized interest in private real property. Accordingly, HHSC is not required to complete a takings impact assessment regarding these rules.

The amendments are proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which establishes HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The amendments affect the Human Resources Code, Chapter 32, and the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by this proposal.

§355.101.Introduction.

(a) The information in §355.102 of this title (relating to General Principles of Allowable and Unallowable Costs), §355.103 of this title (relating to Specifications for Allowable and Unallowable Costs), §355.104 of this title (relating to Revenues), and §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) applies to Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs cost reports pertaining to providers' fiscal years ending in calendar year 2004 [ 1997 ] and subsequent years. For all other programs these sections apply to cost reports pertaining to the providers' fiscal years ending in calendar year 1997 and subsequent years.

(b) The following terminology applies to the state agencies referenced in this subchapter:

(1) Whenever the terms "Texas Health and Human Services Commission" or "HHSC" occur, they each mean the Texas Health and Human Services Commission or its designee.

(2) Whenever the terms "Texas Department of Human Services" or "DHS" occur, they each mean the Texas Department of Human Services or its successor agency [ designee ].

(3) Whenever the terms "Texas Department of Mental Health and Mental Retardation" or "TDMHMR" occur, they each mean the Texas Department of Mental Health and Mental Retardation or its successor agency.

(c) The Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] reimburses providers for contracted client services through reimbursement amounts determined as described in this chapter and in reimbursement methodologies for each program. Statewide, [ Non-Medicaid, statewide, uniform reimbursements and reimbursement ceilings are approved by the Texas Department of Human Services. Medicaid, statewide, ] uniform reimbursements, and reimbursement ceilings are approved by HHSC [ the Texas Health and Human Services Commission (HHSC) ]. Where [ In Medicaid programs where ] reimbursements are contractor-specific, [ the ] HHSC approves the reimbursement parameter dollar amounts, e.g., ceilings, floors, or program reimbursement formula limits. In approving reimbursement amounts [ DHS or the ] HHSC takes into consideration staff recommendations based on the application of formulas and procedures described in this chapter and in reimbursement methodologies for each program. However, [ DHS or the ] HHSC may adjust staff recommendations when [ DHS or the ] HHSC deems such adjustments are warranted by particular circumstances likely to affect achievement of program objectives, including economic conditions and budgetary considerations. Methodology [ Medicaid reimbursement methodology ] rules are developed and recommended for approval to [ the ] HHSC. [ The ] HHSC has oversight authority with respect to the state's reimbursement methodology and cost determination [ Medicaid ] rules.

(1) Reimbursement amounts will be determined coincident with the state's biennium [ based upon odd-year reports ].

(2) Objective of cost determination process. The objective of the cost determination process is to define direct and indirect costs that [ which ] are allowable and, therefore, may be considered for use in the overall reimbursement determination process. The cost determination process seeks to collect accurate financial and other statistical data that constitutes [ which constitute ] the foundation upon which reimbursements are determined.

(A) Cost-reporting. In order to ensure adequate financial and statistical information upon which to base reimbursement, HHSC [ DHS ] requires that each contracted provider submit a periodic cost report or supplemental report. It is the responsibility of the provider to submit accurate and complete information, in accordance with all pertinent HHSC [ DHS ] cost reporting rules and cost report instructions, on the cost report and any supplemental reports required by HHSC [ DHS ].

(B) Pro forma costing. When historical costs are unavailable, such as in the case of a new program, reimbursement may be based on a pro forma approach. This approach involves using historical costs of delivering similar services, where appropriate data are available, and estimating the basic types and costs of products and services necessary to deliver services meeting federal and state requirements.

(3) Relationship between cost determination and reimbursement determination processes. The cost determination process seeks to evaluate individual cost items of providers to determine their allowability and to determine whether individual cost reports are of reasonable accuracy for potential use in reimbursement determination. The reimbursement determination process takes the evaluation of allowable costs one step further by comparing allowable costs across providers to identify those levels of cost, either for individual cost items or groups of cost items, which must be incurred by efficient and economic providers of services meeting all state and federal standards. Thus, all costs allowed in the cost determination process may not necessarily be used in the reimbursement determination process. The basic objective of the reimbursement methodologies employed by HHSC [ DHS ] is to facilitate and balance the broader objectives of the programs administered by the agencies [ agency ] by:

(A) promoting reasonable access for eligible clients to services that meet federal and state quality standards via contracting with an adequate number of qualified providers; and

(B) expending taxpayer dollars in a reasonable and prudent manner such that eligible clients are served at the lowest cost to taxpayers consistent with state and federal laws, standards and regulations, and with program objectives.

§355.102.General Principles of Allowable and Unallowable Costs.

(a) Allowable and unallowable costs. Allowable and unallowable costs, both direct and indirect, are defined to identify expenses that [ which ] are reasonable and necessary to provide contracted client care and are consistent with federal and state laws and regulations. When a particular type of expense is classified as unallowable, the classification means only that the expense will not be included in the database for reimbursement determination purposes because the expense is not considered reasonable and/or necessary. The classification does not mean that individual contracted providers may not make the expenditure. The description of allowable and unallowable costs is designed to be a general guide and to clarify certain key expense areas. This description is not comprehensive, and the failure to identify a particular cost does not necessarily mean that the cost is an allowable or unallowable cost.

(b) Cost-reporting process. The primary objective of the cost-reporting process is to provide a basis for determining appropriate reimbursement to contracted providers. To achieve this objective, the reimbursement determination process uses allowable cost information reported on cost reports or other surveys. The cost report collects actual allowable costs and other financial and statistical information, as required. Costs may not be imputed and reported on the cost report when no costs were actually incurred (except as stated in §355.103(b)(16)(A)(i) of this title (relating to Specifications for Allowable and Unallowable Costs) or when documentation does not exist for costs even if they were actually incurred during the reporting period.

(c) Accurate cost reporting. Accurate cost reporting is the responsibility of the contracted provider. The contracted provider is responsible for including in the cost report all costs incurred, based on an accrual method of accounting, which are reasonable and necessary, in accordance with allowable and unallowable cost guidelines in this section and in §355.103 of this title [ (relating to Specifications for Allowable and Unallowable Costs) ], revenue reporting guidelines in §355.104 of this title (relating to Revenues), cost report instructions, and applicable program rules. Reporting all allowable costs on the cost report is the responsibility of the contracted provider. The Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] is not responsible for the contracted provider's failure to report allowable costs; however, in an effort to collect reliable, accurate, and verifiable financial and statistical data, HHSC [ DHS ] is responsible for providing cost report training, general and/or specific cost report instructions, and technical assistance to providers. Furthermore, if unreported and/or understated allowable costs are discovered during the course of an audit desk review or field audit, those allowable costs will be included on the cost report or brought to the attention of the provider to correct by submitting an amended cost report.

(d) Cost report training. HHSC [ DHS ] is responsible for conducting, at no charge to the provider, comprehensive cost report training for each contracted program. It is the responsibility of the provider to ensure that each preparer signing the Cost Report Methodology Certification has attended the required cost report training conducted by HHSC [ DHS ]. Preparers may be employees of the provider or persons who have been contracted by the provider for the purpose of cost report preparation. Preparers must attend cost report training for each program for which a cost report is submitted. Beginning with the 2001 cost report for Texas Department of Human Services (DHS) contracted providers and the 2004 cost report for Texas Department of Mental Health and Mental Retardation (TDMHMR) contracted providers , preparers must attend cost report training every other year for the odd-year cost report in order to be certified to complete both that odd-year cost report and the following even-year cost report. If a new preparer wishes to complete an even- year cost report and has not attended the previous odd-year cost report training, to be certified to complete the even-year cost report, he/she must attend an even-year cost report training. [ For the 2000 cost report, preparers that met their two-consecutive-year training requirement for the 1999 cost report are not required to attend cost report training for the 2000 cost report. Preparers that did not meet their two-consecutive-year requirement for the 2000 cost report are required to attend cost report training for the 2000 cost report. ] A copy of the most recent cost report training certificate for each preparer of the cost report must be submitted with each cost report. Travel costs to attend the state-sponsored cost report training are allowable within the travel limits specified in §355.103(b)(12) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ]. Contracted preparer's fees to attend state-sponsored cost report training are allowable.

(1) For nursing facilities, failure to file a completed cost report signed by preparers who have attended the required cost report training may result in vendor hold as specified in §355.403 of this title (relating to Vendor Hold).

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to file a completed cost report signed by preparers who have attended the required cost report training may result in vendor hold.

(3) [ (2) ] For all other programs, failure to file a completed cost report signed by preparers who have attended the required cost report training 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).

(e) Generally accepted accounting principles. Except as otherwise specified by the cost determination process rules of this chapter, cost report instructions, or policy clarifications, cost reports should be prepared consistent with generally accepted accounting principles (GAAP), which are those principles approved by the American Institute of Certified Public Accountants (AICPA). Internal Revenue Service (IRS) laws and regulations do not necessarily apply in the preparation of the cost report. In cases where cost reporting rules differ from GAAP, IRS, or other authorities, HHSC [ DHS ] rules take precedence for provider cost-reporting purposes.

(f) Allowable costs. Allowable costs are expenses, both direct and indirect, that are reasonable and necessary, as defined in paragraphs (1) and (2) of this subsection, and which meet the requirements as specified in subsections (i), (j), and (k) of this section, in the normal conduct of operations to provide contracted client services meeting all pertinent state and federal requirements. Only allowable costs are included in the reimbursement determination process.

(1) "Reasonable" refers to the amount expended. The test of reasonableness includes the expectation that the provider seeks to minimize costs and that the amount expended does not exceed what a prudent and cost-conscious buyer pays for a given item or service. In determining the reasonableness of a given cost, the following are considered:

(A) the restraints or requirements imposed by arm's-length bargaining, i.e., transactions with nonowners or other unrelated parties, federal and state laws and regulations, and contract terms and specifications; and

(B) the action that a prudent person would take in similar circumstances, considering his responsibilities to the public, the government, his employees, clients, shareholders, and members, and the fulfillment of the purpose for which the business was organized.

(2) "Necessary" refers to the relationship of the cost, direct or indirect, incurred by a provider to the provision of contracted client care. Necessary costs are direct and indirect costs that are appropriate in developing and maintaining the required standard of operation for providing client care in accordance with the contract and state and federal regulations. In addition, to qualify as a necessary expense, a direct or indirect cost must meet all of the following requirements:

(A) the expenditure was not for personal or other activities not directly or indirectly related to the provision of contracted services;

(B) the cost does not appear as a specific unallowable cost in §355.103 of this title [ (relating to Specifications for Allowable and Unallowable Costs) ];

(C) if a direct cost, it bears a significant relationship to contracted client care. To qualify as significant, the elimination of the expenditure would have an adverse impact on client health, safety, or general well-being;

(D) the direct or indirect expense was incurred in the purchase of materials, supplies, or services provided to clients or staff in the normal conduct of operations to provide contracted client care;

(E) the direct or indirect costs are not allocable to or included as a cost of any other program in either the current, a prior, or a future cost-reporting period;

(F) the costs are net of all applicable credits;

(G) allocated costs of each program are adequately substantiated; and

(H) the costs are not prohibited under other pertinent federal, state, or local laws or regulations.

(3) Direct costs are those costs [ which are ] incurred by a provider that [ which ] are definitely attributable to the operation of providing contracted client services. Direct costs include, but are not limited to, salaries and nonlabor costs necessary for the provision of contracted client care. Whether or not a cost is considered a direct cost depends upon the specific contracted client services covered by the program. In programs in which client meals are covered program services, the salaries of cooks and other food service personnel are direct costs, as are food, nonfood supplies, and other such dietary costs. In programs in which client transportation is a covered program service, the salaries of drivers are direct costs, as are vehicle repairs and maintenance, vehicle insurance and depreciation, and other such client transportation costs.

(4) Indirect costs are those costs that [ which ] benefit, or contribute to, the operation of providing contracted services, other business components, or the overall contracted entity [ with which DHS has contracted ]. These costs could include, but are not limited to, administration salaries and nonlabor costs, building costs, insurance expense, and interest expense. Central office and/or home office administrative expenses are considered indirect costs.

(g) Unallowable costs. Unallowable costs are expenses that are not reasonable or necessary, according to the criteria specified in subsection (f)(1)-(2) of this section and which do not meet the requirements as specified in subsections (i), (j), and (k) of this section or which are specifically enumerated in §355.103 of this title [ (relating to Specifications for Allowable and Unallowable Costs) ] or program-specific reimbursement methodology. Providers must not report as an allowable cost on a cost report a cost that has been determined to be unallowable. Such reporting may constitute fraud. (Refer to [ 40 TAC §79.2103 (Statutory Bases) for the statutory basis for Medicaid fraud and ] §355.106(a) of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports)).

(1) For nursing facilities, placement as an allowable cost on a cost report of a cost which has been determined to be unallowable may result in vendor hold as specified in §355.403 of this title [ (relating to Vendor Hold) ].

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, placement as an allowable cost on a cost report a cost, which has been determined to be unallowable, may result in vendor hold.

(3) [ (2) ] For all other programs, placement as an allowable cost on a cost report of a cost , which has been determined to be unallowable , 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) ].

(h) Other financial and statistical data. The primary purpose of the cost report is to collect allowable costs to be used as a basis for reimbursement determination. In addition, providers may be required on cost reports to provide information in addition to allowable costs to support allowable costs, such as wage surveys, workers' compensation surveys, or other statistical and financial information. Additional data requested may include, when specified and in the appropriate section or line number specified, costs incurred by the provider which are unallowable costs. All information, including other financial and statistical data, shown on a cost report is subject to the documentation and verification procedures required for an audit desk review and/or field audit.

(1) For nursing facilities, inaccuracy in providing, or failure to provide, required financial and statistical data may result in vendor hold as specified in §355.403 of this title [ (relating to Vendor Hold) ].

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, inaccuracy in providing, or failure to provide, required financial and statistical data may result in vendor hold.

(3) [ (2) ] For all other programs, inaccuracy in providing, or failure to provide, required financial and statistical data 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) ].

(i) Related party transactions.

(1) In determining whether a contracted provider organization is related to a supplying organization, the tests of common ownership and control are to be applied separately. Related to a contracted provider means that the contracted provider to a significant extent is associated or affiliated with, has control of, or is controlled by the organization furnishing the services, equipment, facilities, leases, or supplies. Common ownership exists if an individual or individuals possess any ownership or equity in the contracted provider and the institution or organization serving the contracted provider. Control exists if an individual or an organization has the power, directly or indirectly, to significantly influence or direct the actions or policies of an organization or institution. If the elements of common ownership or control are not present in both organizations, then the organizations are deemed not to be related to each other. The existence of an immediate family relationship will create an irrefutable [ irrebuttable ] presumption of relatedness through control or attribution of ownership or equity interests where the significance tests are met. The following persons are considered immediate family for cost- reporting purposes:

(A) husband and wife;

(B) natural parent, child, and sibling;

(C) adopted child and adoptive parent;

(D) stepparent, stepchild, stepsister, and stepbrother;

(E) father-in-law, mother-in-law, sister-in-law, brother-in-law, son-in-law, and daughter-in-law;

(F) grandparent and grandchild;

(G) uncles and aunts by blood or marriage;

(H) nephews and nieces by blood or marriage; and

(I) first cousins.

(2) A determination as to whether an individual (or individuals) or organization possesses ownership or equity in the contracted provider organization and the supplying organization, so as to consider the organizations related by common ownership, will be made on the basis of the facts and circumstances in each case. This rule applies whether the contracted provider organization or supplying organization is a sole proprietorship, partnership, corporation, trust or estate, or any other form of business organization, proprietary or nonprofit. In the case of a nonprofit organization, ownership or equity interest will be determined by reference to the interest in the assets of the organization, e.g., a reversionary interest provided for in the articles of incorporation of a nonprofit corporation.

(3) The term control includes any kind of control, whether or not it is legally enforceable and however it is exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. The facts and circumstances in each case must be examined to ascertain whether legal or effective control exists. Since a determination made in a specific case represents a conclusion based on the entire body of facts and circumstances involved, such determination should 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 [ DHS ] 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 [ DHS ] 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 [ the department ], a copy of the applicable Medicare determination must accompany each written exception request submitted to HHSC [ the department ], 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 [ DHS ] 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 Rate Analysis Department no later than [ within ] 45 days prior to [ of ] 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 [ §355.102 ] and in §355.103 of this title [ (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs) ] 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 [ DHS- 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.

(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 [ DHS ] 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 [ DHS ] for cost-reporting purposes.

(B) HHSC [ DHS ] 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.

(D) Providers must use an allocation method approved or required by HHSC [ DHS ]. Any change in cost-reporting allocation methods from one year to the next must be fully disclosed by the contracted provider on its cost report and must be accompanied by a written explanation of the reasons and justification for such change. If the provider wishes to use an allocation method that is not in compliance with the cost-reporting allocation methods in paragraphs (3)-(4) of this subsection, the contracted provider must obtain written prior approval from HHSC's [ DHS's ] Rate Analysis Department.

(i) Requests for approval to use an allocation method other than those identified in paragraphs (3)-(4) of this subsection or for approval of a provider's change in cost-reporting allocation method other than those identified in paragraphs (3)-(4) of this subsection must be received by HHSC's [ DHS's ] Rate Analysis Department prior to the end of the contracted provider's fiscal year. Requests for approval of allocation methods will not be acceptable as a basis for the extension of the cost report due date.

(ii) The HHSC Rate Analysis Department will forward its written decision to the contracted provider within 45 days of its receipt of the provider's original written request. If sufficient documentation is not provided by the provider to verify the acceptability of the allocation method, then HHSC [ DHS ] may extend the decision time frame. However, an extension of the due date of the cost report will not be granted. Written decisions made on or after the due date of the cost report will apply to the next year's cost report. 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) ].

(iii) Failure to use an allocation method approved or required by HHSC [ DHS ] or to disclose a change in an allocation to HHSC [ DHS ] will result in the following.

(I) For nursing facilities, failure to disclose a change in an allocation method or failure to use the allocation method approved or required by HHSC [ DHS ] may result in vendor hold as specified in §355.403 of this title [ (relating to Vendor Hold) ].

(II) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to use the allocation method approved or required by HHSC may result in vendor hold.

(III) [ (II) ] For all other programs, failure to disclose a change in an allocation method or failure to use the allocation method approved or required by HHSC [ DHS ] 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) ].

(2) Cost-reporting methods for allocating costs must be clearly and completely documented in the contracted provider's workpapers, with details as to how pooled costs are allocated to each segment of the business entity, for both contracted and noncontracted programs.

(A) If a contracted provider has questions regarding the reasonableness of an allocation method, that contracted provider should request written approval from the HHSC Rate Analysis Department prior to submitting a cost report utilizing the allocation method in question. Requests for approval must be received by the HHSC Rate Analysis Department prior to the end of the contracted provider's fiscal year. Requests for approval of allocation methods will not be acceptable as a basis for the extension of the cost report due date.

(B) The HHSC Rate Analysis Department will forward its written decision to the contracted provider within 45 days of its receipt of the original written request. If sufficient documentation is not provided by the provider to verify the acceptability of the allocation method, HHSC [ DHS ] may extend the decision time frame. However, an extension of the due date of the cost report will not be granted. Written decisions made on or after the due date of the cost report will apply to the next year's cost report. 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) ].

(3) When a building is shared and the building usage is separate and distinct for each entity using the building, the building costs, identified as building and facility cost categories on the cost report, should be allocated based upon square footage and may not be allocated with other indirect costs as a pool of costs. When the same building space is shared by various entities, the shared building costs, identified as building and facility cost categories on the cost report, should be allocated using a reasonable method which reflects the actual usage, such as an allocation based on time in shared activity areas or a functional study of shared dietary costs related to shared dining and kitchen areas.

(4) Where costs are shared, are not directly chargeable and are allocated as a pool of costs, the following allocation methods are acceptable for cost-reporting purposes.

(A) If all the business components of a contracted provider have equivalent units of equivalent service, indirect costs must be allocated based upon each business component's units of service. For example, if a provider had two nursing facilities, indirect costs requiring allocation as a pool of costs must be allocated based upon each nursing facility's units of service, since the units of service are equivalent units and the services are equivalent services. If a provider had a nursing facility and a residential care program, indirect costs requiring allocation as a pool of costs could not be allocated based upon units of service because even though the units of service for a nursing facility and a residential care facility are equivalent units, the services are not equivalent services. If a home health agency has indirect costs requiring allocation as a pool of costs across its Medicare home health services and its Medicaid primary home care services, it could not use units of service to allocate those costs, since neither the units of service nor the services are equivalent.

(B) If all of a contracted provider's business components are labor-intensive without programmatic residential facility or residential building costs, the contracted provider must allocate its indirect costs requiring allocation as a pool of costs based either on each business component's pro rata share of salaries or labor costs or on a cost-to-cost basis.

(i) For cost-reporting cost allocation purposes, the term "salaries" includes wages paid to employees directly charged to the specific business component. The term "salaries" also includes fees paid to contracted individuals, excluding consultants, who perform services routinely performed by employees, which are directly charged to the specific business component. The term "salaries" does not include payroll taxes and employee benefits associated with the wages of employees.

(ii) For cost-reporting cost-allocation purposes, the term "labor costs" includes salaries as defined in clause (i) of this subparagraph, plus the payroll taxes and employee benefits associated with the wages of the employees.

(iii) The cost-to-cost method allocates costs based upon the percentage of each business component's directly-charged costs to the total directly-charged costs of all business components.

(C) If a contracted provider's business components are mixed, with some being labor-intensive and others having a programmatic residential or institutional component, the contracted provider must allocate its indirect costs requiring allocation as a pool of costs either:

(i) based upon the ratio of each business component's total costs less that business component's facility or building costs, as related to the contracted provider's total business component costs less facility or building costs for all the contracted provider's business components, with "facility or building costs" referring to those cost categories as identified on the cost report; or

(ii) based upon the labor costs method stated in subparagraph (B)(ii) of this paragraph.

(D) In order to achieve a more accurate and representative reporting of costs than results from allocating shared indirect costs as a pool of costs, a provider may choose to allocate its indirect shared expenses on an appropriate and reasonable functional basis. If allocating shared direct client care costs, a provider may use an appropriate and reasonable functional method. For example, costs of a central payroll operation could be allocated to all business components based on the number of checks issued; the costs of a central purchasing function could be allocated based on the number of purchases made or requisitions handled; payroll costs for an administrative employee working across business components could be directly charged based upon that employee's time sheets and/or allocated based upon a documented time study; food costs could be allocated based upon a functional study of shared dietary costs; transportation equipment costs could be allocated based upon mileage logs; and shared laundry costs could be allocated based upon a functional study of the number of pounds/loads of laundry processed. Providers choosing to allocate allowable employee-related self-insurance paid claims in accordance with §355.103(b)(10)(B)(ii) [ §20.103(b)(10)(B)(ii) ] of this title [ relating to Specifications of Allowable and Unallowable Costs) ] should base the allocation on percentage of salaries of employees benefiting from the coverage for fully self-insured situations or on percentage of premiums of covered employees for partially self-insured situations since purchased premiums must be directly charged.

(E) Because the determination of reimbursement is based on cost data, allocation methods based upon revenue streams are inappropriate and unallowable.

(k) Net expenses. Net expenses are gross expenses less any purchase discounts or returns and allowances. Purchase discounts are cash discounts reducing the purchase price as a result of prompt payment, quantity purchases, or for other reasons. Purchase returns and allowances are reductions in expenses resulting from returned merchandise or merchandise which is damaged, lost, or incorrectly billed. Only net expenses may be reported on the cost report. Expenses reported on the cost report must be adjusted for all such purchase discounts or returns and allowances.

§355.103.Specifications for Allowable and Unallowable Costs.

(a) Introduction. The following list of allowable and unallowable costs is not comprehensive but serves as a guide and clarifies certain key expense areas. If a particular type of expense is classified as unallowable for purposes of reporting on a cost report, it does not mean that individual contracted providers may not make such expenditures. Except where specific exceptions are noted, the allowability of all costs is subject to the general principles specified in §355.102 of this title (relating to General Principles of Allowable and Unallowable Costs). In addition, refer to program-specific allowable and unallowable costs, as applicable.

(1) Accounting and audit fees. See subsection (b)(2)(C)(i) of this section.

(2) Advertising and public relations. See subsection (b)(13) of this section.

(3) Amortization expense. See subsection (b)(7) of this section.

(4) Bad debt expense. See subsection (b)(17)(M) of this section.

(5) Boards of directors and trustees . See subsection (b)(2)(E) of this section.

(6) Bonuses. See subsection (b)(1)(A)(i) of this section.

(7) Central office costs. See subsection (b)(4) of this section.

(8) Charity allowance. See subsection (b)(17)(N) of this section.

(9) Compensation of employees. See subsection (b)(1) of this section.

(10) Compensation of owners and related parties. See subsection (b)(2) of this section [ subsection ].

(11) Compensation of outside consultants. See subsection (b)(2)(C) of this section.

(12) Courtesy allowance. See subsection (b)(17)(N) of this section [ subsection ].

(13) Depreciation expense. See subsection (b)(7) of this section.

(14) Donated revenues. See subsection (b)(15) of this section.

(15) Donated services, supplies, and assets. See subsection (b)(16) of this section.

(16) Dues or contributions to organizations. See subsection (b)(11) of this section.

(17) Employee relations expenses. See subsection (b)(17)(A) of this section.

(18) Employment-related taxes. See subsection (b)(9)(B) of this section.

(19) Endowment income. See subsection (b)(15) of this section.

(20) Expenses not related to contracted services. See subsection (b)(17)(H) of this section.

(21) Fines and penalties. See subsection (b)(17)(G) of this section.

(22) Franchise tax. See subsection (b)(9)(C) of this section.

(23) Finance charges. See subsection (b)(8)(E) of this section.

(24) Franchise fees. See subsection (b)(17)(C) of this section.

(25) Fringe benefits. See subsection (b)(1)(A)(iii) of this section.

(26) Fundraising activities. See subsection (b)(14) of this section.

(27) Gains on disposal of assets. See subsection (b)(7)(F) of this section.

(28) Gifts. See subsection (b)(15) of this section.

(29) Goodwill. See subsection (b)(7) and (17)(C)(ii) of this section.

(30) Grants, gifts and income from endowments. See subsection (b)(15) of this section.

(31) In-kind donations. See subsection (b)(16) of this section.

(32) Insurance expense. See subsection (b)(10) of this section.

(33) Interest expense. See subsection (b)(8) of this section.

(34) Legal fees. See subsection (b)(2)(C)(ii) of this section.

(35) Life insurance. See subsection (b)(10)(G) of this section.

(36) Litigation expenses and awards. See subsection (b)(17)(I) of this section.

(37) Lobbying costs. See subsection (b)(17)(J) of this section.

(38) Losses on disposal of assets. See subsection (b)(7)(F) of this section.

(39) Losses due to theft or embezzlement . See subsection (b)(17)(L) of this section.

(40) Management fees. See subsection (b)(3) of this section.

(41) Medicaid as payor of last resort. See subsection (b)(18) of this section.

(42) Medical supplies and medical costs. See subsection (b)(17)(F) of this section.

(43) Nonpaid workers. See subsection (b)(2)(D) of this section.

(44) Operating revenue. See subsection (b)(15)(D) of this section.

(45) Organization costs. See subsection (b)(17)(B) of this section.

(46) Payroll taxes and insurance. See subsection (b)(1)(A)(ii) of this section.

(47) Penalties. See subsection (b)(17)(G) of this section.

(48) Planning and evaluation expenses. See subsection (b)(7)(E) of this section.

(49) Promotional activities. See subsection (b)(14) of this section.

(50) Public relations. See subsection (b)(13) of this section.

(51) Repairs and maintenance. See subsection (b)(6) of this section.

(52) Research and development costs. See subsection (b)(17)(E) of this section.

(53) Salaries and wages. See subsection (b)(1) and (2) of this section.

(54) Self-insurance. See subsection (b)(10)(B) of this section.

(55) Staff training costs. See subsection (b)(12)(A) of this section.

(56) Startup costs. See subsection (b)(17)(D) of this section.

(57) Tax expense and credits. See subsection (b)(9) of this section.

(58) Travel costs. See subsection (b)(12)(B) of this section.

(59) Utilities. See subsection (b)(5) of this section.

(60) Volunteers. See subsection (b)(2)(D) of this section.

(61) Voucher-paid expenses. See subsection (b)(17)(K) of this section.

(62) Workers' compensation insurance. See subsection (b)(10) of this section.

(b) Allowable and unallowable costs.

(1) Compensation of employees. Compensation includes both cash and non-cash forms of compensation subject to federal payroll tax regulations. Compensation includes wages and salaries (including bonuses); payroll taxes and insurance; and benefits. Payroll taxes and insurance include Federal Insurance Contributions Act (old age, survivors, and disability insurance (OASDI) and Medicare hospital insurance); Unemployment Compensation Insurance; and Workers' Compensation Insurance.

(A) Allowable compensation of employees is compensation paid to employees in arm's-length transactions as nonowners and non-related parties and is subject to the reasonable and necessary costs which must be incurred by providers in the provision of contracted client services. Guidelines for compensation of owners and related parties are specified in paragraph (2) of this subsection.

(i) A bonus is a type of compensation granted to employees as a wage enhancement. Bonuses paid to employees in arm's-length transactions are allowable costs, subject to the reasonable and necessary costs that [ which ] must be incurred by providers in the provision of contracted client services. In determining the employee classification type, part-time employees may be considered a different classification type than full-time employees. To be allowable, bonuses to owners and/or related parties:

(I) must not represent any form of profit sharing and must not be determined on the level of profit earned by the contracted provider;

(II) effective with the 1997 cost report for Texas Department of Human Services (DHS) contracted providers and with the 2004 cost report for Texas Department of Mental Health and Mental Retardation (TDMHMR) contracted providers , must be clearly defined in a written agreement or employment policy;

(III) must not be made only to related parties, in which case the bonuses are unallowable costs;

(IV) must be based upon the same criteria for all members of the same employee classification type;

(V) must be made available to all employees of the same classification type, unless the employee classification type predominantly consists of related parties, in which case the bonuses are unallowable costs; and

(VI) must not discriminate in favor of certain employees, such as employees who are officers, stockholders, or the highest paid individual(s) of the organization.

(ii) Payroll taxes and insurance are described in paragraph (9) of this subsection, concerning tax expense and credits, and paragraph (10) of this subsection.

(iii) Benefits are amounts paid to or on behalf of an employee, in addition to direct salary or wages, and from which the employee, his dependent, or his beneficiary derives a personal benefit before or after the employee's retirement or death.

(I) Benefits paid to employees in arm's length transactions as nonowners and non-related parties are allowable costs, subject to the reasonable and necessary costs which must be incurred by providers in the provision of contracted client care. To be allowable, benefits paid to owners and/or related parties must not discriminate in favor of certain employees, such as employees who are officers, stockholders, or the highest paid individual(s) of the organization.

(II) Allowable benefits are reported on cost reports either as salaries and/or wages, as employee benefits, or as costs applicable to specific cost report line items, as specified in this subclause and in subclause (III) of this clause. Any benefit subject to payroll taxes is reported as salaries and wages. Allowable benefits that [ which ] are routinely reported as salaries and wages include paid vacations, paid holidays, sick leave, voting leave, court or jury duty leave, and/or all-inclusive paid days, as specified in subclause (III)(-c-) of this clause. Allowable benefits which are routinely reported as employee benefits include employer contributions to certain deferred compensation plans, as specified in subclause (III)(-a-) of this clause, employer contributions to an employee retirement fund or certain pension plans, as specified in subclause (III)(-b-) of this clause, and costs of certain employer-paid health, life, and disability insurance premiums, as specified in subclause (III)(-f-) of this clause. The contracted provider's unrecovered cost of meals and room and board furnished to direct care employees, uniforms, employee personal vehicle mileage reimbursement in accordance with paragraph (12) of this subsection, job-related training reimbursements in accordance with paragraph (12) of this subsection, and job certification renewal fees in accordance with paragraph (12) of this subsection are not to be reported as benefits but are to be reported as costs applicable to specific cost report line items, unless they are subject to payroll taxes, whereas they are reported as salaries and wages.

(III) Benefits include the following:

(-a-) Employer contributions to certain deferred compensation plans are reported as employee benefits. Deferred compensation is remuneration currently earned by an employee but which is not received until a subsequent period, usually after retirement. For the cost to be allowable, the deferred compensation plan must be formal, established, and maintained by the contracted provider and communicated to all eligible employees. A formal plan is one that is provided for in a written agreement executed between the contracted provider and the participating employees. The plan must:

(-1-) prescribe the method for calculating all contributions to the fund;

(-2-) be funded with contributions made systematically to a funding agency outside the contracted provider's ownership or control, such as a trustee, an insurance company, or a custodial bank account;

(-3-) provide for the protection of the plan's assets;

(-4-) designate the requirements for vested benefits;

(-5-) provide the basis for the computation of the amounts of benefits to be paid;

(-6-) be expected to continue despite normal fluctuations in the contracted provider's economic experience; and

(-7-) use all fund contributions and earnings for the sole benefit of the participating employees. Contributions made during the cost-reporting period to a deferred compensation plan meeting the requirements specified in subitems (-1-)-(-7-) of this item which represent legal obligations of the contracted provider and which are clearly enumerated as to dollar amount are allowable costs and should be reported on cost reports as employee benefits. Reasonable trustee or custodial fees paid by the contracted provider will be allowed as an administrative cost. However, such fees will not be allowable where the deferred compensation plan provides that they will be paid out of the corpus or earnings of the fund. To be allowable, contributions representing the employee's share cannot revert to the contracted provider. However employer- paid contributions can revert back to the contracted provider in the event an employee does not vest if designated in the requirements for vested benefits.

(-b-) Employer contributions to an employee retirement fund or certain pension plans are reported as employee benefits. A pension plan is a type of deferred compensation plan which is established and maintained by the employer to provide systematic payment of definitely determinable benefits to its employees over a period of years, or for life, after retirement. Such a plan may include disability, withdrawal, option for lump-sum payment, or insurance or survivorship benefits incidental and directly related to the pension benefits. A pension plan must meet all the requirements of a deferred compensation plan. All employees' pension fund rights must be nonforfeitable after such time as they vest under the plan. Pension fund rights cannot be contingent on continuance of employment or other factors. Only the amount the contracted provider or employer contributed to the pension fund during the reporting period is allowable and should be reported as an employee benefit. To be allowable, contributions representing the employee's share cannot revert to the contracted provider. However employer-paid contributions can revert to the contracted provider in the event an employee does not vest.

(-c-) Paid leave is reported as salaries or wages. Paid vacations, paid holidays, sick leave, voting leave, court or jury duty leave, and/or all-inclusive paid days, all are reported as employee salaries and/or wages rather than as employee benefits, as follows:

(-1-) A vacation benefit is a right granted by an employer to an employee to be absent from his job for a stipulated period of time without loss of pay or to be paid an additional salary in lieu of taking a vacation. The contracted provider's vacation policy must be consistent among all employees of a specific category. Vacation expense subject to payroll taxes must be reported as salaries and wages. Accrued vacation expense not yet subject to payroll taxes must be reported as employee benefits. Providers must maintain adequate documentation to substantiate that costs reported one year as accrued benefits are not also reported, either the same or another year, as salaries and wages.

(-2-) The cost of sick leave taken, or payment in lieu of sick leave taken, is not to exceed the salary or wage the employee would have earned had they reported for work. Sick leave costs subject to payroll taxes must be reported as salaries and wages. Accrued sick leave costs not yet subject to payroll taxes must be reported as employee benefits. Providers must maintain adequate documentation to substantiate that costs reported one year as accrued benefits are not also reported, either the same or another year, as salaries and wages.

(-3-) A formal plan for all-inclusive paid days off (PDO) is one under which all employees earn accrued vested leave, or payment in lieu of leave taken, for an unallocated combination of occasions such as illness, medical appointments, holidays, vacations, family leave, and care of a sick child, based on actual hours worked. The cost of PDO subject to payroll taxes must be reported as salaries and wages. Accrued costs of PDO not yet subject to payroll taxes must be reported as employee benefits. Providers must maintain adequate documentation to substantiate that costs reported one year as accrued benefits are not also reported, either the same or another year, as salaries and wages.

(-d-) Provider-paid instructional courses benefiting the employer's interest are not to be reported as employee benefits, but are to be reported as costs related to specific cost report line items. Costs related to provider-paid instructional courses for the benefit of the employee only are unallowable costs. Refer to paragraph (12)(A) of this subsection, concerning staff training costs.

(-e-) Contracted provider's unrecovered cost of meals and room and board furnished on-site to direct care employees are not to be reported as employee benefits, but are to be reported as costs related to specific cost report line items. Any reasonable unrecovered cost of meals and/or room and board furnished on-site by a contracted provider to its direct care employees, which are equivalent to the meals and/or room and board provided to clients, are allowable costs since they are related to client care in that such reasonable costs are appropriate and helpful in developing and maintaining the contracted provider's operations to deliver contracted services. Such allowable costs should be reported in the cost area where the costs were incurred, such as meal costs being reported in the cost area associated with food and meal preparation and room and/or board costs being reported in the cost area associated with building costs.

(-f-) Costs of health, disability and life insurance premiums paid or incurred by the contracted provider if the benefits of the policy are payable to the employee or his beneficiary are reported as employee benefits. Report allowable health, disability, and life insurance premium costs as employee benefits. Refer to paragraph (10) of this subsection, concerning insurance expense.

(B) Compensation of employees that is not clearly enumerated as to dollar amount or which represent profit or surplus revenue distributions are unallowable costs. Accrued expenses that are not legal obligations of the contracted provider are unallowable costs, including any form of profit sharing and the accrued liabilities of unfunded deferred compensation plans.

(2) Compensation of owners and related parties. Compensation includes both cash and non- cash forms of compensation subject to federal payroll tax regulations. Compensation includes withdrawals from an owner's capital account; wages and salaries (including bonuses); payroll taxes and insurance; and benefits. Payroll taxes and insurance include Federal Insurance Contributions Act (old age, survivors, and disability insurance (OASDI) and Medicare hospital insurance); Unemployment Compensation Insurance; and Workers' Compensation Insurance. Allowable compensation must be reported as salaries and not as management fees.

(A) Allowable compensation of owners and related parties.

(i) A person who is a sole proprietor, partner, or corporate stockholder-employee owning any of the outstanding stock of the contracted provider is considered an owner for the purposes of this subparagraph. Allowable compensation for a related party, as defined in §355.102(i) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ], a sole proprietor- employee, a partner-employee, or a corporate stockholder-employee is governed by the principles that the services rendered are necessary functions and that the remuneration is the reasonable value of the services rendered.

(I) A function is deemed necessary when, if the owner or related party had not performed said function, the contracted provider would have had to employ another person to perform that function. To be necessary, a function must pertain to direct or indirect activities in the provision or supervision of contracted client services. The fact that an owner may have potential supervisory and managerial authority and responsibility is not as important as the manner in which this authority and responsibility is actually exercised. As an example, the right of the owner-administrator to overrule decisions does not solely constitute a basis for recognition of compensation comparable to nonowner-administrators.

(II) The test of reasonableness requires that the compensation of owners or related parties be such an amount as would ordinarily be paid for comparable services performed by nonowners or unrelated parties. Reasonable compensation is limited to the fair market value of services rendered by the owner or related party in connection with contracted client care. Education and experience of the owner are pertinent only as they relate to the job being performed and the services being rendered. For example, where an owner-administrator is also a physician or a nurse or a lawyer, but the services evaluated are administrative in nature rather than the actual practice of medicine or nursing or law, the allowable compensation is based on the compensation nonphysician or nonnurse or nonlawyer administrators receive rather than on the rate physicians or nurses or lawyers receive for their professional services.

(ii) The compensation must be for services performed by the related party, owner, partner, or stockholder that do not duplicate services performed by another employee of the contracted provider.

(iii) Compensation for "full-time" service requires that at least 40 hours per week be devoted to the duties of the position for which compensation is requested. For owners devoting less than 40 hours per week to the position, allowable compensation is limited to the proportion of 40 hours actually devoted to the contract services. Documentation regarding owners and related parties must be kept in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(iv) Compensation must be in accordance with paragraph (1)(A) of this subsection concerning compensation of employees, must be made in regular periodic payments, must be subject to payroll or self-employment taxes, and must be verifiable by adequate documentation maintained by the contracted provider.

(B) Unallowable compensation of owners and related parties.

(i) Forms of compensation that are not clearly enumerated as to dollar amount or that [ which ] represent profit or surplus revenue distributions are unallowable costs.

(ii) Compensation in the form of salaries, benefits, or any form of perquisite provided to owners, partners, officers, directors, stockholders, employees, or others who do not provide services directly to clients or who do not provide services required in the normal conduct of operations to provide contracted client services, is an unallowable cost. Services which would be required in the normal conduct of operations to provide contracted client services would include expenses such as administration of the program or supervision of direct care staff.

(C) Compensation for outside consultants and fees for services provided by outside vendors. Allowable compensation for outside consultants and contracted services must meet the criteria in §355.102 of this title [ (relating to General Principles of Allowable and Unallowable Costs) ]. Specific criteria for certain types of compensation of outside consultants and contracted services are as follows:

(i) Accounting and audit fees.

(I) Allowable accounting and audit fees. Fees for preparation of business tax reports and returns, financial statements, and cost reports are allowable costs. Audit fees associated with the performance of a financial audit are allowable costs.

(II) Unallowable accounting and audit fees. Expenses related to the preparation of personal tax returns are unallowable costs as are certain taxes. Refer to paragraph (9) of this subsection, concerning tax expense and credits. Audit fees associated with the performance of a single audit are unallowable costs. The cost attributable to a financial audit that was conducted along with a single audit is allowable if the cost of the financial audit can be identified separately from the cost attributable to the single audit. Accounting fees and related costs associated with litigation between a provider and a governmental entity are unallowable. Accounting costs associated with any other unallowable costs are also unallowable. Fees related to the preparation of annual reports, reports to stockholders or other interested parties, or for investment management are unallowable costs.

(ii) Legal fees. Legal retainers are not allowable in and of themselves, but rather must be documented as specified in §355.105(b)(2)(B)(viii) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ]. Legal costs associated with litigation between a provider and a governmental entity are unallowable. Legal costs associated with any other unallowable costs are also unallowable.

(D) Value of services of nonpaid workers. Since the contracted provider incurs no actual costs for nonpaid and/or volunteer workers, the value of the nonpaid work is not an element of cost; and the value of such nonpaid work is an unallowable cost.

(E) Boards of directors and trustees . Fees and expenses related to boards of directors and trustees are unallowable costs except for:

(i) Travel costs incurred by the contracted provider's board members or trustees to attend meetings of the contracted provider's board of directors or trustees are allowable costs in accordance with the travel guidelines as stated in paragraph (12)(B) of this subsection; and

(ii) Errors and omissions (liability) insurance for boards of directors or trustees are allowable costs.

(3) Management fees.

(A) Allowable management fees. Reasonable management fees paid to unrelated parties are allowable costs. Allowable management fees paid to related parties are the actual costs to the related party for the materials, supplies, and services provided directly to the individual contracted provider. Any related party compensation or owner compensation included in allowable management fees paid to related parties must follow the guidelines specified in §355.102(i) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ] and in paragraph (2) of this subsection, concerning compensation of owners and related parties. Expenses for management provided by the contracted provider's central office must be reported as central office costs on the cost report. Cash management fees related to minimizing interest costs and banking expenses in the management of operating revenue necessary for contracted services are allowable costs.

(B) Unallowable management fees. Fees for management of personal investments or investments not necessary for the provision of contracted services are unallowable costs.

(4) Central office costs. A chain organization consists of a group of two or more contracted entities which are owned, leased or controlled through any other arrangement by one organization. A chain may also include business organizations which are engaged in other activities and which are not contracted program entities. Central offices of a chain organization vary in the services furnished to the components in the chain. The relationship of the central office to an entity providing contracted services is that of a related party organization to a contracted provider. Central offices usually furnish central management and administrative services such as central accounting, purchasing, personnel services, management direction and control, and other necessary services. To the extent the central office furnishes services related directly or indirectly to contracted client care, the reasonable costs of such services are allowable. Allowable central office costs include costs directly related to those services necessary for the provision of client care for contracted services in Texas and an appropriate share of allowable indirect costs. Where functions of the central office have no direct or indirect bearing on delivering contracted client care, the cost for those functions are not allowable costs. Costs which are unallowable to the contracted provider are also unallowable as central office costs. Where a contracted provider is furnished services, facilities, leases, or supplies from its central office, the costs allowed are subject to the guidelines of related party transactions in §355.102(i) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ]. Owner-employees and related parties receiving compensation for services provided through the central office are allowable to the extent provided in paragraph (2)(A) and (B) of this subsection, concerning compensation of owners and related parties.

(5) Utilities. To be allowable, the utilities must be used directly or indirectly in the provision of contracted services.

(6) Repairs and maintenance. For cost-reporting purposes, repairs and maintenance are categorized as ordinary or extraordinary (major) repairs and should be handled as follows.

(A) Ordinary repairs and maintenance are defined as outlays for parts, labor, and related supplies that [ which ] are necessary to keep the asset in operating condition, but neither add materially to the use value of the asset nor prolong its life appreciably. Ordinary repairs are recurring and usually involve relatively small expenditures. Ordinary repairs include, but are not limited to, painting, wall papering, copy machine repair, repairing an electrical circuit, or replacing spark plugs. Because maintenance costs and ordinary repairs are similar, they are usually combined for accounting purposes. Ordinary repairs may be expensed.

(B) Extraordinary repairs (major repairs) involve relatively large expenditures, are not normally recurring in nature, and usually increase the use value (efficiency and use utility) or the service life of the asset beyond what it was before the repair. Extraordinary repairs costing $1,000 or more, with a useful life in excess of one year, should be capitalized and depreciated. The cost of the extraordinary repair should be added to the cost of the asset and depreciated over the remaining useful life of the original asset. If the life of the asset has been extended due to the repair, the useful life should be adjusted accordingly. Extraordinary repairs include, but are not limited to, major vehicle overhauls, major improvements in a building's electrical system, carpeting an entire building, replacement of a roof, or strengthening the foundation of a building.

(7) Depreciation and amortization expense. For DHS contracted providers: for purchases made after the beginning of the contracted provider's fiscal year 1997, an asset valued at $1,000 or more and with an estimated useful life of more than one year at the time of purchase must be depreciated or amortized, using the straight line method. In determining whether to expense or depreciate a purchased item, a contracted provider may expense any single item costing less than $1,000 or having a useful life of one year or less. For purchases made after the beginning of the contracted provider's fiscal year 2004, an asset valued at $2,500 or more and with an estimated useful life of more than one year at the time of purchase must be depreciated or amortized, using the straight line method. In determining whether to expense or depreciate a purchased item, a contracted provider may expense any single item costing less than $2,500 or having a useful life of one year or less. For TDMHMR contracted providers: for purchases made after the beginning of the contracted provider's fiscal year 1997, an asset valued at $2,500 or more and with an estimated useful life of more than one year at the time of purchase must be depreciated or amortized, using the straight line method. In determining whether to expense or depreciate a purchased item, a contracted provider may expense any single item costing less than $2,500 or having a useful life of one year or less. Depreciation and amortization expenses for unallowable assets and costs are also unallowable, including amounts in excess of those resulting from the straight line method, capitalized lease expenses in excess of actual lease payments, and goodwill or any excess above the actual value of physical assets at the time of purchase. The minimum useful lives to be assigned to common classes of depreciable property are as follows:

(A) Buildings. A building's life must be reported as a minimum of 30 years, with a minimum salvage value of 10%. All buildings, excluding the value of the land, are uniformly depreciated on a 30-year life basis, regardless of the actual date of construction or original purchase. Exceptions to this policy are permissible when contracted providers choose a useful-life basis in excess of 30 years. An example of depreciation on a 30-year life basis is:

Figure: 1 TAC §355.103(b)(7)(A)

(B) Building equipment; buildings and grounds improvements and repairs; durable medical equipment, furniture, and appliances; and power equipment and tools used for buildings and grounds maintenance. Use minimum schedules consistent with "Estimated Useful Lives of Depreciable Hospital Assets," published by the American Hospital Association. Copies of this publication may be obtained by contacting American Hospital Publishing, Inc., 737 North Michigan Ave., Chicago, IL 60611 or at www.aha.org. Leasehold improvements whose estimated useful lives according to the guidelines for depreciable hospital assets are longer than the term of the lease must be depreciated and/or amortized over the life of the leasehold improvement. Building improvements which are not structural in nature and do not extend the depreciable life of the building, but whose estimated useful lives according to the guidelines for depreciable hospital assets are longer than the remaining depreciable life of the building, must be depreciated over the normal useful life of the building improvements. Once the estimated useful life of the leasehold improvement has been established using the guidelines above, subsequent extensions of the lease period do not change the useful life of the leasehold improvement. Any exceptions to this policy shall be stated in each program- specific reimbursement methodology rules.

(C) Transportation equipment used for the transport of clients, staff, or materials and supplies utilized by the contracted provider. Cost reporting must reflect a minimum of three years for automobiles (including minivans); five years for light trucks and vans (up to and including 15- passenger vans); and seven years for buses and airplanes. Depreciation expenses for transportation equipment not generally suited or not commonly used to transport clients, staff, or provider supplies are unallowable costs. This includes motor homes and recreational vehicles; sports automobiles; motorcycles; heavy trucks, tractors and equipment used in farming, ranching, and construction; and transportation equipment used for other activities unrelated to the provision of contracted client care, unless program-specific reimbursement methodology rules provide otherwise. Refer to §355.105(b)(2)(B)(iii) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ] for requirements for the maintenance of mileage logs and other documentation required to substantiate transportation equipment costs.

(i) Luxury automobiles are defined for cost-reporting purposes as passenger vehicles, including automobiles, light trucks, and vans (up to and including 15-passenger vans) and excluding buses, with an historical cost at time of purchase or a market value at execution of the lease exceeding $30,000 when purchased or leased before January 1, 1997. For vehicles leased or purchased on or after January 1, 1997, luxury vehicles are defined as a base value of $30,000 with 2.0% being added (using the compound method) to the base value each January 1 beginning on January 1, 1998. Any amount above the definition of a luxury vehicle stated above is an unallowable cost. When a passenger vehicle's cost exceeds the amount determined by the definition of a luxury vehicle stated above, the historical cost is reduced to the amount determined by the definition of a luxury vehicle. When a passenger vehicle's market value at the execution of the lease exceeds the amount determined by the definition of a luxury vehicle stated above, the allowable lease payment is limited to the lease amount for a vehicle with the base value as determined above, with substantiating documentation as specified in §355.105(b)(2)(B)(iv) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ]. Luxury vehicles must be depreciated according to depreciation guidelines in this paragraph. Expenses for passenger luxury vehicles will be allowable if the contracted provider maintains adequate mileage logs substantiating the use of the luxury vehicles to transport clients, contracted provider staff or provider supplies. Refer to §355.105(b)(2)(B)(iii) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ] for requirements for the maintenance of mileage logs. The base value does not include specialized equipment, such as wheelchair lifts, added to assist clients.

(ii) The estimated life of a previously owned (used) vehicle is the longer of the number of years remaining in the vehicle's depreciable life or three years. For example, if a 1994 van were purchased in 1995, it would have four years remaining in its five-year depreciable life and that would become the depreciable life for the used vehicle. If a 1994 minivan were purchased in 1995, it would have two years remaining in its three-year depreciable life and the depreciable life for the used vehicle would then be three years.

(iii) Specialized equipment added to a vehicle to assist a client should be depreciated separately from the vehicle. Wheelchair lifts have an estimated useful life of four years.

(D) Depreciation for the first reporting period. Depreciation for the first reporting period is based on the length of time from the date of acquisition to the end of the reporting period. Depreciation on disposal is based on the length of time from the beginning of the reporting period in which the asset was disposed to the date of disposal.

(E) Planning and evaluation expenses. Planning and evaluation expenses for the purchase of depreciable assets are allowable costs only where purchases are actually made and the assets are put into service in the provision of care by the provider for contracted services.

(F) Gains and losses. Gains and losses realized from the trade-in or exchange of depreciable assets are included in the determination of allowable cost. When an asset is acquired by trading-in an asset that was being depreciated, the historical cost of the new asset is the sum of the undepreciated cost of the asset traded-in plus any cash or other assets transferred or to be transferred to acquire the new asset. Losses resulting from the involuntary conversion of depreciable assets, such as condemnation, fire, theft, or other casualty, are includable as allowable costs in the year of involuntary conversion, provided the total aggregate allowable losses incurred in any cost-reporting period do not exceed $5,000 and provided the assets are replaced. If the total aggregate allowable losses in any cost-reporting period exceed $5,000, the total amount of the losses over $5,000 is recognized as a deferred charge and treated as follows:

(i) If a depreciable asset is destroyed by an involuntary conversion beyond repair, then the amount of the loss over $5,000 must be capitalized as a deferred charge over the estimated useful life of the asset which replaces it. The allowable loss for a total casualty is the undepreciated cost of the asset, less insurance proceeds, gifts, and grants from any source as a result of the involuntary conversion. If the unrepairable asset is disposed of by scrapping, income received from salvage is treated as a reduction in the amount of the allowable loss. Conversely, where additional expense is incurred in the scrapping operation, such cost would be added to the allowable loss of the destroyed asset.

(ii) If a depreciable asset is partially destroyed or damaged as a result of an involuntary conversion, a reduction in its cost basis is assumed to have taken place. Therefore, the cost basis of the asset must be reduced to reflect the amount of the casualty loss, regardless of whether the loss is covered by insurance.

(I) The amount of the casualty loss is the difference between the fair market value immediately before the casualty and the fair market value immediately after the casualty; however, for cost- reporting purposes, the allowable loss is limited to the percent of loss in fair market value applied to the net book value of the asset at the time the casualty occurred. This method of calculating the allowable loss recognizes the actual reduction in the cost value of the asset rather than the reduction in replacement value.

(II) Any loss over $5,000 must be capitalized as a deferred charge and amortized over the useful life of the restored asset.

(III) The fair market value generally can be ascertained by competent appraisal. If no appraisal is made, the cost of repairs to the damaged property is acceptable as evidence of the loss of value if the repairs restore the property to its condition immediately before the casualty and, as a result of the repairs, the value of the property has not been increased. The amount of the allowable loss is then deducted from the cost basis of the asset before the casualty, to arrive at the adjusted cost basis of the asset. Any insurance proceeds received or recoverable must be deducted from the amount of the casualty loss to determine the gain or the loss.

(IV) Actual costs incurred in the restoration of an asset are added to the adjusted cost basis of the asset to arrive at the revised cost of the restored asset and capitalized over the remaining useful life of the restored asset.

(V) When the repairs materially improve or add to the value or utility of the property or appreciably prolong its useful life, the repairs must be depreciated over the estimated life of the repairs.

(VI) When the contracted provider maintains a self-insurance reserve fund, the amount of the casualty loss recognized as an allowable cost is limited to the lesser of the decrease in fair market value, as adjusted, of the damaged or destroyed asset or the amount of cash, and/or investments, comprising the accumulated balance of the self-insurance reserve account.

(VII) When an asset is sold before the end of its useful life and a gain is realized (the sales price is greater than the remaining allowable depreciation), no additional depreciation or expense is allowed.

(8) Interest expense. Reasonable and necessary interest on current and capital indebtedness is an allowable cost. In the case of allowable interest incurred on a loan, in order to be determined necessary, the loan must have been made to satisfy a financial need for a purpose reasonably related to contracted client care.

(A) For cost-reporting purposes, allowable interest expenses are limited to that net portion of interest accrued which has not been reduced or offset by interest income. Refer to §355.104(5) of this title (relating to Revenues). To be allowable, the following requirements must be met:

(i) the [ The ] loan must be supported by evidence in writing of an agreement that funds were borrowed and that payment of interest and repayment of the funds are required and systematically made. Refer to §355.105(b)(2)(B)(ii) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ];

(ii) the [ The ] loan must be made in the name of the contracted provider entity as maker or comaker of the note; and

(iii) the [ The ] proceeds of the note or loan must be used for allowable costs.

(B) Interest expense on a demand note is allowable if the loan is the result of an arm's-length transaction.

(C) Where the lender is a related party, allowable interest is limited to the prevailing national average prime interest rate in effect at the time at which the loan contract was finalized, as reported by the United States Department of Commerce, Bureau of Economic Analysis, in the Survey of Current Business.

(D) Interest costs incurred during the period of construction or enlarging of a building must be capitalized as part of the cost of the building.

(E) Reasonable finance charges and service charges, together with interest on indebtedness, are allowable costs.

(F) Other fees associated with obtaining an allowable loan, such as broker's fees to solicit financing, lender's fees, attorney's fees, and due diligence fees, are allowable costs.

(G) Interest expenses on funds borrowed for purposes of investing in operations other than contracted services, on loans pertaining to unallowable items, and on borrowed funds creating excess working capital are unallowable costs.

(9) Tax expense and credits.

(A) Generally, taxes assessed against the contracted provider, in accordance with the levying enactments of Texas and lower levels of government and for which the contracted provider is liable for payment, are allowable costs. Tax expense based on fines and penalties are unallowable costs.

(B) Employment-related taxes such as Federal Insurance Contribution Act (FICA), Workers' Compensation and Unemployment Compensation, are allowable costs. Refer to paragraph (1) and (1)(A) of this subsection.

(C) Franchise taxes are allowable costs. A franchise tax is a periodic assessment, as defined by the Texas Comptroller of Public Accounts and paid to the Texas State Treasurer, levied on the operation of a business in the State of Texas. Franchise taxes do not refer to franchise fees, which are the costs associated with a company's granting the right to sell its products or services in a specified territory.

(D) Unallowable taxes include:

(i) federal income taxes and excess profit or surplus revenue based taxes, including any interest or penalties paid thereon. However, fees for preparation of business tax reports and business returns required by law are allowable ; [ . ]

(ii) state or local income and excess profit or surplus revenue based taxes. However, fees for preparation of business tax reports and/or business returns are allowable ; [ . ]

(iii) taxes in connection with financing, refinancing, or refunding operations, such as taxes on the issuance of bonds, property transfers, issuance or transfer of stocks ; [ . ] Generally, these costs are either amortized over the life of the securities or depreciated over the life of the asset. They are, however, unallowable as tax expense ; [ . ]

(iv) taxes from which exemptions are available to the contracted provider ; [ . ]

(v) special assessments on land which represent capital improvements should be capitalized and depreciated over their estimated useful lives and are not allowable as tax expenses ; [ . ]

(vi) taxes, such as sales taxes, levied against the client and collected and remitted by the contracted provider ; and [ . ]

(vii) self-employment taxes.

(10) Insurance expense. This section covers the following types of insurance: property damage and destruction; fire and casualty; malpractice and comprehensive general liability; errors and omissions insurance covering boards of directors; theft insurance (fidelity bonds and burglary insurance); workers' compensation; transportation equipment insurance; life insurance for owners, officers, and key employees; health; disability; and unemployment compensation.

(A) Purchased and commercial insurance. The reasonable costs of insurance purchased from a commercial carrier or a nonprofit service corporation are allowable if resulting from an arm's- length transaction. The commercial carrier or nonprofit service corporation must meet the standards as set by the Texas Department of Insurance. Costs of insurance purchased from a limited purpose insurer are allowable if they are not in excess of the cost of available comparable commercial insurance premiums and meet the reasonable cost provisions. If comparable insurance premiums are not available, the limited purpose insurer or captive insurance company must obtain an evaluation of the adequacy and reasonableness of its insurance premium by an independent actuary, commercial insurance company, or broker.

(B) Self-insurance [ Self-Insurance ]. Self-insurance is a means whereby a contracted provider undertakes the risk to protect itself against anticipated liabilities by providing funds in an amount equivalent to liquidate those liabilities. Self-insurance can also be described as being uninsured. To qualify as an allowable self-insurance plan, a contracted provider must enter into an agreement with an unrelated party that does not provide for the shifting of risk to the unrelated party designed to provide only administrative services to liquidate those liabilities and manage risks. Self-insurance costs for contracted providers who have received certificates of authority to self-insure from the Texas Workers' Compensation Commission are allowable costs. Self-insurance costs in excess of costs for similar, comparable coverage by purchased and/or commercial insurance premiums are subject to a cost ceiling in accordance with subparagraph (E)(i)-(iv) of this paragraph. Documentation substantiating the cost of comparable coverage by purchased and/or commercial insurance premiums must be obtained and maintained as specified in §355.105(b)(2)(B)(ix) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ].

(i) Costs related to self-insurance are allowable on a claims-paid basis. Contributions to the self-insurance fund or reserve which do not represent payments based on current liabilities are not considered actual incurred expenses and are not allowable costs. For cost-reporting purposes, self-insurance costs are reported on a cash basis. For cost-reporting purposes, compensation paid to employees who have been injured on the job is allowable and should be reported as compensation according to the type of compensation expense incurred in accordance with paragraphs (1) and (2) of this subsection.

(ii) For cost-reporting purposes, allowable employee-related paid claims, such as health insurance and workers' compensation costs, may either be directly charged to the business component in which the employee worked or may be allocated across all business components as an administrative expense. The method chosen to report these costs must remain consistent each year. Changes in the method for reporting those costs must be approved in accordance with §355.102(j) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ].

(C) Determining self-insurance or purchased commercial insurance. There may be situations in which there is a fine line between self-insurance and purchased or commercial insurance. This is particularly true of "cost-plus" type arrangements. As long as there is at least some shifting of risk to the unrelated party, even if limited to situations such as provider bankruptcy or employee termination, the arrangement will not be considered self-insurance. Contributions to a special risk management fund or pool that [ which ] is operated by a third party that [ which ] assumes some of the risk and that [ which ] has an annual actuarial review are allowable costs. Examples of such special risk management funds and pools include the Texas Council Risk Management Fund and the Texas Municipal League Intergovernmental Risk Pool.

(D) Reporting of insurance costs. All allowable insurance premium costs should be reported on cost reports, with amounts accrued for premiums, modifiers, and surcharges during the cost- reporting period being adjusted by any refunds and discounts actually received or settlements paid during the same cost-reporting period.

(E) Losses in excess of coverage. When a contracted provider is not fully insured by a purchased commercial insurance policy, i.e., the provider's coverage includes coinsurance provisions and/or deductibles, the amount of allowable insurance costs reported for each cost- reporting period is subject to a cost ceiling.

(i) The cost ceiling for employee-related insurance, such as health insurance, or workers' compensation coverage, is either the amount that would have been incurred had the provider purchased full coverage for its entire business entity through a commercial insurance policy or an amount equal to 10% of the payroll for employees eligible for such coverage. This cost ceiling is applied separately to employee-related insurance and to workers' compensation coverage.

(ii) The cost ceiling for non-employee-related insurance, such as malpractice insurance, comprehensive general liability insurance, or property insurance, is the amount that would have been incurred had the provider purchased full coverage for its entire business entity through a commercial insurance policy.

(iii) If, during a cost-reporting period, a provider incurs allowable paid claims in excess of the applicable cost ceiling, the provider reports on its current cost report allowable insurance costs up to the amount of the applicable cost ceiling, with the allowable costs in excess of the applicable cost ceiling being carried forward to future cost-reporting periods. When, during a future cost-reporting period, a provider incurs allowable insurance costs in an amount less than the applicable cost ceiling, the provider reports on its cost report the allowable insurance costs (paid claims) incurred during that cost-reporting period plus any allowable carry forward amount up to the amount of the applicable cost ceiling, with any excess carry forward being carried forward to future cost reporting periods.

(iv) Documentation requirements are stated in §355.105(b)(2)(B)(ix) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ].

(F) Absence of coverage. Where a contracted provider, other than a governmental provider, has no insurance protection, the reporting of the provider's paid claims must follow the guidelines stated in paragraph (10)(E) of this subsection. For governmental providers, allowable paid claims for cost-reporting purposes include all claims paid during the cost-reporting period only if the provider demonstrates that it has a claims management and risk management program.

(G) Life insurance costs.

(i) In general, premiums related to insurance on the lives of owners, officers, and key employees where the contracted provider is a direct or indirect beneficiary are unallowable costs.

(ii) Life insurance costs are allowable if:

(I) a contracted provider is required by a lending institution or other lender to purchase such insurance to guarantee the outstanding loan balance;

(II) the lending institution or other lender must be designated as the beneficiary of the insurance policy; and

(III) upon the death of the insured, the proceeds are restricted to paying off the balance of the loan.

(iii) Allowable insurance premiums are limited to premiums equivalent to that of a decreasing term life insurance policy needed to pay off the outstanding loan balance or that portion of the premium which can be equated to the premium for a similar face amount of a decreasing term life policy. In addition, the loan must be reasonable and necessary and must meet the criteria for allowable loans and interest expense as stated in subsection (b)(8) of this section [ §355.103(b)(8) of this title (relating to Specifications for Allowable and Unallowable Costs) ].

(iv) Provider-paid premiums related to insurance on the lives of owners-employees, officers, and key employees where the individual's relatives or his estate are the beneficiary are considered to be employee benefits to the individual and are allowable costs to the extent such employee benefits are allowable. Provider-paid premiums related to insurance on the lives of owners-employees, officers, and key employees where required by a financial institution and the financial institution is the beneficiary is allowable.

(H) Insurance costs pertaining to unallowable costs. Insurance costs pertaining to items of unallowable costs are themselves unallowable costs.

(I) Board of directors' or trustees insurance. Errors and omissions insurance (liability) on members of boards of directors or trustees is an allowable cost.

(11) Dues or contributions to organizations.

(A) Allowable dues and contributions to organizations. Costs are allowable for membership in professional associations directly and primarily concerned with the provision of services for which the provider is contracted. Allowable costs of memberships in such organizations include initiation fees, dues, and subscriptions to related professional periodicals. Allowable costs related to meetings and conferences whose primary purpose is to disseminate information for the advancement of contracted client care or the efficient operation of the contracted program include reasonable travel costs in accordance with paragraph (12)(B) of this subsection and reasonable registration fees and other costs incidental to those functions. Travel costs incurred by members of the board of directors of professional associations that [ which ] are directly and primarily concerned with the provision of services for which the provider has contracted are allowable in accordance with paragraph (12)(B) of this subsection. Dues or licensing fees related to maintaining the professional accreditation or license of an employee are allowable to the extent that the professional accreditation or license is directly related to and necessary for the performance of that employee's functions.

(B) Unallowable dues and contributions to organizations. Dues to nonprofessional organizations are unallowable. Assessments whose purpose is to fund lawsuits or any legal action against the state or federal government are unallowable. Portions of dues based on revenue or for the purposes of lobbying, or campaign contributions are unallowable costs. Costs of membership in civic organizations whose primary purpose is the promotion and implementation of civic objectives are unallowable. Dues or contributions made to any type of political, social, fraternal, or charitable organization are unallowable. Chamber of Commerce dues are unallowable. Franchise fees are not considered dues or contributions to organizations.

(C) Dues to purchasing organizations or buying clubs. Allowable dues to purchasing organizations or buying clubs are limited to the pro-rata amount representing purchases made for use in providing contracted services.

(12) Training and travel costs.

(A) Staff training costs.

(i) Staff training costs refer to costs associated with educational activities for provider staff. To qualify as an allowable staff training cost, the training must:

(I) have a direct relationship with the employee's job responsibilities, thereby increasing the quality of contracted client care or the efficient operation of the contracted provider. Management training, if it is designed to enhance quality or improve administration and is relevant to the contracted service, is an allowable cost. The following apply to staff training costs.

(-a-) Non-related party staff. Costs of tuition, books, and related fees for courses required to complete the designated degree or certification are allowable. The degree or certification must be necessary to the provision of contracted client services of the contracted provider. An example would be any course required to be taken by a licensed vocational nurse (LVN) working toward a degree as a registered nurse (RN) where RN services are necessary to deliver services as required under the contract.

(-b-) Related party staff. Allowable costs are restricted to specific courses which have a direct relationship with the employee's job responsibilities. Examples of allowable staff training costs include tuition, books, and related fees for an accounting course for a bookkeeper and a management course for a supervisor. However, a history course for a bookkeeper, even though it may be a requirement for a college degree in accounting or business, is unallowable.

(II) be located within the state of Texas unless the purpose of the training is for staff training in contracted client care-related services or quality assurance which is not available in the state of Texas. All costs for training outside the continental United States are unallowable costs. For further guidelines regarding adequate documentation, refer to §355.105(b)(2)(B)(vi) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ].

(ii) Staff training may be conducted within the provider setting or off-site. It may be operated by the contracted provider, provided by an accredited academic or technical institution, or conducted by a recognized professional organization for the particular training activity. Workshops on particular contracted client services, health applications, on-the-job safety, data processing, accounting, the Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] programmatic or cost related training, supervisory techniques, and other administrative activities are examples of allowable types of training. Costs of orientation, on-the-job training, and in-service [ inservice ] training are recognized as normal operating costs and are allowable training costs.

(iii) For staff training conducted within the provider setting, allowable training costs include, but are not limited to, instructor and consultant fees, training supplies, and visual aids. For off-site training, allowable costs include costs such as allowable travel costs, registration fees, seminar supplies, and classroom costs. For additional guidelines regarding allowable travel costs, please refer to paragraph (12)(B) of this subsection.

(iv) Staff training costs must be reported as net costs, having been offset by any reimbursement from grants, tuitions, or donations received for staff educational purposes.

(v) For information regarding nursing facility nurse aide training, refer to paragraph (17)(K) of this subsection and program-specific reimbursement methodology rules.

(vi) For guidelines on allowability for client prevocational, vocational, and educational costs, refer to program-specific reimbursement methodology rules for guidelines on allowability.

(B) Travel costs.

(i) Maximum allowable travel costs for allowable activities are as follows:

(I) 150% of the limits established by the Texas Legislature for non-exempt state employees, with respect to hotel costs and per diem rates ; and [ . ]

(II) the maximum allowable mileage reimbursement amount set by the Texas Legislature for non-exempt state employees.

(ii) Out-of-state travel costs are unallowable, unless the purpose of the travel is for staff training in contracted client-care-related services or in quality assurance which is not available in the state of Texas; the purpose of delivering direct contracted client services within 25 miles of the Texas border with adjoining states or Mexico; or the purpose for the travel is to conduct business related to contracted client services in Texas and the travel is between Texas and the contracted provider's central office. All costs for travel outside the continental United States are unallowable costs, with the singular exception of travel required for the delivery of direct contracted client services within 25 miles of the Texas-Mexico border.

(iii) Expenses for private aircraft are allowable only if:

(I) written documentation supporting the calculations for expenses for private aircraft and commercial alternatives, and flight logs are maintained as specified in §355.105(b)(2)(B)(iii) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ]; and

(II) the documentation demonstrates that the expenses for travel via private aircraft were not greater than those for commercial alternatives at the time the travel took place. If the expenses for private aircraft were greater than the documented costs for commercial alternatives at the time the travel took place, allowable private aircraft costs are limited to the documented costs for commercial alternatives.

(13) Advertising and public relations.

(A) Allowable advertising and public relations include: [ . ]

(i) costs [ Costs ] of advertising to meet statutory or regulatory requirements, such as program standards, rules, or contract requirements, are allowable costs ; [ . ]

(ii) informational [ Informational ] listings of contracted providers in a telephone directory, including yellow page listings up to one-eighth of a page per telephone directory in the provider's service area or in a directory of similar facilities in a given area are allowable if the listings are consistent with practices that are common and accepted in the industry ; [ . ]

(iii) costs [ Costs ] of advertising for the purpose of recruiting necessary personnel are allowable costs. Refer to the definition of necessary in §355.102 (f)(2) of this title ; [ (relating to General Principles of Allowable and Unallowable Costs). ]

(iv) costs [ Costs ] of advertising for procurement of items related to contracted client care, and for sale or disposition of surplus or scrap material are treated as adjustments of the purchase or selling price ; and [ . ]

(v) costs [ Costs ] of advertising incurred in connection with obtaining bids for construction or renovation of the contracted provider's facilities should be included in the capitalized cost of the asset. Refer to paragraph (7) of this subsection.

(B) Unallowable advertising and public relations include:

(i) costs [ Costs ] of advertising of a general nature designed to invite physicians to utilize a contracted provider's facilities in their capacity as independent practitioners;

(ii) costs [ Costs ] of advertising incurred in connection with the issuance of a contracted provider's own stock, or the sale of stock held by the contracted provider in another corporation considered as reductions in the proceeds from the sale;

(iii) costs [ Costs ] of advertising to the general public which seeks to increase client utilization of the contracted provider's facilities;

(iv) public [ Public ] relations costs;

(v) any [ Any ] business promotional advertising; and

(vi) costs [ Costs ] of the development of logos or other company identification.

(14) Promotional and fundraising activities. Promotional refers to any activity whose intent is to advertise or aid in the development of the business. Expenses relating to fundraising and promotional activities are unallowable, including salaries, benefits, and payroll taxes for staff performing these activities. If a staff member performs these activities along with allowable activities, a portion of that staff member's salary must be allocated to these unallowable activities and as such not be reported on the cost report. Other expenses associated with these activities are also unallowable, including advertising, publicity, travel, and meals.

(15) Grants, gifts, and income from endowments and operating revenue.

(A) Restricted grants, gifts, and income from endowments from private sources used to purchase allowable program costs should not be deducted and offset from allowable costs prior to reporting on the cost report.

(B) Grants and contracts from federal, state or local government, such as transportation grants, United States Department of Agriculture grants, education grants, Housing and Urban Development grants, and Community Service Block Grants, should be offset, prior to reporting on the cost report, against the particular cost or group of costs for which the grant was intended. If federal funds are paid for the care of a specified client, those federal funds should not be offset prior to reporting on the cost report, unless otherwise specified in the program- specific reimbursement methodology rules.

(C) Unrestricted grants, gifts, and income from endowments from private sources used to purchase allowable program items should not be offset by the contracted provider prior to reporting on the cost report. All unrestricted funds which are properly allocable to the cost report should be reported on a contracted provider's cost report, as well as any allowable costs to which the unrestricted funds were applied.

(D) Nonroutine revenues such as income from operations not associated with providing contracted services, including, but not limited to, beauty and barber shops, vending machines, gift shops, canteen stores, and meals sold to employees or guests should be offset or reduced by the related expenses prior to reporting the revenue on the cost report. Expenses related to providing these types of non-contracted operations are unallowable costs. If nonroutine operating expenses, including overhead costs incurred to generate nonroutine operating revenue, exceed nonroutine operating revenues, the net nonroutine operating expenses are unallowable costs. Routine operating revenue received as payments for the contracted services, such as income from private clients, private room and board, or other sources of routine contracted services are not to be offset. Refer to §355.102(k) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ] for further guidelines on reporting net expenses.

(16) In-kind donations.

(A) Allowable in-kind donations.

(i) Depreciation of in-kind donations is limited to donated buildings and donated vehicles used in the direct provision of contracted client services, where title has been transferred to the provider entity by a third party in an arm's-length transaction. Depreciation must be reported in accordance with subsection (b)(7) of this section [ §355.103(b)(7) of this title (relating to Specifications for Allowable and Unallowable Costs) ]. The historical cost basis used to depreciate vehicles must be consistent with the retail price of the National Automobile Dealers Association (NADA) listings; or, in the case of a new vehicle, the documented historical cost to the donor or NADA may be used. The historical cost basis used to depreciate donated buildings must be the lower of:

(I) the most recent tax appraisal of the building prior to donation, unless the donor was exempt from tax appraisal, in which case an independent appraisal made by a third-party appraiser at the time of donation may be used in place of the tax appraisal (for donations made prior to the provider's 1997 fiscal year, a current appraisal from an independent third-party appraiser may be used to establish the historical cost); or

(II) the documented historical cost to the donor.

(ii) Expenses actually incurred to maintain a donated asset for use in providing contracted client care [ to DHS ] clients are allowable.

(iii) If a provider receives a donation of the use of space owned by another organization and if the provider and the donor organization are both part of a larger organizational entity (such as units of a state or county government), the space is not considered a related-party donation, but rather treated as allowable costs requiring allocation between the provider and the other organization. For example, if a county home health agency is given space to use in the county office building, costs associated with the use of the space (such as depreciation, janitorial services, maintenance, and repairs) must be allocated from the county to the county home health agency. Allocation of costs must be in compliance with §355.102(j) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ].

(B) Unallowable in-kind donations. The value of unallowable in-kind donations may be collected for specific programs at the discretion of HHSC [ DHS ] for statistical purposes only, on a schedule separately identified for such purpose. The value of in-kind donations to a contracted provider, such as produce, supplies, materials, services, equipment, or other items used by the contracted provider which the contracted provider did not purchase, is an unallowable cost. The value of in-kind donations of buildings or vehicles when the title is not transferred to the provider is an unallowable cost. The value of in-kind donations to a contracted provider which are not arm's-length transactions are unallowable costs. The contracted provider may not treat as an allowable cost the imputed value for unallowable in-kind donations.

(17) Miscellaneous costs.

(A) Employee relations expenses. Costs relating to employee relations are different from fringe benefits, as specified in paragraph (1)(A)(iii) of this subsection, in that employee relations expenses incurred are for employees as a group rather than as a fringe benefit for an individual employee. Examples of allowable employee relations costs, which are reported as administrative costs for cost-reporting purposes, include a staff party, an employee outing, or other such staff expenses intended to boost employee morale and in turn increase the efficiency and quality of care provided. Other examples of allowable employee relations expenses are plaques or awards presented to employees for certain achievements or honors. Employee relations cost which discriminates in favor of certain employees, such as employees who are officers, stockholders, related parties, or the highest paid individual(s) in the organization are unallowable. Employee relations costs are limited to a ceiling of $50 per employee eligible to participate per year. If a staff party includes nonemployees, an allocation must be made such that only the portion of costs relating to employees and their families in attendance is reported on the cost report. If a staff party also serves as an open house for promotional purposes, an allocation of costs must be made so that only costs relating to employees and their families in attendance are reported as allowable costs. Entertainment expenses other than those for the benefit of current clients or those for staff employee relations described above are unallowable costs.

(B) Organization costs. Organization costs are those costs directly incident to the creation of a corporation or other form of business necessary to provide contracted services. These costs are intangible assets in that they represent expenditures for rights and privileges which have a value to the business enterprise.

(i) Allowable organization costs include, but are not limited to, legal fees incurred (such as drafting documents) in establishing the corporation or other organization, necessary accounting fees, and fees paid to states for incorporation. Allowable organization costs must be amortized over a period of not less than 60 consecutive months, beginning with the first month in which services are delivered to the first client.

(ii) The following types of costs are considered unallowable organization costs: costs relating to the issuance and sale of shares of capital stock or other securities, reorganization costs, and stockholder servicing costs. If the business or corporation never commences actual operations, the organization costs are unallowable.

(C) Franchise fees.

(i) Allowable franchise fees. Allowable franchise fees include those costs related to actual goods, supplies, and services received in return for fees paid to a company for the right to sell its goods and/or services in a specific territory.

(ii) Unallowable franchise fees. Franchise fees based upon percentages of revenues and/or sales are unallowable costs. Franchise fees based upon goodwill are unallowable, with goodwill being that intangible, salable asset arising from the reputation of a business and its relationship with its customers.

(D) Startup costs. Startup costs are those reasonable and necessary preparation costs incurred by a provider in the period of developing the provider's ability to deliver services. Startup costs can be incurred prior to the beginning of a newly-formed business and/or prior to the beginning of a new contract or program for an existing business. Allowable startup costs include, but are not limited to, employee salaries, utilities, rent, insurance, employee training costs, and any other allowable costs incident to the startup period. Startup costs do not include capital purchases, which are purchased assets meeting the criteria for depreciation in paragraph (7) of this subsection. Any costs that are properly identifiable as organization costs or capitalizable as construction costs must be appropriately classified as such and excluded from startup costs. Allowable startup costs should be amortized over a period of not less than 60 consecutive months. If the business or corporation never commences actual operations or if the new contract/program never delivers services, the startup costs are unallowable.

(i) For a newly-formed business, startup costs should be accumulated up to the time the business begins (that is, when services are delivered to the first client/customer). Amortization of startup costs for a newly-formed business begins the month the business begins. In the event that a newly-formed business is established for the direct purpose of contracting with the state [ State ] for delivery of client care services, startup costs should be accumulated up to the time the contract is effective or the time the first client receives services, whichever comes first, with amortization of startup costs beginning the same month.

(ii) For a new contract or program implemented by an existing business, startup costs are related only to the development of the provider's ability to furnish services according to the standards of the new contract/program and should be accumulated up to the time the first client receives services according to the contract/program standards or the effective date of the contract, whichever occurs first. Amortization of startup costs for a new contract/program implemented by an existing business begins the month in which the first client receives services according to contract/program standards or the effective date of the contract, whichever occurs first. If a contracted provider intends to prepare all portions of its entire program at the same time, startup costs for all portions of the program should be accumulated in a single account and should be amortized beginning either when the first client is admitted or the effective date of the contract, whichever occurs first. However, if a contracted provider intends to prepare portions of its program on a piecemeal basis, startup costs should be capitalized and amortized separately for the portion(s) of the provider's program prepared during different time periods. For example, a newly-formed corporation opens a senior citizen center for private clients, serving its first client on April 4, 1995. Startup costs would be those costs incurred prior to April 4, 1995, which meet the above definition of startup costs. Amortization of the startup costs for this newly-formed business would begin April 1995. If this same corporation received a contract [ with DHS ] to provide Day Activity and Health Services (DAHS) effective October 1, 1995 and if the corporation served its first DAHS client on November 5, 1995, startup costs would be those costs incurred to be able to deliver services according to DAHS program standards. If the corporation was in compliance with the DAHS standards from its beginning (April 1995), no new startup costs would be allowable for amortization as a result of the implementation of the new DAHS contract by the existing corporation. On the other hand, if the corporation was required to incur additional costs to bring the operation up to the DAHS program standards, those startup costs incurred prior to October 1, 1995 (since the contract effective date occurred prior to serving the first DAHS client) would be amortized beginning with October 1995.

(E) Research and development costs. Research and development costs, including, but not limited to, telephone costs, travel costs, attorney fees, and staff salaries, must be segregated into separate, individual accounts for each venture in the contracted provider's general ledger. Should such a "venture" result in a contract for a program, the allowable research and development costs would be incorporated as startup costs for that program. Research and development costs related to states other than Texas are not allowable costs for any allocation to any contracted program.

(F) Medical supplies and medical costs. In general, medical supplies and equipment required by the Occupational Safety and Health Administration (OSHA), used for universal health and safety precautions, or otherwise required to meet contracted program requirements are allowable costs. Refer to program-specific reimbursement methodology rules to determine program requirements for medical supplies and medical costs.

(G) Fines and penalties. Fines and penalties for violations of regulations, statutes, and ordinances of all types are unallowable costs. Penalties or charges for late payment of taxes, utilities, mortgages, loans or insufficient banking funds are unallowable costs.

(H) Business expenses not directly related to contracted services. Business expenses not directly related to contracted services, including business investment activities, stockholder and public relations activities, and farm and ranch operations (unless farm and ranch operations are specifically allowed by the contracted program as necessary to the provision of client care), are unallowable costs.

(I) Litigation expenses and awards. Unless explicitly allowed elsewhere in this chapter, no court- ordered award of damages or settlements made in lieu thereof or legal fees associated with litigation which resulted in any court-ordered award of damages or settlements made in lieu thereof, or a criminal conviction, are allowable.

(J) Lobbying costs. Lobbying costs are unallowable.

(i) Lobbying means the influencing or attempting to influence an officer or employee of any governmental agency, an officer or employee of Congress or the state legislature [ State Legislature ], or an employee of a member [ Member ] of Congress or the state legislature [ State Legislature ] in connection with any of the following actions:

(I) the awarding of any governmental contract;

(II) the making of any governmental grant;

(III) the making of any governmental loan;

(IV) the entering of any cooperative agreement; and

(V) the extension, continuation, renewal, amendment, or modification of any governmental contract, grant, loan or cooperative agreement.

(ii) Costs associated with the following activities are unallowable as lobbying costs:

(I) attempting to influence the outcomes of any governmental election, referendum, initiative, or similar procedure, through in-kind or cash contributions, endorsements, publicity, or similar activity;

(II) establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections;

(III) attempting to influence the introduction of governmental legislation, the enactment or modification of any pending governmental legislation through communication with any member or employee of the Congress or state legislature [ State Legislature ] (including efforts to influence state or local officials to engage in similar lobbying activity) or any governmental official or employee in connection with a decision to sign or veto enrolled legislation;

(IV) attempting to influence the introduction of governmental legislation, or the enactment or modification of any pending governmental legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public, or any segment thereof, to contribute to or participate in any mass demonstration, march, rally, fund raising drive, lobbying campaign or letter writing or telephone campaign; and

(V) performing legislative liaison activities, including attendance at legislative sessions or committee hearings, gathering information regarding legislation, and analyzing the effect of legislation, when such activities are carried on in support of or in knowing preparation for an effort to engage in unallowable lobbying.

(iii) The cost to contracted providers or their staff to attend meetings with the staff of state agencies or to attend public hearings or advisory committee meetings held by state agencies that [ which ] are involved in the regulation of contracted client care in the program with which they are contracting and which meetings do not meet the definition of lobbying stated above, are not considered lobbying and are therefore allowable costs.

(iv) Expenses relating to lobbying are unallowable including salaries, benefits, and payroll taxes for staff performing these activities. If a staff member performs these activities along with allowable activities, a portion of that staff member's salary must be allocated to the unallowable activities and as such not be reported on the cost report.

(K) Direct reimbursements. Unless specifically exempted through program-specific reimbursement methodology rules, HHSC [ department ] procedures or cost report instructions, any expenses directly reimbursable to the contracted provider that [ which ] are considered outside the reimbursement payment system are unallowable costs. Such expenses include but are not limited to those associated with Medicare Part A and B ancillary services, HHSC [ department ] voucher payment systems and vendor drug coverage. For guidelines on allowability of reporting costs in excess of those reimbursable directly through a voucher payment system, refer to program-specific reimbursement methodology rules.

(L) Losses resulting from theft or embezzlement. Losses resulting from theft or embezzlement of property or funds of the contracted provider or clients by the owners or employees of the contracted provider are not allowable costs.

(M) A bad debt. A bad debt allowance is a reduction in revenue resulting from unrecoverable revenue in uncollectible accounts created or acquired in the provision of contracted client care. Bad debt as an expense is unallowable.

(N) A charity or courtesy allowance. A charity allowance is a reduction in normal charges due to the indigence of the client or resident. A courtesy allowance is a reduction in charges granted as a courtesy to certain individuals, such as physicians or clergy. These allowances themselves are not costs since the costs of the services rendered are already included in the contracted provider's costs.

(18) Medicaid as payor of last resort. Medicaid is the payor of last resort. If a recipient has Medicare Part A or B benefits, other third party payor benefits, or any other benefits available those benefits must be accessed before Medicaid.

§355.104.Revenues.

A provider must report in the format specified by the Texas Health and Human Services Commission (HHSC) revenues that reflect the activity of the provider and that are directly related to the provision of contracted client care or services. A provider may not report revenues from other programs or activities in which the contracted provider may be engaged.

(1) Revenues should be reported net of charity allowances and courtesy allowances, and bad debt expense.

(2) Any revenues received directly by the provider through a voucher or from other direct payment systems as described in §355.103(b)(17)(K) of this title (relating to Specifications for Allowable and Unallowable Costs) must not be reported on the cost report unless specifically requested by the program-specific reimbursement methodology rules, HHSC [ department ] procedures, or cost report instructions.

(3) For guidelines in reporting revenue received as a federal grant, refer to §355.103(b)(15) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ] and to program- specific reimbursement methodology rules.

(4) For guidelines in offsetting revenues against certain expenses, refer to §355.103(b)(15)(D) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ].

(5) For reporting interest income:

(A) report as interest income, with no offset to interest expense, any interest earned on funded depreciation accounts, qualified pension funds, and debt service reserve funds required by non- related party lenders ; and [ . ]

(B) report as interest income, interest earned from all other sources, after first netting this income against interest expenses in the following sequence:

(i) interest incurred on working capital loans; and

(ii) interest incurred on all other loans except mortgage loans. Mortgage loans are not to be offset.

§355.105.General Reporting and Documentation Requirements, Methods, and Procedures.

(a) General reporting. Except where otherwise specified under this title, the Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] follows the requirements, methods, and procedures set forth in subsections (b)-(h) [ (b)-(g) ] of this section to determine costs appropriate for use in the reimbursement determination process.

(b) Cost report requirements. Unless specifically stated in program rules, each provider must submit financial and statistical information on cost report forms provided by HHSC [ DHS ], or on facsimiles that [ which ] are formatted according to HHSC [ DHS ] specifications and are pre-approved by HHSC [ DHS ] staff, or electronically in HHSC-prescribed [ DHS-prescribed ] format in programs where these systems are operational. The cost reports must be submitted to HHSC [ DHS ] in a manner prescribed by HHSC [ DHS ]. The cost reports must be prepared to reflect the activities of the provider while delivering contracted services during the fiscal year specified by the cost report. Cost reports or other special surveys or reports may be required for other periods at the discretion of HHSC [ DHS ]. Each provider is responsible for accurately completing any cost report or other special survey or report submitted to HHSC [ DHS ].

(1) Accounting methods. All financial and statistical information submitted on cost reports must be based upon the accrual method of accounting, except where otherwise specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs) and in the case of governmental entities operating on a cash or modified accrual basis. For cost-reporting purposes, accrued expenses must be incurred during the cost reporting period and must be paid within 180 days after the end of that cost reporting period. In situations where a contracted provider, any of its controlling entities, its parent company/sole member, or its related-party management company has filed for bankruptcy protection, the contracted provider may request an exception to the 180-day requirement for payment of accrued allowable expenses by submitting a written request to the HHSC Rate Analysis Department [ of DHS ]. The written request must be submitted within 60 days of the date of the bankruptcy filing or at least 60 days prior to the due date of the cost report for which the exception is being requested, whichever is later. The contracted provider will then be requested by the HHSC Rate Analysis Department to provide certain documentation, which must be provided by the specified due date. Such exceptions due to bankruptcy may be granted for reasonable, necessary and documented accrued allowable expenses that were not paid within the 180-day requirement. Accrued revenues must be for services performed during the cost reporting period and do not have to be received within 180 days after the end of that cost reporting period in order to be reported as revenues for cost-reporting purposes. Except as otherwise specified by the cost determination process rules of this chapter, cost report instructions, or policy clarifications, cost reports should be prepared consistent with generally accepted accounting principles (GAAP), which are those principles approved by the American Institute of Certified Public Accountants (AICPA). Internal Revenue Service (IRS) laws and regulations do not necessarily apply in the preparation of the cost report. In cases where cost reporting rules differ from GAAP, IRS, or other authorities, HHSC [ DHS ] rules take precedence for provider cost-reporting purposes.

(2) Recordkeeping and adequate documentation. There is a distinction between noncompliance in recordkeeping, which equates with unauditability of a cost report and constitutes an administrative contract violation or, for the Nursing Facility, Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs [ nursing facilities ], may result in vendor hold, and a provider's inability to provide adequate documentation, which results in disallowance of relevant costs. Each is discussed in the following paragraphs.

(A) Recordkeeping. [ Each provider must maintain records according to the requirements stated in 40 TAC §69.205 (Contractor's Records) and according to DHS's prescribed chart of accounts, when available. ] Providers must ensure that records are accurate and sufficiently detailed to support the legal, financial, and other statistical information contained in the cost report. Providers must maintain all workpapers and any other records that support the information submitted on the cost report relating to all allocations, cost centers, cost or statistical line items, surveys, and schedules. HHSC [ DHS ] may require supporting documentation other than that contained in the cost report to substantiate reported information.

(i) For Texas Department of Human Services (DHS) contracted providers, each provider must maintain records according to the requirements stated in 40 TAC §69.205 (relating to Contractor's Records) and according to the HHSC's prescribed chart of accounts, when available.

(ii) For Texas Department of Mental Health and Mental Retardation (TDMHMR) contracted providers, contractors must keep financial and supporting documents, statistical records, and any other records pertinent to the services for which a claim or cost report is submitted to HHSC. The records and documents must be kept for a minimum of five years after the end of the reporting period. If any litigation, claims, or audit involving these records begins before the five-year period expires, the contractor must keep the records and documents for not less than five years or until all litigation, claims, or audit findings are resolved. If a contractor is terminating business operations, the contractor must ensure that:

(I) records are stored and accessible; and

(II) someone is responsible for adequately maintaining the records.

(iii) [ (i) ] For nursing facilities, failure to maintain all workpapers and any other records that support the information submitted on the cost report relating to all allocations, cost centers, cost or statistical line items, surveys and schedules may result in vendor hold as specified in §355.403 of this title (relating to Vendor Hold).

(iv) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to maintain all workpapers and any other records that support the information submitted on the cost report relating to all allocations, cost centers, cost or statistical line items, surveys and schedules may result in vendor hold.

(v) [ (ii) ] For all other programs, failure to maintain all workpapers and any other records that support the information submitted on the cost report relating to all allocations, cost centers, cost or statistical line items, surveys and schedules 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).

(B) Adequate documentation. To be allowable, the relationship between reported costs and contracted services must be clearly and adequately documented. Adequate documentation consists of all materials necessary to demonstrate the relationship of personnel, supplies, and services to the provision of contracted client care or the relationship of the central office to the individual service delivery entity level. These materials may include, but are not limited to, accounting records, invoices, organizational charts, functional job descriptions, other written statements, and direct interviews with staff, as deemed necessary by HHSC [ DHS ] auditors to perform required tests of reasonableness, necessity, and allowability. [ For the 1997 cost report only, DHS will accept documentation to retrospectively support expenses which were incurred in the provider's 1997 fiscal year prior to the adoption of these rules and reported on the provider's 1997 cost report. ]

(i) The minimum allowable statistical duration for a time study upon which to base salary allocations is four weeks per year, with one week being randomly selected from each quarter so as to assure that the time study is representative of the various cycles of business operations. One week is defined as only those days the contracted provider is in operation during seven continuous days. The time study [ timestudy ] can be performed for one continuous week during a quarter, or it can be performed over five or seven individual days, whichever is applicable, throughout a quarter. The time study must be a 100% time study, accounting for 100% of the time paid the employee, including vacation and sick leave.

(ii) To support the existence of a loan, the provider must have available a signed copy of the loan contract which contains the pertinent terms of the loan, such as amount, rate of interest, method of payment, due date, and collateral. The documentation must include an explanation for the purpose of the loan and an audit trail must be provided showing the use of the loan proceeds. Evidence of systematic interest and principal payments must be available and supported by the payback schedule in the note or amortization schedule supporting the note. Documentation must also include substantiation of any costs associated with the securing of the loan, such as broker's fees, due diligence fees, lender's fees, attorney's fees, etc. To document allowable interest costs associated with related party loans, the provider is required to maintain documentation verifying the prime interest rate in accordance with §355.103(b)(8)(C) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ] for a similar type of loan as of the effective date of the related party loan.

(iii) For ground transportation equipment, a mileage log is not required if the equipment is used solely (100%) for provision of contracted client services in accordance with program requirements in delivering one type of contracted care. However, the contracted provider must have a written policy that [ which ] states that the ground transportation equipment is restricted to that use and that policy must be followed. For ground transportation equipment that is used for several purposes (including for personal use) or multiple programs or across various business components, mileage logs must be maintained. Personal use includes, among other things, driving to and from a personal residence. At a minimum, mileage logs must include for each individual trip the date, the time of day (beginning and ending), driver, persons in the vehicle, trip mileage (beginning, ending, and total), purpose of the trip, and the allocation centers (the departments, programs, and/or business entities to which the trip costs should be allocated). Flight logs must include dates, mileage, passenger lists, and destinations, along with any other information demonstrating the purpose of the trips so that a relationship to contracted client care in Texas can be determined. For the purpose of comparison to the cost of commercial alternatives, documentation of the cost of operating and maintaining a private aircraft includes allowable expenses relating to the lease or depreciation of the aircraft; aircraft fuel and maintenance expenses; aircraft insurance, taxes, and interest; pilot expenses; hangar and other related expenses; mileage, vehicle rental or other ground transportation expense; and airport parking fees. Documentation demonstrating the allowable cost of commercial alternatives includes commercial airfare ticket costs at lowest fare offered (including all discounts) and associated expenses including mileage, vehicle rental or other ground transportation expense; airport parking fees; and any hotel or per diem due to necessary layovers (no scheduled flights at time of return trip).

(iv) To substantiate the allowable cost of leasing a luxury vehicle as defined in §355.103(b)(7)(C)(i) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ], the provider must obtain at the time of the lease a separate quotation establishing the monthly lease costs for the base amount allowable for cost-reporting purposes as specified in §355.103(b)(7)(C)(i) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ]. If the lease of the luxury vehicle occurred prior to January 1, 1997, then the provider must obtain the separate quotation prior to submitting its 1997 cost report in order for the allowable costs to be reported on the cost report. Without adequate documentation to verify the allowable lease costs of the luxury vehicle, the reported costs shall be disallowed.

(v) For adequate documentation purposes, a written description of each cost allocation method must be maintained that [ which ] includes, at a minimum, a clear and understandable explanation of the numerator and denominator of the allocation ratio described in words and in numbers, as well as a written explanation of how and to which specific business components the remaining percentage of costs were allocated.

(vi) To substantiate the allowable cost for staff training as defined in §355.103(b)(12)(A) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ], the provider must maintain a description of the training verifying that the training pertained to contracted client care-related services or quality assurance. At a minimum, a program brochure describing the seminar or a conference program with description of the workshop must be maintained. The documentation must provide a description clearly demonstrating that the seminar or workshop provided training pertaining to contracted client care-related services or quality assurance.

(vii) Documentation regarding the allocation of costs related to noncontracted services, as specified in §355.102(j)(2) of this title [ (relating to General Principles of Allowable and Unallowable Costs) ], must be maintained by the provider. At a minimum, the provider must maintain written records verifying the number of units of noncontracted services provided during the provider's fiscal year, along with adequate documentation supporting the direct and allocated costs associated with those noncontracted services.

(viii) Adequate documentation to substantiate legal, accounting, and auditing fees must include, at a minimum, the amount of time spent on the activity, a written description of the activity performed which clearly explains to which business component the cost should be allocated, the person performing the activity, and the hourly billing amount of the person performing the activity. Other legal, accounting, and auditing costs, such as photocopy costs, telephone costs, court costs, mailing costs, expert witness costs, travel costs, and court reporter costs, must be itemized and clearly denote to which business component the cost should be allocated.

(ix) Providers who self insure for all or part of their employee-related insurance costs, such as health insurance and workers' compensation costs, must use one of the two following methods for determining and documenting the provider's allowable costs under the cost ceilings and any carry forward as described in §355.103(b)(10)(E) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ].

(I) Providers may obtain and maintain each fiscal year's documentation to establish what their premium costs would have been had they purchased commercial insurance for total coverage. The documentation should include, at a minimum, bids from two commercial carriers. Bids must be obtained no less frequently than every three years.

(II) If providers choose not to obtain and maintain commercial bids as described in subclause (I) of this clause, providers may claim as an allowable cost the health insurance actual paid claims incurred on behalf of the employees that does not exceed 10% of the payroll for employees eligible for receipt of this benefit. In addition, providers may claim as an allowable cost the workers' compensation actual paid claims incurred on behalf of the employees, an amount each cost report period not to exceed 10% of the payroll for employees eligible for receipt of this benefit.

(III) Providers who self insure must also maintain documentation that supports the amount of claims paid each year and any allowable costs to be carried forward to future cost-reporting periods.

(x) Providers who self insure for all or part of their coverage for nonemployee-related insurance, such as malpractice insurance, comprehensive general liability, and property insurance, must maintain documentation for each cost-reporting period to establish what their premium costs would have been had they purchased commercial insurance for total coverage. The documentation should include, at a minimum, bids from two commercial carriers. Bids must be obtained no less frequently than every three years. Providers who self insure must also maintain documentation that supports the amount of claims paid each year and any allowable costs to be carried forward to future cost-reporting periods. Governmental providers must document the existence of their claims management and risk management programs.

(xi) Regarding compensation of owners and related parties, providers must maintain the following documentation, at a minimum, for each owner or related party: a detailed written description of actual duties, functions, and responsibilities; documentation substantiating that the services performed are not duplicative of services performed by other employees; time sheets or other documentation verifying the hours and days worked; the amount of total compensation paid for these duties, with a breakdown detailing regular salary, overtime, bonuses, benefits, and other payments; documentation of regular, periodic payments and/or accruals of the compensation, documentation that the compensation is subject to payroll or self-employment taxes; and a detailed allocation worksheet indicating how the total compensation was allocated across business components receiving the benefit of these duties.

(I) Regarding bonuses paid to owners and related parties, the provider must maintain clearly defined bonus policies in its written agreements with employees or in its overall employment policy. At a minimum, the bonus policy must include the basis for distributing the bonuses including qualifications for receiving the bonus, and how the amount of each bonus is calculated. Other documentation must specify who received bonuses, whether the persons receiving bonuses are owners, related parties, or arm's-length employees, and the bonus amount received by each individual.

(II) Regarding benefits provided to owners and related parties, the provider must maintain clearly defined benefit policies in its written agreements with employees or in its overall employment policy. At a minimum, the documentation must include the basis for eligibility for each type of benefit available, who is eligible to receive each type of benefit, who actually receives each type of benefit, whether the persons receiving each type of benefit are owners, related parties, or arm's-length employees, and the amount of each benefit received by each individual.

(xii) Regarding all forms of compensation, providers must maintain documentation for each employee which clearly identifies each compensation component, including regular pay, overtime pay, incentive pay, mileage reimbursements, bonuses, sick leave, vacation, other paid leave, deferred compensation, retirement contributions, provider-paid instructional courses, health insurance, disability insurance, life insurance, and any other form of compensation. Types of documentation would include insurance policies; provider benefit policies; records showing paid leave accrued and taken; documentation to support hours (regular and overtime) worked and wages paid; and mileage logs or other documentation to support mileage reimbursements and travel allowances. For accrued benefits, the documentation must clearly identify the period of the accrual. For example, if an employee accrues two weeks of vacation during 20x1 [ 19x1 ] and receives the corresponding vacation pay during 20x3 [ 19x3 ], that employee's compensation documentation for 20x3 [ 19x3 ] should clearly indicate that the vacation pay received had been accrued during 20x1 [ 19x1 ].

(xiii) Management fees paid to related parties must be documented as to the actual costs of the related party for materials, supplies, and services provided to the individual provider, and upon which the management fees were based. If the cost to the related party includes owner compensation or compensation to related parties, documentation guidelines for those costs are specified in clause (xi) of this subparagraph. Documentation must be maintained that indicates stated objectives, periodic assessment of those objectives, and evaluation of the progress toward those objectives.

(xiv) For central office and/or home office costs, documentation must be maintained that indicates the organization of the business entity, including position, titles, functions, and compensation. For multi-state organizations, documentation must be maintained that clearly defines the relationship of costs associated with any level of management above the individual Texas contracted entity which are allocated to the individual Texas contracted entity.

(xv) Documentation regarding depreciable assets includes, at a minimum, historical cost, date of purchase, depreciable basis, estimated useful life, accumulated depreciation, and the calculation of gains and losses upon disposal.

(xvi) Providers must maintain documentation clearly itemizing their employee relations expenditures. For employee entertainment expenses, documentation must show the names of all persons participating, along with classification of the person attending, such as employee, nonemployee, owner, family of employee, client, or vendor.

(xvii) Adequate documentation substantiating the offsetting of grants and contracts from federal, state, or local governments prior to reporting either the net expenses or net revenue must be maintained by the provider. As specified in §355.103(b)(15) of this title [ (relating to Specifications for Allowable and Unallowable Costs) ], such offsetting is required prior to reporting on the cost report. The provider must maintain written documentation as to the purpose for which the restricted revenue was received and the offsetting of the restricted revenue against the allowable and unallowable costs for which the restricted revenue was used.

(xviii) During the course of an audit or an audit desk review, the provider must furnish any reasonable documentation requested by HHSC [ DHS ] auditors within ten working days of the request or a later date as specified by the auditors. If the provider does not present the requested material within the specified time, the audit or audit desk review is closed, and HHSC [ DHS ] automatically disallows the costs in question.

(xix) Any expense that [ which ] cannot be adequately documented or substantiated is disallowed. HHSC [ DHS ] is not responsible for the contracted provider's failure to adequately document and substantiate reported costs.

(xx) Any cost report that [ which ] is determined unauditable through a field audit or that [ which ] cannot have its costs verified through a desk review will not be used in the reimbursement determination process.

(3) Cost report and methodology certification. Providers must certify the accuracy of cost reports submitted to HHSC [ DHS ] in the format specified by HHSC [ DHS ]. Providers may be liable for civil and/or criminal penalties if the cost report is not completed according to HHSC [ DHS ] requirements or is determined to contain misrepresented or falsified information. Cost report preparers must certify that [ they received reimbursement methodology rules regarding allowable and unallowable costs, that ] they read the cost determination process rules, the reimbursement methodology rules, the cost report cover letter and cost report instructions, and that they understand that the cost report must be prepared in accordance with the cost determination process rules, the reimbursement methodology rules and cost report instructions. Not all persons who contributed to the completion of the cost report must sign the certification page. However, the certification page must be signed by a responsible party with direct knowledge of the preparation of the cost report. A person with supervisory authority over the preparation of the cost report who reviewed the completed cost report may sign a certification page in addition to the actual preparer.

(4) Requirements for cost report completion.

(A) A completed cost report must:

(i) be completed according to the cost determination rules of this chapter, program-specific allowable and unallowable rules, cost report instructions, and policy clarifications;

(ii) contain a signed, notarized, original certification page;

(iii) be legible with entries in sufficiently dark print to be photocopied;

(iv) contain all pages and schedules;

(v) be submitted on the proper cost report form;

(vi) be completed using the correct cost reporting period; and

(vii) contain a copy of the state-issued cost report training certificate, beginning with the 1997 cost report for DHS contracted providers and beginning with the 2004 cost report for TDMHMR contracted providers .

(B) Providers are required to report amounts on the appropriate line items of the cost report pursuant to guidelines established in the methodology rules, cost report instructions, and/or policy clarifications. Refer to program-specific reimbursement methodology rules, cost report instructions, and/or policy clarifications for guidelines used to determine placement of amounts on cost report line items.

(i) For nursing facilities, placement on the cost report of an amount , which was determined to be inaccurately placed , may result in vendor hold as specified in §355.403 of this title (relating to Vendor Hold).

(ii) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, placement on the cost report of an amount, which was determined to be inaccurately placed, may result in vendor hold.

(iii) [ (ii) ] For all other programs, placement on the cost report of an amount , which was determined to be inaccurately placed , 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).

(C) A completed cost report must be filed by the cost report due date.

(i) For nursing facilities, failure to file a completed cost report by the cost report due date may result in vendor hold as specified in §355.403 of this title [ (relating to Vendor Hold) ].

(ii) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to file a completed cost report by the cost report due date may result in vendor hold.

(iii) [ (ii) ] For all other programs, failure to file a completed cost report by the cost report due date 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) ].

(D) HHSC [ DHS ] may excuse providers from the requirement to submit a cost report. Exceptions are granted by HHSC [ DHS ] as described by the program-specific reimbursement methodology rules. Providers who are excused from cost report submission will receive written notice from HHSC [ DHS ] verifying that an exception has been granted.

(5) Cost report year. Effective for reporting periods beginning on September 1, 2001 and thereafter, a provider's cost report year must coincide with the provider's fiscal year as used by the provider for reports to the Internal Revenue Service (IRS) or with the state of Texas' fiscal year, which begins September 1 and ends August 31.

(A) Providers whose cost report year coincides with their IRS fiscal year are responsible for reporting to HHSC Rate Analysis any change in their IRS fiscal year and subsequent cost report year by submitting written notification of the change to HHSC Rate Analysis along with supportive IRS documentation. HHSC Rate Analysis must be notified of the provider's change in IRS fiscal year no later than 30 days following the provider's receipt of approval of the change from the IRS.

(B) Providers who chose to change their cost report year from their IRS fiscal year to the state fiscal year or from the state fiscal year to their IRS fiscal year must submit a written request to HHSC Rate Analysis by August 1 of state fiscal year in question.

(6) Failure to report allowable costs. HHSC [ DHS ] is not responsible for the contracted provider's failure to report allowable costs, however any omitted costs which are identified during the desk review or audit process will be included in the cost report or brought to the attention of the provider to correct by submitting an amended cost report.

(c) Cost report due date.

(1) Providers must submit cost reports to HHSC Rate Analysis [ DHS ] no later than 90 days following the end of the provider entity's fiscal year or 90 days from the transmittal date of the cost report forms, whichever due date is later.

(2) HHSC [ DHS ] may grant extensions of due dates for good cause. A good cause is defined as a circumstance which the provider could not reasonably be expected to control and for which adequate advance planning and organization would not have been of any assistance. Providers must submit requests for extensions in writing to HHSC Rate Analysis [ DHS ]. Requests for extensions must be received by HHSC Rate Analysis [ DHS ] prior to the cost report due date. HHSC [ DHS ] staff will respond in writing to requests within 15 days of receipt.

(3) HHSC [ DHS ] may require additional financial and other statistical information, in the form of special surveys or reports, to ensure the fiscal integrity of the program. Providers must submit such additional information and/or special surveys or reports to HHSC Rate Analysis [ DHS ] upon request by the date specified by HHSC Rate Analysis [ DHS ] in its transmittal or cover letter to the special survey, report, or request for additional information.

(d) Amended cost report due dates. HHSC [ DHS ] accepts submittal of provider- initiated or HHSC-requested [ DHS-requested ] amended cost reports as follows.

(1) Provider-initiated amended cost reports must be received no later than the date in subparagraph (A) or (B) of this paragraph, whichever occurs first. Amended cost reports received after the required date have no effect on the reimbursement determination. Amended cost report information that cannot be verified will not be used in reimbursement determinations. Provider-initiated amended cost reports must be received no later than the earlier of:

(A) 60 days after the original due date of the cost report; or

(B) [ for Medicaid programs, ] 30 days prior to the public hearing on proposed reimbursement or reimbursement parameter amounts [ ; and for non-Medicaid programs 30 days prior to the administrative closing of the cost report database for reimbursement determination ].

(2) HHSC-required [ DHS-required ] amendments to the cost reports must be received on or before the date specified by HHSC [ the DHS ] in its request for the amended cost report. Failure to submit the requested amendment to the cost report by the due date is considered a failure to complete a cost report as specified in subsection (b)(4)(C) of this section.

(e) Field audit standards. HHSC [ DHS ] performs cost report field audits in a manner consistent with Government Auditing Standards issued by the Comptroller General of the United States.

(f) Cost of out-of-state audits. As specified in §355.106 of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports), HHSC [ DHS ] conducts desk reviews of all cost reports not selected for field audit. HHSC [ DHS ] also conducts field audits of provider records and cost reports. Although the number of field audits performed each year may vary, HHSC [ DHS ] seeks to maximize the number of field audited cost reports available for use in its cost projections. Whenever possible, all the records necessary to verify information submitted to HHSC [ DHS ] on cost reports, including related party transactions and other business activities engaged in by the provider, must be accessible to HHSC [ DHS ] audit staff within the state of Texas within fifteen working days of field audit or desk review notification. When records are not available to HHSC [ DHS ] audit staff within the state of Texas, the provider must pay the actual costs for HHSC [ DHS ] staff to travel and review the records out-of-state. HHSC [ DHS ] must be reimbursed for these costs within 60 days of the request for payment.

(1) For nursing facilities, failure to reimburse HHSC [ DHS ] for these costs within 60 days of the request for payment may result in vendor hold as specified in §355.403 of this title [ (relating to Vendor Hold) ].

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to reimburse HHSC for these costs within 60 days of the date of the request for payment may result in vendor hold.

(3) [ (2) ] For all other programs, failure to reimburse HHSC [ DHS ] for these costs within 60 days of the request for payment 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) ].

(g) Public hearings.

(1) Uniform reimbursements. For [ Medicaid ] programs where reimbursements are uniform by class of service and/or provider type, [ DHS and the ] HHSC will hold a public hearing on proposed reimbursements before [ the ] HHSC approves reimbursements. The purpose of the hearing is to give interested parties an opportunity to comment on the proposed reimbursements. Notice of the hearing will be provided to the public. The notice of the public hearing will identify the name, address, and telephone number to contact for the materials pertinent to the proposed reimbursements. At least ten working days before the public hearing takes place, material pertinent to the proposed statewide uniform [ Medicaid ] reimbursements will be made available to the public. This material will include the proposed reimbursements, the inflation adjustments used to determine them, and the impact on reimbursements of the major cost limits. This material will be furnished to anyone who requests it. After the public hearing, if negative comments are received, a summary of the comments made during the public hearing will be presented to [ the ] HHSC.

(2) Contractor-specific reimbursements. For [ Medicaid ] programs in which reimbursements are contractor-specific, [ DHS and the ] HHSC will hold a public hearing on the reimbursement determination parameter dollar amounts (e.g., ceilings, floors, or program reimbursement formula limits) before [ the ] HHSC approves parameter dollar amounts. The purpose of the hearing is to give interested parties an opportunity to comment on the proposed reimbursement parameter dollar amounts. Notice of the hearing will be provided to the public. The notice of the public hearing will identify the name, address, and telephone number to contact for the materials pertinent to the proposed reimbursement parameter dollar amounts. At least ten working days before the public hearing takes place, material pertinent to the proposed reimbursement parameter dollar amounts will be made available to the public. This material will include the proposed reimbursement parameter dollar amounts, the inflation adjustments used to determine them, and the impact on the reimbursement parameter dollar amounts of the major cost limits. This material will be furnished to anyone who requests it. After the public hearing, if negative comments are received, a summary of the comments made during the public hearing will be presented to [ the ] HHSC.

(h) Insufficient cost data. If an insufficient number of accurate, full-year cost reports is submitted, as would occur with a new program, or if there are insufficient available data, as would occur in changes in program design, changes in the definition of units of service or changes in regulations or program requirements, reimbursements may be based on a pro- forma analysis by HHSC [ DHS ] staff. A pro-forma analysis is defined as an item-by- item, or classes-of-items, calculation of the reasonable and necessary expenses for a provider to operate. The analysis may involve assumptions about the salary of an administrator or program director, staff salaries, employee benefits and payroll taxes, building depreciation, mortgage interest, contracted client care expenses, and other building or administration expenses. To determine the cost per unit of service, HHSC [ DHS ] adds all the pro- forma expenses and divides the total by the estimated number of units of service that a fully operational provider is likely to provide. The pro-forma analysis is based on available information that is determined to be sufficient, accurate, and reliable by HHSC [ DHS ], including valid cost report data and survey data. The pro-forma analysis is conducted in a way that ensures that the resultant reimbursements are sufficient to support the requirements of the contracted program. When HHSC [ DHS ] staff determine that sufficient and reliable cost report data have become available, the pro-forma reimbursement determination may be replaced with a process based on cost reports.

§355.106.Basic Objectives and Criteria for Audit and Desk Review of Cost Reports.

(a) The Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] conducts desk reviews and field audits of provider cost reports in order to ensure that all financial and statistical information reported in the cost reports conforms to all applicable rules and instructions. Cost reports must be completed according to instructions and rules in accordance with §355.105(b)(4) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). HHSC [ DHS ] may require supporting documentation other than that contained in the cost report to substantiate reported information.

(1) For nursing facilities, failure to complete cost reports according to instructions and rules in accordance with §355.105(b)(4) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ] may result in vendor hold as specified in §355.403 of this title [ 40 TAC §19.2703 ] (relating to Vendor Hold).

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to complete cost reports according to instructions and rules may result in vendor hold.

(3) [ (2) ] For all other programs, failure to complete cost reports according to instructions and rules in accordance with §355.105(b)(4) of this title [ (relating to General Reporting and Documentation Requirements, Methods, and Procedures) ] 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).

(b) The basic objective of audits and desk reviews is to verify that each provider's cost report:

(1) displays financial and other statistical information in the format required by HHSC [ DHS ];

(2) reports expenses in conformity with HHSC's [ DHS's ] lists of allowable and unallowable costs;

(3) follows generally accepted accounting principles, except as otherwise specified in HHSC's [ DHS's ] lists of allowable and unallowable costs, and other pertinent rules or as otherwise permitted in the case of governmental entities operating on a cash or modified accrual basis; and

(4) is completed in accordance with each program's cost report instructions and rules.

(c) HHSC [ DHS ] verifies the information specified in subsection (b) of this section by:

(1) comparing each provider's reported costs to:

(A) past patterns of expenditures for similar services;

(B) the results of previous field audits;

(C) normal operating cost relationships; and

(D) industry average costs, when available;

(2) reviewing each provider's reported costs for:

(A) reported unallowable costs;

(B) omitted allowable costs, if discovered during the course of the audit or desk review; and

(C) understated or overstated allowable costs, if discovered during the course of the audit or desk review;

(3) checking for completion of required information;

(4) checking the format for proper cost classification;

(5) checking for mathematical accuracy; and

(6) adjusting the cost report, or notifying the provider that research and/or corrections are required.

(d) In accordance with methodology rules, cost report instructions or policy clarifications, HHSC [ DHS ] may reassign allowable costs to the appropriate line items of a cost report.

(e) HHSC [ DHS ] seeks to maximize the number of field audited cost reports available for use in its cost projections. In addition to cost reports selected for field audit based upon risk analysis, other specific criteria and random sampling, HHSC [ DHS ] may conduct field audits of cost reports that show unusual fluctuations or trends in costs or other statistics. HHSC [ DHS ] may also conduct field audits when desk reviews are insufficient to verify the accuracy of reported costs.

(f) For cost reports pertaining to providers' fiscal years ending in calendar year 1997 and subsequent years, each provider entity or its designated agent(s) must allow access to any and all records necessary to verify information submitted to HHSC [ DHS ] on cost reports. This requirement includes records pertaining to related party transactions or other business activities engaged in by the provider.

(1) For nursing facilities, failure to allow access to any and all records necessary to verify information submitted to HHSC [ DHS ] on cost reports may result in vendor hold as specified in §355.403 of this title (relating to Vendor Hold).

(2) For Intermediate Care Facilities for Persons with Mental Retardation, Home and Community-based Services, Service Coordination/Targeted Case Management, Rehabilitative Services, and Texas Home Living programs, failure to allow access to any and all records necessary to verify information submitted to HHSC on cost reports may result in vendor hold.

(3) [ (2) ] For all other programs, failure to allow access to any and all records necessary to verify information submitted to HHSC [ DHS ] on 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) ].

(g) A contracted provider may request an informal review, and subsequently an appeal, of a desk review or field audit disallowance in accordance with §355.110 of this title (relating to Informal Reviews and Formal Appeals).

§355.107.Notification of Exclusions and Adjustments.

(a) The Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] notifies providers of exclusions and adjustments to reported expenses made during HHSC's [ DHS's ] desk reviews and field audits of cost reports. HHSC [ DHS ] mails notices of desk-review exclusions and adjustments within 15 working days after finalization of the desk-review by HHSC [ DHS ] auditors. The notice consists of a letter to the provider and desk-review adjustment sheet(s) that specifies:

(1) the line-items on the cost report that have been adjusted or excluded;

(2) the amount of each adjustment or exclusion; and

(3) the principal reason for each adjustment or exclusion.

(b) HHSC [ DHS ] also furnishes providers with written reports of the results of field audits. HHSC [ DHS ] mails each field audit report within 30 days after the final exit interview with the provider. An exit interview is final when HHSC [ DHS ] audit staff have received, reviewed, and analyzed all documentation from the provider pertinent to the scope of the audit. The field audit report consists of a professional report prepared by HHSC [ DHS ] audit staff to enumerate the results of a field audit. Each field audit report includes a specification of:

(1) cost report line-items that have been adjusted or excluded;

(2) the amount of each adjustment or exclusion; and

(3) the principal reason for each adjustment or exclusion.

(c) A provider may also submit a written request for HHSC [ DHS ] to provide additional information about exceptions and adjustments to the provider's cost report, including citations of the laws or regulations that constitute the grounds for the exceptions and adjustments. HHSC [ DHS ] must comply with such requests in writing within 30 calendar days.

§355.108.Determination of Inflation Indices.

(a) Function and types of indices. In order to account for cost inflation between the reporting period and the prospective reimbursement period, the Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] makes adjustments to allowable costs based on inflation factors or multipliers calculated from appropriate inflation indices. HHSC [ DHS ] retains the discretion, on a program- by-program [ program by program ] basis, to exercise the following options in order to obtain appropriate inflation indices.

(b) Contracting for inflation index development. HHSC [ DHS ] may contract with a reputable and experienced independent professional firm to develop appropriate optional indices for Texas. If HHSC [ DHS ] obtains such indices under contract, the agency retains the option, on a program-by-program [ program by program ] basis, of utilizing these indices and/or those described in the remainder of this section, either separately or in combination, for reimbursement determination purposes.

(c) Cost inflation indices. HHSC [ DHS ] may utilize a general cost inflation index obtained from a reputable independent professional source and, where HHSC [ DHS ] deems appropriate and pertinent data are available, develop and/or utilize several item-specific and program-specific inflation indices, as follows.

(d) General cost inflation index. HHSC [ DHS ] uses the Personal Consumption Expenditures (PCE) chain-type price index as the general cost inflation index. The PCE is a nationally recognized measure of inflation published by the Bureau of Economic Analysis of the U.S. Department of Commerce. To project or inflate costs from the reporting period to the prospective reimbursement period, HHSC [ DHS ] uses the lowest feasible PCE forecast consistent with the forecasts of nationally recognized sources available to HHSC [ DHS ] at the time proposed reimbursement is prepared for public dissemination and comment.

(e) Item-specific and program-specific inflation indices. HHSC [ DHS ] may use specific indices in place of the general cost inflation index specified in subsection (d) of this section when appropriate item-specific or program-specific cost indices are available from HHSC [ DHS ] cost reports or other surveys, other Texas state agencies or independent private sources, or nationally recognized public agencies or independent private firms, and HHSC [ DHS ] has determined that these specific indices are derived from information that adequately represents the program(s) or cost(s) to which the specific index is to be applied. For example, HHSC [ DHS ] may use specific indices pertaining to cost items such as payroll taxes, key professional and non-professional staff wages, and other costs subject to specific federal or state limits. The specific indices that HHSC [ DHS ] may use include the following.

(1) Federal Insurance Contributions Act (FICA) or Social Security taxes, including Old Age, Survivors, and Disability Insurance (OASDI) and Medicare taxes, are set by Federal statute. The inflation index for these taxes is the average tax rate, or average tax per payroll dollar, during the prospective reimbursement period divided by the average tax rate, or average tax per payroll dollar, during each provider's reporting period. If tax rates for the prospective reimbursement period are not available at the time proposed reimbursements are prepared for public dissemination and comment, the most recent known rates are assumed to remain in effect.

(2) Costs associated with workers' compensation, e.g., traditional insurance coverage, risk pool participation, and direct claims settlement costs, vary widely among individual providers. Even for those subscribing to traditional insurance, there is no uniform "rate" per payroll dollar. Consequently, these costs are inflated at the same rate as applicable employee wages.

(3) Except where indicated otherwise for specific programs, the unemployment tax inflation index is based on unemployment insurance payroll taxes in accordance with the Federal Unemployment Tax Act (FUTA) and the Texas Unemployment Compensation Act (TUCA) rates obtained from the Texas Workforce [ Employment ] Commission [ (TEC) ]. Because the TUCA component of the tax rate may be contractor-specific, HHSC [ DHS ] obtains the average effective rates for the lowest available Standard Industrial Classification (SIC) code pertinent to each program. The unemployment tax inflation index is the average tax rate during the prospective reimbursement period divided by the average tax rate during each provider's reporting period. If either the FUTA or TUCA rates for the prospective rate period are not available at the time proposed reimbursements are prepared for public dissemination and comment, the most recent known rates are assumed to remain in effect. When changes occur in such factors as payroll limits to which tax rates apply, HHSC [ DHS ] may make appropriate adjustments in projections to reflect new limits and related factors affecting the impact of new limits, such as employee turnover rates.

(4) Inflation factors for key professional and/or paraprofessional staff wages and salaries, e.g., nurses, nurse aides and attendants, are based on wage survey data pertaining to specific types of professional and paraprofessional staff in Texas when HHSC [ DHS ] has determined that reliable data of this kind are available for specific or comparable programs. Projections from the cost reporting period to the reimbursement period are based on discernible trends or experience as evidenced by the most recent reliable data available at the time proposed reimbursement is prepared for public dissemination and comment, and take into consideration economic conditions and regulatory changes which may be reasonably anticipated for the reimbursement period. When HHSC [ DHS ] has determined that reliable wage and salary data pertaining to specific types of staff in Texas are unavailable for specific or comparable programs, inflation factors for professional and/or paraprofessional staff are based on the lowest feasible forecast of the PCE. Professional and/or paraprofessional wage and benefit inflation rates for state employees are based on state employee wage and salary increases determined by the Texas Legislature.

(5) For the Medicaid nursing facility program, determination of adjustments to historical costs of fixed capital assets are consistent with requirements of the federal Omnibus Budget Reconciliation Act of 1984 (OBRA 1984) and Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA 1985). For each program, one of two options is used.

(A) Reimbursement is in the form of a fixed capital asset use fee component of the overall reimbursement, based on facility appraisals, as described in program-specific reimbursement methodology rules.

(B) Reimbursement for fixed capital asset costs is calculated based on historical costs included in the reimbursement component designated in program-specific reimbursement methodology rules. The index used to inflate lease expense and to adjust the allowable depreciation base of assets which have undergone ownership changes is one-half the All-item Urban Consumer Price Index (CPI-U).

§355.109.Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs.

(a) In conducting reimbursement reviews for adjustments the Texas Health and Human Services Commission [ Department of Human Services (DHS) ] takes into consideration changes in laws, rules, regulations, policies, guidelines, or economic factors which will have a demonstrable material impact on most contracted providers' costs of providing services meeting federal and state standards.

(1) HHSC [ DHS ] may recommend adjustments to reimbursement when federal or state laws, rules, regulations, policies, or guidelines are adopted, promulgated, judicially interpreted, or otherwise changed in ways that affect allowable costs. The law, rule, regulation, policy, or guideline change must result in necessary changes in allowable costs that:

(A) affect most, if not all, contracted providers; and

(B) require contracted providers to take definitive action to incur additional allowable costs not included in the cost data base used to determine reimbursements and which would not otherwise be covered in reimbursements.

(2) HHSC [ DHS ] may recommend adjustments to reimbursement when it can be clearly demonstrated that changes in economic factors will result in changes in allowable costs. The changes in economic factors must result in changes in allowable costs that:

(A) affect most, if not all, providers; and

(B) are allowable cost changes that the providers have little or no control over and are allowable costs that are not included in the cost data base used to determine reimbursements and which would not otherwise be covered in reimbursements.

(b) HHSC [ DHS ] may recommend adjustments to reimbursement for the reasons stated in subsection (a)(1) of this section at the earliest feasible opportunity in order for the adjustment to become effective on the effective date of the federal or state laws, rules, regulations, policies, or guidelines. In the case of Medicaid state plan program reimbursements, the adjustments will not be effective until after the federal requirements for notice are met.

(c) HHSC [ DHS ] may recommend adjustments to reimbursement when federal or state funding is changed in ways that affect the available funding for programs.

§355.110.Informal Reviews and Formal Appeals.

(a) General provisions.

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

(A) Formal appeal--An administrative hearing requested by an interested party under subsection (d) of this section and conducted in accordance with procedures described at 40 TAC §§79.1601-79.1610 (relating to Formal Appeals) for appeals related to Texas Department of Human Services (DHS) contracted providers and at 25 TAC Chapter 411, Subchapter D (relating to Administrative Hearings of the Department in Contested Cases) for appeals related to Texas Department of Mental Health and Mental Retardation (TDMHMR) contracted providers. [ ; ]

(B) Informal review--The informal reexamination of an action or determination by the Texas Health and Human Services Commission (HHSC) under this chapter requested by an interested party and conducted in accordance with subsection (c) of this section.

(C) Interested party--A DHS or TDMHMR contracted [ Texas Department of Human Services (DHS)-contracted ] provider.

(2) Standing to file informal reviews or formal appeals. Only an interested party has standing to file for an informal review or formal appeal under this section.

(3) Subject matter of informal reviews and formal appeals. An interested party may request an informal review or formal appeal regarding an action or determination under §355.102 of this title (relating to General Principles of Allowable and Unallowable Costs), §355.103 of this title (relating to Specifications for Allowable and Unallowable Costs), §355.104 of this title (relating to Revenues), and §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods and Procedures), or program-specific allowable or unallowable costs, taken specifically in regard to the interested party.

(b) Separation of informal reviews and formal appeals from the reimbursement determination process.

(1) The filing of a request for an informal review or formal appeal under this section does not stay or delay implementation of reimbursement adopted by HHSC in accordance with the requirements of this chapter.

(2) Closure of cost report databases used in the reimbursement determination process and application of results of pending review or appeal. To facilitate the timely and efficient calculation of reimbursement amounts, HHSC closes cost report databases used in the reimbursement determination process prior to the proposal of reimbursement amounts.

(A) Impact on database of pending informal review or formal appeal. If an informal review is pending at the time the database is closed, the database shall include the interested party's cost report data including any adjustments made either in the desk review or field audit. If a formal appeal is pending at the time the database is closed, the database shall include the interested party's cost report data including any adjustments required as a result of the informal review.

(B) Uniform reimbursement.

(i) For programs where reimbursement is uniform by class of service and/or provider type, the cost report database used in reimbursement determination is closed six weeks prior to the public hearing on the proposed reimbursement that is based on the cost report database.

(ii) If an informal review or formal appeal is pending at the time the cost report database is closed, the results of the informal review or formal appeal shall be applied during the next reimbursement determination cycle, if applicable.

(C) Contractor-specific reimbursement.

(i) For programs where reimbursement is contractor-specific the cost report database is closed ten weeks prior to the end of the reimbursement determination cycle.

(ii) If an informal review or formal appeal is pending at the time the cost report database is closed, the results of the informal review or formal appeal shall be applied to the interested party's payment retroactively to the beginning of the current reimbursement determination cycle. The results of the informal review or formal appeal shall not be applied to the cost report database as a whole or to any other reimbursement amounts influenced by the cost report database as a whole until the next reimbursement determination cycle, if applicable.

(c) Informal review.

(1) An interested party who disputes an action or determination under this chapter may request an informal review under this section. The purpose of an informal review is to provide for the informal and efficient resolution of the matters in dispute. An informal review is not a formal administrative hearing, but is a prerequisite to obtaining a formal administrative hearing and is conducted according to the following procedures:

(A) HHSC Rate Analysis must receive a written request for an informal review by hand delivery, United States (U.S.) mail, or special mail delivery no later than 30 calendar days from the date on the written notification of the adjustments. If the 30th calendar day is a weekend day, national holiday, or state holiday, then the first business day following the 30th calendar day is the final day the receipt of the written request will be accepted. HHSC Rate Analysis will extend this deadline if it receives a written request for the extension by hand delivery, U.S. mail, or special mail delivery no later than 30 calendar days from the date of the written notice of adjustments. The extension gives the requester a total of 45 calendar days from the date of the written notice of adjustment to file a request for an informal review. If the 45th calendar day is a weekend day, national holiday, or state holiday, then the 45th day is considered the next business day following the 45th calendar day. A request for an informal review or extension that is not received by the stated deadline will not be accepted.

(B) An interested party must, with its request for an informal review, submit a concise statement of the specific actions or determinations it disputes, its recommended resolution, and any supporting documentation the interested party deems relevant to the dispute. It is the responsibility of the interested party to render all pertinent information at the time of its request for an informal review.

(C) The written request for the informal review or extension must be signed by an individual legally responsible for the conduct of the interested party, such as the sole proprietor, a partner, a corporate officer, an association officer, a governmental official, a limited liability company member, a person authorized by the applicable DHS Form 2031 for the interested party on file at the time of the request, or a legal representative for the interested party. The administrator or director of the facility or program is not authorized to sign the request unless the administrator or director holds one of these positions. A request for an informal review that is not signed by an individual legally responsible for the conduct of the interested party will not be accepted.

(2) On receipt of a request for informal review:

(A) The lead staff member coordinates the review of the information submitted by the interested party. Staff may request additional information from the interested party, which must be received in writing by the lead staff member no later than 14 calendar days from the date the interested party receives the written request for additional information. If the 14th calendar day is a weekend day, national holiday, or state holiday, then the first business day following the 14th calendar day is the final day the receipt of the additional information will be accepted. Information received after 14 calendar days may not be used in the panel's written decision unless the interested party receives written approval of the lead staff member to submit the information after 14 calendar days. A request for an extension to the 14 calendar day due date must be received by HHSC Rate Analysis prior to the 14th calendar day.

(B) Within 30 calendar days of the date a written request for informal review that complies with paragraphs (1) and (2) of this subsection is received or the date additional requested information is due or received, whichever is later [ sooner ], the lead staff member will send the interested party its written decision by certified mail, return receipt requested. If the 30th calendar day is a weekend day, national holiday, or state holiday, then the first business day following the 30th calendar day is the final day by which the written decision must be sent.

(d) Administrative hearings. An interested party who disagrees with the results of an informal review conducted under subsection (c) of this section may file a formal appeal of the review.

(1) For DHS contracted providers: The Hearings Department of the Texas Department of Human Services, Mail Code W-613, P.O. Box 149030, Austin, Texas 78714- 9030, must receive the written request for a formal appeal from the interested party within 15 calendar days after receiving the written decision as specified in subsection (c) of this section. The written request for a formal appeal must state the basis of the appeal of the adverse action and include a legible copy of the written decision from the informal review referenced in subsection (c)(2)(B) of this section. The formal appeal is limited to the issues that were considered in the informal review process. The information from the interested party is limited to the pertinent information considered in the informal review process. Formal appeals are conducted in accordance with the provisions of 40 TAC §§79.1601-79.1610. If there is a conflict between the applicable section of 40 TAC Chapter 79 (relating to Legal Services) and the provisions of this chapter, the provisions of this chapter prevail.

(2) For TDMHMR contracted providers: The Hearings Office of the Texas Department of Mental Health Mental Retardation, P.O. Box 12668, Austin, Texas 78711- 2668, must receive the written request for a formal appeal from the interested party within 15 calendar days after the interested party receives the written decision as specified in subsection (c) of this section. The written request for a formal appeal must state the basis of the appeal of the adverse action and include a legible copy of the written decision from the informal review referenced in subsection (c)(2)(B) of this section. The formal appeal is limited to the issues that were considered in the informal review process. The information from the interested party is limited to the pertinent information considered in the informal review process. Formal appeals are conducted in accordance with the provisions 25 TAC Chapter 411, Subchapter D (relating to Administrative Hearings of the Department in Contested Cases). If there is a conflict between the applicable section of 25 TAC Chapter 411, Subchapter D, and the provisions of this chapter, the provisions of this chapter prevail.

(e) Because the formal appeal is limited to issues considered in the informal review process, an informal review request that does not comply with subsections (c)(1)(A), (c)(1)(C), and (c)(2)(A) of this section is not subject to further appeal under either 40 TAC §§79.1601- 79.1610 or 25 TAC Chapter 411, Subchapter D .

§355.111.Administrative Contract Violations.

The Texas Health and Human Services Commission (HHSC) [ Department of Human Services (DHS) ] may take the following actions for administrative contract violations.

(1) HHSC [ DHS ] grants the following compliance periods for administrative contract violations:

(A) For failure to submit a cost report by the due date, HHSC [ DHS ] grants the provider a compliance period of no more than 15 calendar days.

(B) For all other administrative contract violations, HHSC [ DHS ] grants the provider a compliance period of no more than 30 calendar days to correct a contract violation. At the end of the compliance period, if HHSC [ DHS ] determines that a contract violation is not corrected, but determines that the provider has made substantial progress toward correcting the contract violation, HHSC [ DHS ] may grant an additional one-time extension period of up to 15 calendar days.

(2) If the contract violation is not corrected within the compliance period, HHSC [ DHS ] imposes vendor hold on payments to the provider.

(3) If a contract violation is not corrected within 60 days from the date the provider is placed on vendor hold, HHSC [ DHS ] may cancel the provider's contract on the 61st day. A provider may request an appeal hearing of the contract cancellation. Formal [ DHS conducts formal ] appeals are conducted in accordance with the provisions of 40 TAC §§79.1601-79.1610 [ §§79.1601-79.1614 ] ( relating to Formal Appeals). If there is a conflict between the applicable section of 40 TAC Chapter 79 ( relating to Legal Services) and the provisions of this chapter, the provisions of this chapter prevail. If the provider appeals the contract cancellation by HHSC [ DHS ] and the adverse action is sustained by an administrative law judge or judicial proceeding, the effective date of the contract cancellation is the date specified in the notice of contract cancellation. Unless otherwise specifically provided for, HHSC [ DHS ] makes no payment for services provided by the provider after the effective date of the provider's contract cancellation. HHSC [ DHS ] may continue payments for no more than 30 calendar days from the date DHS cancels or fails to renew a provider's contract if HHSC [ DHS ] determines that:

(A) reasonable efforts are being made to transfer clients to another provider or to alternate care; and

(B) additional time is needed to effect an orderly transfer of the clients.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403310

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 438-3734


1 TAC §355.114

The Texas Health and Human Services Commission (HHSC) proposes to amend §355.114, concerning the Consumer Directed Services Payment Option, in its Medicaid Reimbursement Rates chapter. The purpose of the amendment is to lower the minimum spending requirement that a consumer must spend on attendant compensation to reflect the lower spending requirement implemented in the attendant compensation rate enhancement. Since the spending requirement for the consumer directed services payment option is based on the attendant compensation rate enhancement spending requirement, the proposed reduction in the spending requirement is being made so as to match the spending requirement reduction adopted in rule for the attendant compensation rate enhancement.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed section is in effect, there is no fiscal implication for state government as a result of enforcing or administering the section. There are no fiscal implications for local governments as a result of enforcing or administering the section.

There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the section, because the proposal increases flexibility for providers and does not add any new requirements on businesses. There is no anticipated economic cost to persons who are required to comply with the proposed section. There is no anticipated effect on local employment in geographic areas affected by the section.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the section is in effect, the public benefit anticipated as a result of enforcing the section is that the consumer will be allowed more flexibility in spending more of the rate on other costs if necessary.

HHSC has determined that this proposal is not a "major environmental rule" as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environment exposure and that may adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment or the public health and safety of a state or a sector of the state. This proposal is not specifically intended to protect the environment or reduce risks to human health from environment exposure.

HHSC has determined that this proposal does not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking under §2007.043 of the Government Code.

Questions about the content of this proposal may be directed to Carolyn Pratt at (512) 491-1359 in the Texas Health and Human Services Commission's Rate Setting and Forecasting Department. Written comments on the proposal may be submitted to Ms. Pratt via facsimile at (512) 491-1998 or mail to Texas Health and Human Services Commission, Rate Setting and Forecasting, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register . For further information regarding the proposal or to make the proposal available for public review, contact local offices of the Texas Department of Human Services or Carolyn Pratt at (512) 491-1359 in HHSC's Rate Setting and Forecasting Department.

The amendment is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The amendment implements the Government Code, §§531.033 and 531.021(b).

§355.114.Consumer Directed Services Payment Option.

(a) The consumer directed services (CDS) payment option is made available to eligible consumers in the Community Based Alternatives (CBA), Community Living Assistance and Support Services (CLASS), Deaf-Blind Multiple Disabilities, Medically Dependent Children, and Primary Home Care (PHC) programs.

(b) The sum of the payment rate for the contracted CDS agency and the payment rate for the consumer participating in CDS must not exceed the payment rate made to contracted providers in these programs. The payment rate for the contracted CDS agency is determined by modeling the estimated administrative cost to carry out the responsibilities of the CDS agency. The payment rate for the consumer is determined by subtracting the contracted CDS payment rate from the payment rate made to contracted providers in these programs.

(c) The CDS payment rate is paid to the CDS agency as a percentage of the amount expended and claimed to the Texas Department of Human Services.

(d) Consumers must expend on the average hourly compensation of attendants, an amount equal to the calculated attendant cost component of the consumer payment rate per hour of service divided by 1.10 [ 1.07 ]. Compensation includes salaries and wages, payroll taxes, workers' compensation, employee benefits/insurance, and mileage reimbursement.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403317

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter C. REIMBURSEMENT METHODOLOGY FOR NURSING FACILITIES

1 TAC §355.404

The Texas Health and Human Services Commission (HHSC) proposes new §355.404 concerning the reimbursement methodology for nursing facilities, in its Medicaid Reimbursement Rates chapter. The rule provides for a supplemental payment for qualifying non-state government-owned or operated nursing facilities. The supplemental payment shall not exceed the difference between the Medicaid payment and the federal upper payment limit established in 42 CFR 447.272 for the class of non-state government-owned or operated nursing facilities. The rule describes the calculation of the upper payment limit and the calculation of the supplemental payment amount.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed section is in effect, there are fiscal implications for state government as a result of enforcing or administering the section. The effect on state government for first five-year period the rule is in effect is an estimated cost of $6,156,510 for state fiscal year 2004 and $7,009,498 for each year of state fiscal years 2005 through 2008. The proposed section is estimated to result in increased federal matching funds of $10,559,509 for state fiscal year 2004 and in increased federal matching funds of $10,747,404 for each year of state fiscal years 2005 through 2008. There are no fiscal implications for local governments as a result of enforcing or administering the section. There may be a minimal additional cost to local governments of qualifying facilities to administer this rule.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the section is in effect, the public benefit anticipated as a result of enforcing the section is that the unique role that non-state government-owned or operated nursing facilities play in the Texas healthcare delivery system for the Medicaid population will be recognized and that Medicaid payments will be commensurate with Medicare payments and/or Medicare payment principles for this class of facilities. There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the section, because the section imposes no additional requirements on businesses. There is no anticipated economic cost to persons who are required to comply with the proposed section. There is no anticipated effect on local employment in geographic areas affected by this section.

Questions about the content of this proposal may be directed to Carolyn Pratt at (512) 491-1359 in the Texas Health and Human Services Commission's Rate Analysis Department. Written comments on the proposal may be submitted to Ms. Pratt via facsimile at (512) 491-1998 or mail to Texas Health and Human Services Commission, Rate Analysis, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register .

Under §2007.003(b) of the Government Code, HHSC has determined that Chapter 2007 of the Government Code does not apply to this rule. Accordingly, HHSC is not required to complete a takings impact assessment regarding this rule.

The new rule is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The new rule implements the Government Code, §§531.033 and 531.021(b).

§355.404.Supplemental payments to qualifying non-state government-owned or operated nursing homes.

(a) The aggregate supplemental payment for non-state government-owned or operated nursing homes is calculated as follows:

(1) The aggregate upper payment limit for the class of non-state government-owned or operated nursing homes is calculated based on Medicare payment principles and in accordance with the federal upper payment limit rules at 42 CFR Part 447 using applicable Medicare payment rates and Resource Utilization Groups (RUGs) frequency distributions for Medicaid clients.

(2) The aggregate Medicaid payment for the class of non-state government-owned or operated nursing facilities prior to the supplemental payment is the sum of the products of the Medicaid days of service by case mix group multiplied by the final case mix rates for each facility for the period, calculated for all non-state government-owned or operated nursing homes from data derived from the most recent complete fiscal year paid claims.

(3) The aggregate supplemental amount is determined by:

(A) Calculating the difference between the aggregate upper payment limit from paragraph (1) of this subsection and the aggregate Medicaid payment prior to supplementation from paragraph (2) of this subsection; and

(B) Adjusting the difference for other ancillary services not included in Medicaid per diem payments for nursing home services including, but not limited to, pharmacy services, specialized services, and emergency dental services.

(b) Effective October 1, 2003, the Texas Department of Human Services, or its successor agency, makes annual supplemental Medicaid payments to qualifying non-state government-owned or operated nursing facilities. Qualifying non-state government-owned or operated facilities are those non-state government-owned or operated facilities which, for SFY 2001, provided a designated number of days of care to Medicaid recipients and had a minimum Medicaid occupancy rate, as specified by the Health and Human Services Commission.

(c) The supplemental payment for each qualifying non-state government-owned or operated nursing facility from subsection (b) of this section is determined by dividing that facility's Medicaid units of service as reported on the 2001 cost report by the Medicaid units of service as reported on the 2001 cost report for all facilities identified by subsection (b) of this section and multiplying the resulting percentage by the aggregate supplemental amount from subsection (a) of this section.

(d) Supplemental payments are made annually to each qualifying nursing facility from subsection (b) of this section.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403318

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Chapter 355. MEDICAID REIMBURSEMENT RATES

The Texas Health and Human Services Commission (HHSC) proposes to amend Subchapter D §§355.452, 355.453, 355.456, and 355.457 concerning the reimbursement methodology for Intermediate Care Facilities for persons with mental retardation (ICF/MR), in its Medicaid Reimbursement Rates chapter. HHSC also proposes to amend Subchapter F §§355.722, 355.741, 355.773, and 355.791 concerning the reimbursement methodology for programs serving persons with mental illness and mental retardation, in its Medicaid Reimbursement Rates chapter. HHSC also proposes to repeal §355.792 and §355.707 concerning the reimbursement methodology for programs serving persons with mental illness and mental retardation, in its Medicaid Reimbursement Rates chapter.

The purpose of the amendments to §§355.452, 355.453, 355.456 355.457, 355.722, 355.741, 355.773, and 355.791 are to add references to the cost determination process rules from subchapter A of this chapter to make the rules contained in subchapter A applicable to contracted providers that are required to submit cost reports used in rate determination for programs operated by the Texas Department of Mental Health and Mental Retardation (TDMHMR). The amendments also remove language that is (1) no longer necessary as a result of the new references to the cost determination process rules; (2) obsolete because the timeframe in the rules has passed; and (3) duplicative. The amendments clarify when a contract violation can result in a vendor hold of provider payments. The amendments also clarify that the total amount of hours that an owner or related party employee can report on a cost report is 2080 hours per fiscal year. Other minor changes and clarifications were also made. These changes are being made so that all long term care programs that require cost reporting will be required to use the same rules for determining allowable and unallowable costs; cost reporting guidelines; recordkeeping requirements; audit/review procedures; and informal reviews and formal appeals.

The purpose of the repeal of §355.792 is to incorporate the rule language from this section into §355.791 to create a single rule section for the reimbursement methodology for the Texas Home Living waiver program. The purpose of the repeal of §355.707 is because it is no longer needed due to the use of the informal review and formal appeal processes in §355.110 of the cost determination process rules.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed sections are in effect, there are no fiscal implications for state government as a result of enforcing or administering the sections. There are no fiscal implications for local governments as a result of enforcing or administering the sections.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the sections are in effect, the public benefit anticipated as a result of enforcing the sections is that the cost determination process rules will be consistent for all long term care programs for which cost reporting is required and will provide more comprehensive rules and guidelines on cost reporting, allowable and unallowable costs and recordkeeping for providers contracted with TDMHMR. Also, obsolete and duplicative rules will be removed. The rules will be clarified as to when a contract violation can result in a vendor hold of provider payments and will be clarified to state the maximum hours that can be reported on a cost report for owner and related party employees. The Texas Home Living waiver program will have all the reimbursement methodology rules consolidated into one rule section for ease of reference. There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the sections, because the amendments impose no additional requirements on businesses. The cost determination process rules clarify in greater detail the expectations of providers when reporting costs on cost reports submitted to HHSC. There is no anticipated economic cost to persons who are required to comply with the proposed sections. There is no anticipated effect on local employment in geographic areas affected by these sections.

Under §2007.003(b) of the Government Code, HHSC has determined that Chapter 2007 of the Government Code does not apply to this rule. Accordingly, HHSC is not required to complete a takings impact assessment regarding this rule.

Questions about the content of this proposal may be directed to Carolyn Pratt at (512) 491-1359 in the Texas Health and Human Services Commission's Rate Analysis Department. Written comments on the proposal may be submitted to Ms. Pratt via facsimile at (512) 491-1998 or mail to Texas Health and Human Services Commission, Rate Analysis, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register .

Subchapter D. REIMBURSEMENT METHODOLOGY FOR INTERMEDIATE CARE FACILITIES FOR PERSONS WITH MENTAL RETARDATION (ICF/MR)

1 TAC §§355.452, 355.453, 355.456, 355.457

The amendments are proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The amendments implement the Government Code, §§531.033 and 531.021(b).

§355.452.Cost Reporting Procedures.

(a) Reporting costs. Each provider must submit financial and statistical information on forms provided by HHSC on facsimiles which are formatted according to HHSC's specifications and are preapproved by HHSC.

(b) Record keeping requirements. Each provider must retain records according to TDMHMR and HHSC rules. Providers must ensure that records are accurate and sufficiently detailed to support the legal, financial, and statistical information provided to HHSC.

(c) Noncompliance with record keeping requirements. Failure to retain records that support the information submitted to HHSC constitutes a [ an administrative ] contract violation and may result in a vendor hold on the contracts for which the necessary records are not made available to HHSC staff . [ In the case of an administrative contract violation, penalties are applied as specified in TDMHMR and HHSC rules. ]

(d) Allowable and unallowable costs. Providers must complete cost reports in accordance with §355.453 of this title (relating to Allowable and Unallowable Costs) and §355.708 of this title (relating to Allowable and Unallowable Costs).

(e) Certification. Providers must certify the accuracy of cost reports submitted to HHSC. Providers may be liable for civil and/or criminal penalties if the cost report is not completed according to HHSC requirements.

(f) Due date. Providers must submit direct services cost surveys no later than 45 calendar days after the end of the reporting period or 45 days after the date that HHSC mails the form to the provider, whichever is later. Providers must submit full cost reports no later than 90 days after the reporting period or 90 days after the date that HHSC mails the form to the provider, whichever is later.

(g) Extension of due date. HHSC may grant extensions of due dates for good cause. Good cause is defined as one that the provider could not reasonably be expected to control. A provider must submit a written request for extension to HHSC before the cost report due date. HHSC will respond to a request for extension within 10 working days of its receipt.

(h) Cost data. HHSC may at times require additional financial and statistical information to ensure the fiscal integrity of the Texas Medicaid ICF/MR Program. Each provider must submit additional information to HHSC upon request, unless the information is not at the provider's disposal.

(i) Failure to submit requested data. Failure to submit acceptable cost data by the due date may result in a vendor hold [ constitutes an administrative contract violation. In the case of an administrative contract violation, penalties are applied as specified in 25 TAC §406.62(c)(2) (Sanction Provisions for Violations of Title XIX ICF/MR Contractual Agreements). ]

(j) Review of cost data. HHSC reviews each provider's cost data to ensure that the financial and statistical information submitted conforms to all applicable rules and instructions. Forms that are not completed according to HHSC's instructions or rules may be returned to the provider for proper completion.

(k) On-site audits. HHSC performs a sufficient number of on-site financial audits to ensure the fiscal integrity of the TDMHMR Medicaid Programs. The number of on-site audits performed may vary.

(l) On-site audit standards. HHSC performs on-site financial audits in a manner consistent with the generally accepted auditing standards (GAAS) approved by the American Institute of Certified Public Accountants and included in Standards for Audit of Governmental Organizations, Programs, Activities and Functions, issued by the United States Comptroller General.

(m) Access to records. Each provider must allow access to any and all records necessary to verify cost data submitted to HHSC. This requirement includes records pertaining to related-party transactions and other business activities engaged in by the provider that are directly or indirectly related to the provision of contracted services. Failure to allow inspection of pertinent records within 10 working days following written notice from HHSC constitutes a [ an administrative ] contract violation and may result in vendor hold . [ In the case of an administrative contract violation, penalties are applied as specified in TDMHMR and HHSC rules. ] If a central office or other entity pertaining to a multi-facility operation refuses access to records, then the vendor hold may be [ penalties are ] extended to all of the provider's contracted entities [ having Medicaid contracts with TDMHMR ]. Additional rules regarding access to records that are out-of-state are in §355.105 [ §355.703 ] of this title (relating to Basic Objectives and Criteria for Review of Cost Reports).

(n) Reviews of exclusions or adjustments. A provider who disagrees with HHSC's exclusion or adjustment of items in cost reports may request an informal review and, when necessary, an administrative hearing as specified in §355.110 [ §355.707 ] of this title (relating to Informal Reviews and Formal Appeals [ Reviews and Administrative Hearings ]).

(o) Notification of exclusions and adjustments. HHSC will notify a provider of exclusions and any adjustments including caps applied to reported costs made during HHSC's desk reviews and on-site audits.

(p) The information in subsections (a)-(o) of this section applies to cost reports pertaining to providers' fiscal years ending in calendar year 2001, 2002 and 2003.

(q) For cost reports pertaining to providers' fiscal years ending in calendar year 2004 and subsequent years the information in §355.102 of this title (relating to General Principles of Allowable and Unallowable Costs), §355.103 of this title (relating to Specifications for Allowable and Unallowable Costs), §355.104 of this title (relating to Revenues), §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) applies to the completion of cost reports. 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 under §355.110 of this title (relating to Informal Reviews and Formal Appeals).

§355.453.Allowable and Unallowable Costs.

(a) General information. HHSC defines allowable and unallowable costs in order to identify expenses that are reasonable and necessary when an economical and efficient provider cares for Medicaid recipients. The primary objective of the cost reporting process is to determine fair and reasonable reimbursement rates. To achieve this objective, HHSC compiles a rate base consisting, if possible, only of allowable cost information. When HHSC classifies a particular type of expense as unallowable for purposes of compiling a rate base, the classification does not mean that individual providers must not make expenditures of this type. Allowable costs included in the rate base reflect only the costs and maximum reimbursement rates associated with an economical and efficient operator. Providers must report costs in accordance with the generally accepted accounting principles (GAAP) of the American Institute of Certified Public Accountants. However, if particular HHSC cost reporting requirements conflict with GAAP, with Internal Revenue Service requirements, or with other authorities, the HHSC requirements take precedence for provider cost reporting purposes.

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

(1) Allowable costs--Those expenses that are reasonable and necessary in the normal conduct of operations relating to recipient care in an ICF/MR. Whenever possible, only allowable costs are included in the rate base.

(A) The word "reasonable" applies to the amount expended. The test of reasonableness is that the amount expended does not exceed the cost which would be incurred by a prudent business operator seeking to contain costs.

(B) The word "necessary" applies to the relationship of the cost to the provision of care. To qualify as a necessary expense, a cost must be one that is usual and customary in the operation of an ICF/MR, and must meet all of the following requirements.

(i) The expenditure is not for personal or other activities not specifically related to the provision of long-term care.

(ii) The cost does not appear on the list of specific unallowable costs.

(iii) The cost bears a significant relationship to client care. The test of significance in this case is whether there would be an adverse impact on the individual's health, safety, or general well-being if the expenditure were eliminated.

(iv) The expense was incurred in the purchase of materials, supplies, or services provided directly to the recipients or staff of individual ICF/MR in the conduct of normal operations relating to client care.

(v) The costs are not unallowable under other federal, state, or local laws or regulations.

(C) The phrase "normal conduct of operations relating to client care" applies to costs for, but not limited to, the following.

(i) Expenses for facilities, materials, supplies, or services not used by an ICF/MR solely for providing long-term client care. Whenever otherwise allowable costs are attributable partially to personal or other business interests and partially to ICF/MR client care, the latter portion may be allowed on a pro rata basis if the proportion used for ICF/MR client care is well-documented.

(ii) Related-party transactions. Allowable costs are those which result from arm's-length transactions involving unrelated parties. In related-party transactions, the allowable cost to the ICF/MR is the cost to the related party. Allowable costs in this regard are limited either to the actual purchase prices paid by the related party or to the usual and customary charges for comparable goods or services, whichever is less. Two or more individuals or organizations constitute related parties whenever they are affiliated or associated in a manner that entails some degree of legal control or practical influence of one over the other. This affiliation or association can be based on common ownership, past or present mutual interests in long-term care or other types of enterprises, or family ties.

(2) Unallowable costs--Expenses that are not reasonable or necessary for the provision of client care in an ICF/MR, in accordance with the criteria specified in paragraph (1) of this subsection. Unallowable costs are not included in the rate base used for determining recommended reimbursement rates.

(c) The information in this section applies to cost reports pertaining to providers' fiscal years ending in calendar year 2001, 2002, and 2003.

(d) For cost reports pertaining to provider's fiscal years ending in calendar year 2004 and subsequent years, providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs).

§355.456.Rate Setting Methodology.

(a) Types of facilities. There are two types of facilities for purposes of rate setting: state-operated and non-state operated. Facilities are further divided into classes that are determined by the size of the facility.

(b) Classes of non-state operated facilities. There is a separate set of reimbursement rates for each class of non-state operated facilities, which are as follows.

(1) Large facility--A facility with a Medicaid certified capacity of 14 or more as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.

(2) Medium facility--A facility with a Medicaid certified capacity of nine through 13 as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.

(3) Small facility--A facility with a Medicaid certified capacity of eight or fewer as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification

(c) Classes of state-operated facilities. There is a separate interim rate for each class of state-operated facilities, which are as follows:

(1) Large facility--A facility with a Medicaid certified capacity of 17 or more as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.

(2) Small facility--A facility with a Medicaid certified capacity of 16 or less as of the first day of the full month immediately preceding a rate's effective date or, if certified for the first time after a rate's effective date, as of the date of initial certification.

(d) Reimbursement rate determination for non-state operated facilities. HHSC will adopt the reimbursement rates for non-state operated facilities in accordance with §§355.101 [ Chapter 355, Subchapter F ] of this title (relating to Introduction [ General Reimbursement Methodology for all Medical Assistance Programs ]) and this subchapter.

(1) The initial modeled rates for calendar year 1997 are set according to paragraph (7) of this subsection.

(2) Annual rates for the time period between the years that modeled rates are rebased are set by inflating the direct service portion of the previous year's rates by the Personal Consumption Expenditures (PCE) Chain-Type Index as defined in §355.108 [ Chapter 355, Subchapter F ] of this title (relating to Determination of Inflation Indices [ General Reimbursement Methodology for all Medical Assistance Programs ]). These rates are uniform by class of facility and client level-of-need, and determined prospectively and annually.

(3) In the year 2000, the models from which the rates are based are analyzed to determine if rebasing is necessary for the rates paid in the year 2001. The models will be analyzed every three years thereafter to determine if rebasing is necessary.

(4) Reimbursement rates combine residential and day program services, i.e., payment for the full 24 hours of daily service.

(5) Reimbursement rates are differentiated based on client level-of-need. The levels of need are intermittent, limited, extensive, pervasive, and pervasive plus.

(6) Modeled rates are rebased according to §55.458 of this title (relating to Rebasing the Non-State Operated Facility Modeled Rates).

(7) The modeled rates are based on cost components deemed appropriate for economically and efficiently operated services. The determination of these components is based on a combination of data including, but not limited to, historical costs and operational information collected from a representative sample of ICF/MR providers. In the year 2000 and every three years thereafter, an advisory panel consisting of providers, advocates, and HHSC, and an independent consultant retained by HHSC analyzes available information regarding historical cost and operational data and level-of-need assessment to determine if revisions to the models are necessary. HHSC will review the analysis in setting rates.

(e) Transitional add-on. A transitional add-on, in an amount to be determined by HHSC, will be paid to a provider for a consumer who is admitted to a small non-state operated facility on or after October 1, 2001, if the consumer is admitted from a large state-operated facility. The transitional add-on will be paid for the time period the consumer resides in the small non-state operated facility or for 180 calendar days, whichever time period is less.

(f) Reimbursement determination for state-operated facilities. Except as provided in paragraph (2) of this subsection and subsection (g) of this section, state-operated facilities are reimbursed an interim rate with a settlement conducted in accordance with paragraph (1)(B) of this subsection. HHSC will adopt the interim reimbursement rates for state-operated facilities in accordance with §§355.101 [ §§355.701-355.709 of Chapter 355, Subchapter F ] of this title (relating to Introduction [ General Reimbursement Methodology for all Medical Assistance Programs ]) and this subchapter.

(1) State-operated facilities certified prior to January 1, 2001, will be reimbursed using an interim reimbursement rate and settlement process.

(A) Interim reimbursement rates for state-operated facilities are based on the most recent cost report accepted by HHSC.

(B) Settlement is conducted each state fiscal year by class of facility. If there is a difference between allowable costs and the reimbursement paid under the interim rate, including applied income, for a state fiscal year, federal funds to the state will be adjusted based on that difference.

(2) A state-operated facility certified on or after January 1, 2001, will be reimbursed using a pro forma rate determined in accordance with §355.101(c)(2)(B) and §355.105(h) [ §355.702(i) ] of this title (relating to Introduction and General Reporting and Documentation Requirements [ Method for Cost Determination ]). A facility will be reimbursed under the pro forma rate methodology until HHSC receives an acceptable cost report which includes at least 12 months of the facility's cost data and is available to be included in the annual interim rate determination process.

(g) Experimental class. HHSC may define experimental classes of service to be used in research and demonstration projects on new reimbursement methods. Demonstration or pilot projects based on experimental classes may be implemented on a statewide basis or may be limited to a specific region of the state or to a selected group of providers. Reimbursement for an experimental class is not implemented, however, unless HHSC and the Health Care Financing Administration (HCFA) approve the experimental methodology.

(h) Cost Reporting. For cost reports pertaining to providers' fiscal years ending in calendar year 2004 and subsequent years the following applies:

(1) Providers must follow the cost-reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(2) Providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs), in addition to the following.

(3) Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(i) Adjusting costs. 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). HHSC may adjust reimbursement if new legislation, regulations, or economic factors affect costs, according to §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs).

(j) Field Audit and Desk Review. Desk reviews or field audits are performed on cost reports for all contracted providers. The frequency and nature of the field audits are determined by HHSC 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 under §355.110 of this title (relating to Informal Reviews and Formal Appeals).

§355.457.Fiscal Accountability.

(a) General principles. The Texas Health and Human Services Commission (HHSC) applies the general principles of cost determination as specified in §355.101 of this title (relating to introduction). Fiscal accountability is a process used to gauge the ongoing financial performance under the non-state operated facility reimbursement rates.

(b) Annual reporting. Fiscal accountability will consist of the annual reporting of direct service costs from all non-state operated providers. The data will be collected on a cost report designed by HHSC in accordance with §355.105(b) [ §355.452 ] of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures [ Cost Reporting Procedures ]).

(1) Direct service costs include costs associated with personnel who provide direct hands-on support for consumers and include personnel such as direct care workers, first-level supervisors of direct care staff, QMRPs, registered nurses, and licensed vocational nurses. Direct service costs include: costs related to wage rates, benefits, payroll taxes, contracts for direct services, and direct service supervision information. Accrued leave (sick or annual) can only be considered a direct service cost if the employee has a right to the cash value of that leave upon termination.

(2) The provider is responsible for submission of the fiscal accountability cost report to HHSC, and payment of amounts owed [ to TDMHMR ] in accordance with subsection (c)[ (2) and ] (3) of this section, regardless of whether the provider contracts with another entity for the management or operation of the ICF/MR.

(A) If the provider contracts with another entity for the management or operation of the ICF/MR, the provider must report the specific direct services costs of that entity as required in the cost report instructions and not the amount for which the provider is contracting for the entity's services.

(B) For staff whose duties include work other than the provision of direct services, the proportion of work that is spent on direct services may be included in the direct service costs. The proportion of their salary and benefits that is compensation for direct services work can be included in the direct service cost report. The facility must have a procedure that specifies how direct service work time is allocated.

(C) If the staff providing direct services is an owner, operator, or a related party as defined in §§355.102(i)-355.103(b)(2) [ §355.701(a)(9) ] of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs [ Definitions and General Specifications ]), the salary and benefits must be the lesser of the actual wages and benefits paid or the wages and benefits for a comparable staff person assumed in the model. [ The facility must have a procedure that specifies how direct service work time is allocated. ] Owner and related party employees who provide both direct care and indirect services must maintain daily time sheets that record the time spent on activities in each area. The provider must maintain documentation relating to compensation, bonuses, and benefits of each owner or related party in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). The maximum hours per fiscal year that an owner and related party employee may report on the cost report is 2080 hours per fiscal year.

(3) The direct service portions of the current rate model are inflated on an annual basis as specified in §355.456(d)(2) of this title (relating to Rate Setting Methodology).

(4) TDMHMR will place a vendor hold on a prior owner at a change of ownership which results in the execution of a new provider agreement. The prior owner must submit a fiscal accountability report to HHSC for the current reporting period. Upon receipt of an acceptable fiscal accountability report and resolution of any outstanding balances, the vendor hold will be released.

(5) For cost reports pertaining to providers' fiscal years ending in calendar year 2004 and subsequent years the following applies:

(A) Providers must follow the cost-reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(B) Providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs), in addition to the following.

(C) Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(6) Field Audit and Desk Review. Desk reviews or field audits are performed on cost reports for all contracted providers. The frequency and nature of the field audits are determined by HHSC 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).

(c) HHSC will require providers to report all direct costs incurred in their annual fiscal year. HHSC will compare the reported direct service costs to the direct service cost component of the modeled rates.

(1) Paragraph (2) of this subsection, concerning the fiscal accountability repayment, applies to that portion of the provider's fiscal year that occurs after April 5, 1998. Paragraph (3) of this subsection, concerning the fiscal accountability repayment, applies to that portion of the provider's fiscal year that begins on or after January 1, 1999.

[ (2) The total direct service revenue of the modeled rates is the direct service portion of the rate multiplied by the number of allowable units paid for services provided during the reporting period.]

[ (A) Providers whose direct service costs are 90% or more of the direct service revenues will not be subject to repayment under this section.]

[ (B) Providers whose direct service costs are less than 80% of the direct service revenues will be required to pay to TDMHMR the difference between the direct service costs and 95% of the direct service revenues.]

[ (C) Providers whose direct service costs are between 80% and 85% of the direct service revenues will be required to pay to TDMHMR 100% of the difference between the direct service costs and 85% of the direct service revenues plus 50% of the difference between 85% and 90% of the direct service revenues.]

[ (D) Providers whose direct service costs are between 85% and 90% of the direct service revenues will be required to pay to TDMHMR 50% of the difference between the direct service costs and 90% of the direct service revenues.]

(2) [ (3) ] The total direct service revenue of the modeled rates is the direct service portion of the rate multiplied by the number of allowable units paid for services provided during the reporting period.

(A) Providers whose direct service costs are 90% or more of the direct service revenues will not be subject to repayment under this section.

(B) Providers whose direct service costs are less than 85% of the direct service revenues will be required to pay to TDMHMR the difference between the direct service costs and 95% of the direct service revenues.

(C) Providers whose direct service costs are between 85% and 90% of the direct service revenues will be required to pay to TDMHMR 75% of the difference between the direct service costs and 90% of the direct service revenues.

[ (4) Providers will be notified of their repayment status within 90 days of submitting their cost reports. A provider's repayment status may change as a result of the desk reviews or outside audits of cost reports, or by adjustments to claims paid to the provider for services provided in the cost reporting period. Providers will submit the repayment amount within 60 days of notification.]

(3) The fiscal accountability calculation shows an estimated amount due for repayment. A provider's repayment status may change as a result of the desk review or onsite audit of the cost report or adjustments to claims paid to the provider for services provided in the cost reporting period. The provider will be notified of the results of the desk reviews or onsite audits in accordance with §355.107 of this title (relating to Notification of Exclusions and Adjustments). If the adjustments and or exclusions result in an amount due, or if the original estimated amount due calculation is upheld, HHSC will notify the provider of the amount due and the provider will remit the repayment amount no later than 60 calendar days of the date the notification was received by the provider.

(4) [ (5) ] Repayment will be collected from the following:

(A) the provider or legal entity submitting the report;

(B) any other legal entity responsible for the debts or liabilities of the submitting entity; or

(C) the legal entity on behalf of which a report is submitted.

(5) [ (6) ] Providers [ These entities ] will be jointly and severally liable for any repayment due [ to TDMHMR ]. Failure to repay the amount due by the 61st calendar day after the provider has received notification [ when notified ] may result in a vendor hold on all of the ICF/MR payments to a provider [ facilities included in the cost report ].

(6) [ (7) ] Providers may request an informal review and, if necessary, an administrative hearing to dispute an action taken under §355.110 of this title (relating to Informal Reviews and Formal Appeals). [ Providers who wish to appeal the requirement to make payment to TDMHMR in accordance with this section may do so in accordance with 25 TAC Chapter 409, Subchapter B (relating to Adverse Actions) ].

(d) If a provider is paid a transitional add-on for a consumer in accordance with §355.456(e) of this title, the provider may exclude the amount of the transitional add-on from its fiscal accountability cost report only if the consumer resides in the small non-state operated facility for at least 12 months.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403319

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter F. GENERAL REIMBURSEMENT METHODOLOGY FOR ALL MEDICAL ASSISTANCE PROGRAMS

1 TAC §355.707

(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the Texas Health and Human Services Commission or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The repeal is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The repeal implements the Government Code, §§531.033 and 531.021(b).

§355.707.Reviews and Administrative Hearings.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403320

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter F. REIMBURSEMENT METHODOLOGY FOR PROGRAMS SERVING PERSONS WITH MENTAL ILLNESS AND MENTAL RETARDATION

1 TAC §§355.722, 355.741, 355.773, 355.791

The amendments are proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The amendments implement the Government Code, §§531.033 and 531.021(b).

§355.722.Reporting Costs by Home and Community-based Services (HCS) [ HCS ] Providers.

(a) On an annual basis, all state-operated HCS providers must submit cost reports as directed by HHSC or its designee and in accordance with this subchapter. The Texas Health and Human Services Commission (HHSC) applies the general principles of cost determination as specified in §355.101 of this title (relating to Introduction).

[ (b) On an annual basis, non-state operated HCS providers must report direct service costs as specified in this subsection and in accordance with this subchapter. ]

(1) Direct service costs are defined to include costs associated with personnel who provide direct hands-on support for consumers and include personnel such as direct care workers, first-level supervisors of direct care workers, registered nurses, licensed vocational nurses, and other personnel who provide activities of daily living training and clinical program services. Direct service costs include: costs related to wage rates, benefits, payroll taxes, contracts for direct services, and direct service supervision information. Accrued leave (sick or vacation) can only be considered a direct service cost if the employee has a right to a cash value of that leave upon termination.

(2) For staff whose duties include work other than the provision of direct services, the proportion of work that is spent on direct services may be included in the direct service costs. The proportion of their salary and benefits that are compensation for direct services work can be included in the direct service cost report only to the extent that the salary and benefits for this direct service work must be the lesser of the actual wages and benefits or the wages and benefits for a comparable direct care workers assumed in the model. The provider must have a procedure that specifies how direct service work time is allocated.

(3) The direct service portions of the current rate model are inflated on an annual basis as specified in §355.723(g)(1) of this title (relating to Reimbursement Methodology for Home and Community-Based Services (HCS)). This will increase the indirect part of the rate proportionately.

[ (4) On an annual basis, non-state operated providers will submit direct service cost data.]

(4) [ (5) ] Providers must report the following costs:

(A) Staff wages related to the delivery of direct services including residential assistance, day habilitation services, and the direct supervision of the delivery of these services.

(B) These costs may be either the HCS provider's actual expense or contracted expenditures.

(b) [ (c) ] HHSC will select a sample of non-state operated HCS providers which will be required to submit a full and accurate account of all costs related to the provision of services for an HCS provider's fiscal year in order to collect data for the analysis referenced in §355.723(g)(2) of this title (relating to Reimbursement Methodology for Home and Community-Based Services (HCS).

(c) [ (d) ] HHSC will conduct desk audits of all full cost reports and/or direct service cost reports, and will conduct on-site reviews of a sample of providers submitting cost reports.

(d) [ (e) ] Record keeping requirements. Each HCS provider must retain records according to HHSC's requirements. HCS providers must ensure that records are accurate and sufficiently detailed to support the legal, financial, and statistical information provided to HHSC.

(e) [ (f) ] Noncompliance with record keeping requirements. Failure to maintain records that support the information submitted to HHSC constitutes a violation of the HCS provider contract.

(f) [ (g) ] Allowable and unallowable costs. HCS providers must complete cost reports in accordance with this subchapter.

(g) [ (h) ] Certification. HCS providers must certify the accuracy of cost reports submitted to HHSC. HCS providers may be liable for civil and/or criminal penalties if the cost report is not completed according to HHSC requirements.

(h) [ (i) ] Due date. HCS providers must submit direct service cost reports no later than 90 calendar days after the end of the reporting period or 90 days after the date that HHSC mails the form to the HCS provider, whichever is later. HCS providers must submit full cost reports no later than 90 days after the reporting period or 90 days after the date that HHSC mails the form to the HCS provider, whichever is later.

(i) [ (j) ] Extension of due date. HHSC may grant extensions of due dates for good cause. Good cause is defined as one that the HCS provider could not reasonably be expected to control. An HCS provider must submit a request for extension in writing to HHSC before the cost report due date. HHSC will respond to a request for extension within 10 working days of its receipt.

(j) [ (k) ] Cost data. HHSC may at times require additional financial and statistical information to ensure the fiscal integrity of the HCS Program. Each provider must submit additional information to HHSC upon request, unless the information is not at the HCS provider's disposal.

(k) [ (l) ] Failure to submit requested data. Failure to submit acceptable cost data by the due date constitutes a violation of the HCS provider contract.

(l) [ (m) ] Review of cost data. HHSC or its designee reviews each HCS provider's cost data to ensure that the financial and statistical information submitted conforms to all applicable rules and instructions. Forms that are not completed according to HHSC's instructions or rules may be returned to the HCS provider for proper completion.

(m) [ (n) ] On-site audits. TDMHMR or its designee performs a sufficient number of on-site financial audits to ensure the fiscal integrity of the HCS Programs. The number of on-site audits performed may vary.

(n) [ (o) ] On-site audit standards. HHSC performs on-site financial audits in a manner consistent with the generally accepted auditing standards (GAAS) approved by the American Institute of Certified Public Accountants and included in Standards for Audit of Governmental Organizations, Programs, Activities and Functions, issued by the United States Comptroller General.

(o) [ (p) ] Access to records. Each HCS provider must allow access to HHSC to any and all records necessary to verify cost data submitted to HHSC. This requirement includes records pertaining to related-party transactions and other business activities engaged in by the HCS provider that are directly or indirectly related to the provision of contracted services. Failure to allow inspection of pertinent records within 10 working days following written notice from HHSC constitutes a violation of the HCS provider contract. If the administrative office or other entity pertaining to a multi-contract operation refuses access to records, then the penalties are extended to all of the provider's entities having Medicaid contracts with TDMHMR. Additional rules regarding access to records that are out-of-state may be found in §355.105 [ §355.702 ] of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures [ Methods for Cost Determination ]).

(p) [ (q) ] Reviews of exclusions or adjustments. An HCS provider who disagrees with HHSC's exclusion or adjustment of items in cost reports may request an informal review and, when appropriate, an administrative hearing as specified in §355.110 [ §355.7 ] of this title (relating to Informal Reviews and Formal Appeals [ Reviews and Administrative Hearings ]).

(q) [ (r) Notification of exclusions and adjustments. HHSC will notify an HCS provider of exclusions and any adjustments, including caps applied, to reported costs in accordance with §355.705 of this title (relating to Notification). ] Field Audit and Desk Review. Desk reviews or field audits are performed on cost reports for all contracted providers. The frequency and nature of the field audits are determined by HHSC 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).

(r) The information in subsections (d)-(p) of this section applies to cost reports pertaining to provider's fiscal years ending in calendar year 2001, 2002 and 2003.

(s) For cost reports pertaining to providers' fiscal years ending in calendar year 2004 and subsequent years the following applies:

(1) Providers must follow the cost-reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(2) Providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs), in addition to the following.

(3) Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(t) Allowable compensation for owners and related parties and definitions of owners and related parties are specified in §355.102(i) and §355.103(b)(2) of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs. Owner and related party employees who provide both direct care and indirect services must maintain daily time sheets that record the time spent on activities in each area. The provider must maintain documentation relating to compensation, bonuses, and benefits of each owner or related party in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). The maximum hours per fiscal year that an owner and related party employee may report on the cost report is 2080 hours per fiscal year.

(u) 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). HHSC may adjust reimbursement if new legislation, regulations, or economic factors affect costs, according to §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs).

(v) [ (s) ] Fiscal Accountability.

(1) General principles. Fiscal accountability is a process used to gauge the ongoing financial performance under the non-state operated reimbursement rates.

(2) Annual reporting. Fiscal accountability will consist of the annual reporting of the direct service costs including wages, and benefits, from all non-state operated HCS providers. The data will be collected on a cost report designed by HHSC in accordance with §355.105(b) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) .

(A) TDMHMR will place a vendor hold on payments to an HCS provider whose provider agreement is being assigned or terminated. The HCS provider will submit a cost report for the current reporting period to HHSC. Upon receipt of an appropriate cost report and repayment of any amounts due to HHSC in accordance with this section, the vendor hold will be released.

(B) HCS providers are exempt from submitting cost reports in accordance with this section for the portion of their programs which convert to the Mental Retardation Local Authority (MRLA Program) for the fiscal year in which the conversion occurred.

(3) HHSC will require HCS providers to report all direct costs incurred on an annual fiscal year basis. HHSC will compare the reported direct service costs to the total direct service revenue.

(4) Paragraph (5) of this subsection applies to that portion of the HCS provider's fiscal year that occurs after April 5, 1998. Paragraph (6) of this subsection, concerning the following fiscal accountability repayment, applies to that portion of the provider's fiscal year that begins on or after January 1, 1999.

(5) Direct service revenues are calculated by multiplying the number of units eligible for payment that have been paid, for services delivered during the reporting period times the appropriate direct service portion of the rate for the service billed.

(A) HCS providers whose direct service costs are 85% or more of the direct service revenues will not be subject to repayment under this section.

(B) HCS providers whose direct service costs are less than 80% of the direct service revenues will be required to pay to TDMHMR the difference between the direct service costs and 95% of the direct service revenues.

(C) HCS providers whose direct service costs are between 80% and 85% of the direct service revenues will be required to pay to TDMHMR 100% of the difference between the direct service costs and 85% of the direct service revenues.

(6) Direct Service Revenues are calculated by multiplying the number of units eligible for payment that have been paid for services delivered during the reporting period times the appropriate direct service portion of the rate for the service billed.

(A) HCS providers whose direct service costs are 90% or more of the direct service revenues will not be subject to repayment under this section.

(B) HCS providers whose direct service costs are between 85% and 90% of the direct service revenues will be required to pay to TDMHMR 50% of the difference between the direct service costs and 90% of the direct service revenues.

(C) HCS providers whose direct service costs are between 80% and 85% of the direct service revenues will be required to pay to TDMHMR 100% of the difference between the direct service costs and 85% of the direct service revenues plus 50% of the difference between 85% and 90% of the direct service revenues.

(D) HCS providers whose direct service costs are less than 80% of the direct service revenues will be required to pay to TDMHMR the difference between the direct service costs and 95% of the direct service revenues.

(7) Where applicable, HCS providers will be notified of the requirement to repay revenues within 90 days of submitting their cost reports. An HCS provider's repayment status may change as a result of the desk reviews or outside audits of cost reports, or adjustments to claims paid to the HCS provider for services provided in the cost reporting period. HCS providers will submit the repayment amount within 60 days of notification.

(8) Repayment will be made by the following:

(A) the HCS provider or legal entity submitting the report;

(B) any other legal entity responsible for the debts or liabilities of the submitting entity; or

(C) the legal entity on behalf of which a report is submitted.

(9) HCS providers required to repay revenues to TDMHMR will be jointly and severally liable for any repayment. TDMHMR will apply a vendor hold on Medicaid payments to a HCS provider for not making the payment to TDMHMR within 60 days of receiving notice.

[ (10) HCS providers who wish to appeal the requirement to make payment to TDMHMR should do so in accordance with 25 TAC §409.106.]

§355.741.Definitions for Service Coordination and Targeted Case Management .

The following words and terms, when used in §§355.741-743, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Allowable costs--Those expenses that are reasonable and necessary costs in the normal conduct of operations relating to case management services. See also definitions of "reasonable cost" and of "necessary cost" in this section, and §355.102 (f)(1) and (2) [ §355.743(e)(2) ] of this title (relating to General Principles of Allowable and Unallowable Costs [ Reimbursement Methodology for Service ]).

(2) Case management contact--An action taken on behalf of a client to locate, coordinate and monitor necessary and appropriate services with a specific person or organization. This activity is referred to as service coordination in the Texas Department of Mental Health and Mental Retardation (TDMHMR) Services Coordination program rule.

(3) Developmental period--The period of time from conception to 18 years of age.

(4) Functional retardation--Arrest or deterioration of intellectual ability that occurs after the developmental period. It is not the same as mental retardation.

(5) Mental retardation--Significantly subaverage general intellectual functioning existing concurrently with deficits in adaptive behavior and originating during the developmental period.

(6) Necessary cost--A cost that is usual and customary in the operation of case management services in accordance with §355.102(f)(2) of this title (relating to General Principles of Allowable and Unallowable Costs) and that meets the following requirements.

(A) The cost is not for personal or other activity not specifically related to the provision of case management services.

(B) The cost does not appear on the list of specific unallowable costs and is not unallowable under §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs) or other federal, state, or local laws or regulations. [ See definition of "unallowable cost" in this section, and see §355. 743(e)(3) of this title (relating to Reimbursement Methodology for Service) ].

(C) The cost bears a significant relationship to case management services. The test of significance is whether there would be an adverse impact on the delivery of case management services if the expenditure were eliminated.

(7) Prospective reimbursement--Reimbursement payment amounts that are determined for a future period of time and that are not to be readjusted during that period

(8) Reasonable cost--The amount that does not exceed the cost which would be incurred by a prudent business operator seeking to contain costs in accordance with §355.102(f)(1) of this title (relating to General Principles of Allowable and Unallowable Costs) .

(9) Related condition--A severe, chronic disability that meets all the criteria outlined in 42 Code of Federal Regulations 435.1009.

(10) Subaverage general intellectual functioning--Measured intelligence on standardized psychometric instruments of two or more standard deviations below the age group mean for the tests used.

[ (11) Unallowable cost--A cost that is not a reasonable or necessary cost for the provision of case management services. See definitions of "necessary cost" and of "reasonable cost" in this section.]

§355.773.Reporting Costs by Mental Retardation Local Authority (MRLA) [ MRLA ] Providers.

(a) Submission of cost reports. All MRLA providers must submit cost reports as directed by the Health and Human Services Commission (HHSC) in accordance with §§355.701-355.709 of this title (relating to General Reimbursement Methodology for Programs Serving Persons with Mental Illness and Mental Retardation [ All Medicaid Assistance Programs ]).

(b) Recordkeeping requirements. Each MRLA provider must retain records according to HHSC's requirements. MRLA providers must ensure that records are accurate and sufficiently detailed to provide the legal, financial, and statistical information requested by HHSC.

(c) Noncompliance with recordkeeping requirements. If an MRLA provider fails to maintain records that support the information submitted, HHSC will notify TDMHMR to place the provider on vendor hold.

(d) Cost certification. Providers must certify the accuracy of cost reports submitted to HHSC. Providers may be liable for civil and/or criminal penalties if the cost report is not completed according to HHSC requirements.

(e) Due date. Providers must submit cost reports no later than 90 days after the reporting period or 90 days after the date that HHSC mails the form to the provider, whichever is later.

(f) Extension of due date. HHSC may grant extensions of due dates for good cause. Good cause is defined as a causal factor that the provider could not reasonably be expected to control. A provider must submit a request for an extension in writing to HHSC before the cost survey or cost report due date. HHSC will respond to a request for extension within 10 working days of its receipt.

(g) Cost data. HHSC may at times require additional financial and statistical information to ensure the fiscal integrity of the MRLA program. Each provider must submit additional information to HHSC upon request, unless the information is not at the provider's disposal.

(h) Failure to submit requested data. Failure to submit acceptable cost data by the due date may result in HHSC notifying TDMHMR to place the provider on vendor hold.

(i) Review of cost data. HHSC reviews each provider's cost data to ensure that the financial and statistical information submitted conforms to all applicable rules and instructions. Forms that are not completed according to HHSC's instructions or rules may be returned to the provider for proper completion.

(j) On-site financial audits. HHSC performs a sufficient number of on-site financial audits to ensure the fiscal integrity of the MRLA program. The number of on-site audits performed may vary.

(k) On-site financial audit standards. HHSC or its designee performs on-site financial audits in a manner consistent with the generally accepted auditing standards (GAAS) approved by the American Institute of Certified Public Accountants and included in Standards for Audit of Governmental Organizations, Programs, Activities and Functions, issued by the United States Comptroller General.

(l) Access to records. Each provider must allow access by HHSC to any and all records necessary to verify cost data submitted to HHSC. This requirement includes records pertaining to related-party transactions and other business activities engaged in by the provider that are directly or indirectly related to the provision of contracted services. Failure to allow inspection of pertinent records within 10 working days following written notice from HHSC constitutes a violation of the MRLA provider contract. If the administrative office or other entity pertaining to a multi-contract operation refuses access to records, then the penalties are extended to all of the provider's entities having Medicaid contracts with TDMHMR. Additional rules regarding access to records that are out-of-state may be found in §355.703 of this title (relating to Basic Objectives and Criteria for Review of Cost Reports).

(m) Reviews of exclusions or adjustments. A provider who disagrees with HHSC's exclusion or adjustment of items in cost reports may request an informal review and, when appropriate, an administrative hearing as specified in §355.110 [ §355.707 ] of this title (relating to Informal Reviews and Formal Appeals [ Reviews and Administrative Hearings ]).

(n) Notification of exclusions and adjustments. HHSC will notify a provider of exclusions and any adjustments, including caps applied, to reported costs in accordance with §355.107 of this title (relating to Notification of Exclusions and Adjustments) .

(o) Fiscal Accountability. Fiscal accountability is a process used to gauge the ongoing financial performance under the reimbursement rates.

(1) Fiscal accountability will consist of the annual reporting of direct service costs including wages, benefits, staffing, and supervisory span-of-control information from all MRLA providers. The data will be collected on a cost survey designed by HHSC.

(2) Providers are required to submit direct services costs on a survey during a uniform three-month period of the year, selected by HHSC. The survey will reflect the provider's actual direct costs for the three-month period. The direct service costs will be compared to the "direct service cost" component of the MRLA rates. Instances in which a provider's actual direct service costs, as captured by the quarterly cost surveys, are less than 85% of the direct service revenues in the model will require additional reporting of costs and other information from the provider.

(3) HHSC will review the results obtained from the direct services cost surveys with representatives of provider associations and advocacy groups to further refine the fiscal accountability process. Direct services cost surveys will be collected in each fiscal year. In instances in which a provider's actual direct service costs are less than 85% of the direct service revenues in the model, HHSC may require the provider to:

(A) report more detailed financial information;

(B) submit to a quality assurance survey and review;

(C) submit to a utilization review of all services provided; and/or

(D) submit to a detailed audit of all relevant financial records.

(p) Owner and related party employees who provide both direct care and indirect services must maintain daily time sheets that record the time spent on activities in each area. The provider must maintain documentation relating to compensation, bonuses, and benefits of each owner or related party in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). The maximum hours per fiscal year that an owner and related party employee may report on the cost report is 2080 hours per fiscal year.

§355.791.Reporting Costs and Reimbursement Methodology for the Texas Home Living (TxHmL) [ by TxHmL ] Program [ Providers ].

(a) Submission of cost reports. On an annual basis, Texas Home Living (TxHmL) Program providers must submit cost reports [ Full Cost Reports ] as directed by the Health and Human Services Commission (HHSC) or its designee in accordance with §§355.105 [ §§355.701-355.709 ] of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures [ General Reimbursement Methodology for All Medical Assistance Programs ]).

(1) "Direct service costs" are defined in §355.102(f)(3) [ §355.708(c)(3) ] of this title (relating to General Principles of Allowable and Unallowable Costs [ Allowable and Unallowable Costs ]). For purposes of this section, direct service costs include:

(A) costs associated with personnel who provide direct hands-on support for consumers and include personnel such as:

(i) direct care workers;

(ii) first-level supervisors of direct care workers;

(iii) registered nurses;

(iv) licensed vocational nurses; and

(v) other personnel who provide activities of daily living training and clinical program services; and

(B) costs related to:

(i) wage rates;

(ii) benefits;

(iii) payroll taxes;

(iv) contracts for direct services; and

(v) direct service supervision information; and

(C) [ accrued ] leave (sick or vacation) in accordance with §355.103(b)(1)(A)(iii)(III)(-c-) of this title (relating to Specifications for Allowable and Unallowable Costs) including accrued leave if the TxHmL Program provider has implemented a written policy that entitles an employee to the cash value of accrued leave upon termination.

(2) For staff whose duties include work other than the provision of direct services, the proportion of work that is spent on direct services may be included in the direct service costs.

(A) The proportion of their salary and benefits that is compensation for direct services work can be included in the direct service cost report only to the extent that the salary and benefits for this direct service work must be the lesser of the actual wages and benefits or the wages and benefits for a comparable direct care worker assumed in the model.

(B) The TxHmL Program provider must have a procedure in place that specifies how direct service work time is allocated.

(3) TxHmL Program providers must report the following information in the Full Cost Report:

(A) direct service costs related to the delivery of direct services including, but not limited to community support services, supported employment, and the direct supervision of the delivery of these services; and

(B) indirect costs including but not limited to facility operating and administrative costs.

(4) These direct service costs and indirect costs may be either the TxHmL Program provider's actual expense or contracted expenditures.

(b) Record keeping requirements.

(1) A TxHmL Program provider must:

(A) retain records according to HHSC's requirements;

(B) ensure that records are accurate and sufficiently detailed to provide the legal, financial, and statistical information requested by HHSC; and

(C) maintain all work papers and any other records that support the information submitted on the Full Cost Reports relating to all allocations, cost centers, cost or statistical line items, surveys, and schedules.

(2) HHSC may require supporting documentation other than that contained in the cost report to substantiate reported information.

(3) A TxHmL Program provider must maintain [ the following ] documentation [ , at a minimum, ] relating to compensation , bonuses, and benefits of each owner or related party [ : ] in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) .

[ (A) a detailed written description of actual duties, functions, and responsibilities;]

[ (B) documentation substantiating that the services performed are not duplicative of services performed by other employees;]

[ (C) time sheets or other documentation verifying the hours and days worked;]

[ (D) the amount of total compensation paid for these duties, with a breakdown detailing regular salary, overtime, bonuses, benefits, and other payments;]

[ (E) documentation of regular, periodic payments and/or accruals of the compensation;]

[ (F) documentation that the compensation is subject to payroll or self-employment taxes; and]

[ (G) a detailed allocation worksheet indicating how the total compensation was allocated across business components receiving the benefit of these duties.]

(4) A TxHmL Program provider must maintain clearly defined bonus policies in its written agreements with employees or in its overall employment policy in accordance with §355.103 (b)(1)(A)(i) of this title (relating to Specifications for Allowable and Unallowable Costs) and for owners and related parties §355.105(b)(2)(B)(xi)(I) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) .

[ (A) At a minimum, the bonus policy must include the basis for distributing the bonuses including qualifications for receiving the bonus, and how the amount of each bonus is calculated.]

[ (B) Other documentation must specify who received bonuses, whether the persons receiving bonuses are owners, related parties, or arm's-length employees, and the bonus amount received by each individual.]

(5) A TxHmL Program provider must maintain clearly defined benefit policies in its written agreements with employees or in its overall employment policy in accordance with §355.103(b)(1)(A)(iii) of this title (relating to Specifications for Allowable and Unallowable Costs) and for owners and related parties §355.105(b)(2)(B)(xi)(II) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) . [ At a minimum, the documentation must include: ]

[ (A) the basis for eligibility for each type of benefit available;]

[ (B) who is eligible to receive each type of benefit;]

[ (C) who actually receives each type of benefit;]

[ (D) whether the persons receiving each type of benefit are owners, related parties, or arm's-length employees; and]

[ (E) the amount of each benefit received by each individual.]

(6) A TxHmL Program provider must maintain documentation for each employee that clearly identifies each compensation component, including regular pay, overtime pay, incentive pay, mileage reimbursements, bonuses, sick leave, vacation, other paid leave, deferred compensation, retirement contributions, TxHmL Program provider-paid instructional courses, health insurance, disability insurance, life insurance, and any other form of compensation.

(A) Types of documentation would include insurance policies, TxHmL Program provider benefit policies, records showing paid leave accrued and taken, documentation to support hours (regular and overtime) worked and wages paid, and mileage logs or other documentation to support mileage reimbursements and travel allowances.

(B) For accrued benefits, the documentation must clearly identify the period of the accrual. For example, if an employee accrues two weeks of vacation during 20X1 and receives the corresponding vacation pay during 20X3, that employee's compensation documentation for 20X3 should clearly indicate that the vacation pay received had been accrued during 20X1.

(c) Noncompliance with record keeping requirements. Failure to maintain accurate records is a violation of the TxHmL Program provider contract, and will result in HHSC notifying TDMHMR to place the TxHmL Program provider and all waiver contracts on vendor hold.

(d) Cost reporting. [ Allowable and unallowable costs. ] A TxHmL Program provider must complete Full Cost Reports in accordance with HHSC's rules, regulations, and instructions.

(1) Providers must follow the cost-reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(2) Providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs), in addition to the following.

(3) Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(4) Allowable compensation for owners and related parties and definitions of owners and related parties are specified in §355.102(i) and §355.103(b)(2) of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs. Owner and related party employees who provide both direct care and indirect services must maintain daily time sheets that record the time spent on activities in each area. The provider must maintain documentation relating to compensation, bonuses, and benefits of each owner or related party in accordance with §355.105(b)(2)(B)(xi) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). The maximum hours per fiscal year that an owner and related party employee may report on the cost report is 2080 hours per fiscal year.

(e) Cost certification. A TxHmL Program provider must certify the accuracy of cost reports submitted to HHSC. A TxHmL Program provider may be liable for civil and/or criminal penalties if the cost report is not completed according to HHSC requirements.

(f) Due date. A TxHmL Program provider must submit Full Cost Reports in accordance with §355.105(c) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures) [ no later than 90 days after the reporting period or 90 days after the date that HHSC mails the form to the TxHmL Program provider, whichever is later. ]

(g) Extension of due date. HHSC may grant extensions of due dates for good cause in accordance with §355.105(c)(2) . [ Good cause is defined as a causal factor that the TxHmL Program provider could not reasonably be expected to control. A TxHmL Program provider must submit a request for an extension in writing to HHSC before the cost survey or Full Cost Report due date. HHSC will respond to a request for extension within 15 business days of its receipt. ]

(h) Cost data. HHSC may at times require additional financial and statistical information to assess the fiscal integrity of the TxHmL Program in accordance with §355.105(c)(3) . [ A TxHmL Program provider must submit additional information to HHSC upon request, unless the information is not subject to the TxHmL Program provider's control. ]

(i) Failure to submit requested data. Failure to submit acceptable cost data by the due date constitutes a violation of the TxHmL Program provider contract and may result in [ HHSC notifying TDMHMR to place the TxHmL Program provider and all waiver contracts on ] vendor hold.

(j) Review of cost data. HHSC reviews each TxHmL Program provider's cost data to determine whether the financial and statistical information submitted conforms to all applicable rules and instructions. Forms that are not completed according to HHSC's instructions or rules may be returned to the TxHmL Program provider for proper completion.

(k) Desk reviews or field audits are performed on cost reports for all contracted providers. The frequency and nature of the field audits are determined by HHSC 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). [ On-site financial audits. HHSC performs a sufficient number of on-site financial audits to assess the fiscal integrity of the TxHmL Program. The number of on-site audits performed may vary. ]

[ (l) On-site financial audit standards. HHSC or its designee performs on-site financial audits in a manner consistent with the Government Auditing Standards issued by the United States Comptroller General.]

(l) [ (m) ] Access to records. Each TxHmL Program provider must allow access by HHSC or its authorized representatives to any and all records necessary to verify cost data submitted to HHSC.

(1) This requirement includes records pertaining to related-party transactions and other business activities engaged in by the TxHmL Program provider that are directly or indirectly related to the provision of contracted services.

(2) Failure to allow inspection of pertinent records within 10 working days following written notice from HHSC constitutes a violation of the TxHmL Program provider contract.

(3) If the administrative office or other entity pertaining to a multi-contract operation refuses access to records, then the penalties are extended to all of the TxHmL Program provider's entities having Medicaid contracts with TDMHMR.

(4) Additional rules regarding access to records that are out-of-state may be found in §355.105 [ §355.703 ] of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures [ Basic Objectives and Criteria for Review of Cost Reports ]).

(m) [ (n) ] Reviews of exclusions or adjustments. An TxHmL Program provider who disagrees with HHSC's exclusion or adjustment of items in cost reports may request an informal review and, when appropriate, an administrative hearing as specified in §355.110 [ §355.707 ] of this title (relating to Informal Reviews and Formal Appeals [ Reviews and Administrative Hearings ]).

(n) [ (o) ] Notification of exclusions and adjustments. HHSC will notify a TxHmL Program provider of exclusions and any adjustments, including caps applied, to reported costs in accordance with §355.107 [ §355.705 ] of this title (relating to Notification of Exclusions and Adjustments [ Notification ]).

(o) General requirements. HHSC determines reimbursement rates according to §355.101 of this title (relating to Introduction).

(p) Payment rate determination. For the initial reimbursement period, beginning the effective date of the Center for Medicare and Medicaid Services (CMS) approval of the waiver, payment rates are those rates determined for other Medicaid programs with similar services. When payment rates are not available from other Medicaid programs with similar services, payment rates are determined on a pro forma approach in accordance with §355.101(c)(2)(B) and §355.105(h) of this title (relating to Introduction and General Reporting and Documentation Requirements, Methods, and Procedures).

(q) Payment rates for TxHmL services in effect for the initial reimbursement period will remain in effect until HHSC obtains sufficient reliable cost data to determine new payment rates.

(r) Each TxHmL Program 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). HHSC may adjust reimbursement if new legislation, regulations, or economic factors affect costs, according to §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs).

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403321

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter F. GENERAL REIMBURSEMENT METHODOLOGY FOR ALL MEDICAL ASSISTANCE PROGRAMS

1 TAC §355.792

(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the Texas Health and Human Services Commission or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The repeal is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The repeal implements the Government Code, §§531.033 and 531.021(b).

§355.792.Reimbursement Methodology for the TxHmL Program.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403322

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter E. COMMUNITY CARE FOR AGED AND DISABLED

1 TAC §355.505

The Texas Health and Human Services Commission (HHSC) proposes to amend §355.505 concerning the Reimbursement Methodology for the Community Living Assistance and Support Services (CLASS) Waiver Program, in its Medicaid Reimbursement Rates chapter. The purpose of the amendment is to add the reimbursement methodology for a new service in the CLASS program, support family service, and to define the method that will be used to determine the payment rate for this service. The amendment specifies that a modeled rate will be used to determine the payment rate for this service.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed section is in effect, there are no fiscal implications for state government as a result of enforcing or administering the section. The support family services will substitute for habilitation services the child would have been eligible for as a waiver service if they lived in their own home. The support family services daily rate will not exceed the average daily cost for habilitation services for children in the waiver. There are no fiscal implications for local governments as a result of enforcing or administering the section.

There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the section, because the amendments impose no additional requirements on businesses. There is no anticipated economic cost to persons who are required to comply with the proposed section. There is no anticipated effect on local employment in geographic areas affected by this section.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the section is in effect, the public benefit anticipated as a result of enforcing the section is that the method of determining the payment rate for this new service will be identified in rule.

HHSC has determined that this proposal is not a "major environmental rule" as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environmental exposure and that may adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment or the public health and safety of a state or a sector of the state. This proposal is not specifically intended to protect the environment or reduce risks to human health from environment exposure.

HHSC has determined that this proposal does not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking under §2007.043 of the Government Code.

Questions about the content of this proposal may be directed to Carolyn Pratt at (512) 491-1359 in the Texas Health and Human Services Commission's Rate Setting and Forecasting Department. Written comments on the proposal may be submitted to Ms. Pratt via facsimile at (512) 491-1998 or mail to Texas Health and Human Services Commission, Rate Setting and Forecasting, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register .

The amendment is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The amendment implements the Government Code, §§531.033 and 531.021(b).

§355.505.Reimbursement Methodology for the Community Living Assistance and Support Services Waiver Program.

(a) General requirements. The Texas Health and Human Services Commission (HHSC) applies the general principles of cost determination as specified in §355.101 of this title (relating to Introduction).

(b) General. Texas Medicaid contracted providers will be reimbursed for waiver services provided to Medicaid-eligible persons with related conditions (waiver services). Additionally, Texas Medicaid contracted providers will be reimbursed 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.

(c) Reporting of cost.

(1) Providers must follow the cost reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(2) All contracted providers must submit a cost report unless the number of days between the date the first Texas Department of Human Services (DHS) client received services and the provider's fiscal year end is 30 days or fewer.

(3) A provider may be excused from submitting a cost report if 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. Requests to be excused from submitting a cost report must be received by HHSC Rate Analysis before the due date of the cost report.

(d) Waiver reimbursement determination methodology.

(1) Unit of service reimbursement or reimbursement ceiling by unit of service. Reimbursement or reimbursement ceilings for related-conditions waiver services, habilitation, nursing services provided by an RN, nursing facilities provided by an LVN, physical therapy, occupational therapy, speech pathology, and psychological and respite care services will be determined on a fee-for-service basis. These services are provided under §1915(c) of the Social Security Act Medicaid waiver for persons with related conditions.

(2) Monthly reimbursement. The reimbursement for the related-conditions case management waiver service will be determined as a monthly reimbursement. This service is provided under the §1915(c) of the Social Security Act Medicaid waiver for persons with related conditions.

(3) Reporting and verification of allowable cost.

(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 reimbursements. HHSC 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 that are necessary for the provision of services and are consistent with federal and state regulations.

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

(i) there is reasonable doubt as to the accuracy or allowability of a significant part of the information reported; or

(ii) an auditor determines that reported costs are not verifiable.

(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) Reimbursement determination. Recommended unit of service reimbursements are determined in the following manner.

(A) Unit of service reimbursement for habilitation, nursing services provided by an RN, nursing services provided by an LVN, physical therapy, occupational therapy, speech pathology, and psychological services are determined in the following manner:

(i) Total allowable costs for each provider will be determined by analyzing the allowable historical costs reported on the cost report and other pertinent cost survey information.

(ii) Total allowable costs are reduced by the amount of the administrative expense fee and requisition fee revenues accrued for the reporting period.

(iii) Each provider's total 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).

(iv) 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).

(v) Each provider's projected total allowable costs are divided by the number of monthly units of service to determine the projected cost per client month of service.

(vi) For nursing services provided by an RN, nursing services provided by an LVN, physical therapy, occupational therapy, speech pathology, and psychological services:

(I) An allowable cost per unit of service is calculated for each service. The allowable costs per unit of service for each contracted provider are arrayed and weighted by the number of units of service, and the median cost per unit of service is calculated. The allowable costs per unit of service may be combined into an array with the allowable cost per unit of service of similar services provided by other programs in determining the median cost per unit of service.

(II) The median cost per unit of service for each waiver service is multiplied by 1.044.

(III) Specialized nursing reimbursement add-on. A specialized nursing reimbursement add-on will be paid in addition to the unit-of-service reimbursements for skilled nursing services provided by an RN or by an LVN. The specialized nursing reimbursement add-on is paid when a client requires, as determined by a physician, daily skilled nursing to cleanse, dress, and suction a tracheostomy or daily skilled nursing assistance with ventilator or respirator care. The client must be unable to do self-care and require the assistance of a nurse for the ventilator, respirator, or tracheostomy care. This specialized nursing reimbursement add-on will be determined in accordance with §355.105(h) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures).

(vii) For habilitation services two cost areas are created:

(I) The attendant cost area includes salaries, wages, benefits, and mileage reimbursement calculated as specified in §355.112 of this title (relating to Attendant Compensation Rate Enhancement).

(II) Another attendant cost area is created which includes the other habilitation services costs not included in subclause (I) of this clause as determined in clauses (i)-(v) of this subparagraph to create an other attendant cost area. An allowable cost per unit of service is calculated for the other habilitation cost area. The allowable costs per unit of service for each contracted provider are arrayed and weighted by the number of units of service, and the median cost per unit of service is calculated. The median cost per unit of service is multiplied by 1.044.

(III) The attendant cost area and the other attendant cost area are summed to determine the habilitation attendant cost per unit of service.

(B) Unit of service reimbursement and reimbursement ceilings for respite care services are determined in the following manner:

(i) For in-home respite care services, a unit of service reimbursement is determined using a method based on modeled projected expenses which are developed using data from surveys, cost report data from other similar programs or services, professionals' experience in delivering similar type services, and other relevant sources.

(ii) For out-of-home respite care services, a unit of service reimbursement ceiling is determined using a method based on modeled projected expenses which are developed using data from surveys, cost report data from other similar programs or services, professionals' experience in delivering similar type services, and other relevant sources.

(C) The monthly reimbursement for case management services is determined in the following manner:

(i) Total allowable costs for each provider will be determined by analyzing the allowable historical costs reported on the cost report and other pertinent cost survey information.

(ii) Total allowable costs are reduced by the amount of administrative expense fee revenues reported.

(iii) Each provider's total 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).

(iv) 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).

(v) Each provider's projected total allowable costs are divided by the number of monthly units of service to determine the projected cost per client month of service.

(vi) Each provider's projected cost per client month of service is arrayed from low to high and weighted by the number of units of service and the median cost per client month of service is calculated.

(vii) The median projected cost per client month of service is multiplied by 1.044.

(D) HHSC also adjusts reimbursement according to §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs) if new legislation, regulations, or economic factors affect costs.

(5) The reimbursement for support family services will be determined as a per day rate using a method based on modeled costs which are developed by using data from surveys, cost report data from other similar programs, payment rates from other similar programs, consultation with other service providers and/or professionals experienced in delivering contracted services, or other sources as determined appropriate by HHSC. The per day rate will have two parts, one part for the child placing agency and one part for the support family.

(e) Administrative expense fee determination methodology.

(1) One-time administrative expense fee. Reimbursement for the pre-enrollment assessment and care planning process required to determine eligibility for the waiver program will be provided as a one-time administrative expense fee.

(2) Administrative expense fee determination process. The recommended administrative expense fee is determined using a method based on modeled projected expenses which are developed using data from surveys, cost report data from other similar programs or services, professionals' experience in delivering similar services, and other relevant sources.

(f) Requisition fees. Requisition fees are reimbursements paid to the CLASS direct service agency contracted providers for their efforts in acquiring adaptive aids and minor home modifications for CLASS 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.

(g) Allowable and unallowable costs.

(1) Providers must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §355.102 and §355.103 of this title (relating to General Principles of Allowable and Unallowable Costs, and Specifications for Allowable and Unallowable Costs) as well as the following provisions.

(2) Participant room and board expenses are not allowable, except for those related to respite care.

(3) The cost of adaptive aids and home modifications is not allowable. Allowable labor costs associated with acquiring adaptive aids and home modifications should be reported in the cost report. Any item purchased for participants in this program and reimbursed through a voucher payment system is unallowable. Refer to §355.103(b)(17)(K) of this title (relating to Specifications for Allowable and Unallowable Costs).

(h) Authority to determine reimbursement. The authority to determine reimbursement is specified in §355.101 of this title (relating to Introduction).

(i) Reporting revenue. Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(j) Reviews and field audits of cost reports. Desk reviews or field audits are performed on all contracted providers' cost reports. The frequency and nature of the field audits are determined by HHSC 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 under §355.110 of this title (relating to Informal Reviews and Formal Appeals).

(k) Reporting requirements. The program director's full salary is to be reported on the line item of the cost report designated for the director.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403323

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


1 TAC §355.508

The Texas Health and Human Services Commission (HHSC) proposes new §355.508 concerning the Reimbursement Methodology for Transition Assistance Services, in its Medicaid Reimbursement Rates chapter. The purpose of the new rule is to create a reimbursement methodology for a new service in the Community Based Alternatives, Community Living Assistance and Support Services, Medically Dependent Children, Deaf Blind with Multiple Disabilities and Consolidated Waiver programs, transition assistance services, and to define the method that will be used to determine the payment rate for this service. The amendment specifies that a modeled rate will be used to determine the payment rate for this service.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that, for the first five-year period the proposed section is in effect, there are no fiscal implications for state government as a result of enforcing or administering the section. There are no fiscal implications for local governments as a result of enforcing or administering the section.

There is no adverse economic effect on small or micro businesses, or on businesses of any size, as a result of enforcing or administering the section, because the amendments impose no additional requirements on businesses. There is no anticipated economic cost to persons who are required to comply with the proposed section. There is no anticipated effect on local employment in geographic areas affected by the section.

Ed White, Director for Rate Setting and Forecasting, has determined that, for each year of the first five years the section is in effect, the public benefit anticipated as a result of enforcing the section is that the method of determining the payment rate for this new service will be identified in rule.

HHSC has determined that this proposal is not a "major environmental rule" as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environment exposure and that may adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment or the public health and safety of a state or a sector of the state. This proposal is not specifically intended to protect the environment or reduce risks to human health from environment exposure.

HHSC has determined that this proposal does not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking under §2007.043 of the Government Code.

Questions about the content of this proposal may be directed to Carolyn Pratt at (512) 491-1359 in the Texas Health and Human Services Commission's Rate Setting and Forecasting Department. Written comments on the proposal may be submitted to Ms. Pratt via facsimile at (512) 491-1998 or mail to Texas Health and Human Services Commission, Rate Setting and Forecasting, Mail Code H-400, 1100 West 49th Street, Austin, TX 78756-3101, within 30 days of publication in the Texas Register .

The new rule is proposed under the Texas Government Code, §531.033, which authorizes the commissioner of HHSC to adopt rules necessary to carry out the commission's duties, and §531.021(b), which established HHSC as the agency responsible for adopting reasonable rules governing the determination of fees, charges, and rates for medical assistance payments under the Human Resources Code, Chapter 32.

The new rule implements the Government Code, §§531.033 and 531.021(b).

§355.508.Reimbursement Methodology for Transition Assistance Services Case Management.

The reimbursement for transition assistance services will be determined as a one-time rate per client based on modeled costs of compensation and other support costs using data from surveys, cost reports, consultation with other professionals in delivering contracted services, or other sources determined appropriate by HHSC. This rate is for eligible clients receiving transition assistance services in the Community Based Alternatives, Community Living Assistance and Support Services, Medically Dependent Children, Deaf Blind with Multiple Disabilities, and Consolidated Waiver programs.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403324

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Subchapter F. REIMBURSEMENT METHODOLOGY FOR PROGRAMS SERVING PERSONS WITH MENTAL ILLNESS AND MENTAL RETARDATION

1 TAC §355.743

The Texas Health and Human Services Commission (HHSC) proposes to amend §355.743, Subchapter F, concerning reimbursement methodology for Mental Health Case Management in its Medicaid Reimbursement Rates chapter. The purpose of the amendment is to separate the reimbursement methodologies for Mental Health Case Management and Mental Retardation Service Coordination to reflect the separation of these services in the Texas Department of Mental Health and Mental Retardation (TDMHMR) programmatic rules. References to MR Service Coordination are being removed from this rule. The reimbursement methodology for MR Service Coordination will be proposed under a separate rule. This rule is also being amended to change the services due to the implementation of the Resiliency and Disease Management model; change references from the general cost determination rules of Subchapter F to the cost determination process rules of Subchapter A. The proposed rule replaces the references to "TDMHMR" with references to "TDMHMR or its successor agency". Also, references to a settle-up process are being removed. Proposed changes are to be effective August 31, 2004.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that for each year of the first five-year period that the proposed amendment is in effect, there are no foreseeable fiscal implications relating to costs or revenues of state or local government.

Ed White, Director of HHSC Rate Setting and Forecasting, has determined that, for each year of the first five-year period the proposed amendment is in effect, the public benefit anticipated as a result of enforcing the section is that the reimbursement methodology for Mental Health Case Management will: (a) reflect the services offered under the Resiliency and Disease Management model; (b) reflect the structure of the TDMHMR programmatic rules by separating the MR Service Coordination and MH Case Management programs into separate reimbursement methodology rules; (c) reflect use of the cost determination process rules which will be consistent for all HHSC long-term care programs; (d) reflect the elimination of the settle-up process after the payment rates have been established and paid to providers; and (e) recognize the impending transfer of TDMHMR's program responsibilities to agencies created by H.B. 2292, 78th Legislature (R.S.). There is no anticipated impact on small or micro-businesses to comply with the proposed amendments, as they will not be required to alter their business practices as a result of the amendments. There are no anticipated economic costs to persons required to comply with the proposed amendments. There is no anticipated impact on a local economy.

Under §2007.003(b) of the Government Code, HHSC has determined that Chapter 2007 of the Government Code does not apply to this proposed rule. The changes made by this rule do not implicate a recognized interest in private real property. Accordingly, HHSC is not required to complete a takings impact assessment regarding this rule.

Comments concerning the proposed amendments may be submitted in writing to Lupita Villarreal, Rate Analysis, by mail to 1100 West 49th Street, Mail Code H-400, Austin, Texas 78756-3101, by fax to 512/491-1998, or by e-mail to lupita.villarreal@hhsc.state.tx.us within 30 days of publication of this proposal in the Texas Register . For further information regarding the proposal or to make the proposal available for public review, contact local offices of DHS or Lupita Villarreal at (512) 491-1178 in HHSC's Rate Analysis Department.

The amendment is proposed under the Texas Government Code, §531.033, which provides the executive commissioner of HHSC with broad rulemaking authority; the Texas Government Code, §531.021(a), and the Texas Human Resources Code, §32.021(a), which provide HHSC with the authority to administer the federal medical assistance (Medicaid) program in Texas; and the Texas Government Code, §531.021(b), which provides HHSC with the authority to propose and adopt rules governing the determination of Medicaid reimbursements.

The proposed amendment affects the Texas Government Code, Chapter 531, and the Texas Human Resources Code, Chapter 32.

§355.743.Reimbursement Methodology for Mental Health Case Management [ Service ]

(a) The Texas Department of Mental Health and Mental Retardation (TDMHMR) or its successor agency reimburses qualified local authorities for Mental Health Case Management (CM) [ service coordination ] provided to Medicaid-eligible individuals who are eligible for CM [ service coordination ] according to program rules established by TDMHMR or its successor agency [ 25 Texas Administrative Code §412.455 (relating to Eligibility) ]. HHSC determines reimbursement for CM [ service coordination ]. Reimbursement is:

(1) uniform statewide;

(2) prospective; and

(3) cost related [ with a year-end settlement ].

(b) Separate rates. Separate rates are set for services based on their intensity [ provided to ]:

[ (1) individuals in the mental retardation priority population as defined in 25 TAC §412.453 (to Definitions) and persons with a related condition (as defined in 42 CFR §435.1009); ]

(1) [ (2) ] Routine CM which is a low intensity service that will be provided to both adults and children who need limited assistance in obtaining access to services and is primarily site-based [ individuals in the adult mental health priority population as defined in 25 TAC §412.453 (Definitions); ] and

(2) [ (3) ] Intensive CM is a high-intensity service that will be provided to just children who need a greater level of assistance in obtaining services and is primarily community-based [ individuals in the child mental health priority population as defined in 25 TAC §412.453 (Definitions) ].

(c) [ Local authority qualifications. ] Section 1396n(g) of Title 42 of the U.S. Code [ USC ] is invoked to limit the provision of CM [ service coordination ] to [ the state mental retardation authorities, the ] state mental health authorities, TDMHMR or its successor agency , or its designated local authorities authorized under §534.054 of the Texas Health and Safety Code, who offer a service delivery system of required services as outlined in §534.053 of the Texas Health and Safety Code.

(d) Rules and procedures. TDMHMR or its successor agency has implemented rules and procedures to ensure that CM [ service coordination ] is provided by persons who meet the requirements specified by TDMHMR or its successor agency and is provided in compliance with federal and state laws, rules, and regulations.

(e) Reimbursement methodology. HHSC determines reimbursement according to §355.101 [ §355.701 ] of this title (relating to Introduction [ General Specifications ]). HHSC may also adjust reimbursement if new legislation, regulations or economic factors affect costs, according to [ As specified in ] §355.109 [ §355.706 ] of this title (relating to Adjusting Reimbursement. [ Rates ] When New Legislation, Regulations, or Economic Factors Affect Costs)[ , HHSC may also adjust reimbursements ].

(1) Local authorities will be reimbursed [ a ] statewide rates [ rate ] comprising a modeled rate plus a statewide weighted average associated service add-on.

(A) The modeled rate is based on cost calculations that include a statewide weighted average hourly wage for persons who provide CM [ service coordination ] as 100 percent of their job responsibilities, a predetermined caseload size, a statewide weighted average supervisory wage rate and span of control, and a statewide weighted average benefits factor.

(B) The associated service add-on includes clerical and support costs, travel and training costs, and other allowable operating costs (e.g., rent, utilities, office supplies, administration, and depreciation) necessary to provide CM [ service coordination ].

[ (2) At the end of each reimbursement period HHSC will compare the difference between the statewide rate and each local authority's service coordination costs as submitted on its cost report in accordance with subsection (g) of this section. ]

[ (A) If a local authority's costs are less than 95 percent of the statewide rate, the local authority will pay TDMHMR the difference between that local authority's costs and 95 percent of the statewide rate. The local authority will be notified of the amount due to TDMHMR by certified mail. ]

[ (i) The local authority will have 30 days to make payment. If payment is not received from the local authority within 30 days of the date that the notice was received, as specified on the certified mail receipt, HHSC will notify TDMHMR to place the local authority on vendor hold. ]

[ (ii) A local authority that has been placed on vendor hold may request an administrative hearing in accordance with §355.707 of this title (relating to Reviews and Administrative Hearings). ]

[ (B) If a local authority's costs exceed the statewide rate, TDMHMR will reimburse the local authority its costs up to 125 percent of the statewide rate. TDMHMR will notify the local authority by certified mail of the amount that is owed to the local authority and will make payment within 30 days of the date that the notice was received, as specified on the certified mail receipt. ]

(2) [ (3) ] At such time as HHSC determines that cost data collected as described in subsection (g) of this section are reliable, statewide reimbursement rates will be developed based on the cost data submitted by local authorities in the following manner:

(A) Total allowable costs for each provider for each rate will be determined from analyzing the allowable historical costs reported on the cost report.

(B) Each provider's total allowable costs are projected from the historical cost reporting period to the prospective reimbursement period using inflation factors according to §355.108 [ §355.704 ] of this title (relating to Determination of Inflation Indices) for each covered contact.

(C) Each provider's projected cost per unit of service is calculated. The mean provider cost per contact is calculated, and the statistical outliers (those providers whose cost per contact exceeds plus or minus (+/-) two standard deviations of the mean provider cost per contact) are removed. After removal of the statistical outliers, the mean cost per contact is calculated. This mean cost per contact becomes the recommended cost per contact. [ Following each annual reimbursement period, allowable costs will be compared to reimbursement and any resulting monetary reconciliation will be made in accordance with paragraph (2) of this subsection. ]

(f) Reimbursable unit of service.

(1) The unit of service upon which reimbursement is made is a face-to-face contact with a Medicaid-eligible individual eligible for CM [ service coordination ] in accordance with TDMHMR's or its successor agency's program rules [ 25 TAC §412.455 (Eligibility) ] by:

(A) a local authority as required by subsection (c) of this section; and

(B) a person who meets the qualifications set forth in TDMHMR's or its successor agency's program rules [ 25 TAC §412.461 (Minimum Qualifications) ].

(2) The face-to-face contact must include the provision of one or more services as defined in TDMHMR's or its successor agency's program rules [ 25 TAC §412.453(18) (Definitions) ].

(3) Reimbursement is [ limited to ] one unit of service per 15 continuous minutes of face-to-face contact with a Medicaid-eligible individual [ per month ].

(g) Reporting of costs. HHSC or its designee collects from local authorities statistical and cost data. The statistical data includes, but is not limited to, the total number of individuals receiving CM [ service coordination ], and the number of Medicaid-eligible individuals receiving CM [ service coordination ]. The cost data include direct costs, programmatic indirect costs, and general and administrative costs including salaries, benefits, and non-labor costs.

(1) Cost reports. Each local authority must submit financial and statistical information in a cost report or survey format designated by HHSC or its designee. The cost report will capture the expenses of the local authority including salaries and benefits, administration, building and equipment, utilities, supplies, travel, and indirect overhead costs related to the provision of CM [ service coordination ]. Only allowable cost information is used to compile the cost base . Each Local authority must follow the guidelines in determining whether a cost is allowable or unallowable as specified in §§355.102 & 355.103 [ , as defined in §355.741 of this title and §355.708 ] of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs ). Local Authorities must follow the cost-reporting guidelines as specified in §355.105 of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures). Revenues must be reported on the cost report in accordance with §355.104 of this title (relating to Revenues).

(A) Accounting requirements. All information submitted on the cost reports must be based upon the accrual method of accounting unless the governmental entity operates on a cash or modified accrual basis. The local authority must complete the cost report according to the prescribed statement of allowable and unallowable costs as referenced in §355.101 [ §355.702 ] of this title (relating to Introduction [ Method of Cost Determination ]). Cost reporting should be consistent with generally accepted accounting principles (GAAP). In cases in which cost reporting rules conflict with GAAP, Internal Revenue Service, or other authorities, the cost reporting rules take precedence.

(B) Reporting period. The local authority must prepare the cost report according to §355.105 [ §355.702 ] of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures [ Method of Cost Determination ]).

(2) Exclusions or adjustments. Local authorities must exclude unallowable costs from the cost report. HHSC or its designee excludes from the cost reimbursement base any unallowable costs included in the cost report and makes adjustments to expenses reported by local authorities to ensure that the cost reimbursement base reflects costs which are consistent with efficiency, economy, and quality care, are necessary for the provision of CM [ service coordination ] services, and are consistent with federal and state Medicaid regulations as specified in §§355.102 & 355.103 [ §355.701 ] of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs [ Definitions and General Specifications ]). If there is doubt as to the accuracy of allowability of a significant part of the information reported, individual cost reports may be eliminated from the cost base.

(3) Desk reviews. As specified in §355.106 [ §355.703 ] of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports), HHSC or its designee reviews such cost reports or surveys. Cost reports not completed according to instructions or rules will be corrected and resubmitted by the local authority within the time frame prescribed by HHSC.

(4) On-site audit of cost reports. HHSC or its designee performs a sufficient number of audits each year to ensure the fiscal integrity of the CM [ service coordination ] reimbursement. The number of on-site audits actually performed each year may vary.

(A) HHSC or its designee notifies local authorities of disallowances and adjustments to reported expenses made during desk reviews and on-site audits of cost reports according to §355.107 [ §355.705 ] of this title (relating to Notification of Exclusions and Adjustments ).

(B) Reviews of cost report disallowances. A local authority, which disagrees with HHSC or its designee on cost report disallowances, may request a review of the disallowances as specified in §355.110 [ §355.707 ] of this title (relating to Informal Reviews and Formal Appeals [ Administrative Hearings ]).

(5) Recordkeeping requirements. Each local authority must maintain records according to the requirements specified in TDMHMR or its successor agency's rules and the provider agreement. The local authority must ensure that the records are accurate and sufficiently detailed to support the financial and statistical information reported in the cost report. If a local authority does not maintain records, which support the financial and statistical information submitted on the cost report, the local authority will be given 90 days to correct this recordkeeping. HHSC will notify TDMHMR or its successor agency to place the authority on vendor hold if the correction is not made within 90 days from the date the local authority receives notification.

(6) Access to records. The local authority must allow HHSC access to any and all records necessary to verify information on the cost report.

(h) Billing and payment reviews. The provider must allow TDMHMR or its successor agency access to any and all records regarding CM [ service coordination ].

(1) TDMHMR or its successor agency will conduct periodic billing and payment reviews utilizing TDMHMR's or its successor agency's Billing and Payment Review Protocol.

(2) Recoupment will be taken according to the application of error calculations contained in TDMHMR's or its successor agency's Billing and Payment Review Protocol.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403325

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


1 TAC §355.781

The Texas Health and Human Services Commission (HHSC) proposes to amend §355.781, concerning reimbursement methodology for Rehabilitative Services, in its Medicaid Reimbursement Rates chapter. The proposed amendment to the methodology adds new services for the Resiliency and Disease Management model and deletes services the Resiliency and Disease Management model will not be using. This rule is also being amended to change the references from the general cost determination rules of Subchapter F to the cost determination process rules of Subchapter A. The proposed rule replaces the references to "TDMHMR" with references to "TDMHMR or its successor agency". Also, references to a settle-up process are being removed. Proposed changes are to be effective August 31, 2004.

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that for each year of the first five-year period the proposed rule is in effect, there are no foreseeable fiscal implications relating to costs or revenues of state or local government.

Ed White, Director, of HHSC Rate Setting and Forecasting, has determined that, for each year of the first five-year period the proposal is in effect, the public benefit anticipated as a result of enforcing the section is that the reimbursement methodology for rehabilitative services will: (a) reflect the services offered under the Resiliency and Disease Management model; (b) reflect use of the cost determination process rules consistent with all HHSC long-term care programs; (c) reflect the elimination of the settle-up process after the payment rates have been established and paid to providers; and (d) recognize the impending transfer of TDMHMR's program responsibilities to agencies created by H.B. 2292, 78th Legislature (R.S.). There is no anticipated impact on small or micro-businesses to comply with the proposed amendment, as they will not be required to alter their business practices as a result of the amendment. There are no anticipated economic costs to persons required to comply with the proposed amendment. There is no anticipated impact on a local economy.

Under §2007.003(b) of the Government Code, HHSC has determined that Chapter 2007 of the Government Code does not apply to this proposed rule. The changes made by this rule do not implicate a recognized interest in private real property. Accordingly, HHSC is not required to complete a takings impact assessment regarding this rule.

Comments concerning the proposed amendment may be submitted in writing to Lupita Villarreal, Rate Analysis, by mail to 1100 West 49th Street, Mail Code H-400, Austin, Texas 75756-3101, by fax to 512/491-1998, or by e-mail to lupita.villarreal@hhsc.state.tx.us within 30 days of publication of this proposal in the Texas Register. For further information regarding the proposal or to make the proposal available for public review, contact local offices of DHS or Lupita Villarreal at (512) 491-1178 in HHSC's Rate Analysis Department.

The amendment is proposed under the Texas Government Code, §531.033, which provides the executive commissioner of HHSC with broad rulemaking authority; the Texas Government Code, §531.021(a), and the Texas Human Resources Code, §32.021(a), which provide HHSC with the authority to administer the federal medical assistance (Medicaid) program in Texas; and the Texas Government Code, §531.021(b), which provides HHSC with the authority to propose and adopt rules governing the determination of Medicaid reimbursement.

The proposed amendment affects the Texas Government Code, Chapter 531, and the Texas Human Resources Code, Chapter 32.

§355.781.Rehabilitative Services Reimbursement Methodology.

(a) General information.

(1) The Texas Health and Human Services Commission (HHSC) will reimburse qualified rehabilitative services providers for rehabilitative services provided to Medicaid-eligible persons with mental illness.

(2) The HHSC establishes the reimbursement rate. The HHSC sets reimbursement rates that reflect cost-effective operations and are within State appropriation constraints.

(b) Definitions.

(1) Rate [ Interim rate ]--Rate paid to a rehabilitative services provider based on cost reports [ prior to settle-up conducted in accordance with subsection (d)(4) of this section ].

(2) Service type--Types of Medicaid reimbursable rehabilitative services as specified in program rules for the following [ §419.453 of Title 25 (relating to Definitions); §419.456 of Title 25 (relating to Community Support Services); §419.457 of Title 25 (relating to Day Programs for Acute Needs); §419.458 of Title 25 (relating to Day Programs for Skills Training); §419.459 of Title 25 (relating to Day Programs for Skills Maintenance); and §419.460 of Title 25 (relating to Rehabilitative Treatment Plan Oversight) ]:

(A) Day programs for acute needs--adult;

(B) Crisis intervention services--individual-child/adolescent and adult [ Day programs for skills training--adult ];

(C) Medication training and support--individual-child/adolescent and adult [ Day programs for skills maintenance--adult ];

(D) Medication training and support--group-adult [ Day programs for acute needs--child ];

(E) Medication training and support--group-child/adolescent [ Day programs for skills training--child ];

(F) Psychosocial rehabilitative services--individual-adult [ Community support services by professional--individual ];

(G) Psychosocial rehabilitative services--group-adult [ Community support services by paraprofessional--individual ];

(H) Rehabilitative counseling and psychotherapy--individual-adult [ Community support services by professional--group ];

(I) Rehabilitative counseling and psychotherapy--group-adult; [ Community support services by paraprofessional--group; and ]

(J) Skills training and development--individual-child/adolescent and adult; [ Rehabilitative treatment plan oversight. ]

(K) Skills training and development--group-adult; and

(3) Unit of service--The amount of time an individual, eligible for Medicaid rehabilitative services or non-Medicaid rehabilitative services (or parent or guardian of the person of an eligible minor), is engaged in face-to-face contact with a person described in program rules established by TDMHMR or its successor agency. [ §419.455(d) of Title 25 (relating to Rehabilitative Services: General Requirements) plus any time spent by such person traveling to and from the off-site location of the eligible individual to provide the contact ]. The units of service are as follows:

[ (A) Individual and group community support services--15 continuous minutes ];

(A) [ (B) ] Day programs for acute needs --45-60 continuous minutes;[ and ]

(B) [ (C) ] Crisis intervention services--15 continuous minutes; [ Rehabilitative treatment plan oversight--one contact of 15 or more continuous minutes. ]

(C) Medication training and support--15 continuous minutes;

(D) Psychosocial rehabilitative services--15 continuous minutes;

(E) Rehabilitative counseling and psychotherapy--15 continuous minutes; and

(F) Skills training and development--15 continuous minutes.

[ (4) Settle-up categories--The settle-up process utilizes the following groupings of service types: ]

[ (A) Category 1: ]

[ (i) Day programs for acute needs--adult; ]

[ (ii) Day programs for acute needs--child; and ]

[ (iii) Day programs for skills maintenance--adult. ]

[ (B) Category 2: ]

[ (i) Day programs for skills training--adult; ]

[ (ii) Day programs for skills training--child; ]

[ (iii) Community support services by professional--group; and ]

[ (iv) Community support services by paraprofessional--group; ]

[ (C) Category 3: ]

[ (i) Community support services by professional--individual; and ]

[ (ii) Community support services by paraprofessional--individual. ]

[ (D) Category 4: Rehabilitative treatment plan oversight. ]

(c) Reporting of Costs.

(1) Cost reporting. Rehabilitative services providers must submit information quarterly, unless otherwise specified, on a cost report formatted according to HHSC's specifications. Rehabilitative services providers must complete the cost report according to §§355.101, 355.102, 355.103, 355.104, and 355.105 [ §§355.701-355.709 ] of this title [ subchapter ], (relating to Introduction, General Principles of Allowable and Unallowable Costs, Specifications for Allowable and Unallowable Costs, Revenues, and General Reporting and Documentation Requirements, Methods, and Procedures [ General Reimbursement Methodology For All Medical Assistance Programs ]).

(2) Reporting period and due date. Rehabilitative services providers must prepare the cost report to reflect rehabilitative services provided during the designated cost report reporting period. The cost reports must be submitted to the HHSC no later than 45 days following the end of the designated reporting period unless otherwise specified by the HHSC.

(3) Extension of the due date. The HHSC may grant extensions of due dates for good cause. A good cause is one that the rehabilitative services provider could not reasonably be expected to control. Rehabilitative services providers must submit requests for extensions in writing. Requests for extensions must be received by HHSC prior to the cost report due date. HHSC will respond to requests within 15 days of receipt.

(4) Failure to file an acceptable cost report. If a rehabilitative services provider fails to file a cost report according to all applicable rules and instructions, [ the ] HHSC will notify TDMHMR or its successor agency to place the rehabilitative services provider on vendor hold until the rehabilitative services provider submits an acceptable cost report.

(5) Allocation method. If allocations of cost are necessary, rehabilitative services providers must use and be able to document reasonable methods of allocation. HHSC adjusts allocated costs if HHSC considers the allocation method to be unreasonable. The rehabilitative services provider must retain work papers supporting allocations for a period of three years or until all audit exceptions are resolved (whichever is longer).

(6) Cost report certification. Rehabilitative services providers must certify the accuracy of cost reports submitted to HHSC in the format specified by HHSC. Rehabilitative services providers may be liable for civil and/or criminal penalties if they misrepresent or falsify information.

(7) Cost data supplements. HHSC may require additional financial and statistical information other than the information contained on the cost report.

(8) Allowable and unallowable costs. Cost reports may only include costs that meet the requirements as specified in §§355.102 and 355.103 [ §355.708 ] of this title (relating to General Principles of Allowable and Unallowable Costs and Specifications for Allowable and Unallowable Costs).

(9) Review of cost reports. HHSC reviews each cost report to ensure that financial and statistical information submitted conforms to all applicable rules and instructions. The review of the cost report includes a desk review [ audit ]. HHSC reviews all cost reports according to the criteria specified in §355.106 [ §355.703 ] of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports). If a rehabilitative services provider fails to complete the cost report according to instructions or rules, HHSC returns the cost report to the rehabilitative services provider for proper completion. HHSC may require information other than that contained in the cost report to substantiate reported information. 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).

(10) On-site audits. HHSC may perform on-site audits on all rehabilitative services providers that participate in the Medicaid program for rehabilitative services. HHSC determines the frequency and nature of such audits but ensures that they are not less than that required by federal regulations related to the administration of the program.

(11) Notification of exclusions and adjustments. HHSC notifies rehabilitative services providers of exclusions and adjustments to reported expenses made during desk reviews and on-site audits of cost reports.

(12) Reviews and administrative hearings. Rehabilitative services providers may request an informal review and, if necessary, an administrative hearing to dispute the action taken by HHSC under §355.110 [ §355.707 ] of this title (relating to Informal Reviews and Formal Appeals [ Administrative Hearings ]).

(13) Access to records. Each rehabilitative services provider must allow access to all records necessary to verify cost report information submitted to HHSC. Such records include those pertaining to related-party transactions and other business activities engaged in by the rehabilitative services provider. If a rehabilitative services provider does not allow inspection of pertinent records within 14 days following written notice HHSC will notify TDMHMR or its successor agency to place the rehabilitative services provider on vendor hold until access to the records is allowed. If the rehabilitative services provider continues to deny access to records, TDMHMR or its successor agency may terminate the rehabilitative services provider agreement with the rehabilitative services provider.

(14) Record keeping requirements. Rehabilitative services providers must maintain service delivery records and eligibility determination for a period of five years or until any audit exceptions are resolved (whichever is later). Rehabilitative services providers must ensure that records are accurate and sufficiently detailed to support the financial and statistical information contained in cost reports.

(15) Failure to maintain adequate records. If a rehabilitative services provider fails to maintain adequate records to support the financial and statistical information reported in cost reports, HHSC allows 30 days for the rehabilitative services provider to bring record keeping into compliance. If a rehabilitative services provider fails to correct deficiencies within 30 days from the date of notification of the deficiency, HHSC will notify TDMHMR or its successor agency to terminate the rehabilitative services provider agreement with the rehabilitative services provider.

(d) Reimbursement determination. [ The ] HHSC determines reimbursement according to §355.101 of this title [ §§355.701-355.709 of this subchapter, ] (relating to Introduction [ General Reimbursement Methodology For All Medical Assistance Programs ]). Rehabilitative services providers are reimbursed a uniform, statewide [ , interim ] rate [ with a cost-related year-end settle-up ]. The HHSC determines reimbursement in the following manner:

(1) Inclusion of certain reported expenses. Rehabilitative services providers must ensure that all allowable costs are included in the cost report.

(2) Data collection. The HHSC collects several different kinds of data. These include the number of units of service that individuals receive and cost data, including direct costs, programmatic indirect costs, and general and administrative overhead costs. These costs include salaries, benefits, and other costs. Other costs include nonsalary related costs such as building and equipment maintenance, repair, depreciation, amortization, and insurance expenses; employee travel and training expenses; utilities; and material and supply expenses.

(3) Rate [ Interim rate ] methodology. A [ The interim ] rate is determined biennially for each service type [ prospectively ] based on cost reports. [ and at least annually. An interim rate is set for each service type by settle-up category. ]

(A) The HHSC projects and adjusts reported costs from the historical reporting period to determine the [ interim ] rate for the prospective reimbursement period. Cost projections adjust the allowed historical costs based on significant changes in cost-related conditions anticipated to occur between the historical cost period and the prospective reimbursement period. Changes in cost-related conditions include, but are not limited to, inflation or deflation in wage or price, changes in program utilization and occupancy, modification of federal or state regulations and statutes, and implementation of federal or state court orders and settlement agreements. Costs are adjusted for the prospective reimbursement period by a general cost inflation index as specified in §355.108 [ §355.704 ] of this title (relating to Determination of Inflation Indices).

(B) For each service [ settle-up ] category, each rehabilitative services provider's projected cost per unit of service is calculated. The mean rehabilitative services provider cost per unit of service is calculated, and the statistical outliers (those rehabilitative services providers whose unit costs exceed plus or minus (+/-) two standard deviations of the mean rehabilitative services provider cost) are removed. After removal of the statistical outliers, the mean cost per unit of service is calculated. This mean cost per unit of service becomes the recommended reimbursement per unit of service.

[ (4) Settle-up process. At the end of each reimbursement period, the HHSC will compare the amount reimbursed at the interim rate for each settle-up category and the rehabilitative services provider's costs for each category, as submitted on its cost report in accordance with subsection (c) of this section. ]

[ (A) Rehabilitative service provider's whose costs are less than 95% of the amount reimbursed at the interim rate, will be required to pay to TDMHMR 100% of the difference between its allowable costs and 95% of the amount reimbursed at the interim rate for each settle-up category. TDMHMR will notify the rehabilitative services provider of the amount due by certified mail and the rehabilitative services provider will remit the repayment amount within 60 days of notification. TDMHMR will apply a vendor hold on Medicaid payments to a rehabilitative services provider for not making the payment to TDMHMR within 60 days of receiving notice. ]

[ (B) If a rehabilitative services provider's costs exceed the amount reimbursed at the interim rate, TDMHMR will reimburse the rehabilitative services provider the difference between its allowable costs and the reimbursement at the interim rate up to 125% of the interim rate for each settle-up category. TDMHMR will notify the rehabilitative services provider of the amount owed to the provider via certified mail. TDMHMR will make payment within 30 days of the date the notice was received, as indicated by the certified mail receipt. ]

(4) Adjustments to the reimbursement determination methodology. HHSC may adjust reimbursement if new legislation, regulations, or economic factors affect costs as described in §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs).

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403326

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Chapter 370. STATE CHILDREN'S HEALTH INSURANCE PROGRAM

Subchapter F. SPECIAL INVESTIGATIVE UNITS

1 TAC §§370.501 - 370.505

The Texas Health and Human Services Commission (the Commission) proposes a new Subchapter F, §§370.501-370.505, concerning Special Investigations Unit mandated by HB2292, 78th Legislature, Regular Session, 2003.

Background and Summary of Factual Basis for the Rules

The 75th Legislature, Regular Session, 1997, through Senate Bill 30, mandated managed care organizations (MCOs) develop and submit to the operating agency for approval by the commission a plan for preventing, detecting, and reporting fraud and abuse. The bill also required MCOs to report any known or suspected acts of fraud or abuse to the operating agency for referral to the commission for investigation.

The 78th Legislature, Regular Session, 2003, through House Bill 2292, expanded on Senate Bill 30 and mandated that, effective September 1, 2004, all MCOs that provide or arrange for the provision of health care services to an individual under a government-funded program, including the Children's Health Insurance Program (CHIP), establish and maintain a Special Investigations Unit (SIU) to investigate fraudulent claims and other types of program abuse by recipients and service providers.

The additions and revisions to state statutes passed through SB 30 and HB 2292 are designed to strengthen the state's ability to improve waste, abuse and fraud detection, investigation, criminal referral and prosecution, and recovery of overpayments, damages, and penalties from health and human service providers, recipients, and contractors. The rules provide an increased effort to identify fraud or abuse in managed care.

The proposed rules were developed in conjunction with the Commission's Office of Inspector General (OIG) and HHSC, Medicaid/CHIP Managed Care representatives. The proposed rules were submitted for review and comments to the MCOs currently under contract with the state of Texas.

Section-by-Section Explanation

Proposed new §370.501 generally describes the purpose of the plan to prevent waste, abuse and fraud. It details when the plan is to be submitted to the OIG, when the plan is to be resubmitted if denied, and the requirements of the MCO if it chooses to contract with another entity for the investigation of fraudulent claims and other types of program abuse.

Proposed new §370.502 describes the elements for the MCOs plan to detect and investigate possible acts of waste, abuse and fraud. The description is specific and provides the requirements for detecting and investigating waste, abuse and fraud by providers and recipients.

Proposed new §370.503 outlines the requirements for information that must be submitted to the OIG from the MCO if the MCO contracts with another entity for the investigation of fraudulent claims and other types of programs abuse by recipients and providers. It also provides the timeline for submittal of the information to the OIG.

Proposed new §370.504 contains specific language with regard to the MCOs maintaining and providing records upon request. The proposed rules provides detail language as to which agencies are to receive the records, when the records are to be produced and the records that are to be maintained by the MCO. It also provides general language for possible sanctions if the records request is out of compliance.

Proposed new §370.505 describes the process for the recovery of funds resulting from an investigation conducted by the MCO or the OIG. In addition, the proposed rule describes when the money will be recovered and how the recovered funds will be disbursed.

Public Benefit

Jason Cooke, Associate Commissioner for Medicaid and CHIP, has determined that for each year of the first five years the proposed rules are in effect, the public will benefit from adoption of the proposed rules. The anticipated public benefit as a result of enforcing the proposed rules will be to ensure that CHIP funds are expended for medically necessary services. Monitoring and investigating suspected fraud and abuse will result in recovered dollars appropriated back to the program.

Small and Micro-business Impact Analysis

Tom Suehs, Deputy Commissioner for Financial Services, has determined that there will be no effect on small businesses or micro-businesses to comply with the rules as proposed. This was determined by interpretation of the rule that small businesses and micro-businesses will not be required to alter their business practices in order to comply with the rules. There are no anticipated economic costs to persons who are required to comply with the rules as proposed. There is no anticipated negative impact on local employment.

Fiscal Note

Mr. Suehs has also determined that during the first five years the proposed rules are in effect there will not be any fiscal impact to the state for fiscal years 2004 through 2008. Implementation of the proposed rules are not anticipated to result in any fiscal implications for local health and human service agencies. There are no foreseeable fiscal implications for local governments.

Regulatory Analysis

HHSC has determined that the proposed rules are not a "major environmental rule," as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environmental exposure and that may adversely affect, in a material way, the public health and safety of a state or a sector of the state. The proposed rules are not specifically intended to protect the environment or reduce risks to human health from environmental exposure.

Taking Impact Assessment

HHSC has determined that the proposed rules do not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, do not constitute a taking under §2007.043, Government Code.

Public Comment

Comments on the proposed rules may be submitted in writing to Juanita Henry, Office of Inspector General, Texas Health and Human Services Commission, P.O. Box 13247, Austin, Texas 78711-3247 or by e-mail to Juanita.Henry@hhsc.state.ts.us. Comments will be accepted for 30 days following publication of this proposal in the Texas Register .

Statutory Authority

The new rules are proposed under the Texas Government Code, §531.033, which provides the Commissioner of HHSC with broad rulemaking authority; the Texas Health and Safety Code, §62.051(d), which directs HHSC to adopt rules as necessary to implement the Children's Health Insurance Program; and Government Code, §2001.006, which allows state agencies to adopt rules in preparation for the implementation of legislation.

The rules are implemented under the authority of the Texas Health and Safety Code, §62.051, concerning development of and the making of policy for the state child health plan program.

The proposed rules affect the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by these rules.

§370.501.Purpose.

(a) This subchapter implements the Health and Human Services Commission's (HHSC), Office of Inspector General (OIG) authority to approve annually, each managed care organization (MCO) plan to prevent and reduce waste, abuse, and fraud. This authority is granted by Chapter 531, Subchapter C, Government Code, Section 531.113.

(b) An MCO that provides or arranges for the provision of health care services to an individual under the children's health insurance program (CHIP), must arrange for a special investigative unit to investigate fraudulent claims and other types of program abuse by recipients and providers. An MCO may choose to:

(1) Establish and maintain the special investigative unit within the managed care organization; or

(2) Contract with another entity for the investigation.

(c) An MCO must develop a plan to prevent and reduce waste, abuse, and fraud. The plan must be submitted annually to the HHSC-OIG for approval each year the MCO is enrolled with the State of Texas. The plan must be submitted 60 days prior to the start of the State fiscal year.

(d) If the initial plan to prevent and reduce waste, abuse, and fraud is not approved, the MCO must resubmit the plan to HHSC-OIG within 15 working days of receiving the denial letter, which will explain the deficiencies. If the plan is not resubmitted within the time allotted, the MCO will be in default and sanctions may be imposed.

(e) If the MCO elects to contract with another entity for the investigation of fraudulent claims and other types of program abuse as referenced in paragraph (b)(2) of this section, the MCO must adhere to all requirements of Chapter 42, §438.230 of the Code of Federal Regulations.

§370.502.Managed Care Organization's Plans and Responsibilities in Preventing and Reducing Waste, Abuse, And Fraud.

(a) Each managed care organization (MCO) subject to this section must develop a plan to prevent and reduce waste, abuse, and fraud and submit that plan annually to the Health and Human Services Commission (HHSC), Office of Inspector General (OIG) for approval.

(b) The MCO is responsible for investigating possible acts of waste, abuse, or fraud for all services, including those that the MCO subcontracts to outside entities.

(c) The plan submitted to the HHSC-OIG must include the information below to be considered for approval.

(1) A description of the MCO's procedures for detecting possible acts of waste, abuse, or fraud by providers. The description must address each of the following requirements:

(A) Use of audits to monitor compliance and assist in detecting and identifying CHIP program violations and possible waste, abuse, and fraud overpayments through data matching, analysis, trending and statistical activities;

(B) Monitoring of service patterns for providers, subcontractors, and recipients;

(C) Use of a hotline or another mechanism to report potential or suspected violations;

(D) Use of random payment review of claims submitted by providers for reimbursement to detect potential waste, abuse, or fraud ;

(E) Use of edits or other evaluation techniques to prevent payment for fraudulent or abusive claims; and

(F) Use of routine validation of MCO data.

(2) A description of the MCO's procedures for investigating possible acts of waste, abuse, and fraud by providers. The procedures must satisfy the requirements in subparagraphs (A)-(C) of this paragraph.

(A) MCOs are required to conduct preliminary investigations. The preliminary investigation must be conducted within 15 working days of the identification and/or reporting of suspected and/or potential waste, abuse, or fraud

(B) The requirements for a preliminary investigation include but are not limited to the following:

(i) Determining if the MCO has received any previous reports of incidences of suspected waste, abuse, or fraud or conducted any previous investigations of the provider in question. If so, the investigation should include a review of all materials related to the previous investigations, the outcome of the previous investigations, and a determination of whether the new allegations are the same or relate to the previous investigation.

(ii) Determining if the service provider has received any educational training from the MCO in regard to the allegation.

(iii) Conducting a review of the provider's billing pattern to determine if there are any suspicious indicators

(iv) Reviewing the provider's payment history for the past three years, if available, to determine if there are any suspicious indicators.

(v) Reviewing the policies and procedures for the program type in question to determine if what has been alleged is a violation.

(C) If it is determined that suspicious indicators of possible waste, abuse, or fraud exist, within 15 working days from the conclusion of subparagraphs (A) and (B) of this paragraph, the MCO must select a sample for further review. The sample must consist of a minimum of 50 recipients or 15% of a provider's claims related to the suspected waste, abuse, and fraud.

(i) Within 15 working days of the selection of the sample, request medical records and encounter data for the sample recipients.

(ii) Review the requested medical records and encounter data within 45 working days of receipt of the records to:

(I) validate the sufficiency of service delivery data and to assess utilization and quality of care.

(II) ensure that the encounter data submitted by the provider is accurate.

(III) evaluate if the review of other pertinent records is necessary to determine if waste, abuse, or fraud has occurred. If the review of additional records is necessary then conduct such review.

(3) A description of the MCO's procedures for detecting possible acts of waste, abuse, and fraud by recipients. The description must address the following:

(A) Review of claims when waste, abuse, or fraud is suspected or reported to determine if :

(i) Treatment(s) and/or medication(s) prescribed by more than one provider appears to be duplicative, excessive, or contraindicated; and

(ii) Recipients are using more than one physician to obtain similar treatments and /or medications; and,

(iii) Providers other than the assigned Primary Care Provider (PCP) are treating the recipient, and there is no evidence that the recipient was treated by the assigned PCP for a similar or related condition; and,

(iv) The recipient has a high volume of emergency room visits with a non-emergent diagnosis.

(B) Review medical records for the recipients in question if claims review does not clearly determine if waste, abuse, or fraud has occurred.

(C) Use of edits or other evaluation techniques to identify possible overuse and/or abuse of psychotropic and/or controlled medications by recipients who are allegedly treated at least monthly by two or more physicians. A physician includes but is not limited to: psychiatrists, pain management specialists, anesthesiologists, physical medicine and rehabilitation specialists.

(4) A description of the MCO's procedures for investigating possible acts of waste, abuse, and fraud by recipients. The procedures must satisfy the requirements in subparagraphs (A) and (B) of this paragraph.

(A) MCOs are required to conduct preliminary investigations. The preliminary investigation must be conducted within 15 working days of the identification and/or reporting of suspected and/or potential waste, abuse, or fraud.

(B) The requirements for a preliminary investigation consist of but are not limited to the following:

(i) Review of acute care and emergency room claims submitted by providers for the suspected recipient.

(ii) Analyze pharmacy claim data submitted by providers for the suspected recipient to determine possible abuse of controlled or non-controlled medications. If the MCO does not have the data necessary to conduct the pharmacy claims review, the MCO must request the data within 15 working days of the initial identification and/or reporting of the suspected or potential waste, abuse, or fraud.

(iii) Analyze claims submitted by providers to determine if the diagnosis is appropriate for the medications prescribed.

(5) A description of the MCO's internal procedures for referring possible acts of waste, abuse, or fraud to the MCO's Special Investigative Unit (SIU) and the mandatory reporting of possible acts of waste, abuse, or fraud by providers or recipients to the HHSC-OIG. The procedures must satisfy the requirements in subparagraphs (A)-(E) of this paragraph.

(A) Assign an officer or director the responsibility and authority for reporting all investigations resulting in a finding of possible acts of waste, abuse, or fraud to the OIG. An officer could be but is not limited to a Compliance Officer, a Manager of Government Programs, or a Regulatory Compliance Analyst.

(B) Provide specific and detailed internal procedures for officers, directors, managers, and employees to report possible acts of waste, abuse, and fraud to the MCO's SIU. The procedures must include but are not limited to:

(i) Guidance regarding what information must be reported to the MCO's SIU.

(ii) A requirement that information must be reported to the MCO's SIU within 24 hours of identification or reporting of suspected waste, abuse, and fraud.

(C) Provide specific and detailed internal procedures for the SIU to report investigations resulting in a finding of waste, abuse, or fraud to the assigned officer or director.

(i) Guidance regarding what information must be reported to the assigned officer or director.

(ii) A requirement that possible acts of waste, abuse, or fraud be reported to the assigned officer or director must occur within 15 working days of making the determination.

(D) Utilizing the HHSC-OIG fraud referral form, the assigned officer or director must report and refer all possible acts of waste, abuse or fraud to the HHSC- OIG within 30 working days of receiving the reports of possible acts of waste, abuse or fraud from the SIU. The report and referral must include an investigative report identifying the allegation, statutes/regulations violated or considered, and the results of the investigation; copies of program rules and regulations violated for the time period in question; the estimated overpayment identified; a summary of interviews conducted; the encounter data submitted by the provider for the time period in question; and all supporting documentation obtained as the result of the investigation. This requirement applies to all reports of possible acts of waste, abuse, and fraud with the exception of an expedited referral.

(E) An expedited referral is required when the MCO has reason to believe that a delay may result in:

(i) harm or death to patients

(ii) the loss, destruction, or alteration of valuable evidence; or

(iii) a potential for significant monetary loss that may not be recoverable; or

(iv) hindrance of an investigation or criminal prosecution of the alleged offense.

(6) A description of the MCO's procedures for educating recipients and providers and training personnel to prevent waste, abuse, and fraud . The procedures must satisfy the requirements in subparagraphs (A)-(H) of this paragraph.

(A) On an annual basis, the organization shall provide waste, abuse and fraud training to each employee who is directly involved in any aspect of CHIP. At a minimum, training is required for all individuals responsible for data collection, provider enrollment or disenrollment, encounter data, claims processing, utilization review, appeals or grievances, quality assurance, and marketing.

(B) The training must be specific to the area of responsibility for the staff receiving the training and contain examples of waste, abuse or fraud in their particulararea of interest.

(C) The organization must provide general training to all CHIP managed care staff that is not directly involved with the areas listed in subparagraph (A) of this paragraph. The general training must provide information about the definition of waste, abuse, and fraud , how to report suspected waste, abuse, and fraud and to whom the suspected waste, abuse, and fraud is reported.

(D) The organization must provide waste, abuse, and fraud training to all new staff that will be directly involved with any aspect of CHIP within 90 days of the employee's employment date.

(E) Provide updates to all affected areas when changes to policy and/or procedure may affect their area(s). The updates must be provided within 20 working days of the changes occurring.

(F) Educate recipients , providers, and employees about their responsibilities, the responsibility of others, the definition of waste, abuse, and fraud and how and where to report it. Appropriate methods of educating recipients, providers, and employees may include but are not limited to newsletters, pamphlets, bulletins, and provider manuals.

(G) The MCOs will maintain a training log for all training pertaining to waste, abuse, and/or fraud in CHIP. The log must include the name and title of the trainer, names of all staff attending the training, and the date and length of the training. The log must be provided immediately upon request to the HHSC-OIG, Office of the Attorney General's (OAG)- Medicaid Fraud Control Unit (MFCU) and OAG - Civil Medicaid Fraud Division (CMFD), and the United States Health and Human Services- Office of Inspector General (HHS-OIG).

(H) Written standards of conduct, and written policies and procedures that include a clearly delineated commitment from the MCOs for detecting, preventing and investigating waste, abuse, and fraud.

(7) The name, title, address, telephone number, and fax number of the assigned officer or director responsible for carrying out the plan;

(A) The person carrying out the plan should be but is not limited to a Compliance Officer, a Manager of Government Programs, Regulatory Compliance Analyst, Director of Quality Integrity or a person in senior management.

(B) When the person that is responsible for carrying out the plan changes, the required information is to be reported to HHSC-OIG within 15 working days of the change.

(8) A description, process flow diagram, or chart outlining the organizational arrangement of the MCO's personnel responsible for investigating and reporting possible acts of waste, abuse, or fraud; and,

(9) Advertising and marketing materials utilized by the MCOs must be complete and accurately reflect the information about the MCO. Marketing materials includes any informational materials targeted to recipients.

(d) Each MCO must satisfy the requirements in paragraphs (1)-(3) of this subsection related to investigations of waste, abuse, and fraud conducted by the MCO's SIU.

(1) On a quarterly basis, submit to the HHSC- OIG a report listing all investigations conducted that resulted in no findings of waste, abuse, or fraud. The report shall include the allegation, the suspected recipient's or provider's CHIP number, the source, the time period in question, and the date of receipt of the identification and or reporting of suspected and/or potential waste, abuse, or fraud.

(2) Maintain a log of all incidences of suspected waste, abuse and fraud, received by the MCO regardless of the source. The log shall contain the subject of the complaint, the source, the allegation, the date the allegation was received, the recipient or providers CHIP number, and the status of the investigation.

(3) The log should be provided at the time of a reasonable request to the HHSC-OIG, OAG-MFCU, OAG-CMFD, and the HHS-OIG. A reasonable request means a request made during hours that the business or premises is open for business.

(e) MCOs must maintain the confidentiality of any patient information relevant to an investigation of waste, abuse, or fraud.

(f) MCOs must retain records obtained as the result of an investigation conducted by the SIU for a minimum period of five years or until all audit questions, appealed hearings, investigations, or court cases are resolved.

(g) Failure of the provider to supply the records requested by the MCO will result in the provider being reported to the HHSC-OIG as refusing to supply records upon request and the provider may be subject to sanction or immediate payment hold.

§370.503.Managed Care Organization's Contracts.

If a Managed Care Organization (MCO) contracts for the investigation of fraudulent claims and other types of programs abuse by recipients and providers under subsection 370.501(e), within 10 working days of executing the contract the MCO shall file with the Health and Human Services Commission, Office of Inspector General (HHSC-OIG):

(1) A copy of the written contract including any and all attachments.

(2) The names, titles, addresses, telephone numbers, and fax numbers of the principals of the entity with which the MCO has contracted; and

(3) A description of the qualifications of the principals of the entity with which the MCO has contracted to perform the contracted responsibilities.

§370.504.Review of Managed Care Organization's Records.

(a) Immediately upon request, the Health and Human Services Commission, Office of Inspector General (HHSC-OIG), Office of the Attorney General-Medicaid Fraud Control Unit (OAG-MFCU) and OAG, Office of the Attorney General- Civil Medicaid Fraud Division (OAG-CMFD), and the United States Health and Human Services, Office of Inspector General (HHS-OIG) may review the records of a Managed Care Organization (MCO) to determine compliance with this subchapter.

(b) Upon receipt of a record review request from any state or federal agency authorized to conduct compliance, regulatory, or program integrity functions, a MCO must:

(1) Provide the records requested by a properly identified agent of any state or federal agency authorized to conduct compliance, regulatory, or program integrity functions on the provider, person, MCO, or the services rendered by the provider or person within 24 hours of the request.

(2) An exception to the 24 hours stated in paragraph (1) of this subsection may be made when the OIG or another state or federal agency representative reasonably believes that the requested records are about to be altered or destroyed or that the request may be completed at the time of the request and/or in less than 24 hours.

(c) The request for record review includes, but is not limited to:

(1) clinical medical patient records;

(2) other records pertaining to the patient;

(3) any other records of services provided to CHIP or other health and human services program recipients and payments made for those services;

(4) documents related to diagnosis, treatment, service, lab results, charting;

(5) billing records, invoices, documentation of delivery items, equipment, or supplies;

(6) radiographs;

(7) business and accounting records with backup support documentation;

(8) statistical documentation;

(9) computer records and data;

(10) contracts with providers and subcontractors.

(d) Failure to produce the records or make the records available for the purpose of reviewing, examining, and securing custody of the records may result in HHSC-OIG imposing sanctions against the MCO as described in 1 TAC (Texas Administrative Code), Chapter 371, Subchapter G, §371.1609, Grounds for Fraud Referral and Administrative Sanction.

§370.505.Recovery of Funds.

(a) Upon completion of the investigation and final disposition of any administrative, civil, or criminal action taken by the state or federal government, the Health and Human Service Commission-Office of Inspector General (HHSC-OIG) will determine and direct the collection of any overpayment.

(b) Overpayments collected as a result of an investigation will be distributed to the Managed Care Organization (MCO) unless HHSC-OIG determines that an alternative distribution is indicated.

(c) If the HHSC-OIG determines that an MCO is not entitled to all or any portion of the distribution of funds collected as a result of an overpayment then HHSC-OIG will provide the MCO with a written explanation indicating the rationale for the alternative distribution of funds.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403327

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576


Chapter 380. MEDICAL TRANSPORTATION PROGRAM

Subchapter B. ELIGIBILITY, PROGRAM SERVICES, PROCESSES, ADDITIONAL TRANSPORTATION CONNECTED WITH AN AUTHORIZED TRIP, LIMITATIONS, AND EXCLUSIONS

1 TAC §380.203, §380.207

The Health and Human Services Commission (HHSC or Commission) proposes to amend Chapter 380, Medical Transportation Program, Subchapter B, Eligibility, Program Services, Processes, Additional Transportation Connected with an Authorized Trip, Limitations, and Exclusions, §380.203, Program Services and §380.207, Program Limitations.

Background and Justification

Section 2.97 of House Bill 2292, 78th Legislature, Regular Session (2003), states that HHSC may not prohibit a recipient of medical assistance from receiving transportation services through the Medical Transportation Program (MTP) to obtain renal dialysis treatment on the basis that the recipient resides in a nursing facility.

Section-by-Section Summary

Sections 380.203 and 380.207 allow for nursing facility residents that are enrolled in the medical assistance program to obtain transportation services for renal dialysis through MTP.

Fiscal Note

Tom Suehs, Deputy Executive Commissioner for Financial Services, has determined that during the first five years the proposed amendments are in effect there will be an estimated fiscal impact to the state for State Fiscal Year 2004 of $104,784.00 in general revenue and for State Fiscal Year 2005 of $418,926.00 in general revenue. Implementation of the proposed amendments will not result in any fiscal implications for local health and human service agencies. There are no foreseeable fiscal implications for local governments. For local governments operating Medicaid-contracted transportation services, there could be a positive impact

Small and Micro-business Impact Analysis

Mr. Suehs has also determined that there will be no effect on small businesses or micro-businesses to comply with the amendments as proposed. This was determined by interpretation of the rule that small businesses and micro-businesses will not be required to alter their business practices in order to comply with the amendments. There are no anticipated economic costs to persons who are required to comply with the amendments as proposed. There is no anticipated negative impact on local employment.

Public Benefit

Jason Cooke, Associate Commissioner for Medicaid and CHIP, has determined that for each year of the first five years the amendments are in effect, the public will benefit from adoption of the amendments. The anticipated public benefit, as a result of enforcing the amendments, will be to ensure that transportation is provided for renal dialysis services to recipients residing in nursing facilities.

Regulatory Analysis

HHSC has determined that the proposed amendments are not a "major environmental rule," as defined by §2001.0225 of the Texas Government Code. "Major environmental rule" is defined to mean a rule the specific intent of which is to protect the environment or reduce risk to human health from environmental exposure and that may adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, or the public health and safety of a state or a sector of the state. The proposed amendments are not specifically intended to protect the environment or reduce risks to human health from environmental exposure.

Takings Impact Assessment

HHSC has determined that the proposed amendments do not restrict or limit an owner's right to his or her property that would otherwise exist in the absence of government action and, therefore, do not constitute a taking under §2007.043, Government Code.

Public Comment

Written comments on the proposal may be submitted to Jennifer Stansbury, Senior Policy Analyst, Texas Health and Human Services Commission, 1100 W. 49th Street, MC-H310, Austin, Texas 78756-3199, within 30 days of publication of this proposal in the Texas Register .

Public Hearing

A public hearing has been scheduled for June 24, 2004, from 1:30 to 3:00 p.m. The hearing will be held at the Health and Human Services Commission, Brown-Heatly Building, Public Hearing Room, 4900 N. Lamar Boulevard, Austin, Texas.

Statutory Authority

The amendments are proposed under the Texas Government Code, §531.033, which provides the Commissioner of HHSC with broad rulemaking authority; Human Resources Code, §32.021 and the Texas Government Code, §531.021(a), which provide the Health and Human Services Commission (HHSC) with the authority to administer the federal medical assistance (Medicaid) program in Texas.

The proposed rules affect the Human Resource Code, Chapter 32, and the Texas Government Code, Chapter 531. No other statutes, articles, or codes are affected by these rules.

§380.203.Program Services.

Medical Transportation Program (MTP) services must be prior authorized by Regional MTP staff. MTP services include the following:

(1) reasonable transportation of a prior authorized MTP recipient to and/or from a prior authorized health care facility where health care needs will be met , which includes transportation to and from renal dialysis services for recipients enrolled in the medical assistance program who are residing in a nursing facility ;

(2) special medical transportation to a health care facility when one of the following conditions is met:

(A) the services are allowable and the health care provider will not bill Medicaid or another source for the cost of the services; or

(B) the recipient provides Regional MTP staff with a Health Care Provider's Statement of Need or equivalent for review and the service is determined reasonable.

(3) transportation for an attendant(s); if the health care provider documents the need, the recipient is a minor, or a language or other barrier to communication or mobility exists that necessitates such assistance;

(4) transportation for a service animal when accompanying a recipient;

(5) retroactive reimbursement for up to three months of reasonable transportation, meals and lodging if the recipient is a new recipient to MTP and was eligible under all program requirements. The retroactive reimbursement process will begin on the date of the request for retroactive reimbursement;

(6) advance funds for an eligible child and attendant(s) when lack of transportation funds will prevent the child from traveling to receive health care services; and

(7) reimbursement or advance funds for an eligible child and attendant(s) for meals and lodging when the health care service requires the child to remain overnight. If the child remains overnight for six consecutive months, the recipient or responsible party must provide proof of residency by providing:

(A) copy of federal or state ID (driver's license or identification card); and

(B) copy of a utility bill under the recipient's or responsible party's (if recipient is a child) name; or

(C) if residing with a family member, written verification that the applicant resides in the household.

(8) partial reimbursement or advance funds for a prior authorized MTP recipient and attendant(s) for transportation beyond the approved destination. Partial reimbursement is limited to the amount that would have been paid to the approved destination for transportation permitted under paragraph (1) of this section.

§380.207.Program Limitations.

Recipients are not eligible to receive medical transportation services under the following circumstances:

(1) to and from a day activity, a personal care home or state institution, or a facility participating in another Tile XIX program for which the reimbursement rate structure includes transportation funds , except as specified in §380.203 (1), Program Services ;

(2) the intended destination is a nursing facility;

(3) The recipient is an inpatient in a health care facility , except as specified in §380.203 (1), Program Services ;

(4) the recipient is under 18 years of age and not accompanied by a parent or legal guardian, unless one of the following conditions exists:

(A) the recipient is aged 15 through 17 years of age and presents the parent's or legal guardian's signed, written consent for the transportation services to the Regional MTP office or the transportation contractor; and/or

(B) the treatment to which the minor is being transported is such that the law extends confidentiality to the minor for this treatment;

(5) the recipient or another person or entity providing care for the recipient receives direct payment of worker's compensation benefits, U. S. Department of Veterans Affairs benefits, or other third-party resources for transportation to health care services on the recipient's behalf;

(6) the recipient is on limited status, unless the provider has made the referral or the recipient requests family planning services;

(7) TICP diagnostic visits and/or cancer or cancer-related treatments that are provided out-of-state;

(8) the recipient and/or attendant intentionally, knowingly, or recklessly boards the vehicle carrying an illegal knife, a club, handgun or other weapon, as defined in Penal Code, §46.01, on or about his or her person;

(9) a third-party, such as a lodging establishment, provides transportation, meals, and/or lodging at no charge for a recipient and attendant, for a particular appointment; or

(10) an attendant does not accompany the recipient on the MTP-requested trip when a Health Care Provider's Statement of Need, Form 3113 or equivalent, is on file stating the recipient requires an attendant(s).

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 17, 2004.

TRD-200403328

Steve Aragón

General Counsel

Texas Health and Human Services Commission

Earliest possible date of adoption: June 27, 2004

For further information, please call: (512) 424-6576