(a) The Texas Health and Human Services Commission (HHSC) 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 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 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 complete cost reports according to instructions and rules 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).
  (3) For School and Health Related Services (SHARS), failure to complete cost reports according to instructions and rules described in §355.105(b)(4) of this title may result in an administrative contract violation as specified in §355.8443 of this title (relating to Reimbursement Methodology for School Health and Related Services (SHARS)).
  (4) For all other programs, failure to complete cost reports according to instructions and rules in accordance with §355.105(b)(4) of this title 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.
(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;
  (2) reports expenses in conformity with HHSC's lists of allowable and unallowable costs;
  (3) follows generally accepted accounting principles, except as otherwise specified in HHSC'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 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 may reassign allowable costs to the appropriate line items of a cost report.
(e) HHSC 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 may conduct field audits of cost reports that show unusual fluctuations or trends in costs or other statistics. HHSC 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 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 on cost reports may result in vendor hold as specified in §355.403 of this title.
  (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 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.
  (3) For SHARS, failure to allow access to any and all records necessary to verify information submitted to HHSC on cost reports may result in an administrative contract violation as specified in §355.8443 of this title.
  (4) For all other programs, failure to allow access to any and all records necessary to verify information submitted to HHSC 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.
(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).

Source Note: The provisions of this §355.106 adopted to be effective September 1, 1996, 21 TexReg 7866; duplicated effective September 1, 1997, as published in the Texas Register October 17, 1997, 22 TexReg 10311; amended to be effective June 26, 2000, 25 TexReg 6089; amended to be effective August 31, 2004, 29 TexReg 8093; amended to be effective September 1, 2011, 36 TexReg 4795