Cost Finding, Step-Down Allocation, and Allowable Cost Determination
Allowable cost and the step-down
Cost finding starts with the principle that Medicare pays reasonable cost: costs that are ordinary, necessary, and related to patient care, as defined in 42 CFR 413.9. Nonallowable items, including advertising, donations, most research, separately billed physician professional services, patient conveniences, and costs of non-reimbursable cost centers, are removed or isolated before allocation. Worksheet A records total expense; the A-8 series documents reclassifications so that a cost posted to one center is moved to the center that actually incurred it.
Step-down allocation, the B series, is sequential. The most encompassing overhead center, usually administration or a general service center, is allocated first using a statistic such as square footage, pounds of laundry, or hours. Once a center is closed, no cost may later be allocated back into it. Allocations go to all remaining centers, including non-reimbursable ones; those centers absorb overhead, but the Medicare share of their cost is not paid. The last centers to close are the revenue-producing patient care centers, whose costs feed Worksheet C cost-to-charge ratios and the settlement.
Traps: allocating directly from overhead to patient care while skipping intermediate centers; using charges as the statistic when the report specifies another basis; failing to allocate to a non-reimbursable center and thereby overstating Medicare cost; and treating a reclassification as an adjustment without support. Rule of thumb: total cost allocated out of a center must equal what it had plus what it received, and no closed center may appear as a recipient.