(a) Cost reports. Cost reporting requirements vary depending on whether the provider participates in the Direct Care Staff Rate enhancement program. All providers who participate in the rate enhancement program must file a cost report, as described in §355.308 of this title (relating to Direct Care Staff Rate Component). A provider that is not participating in the rate enhancement program must file a cost report unless:
  (1) the provider meets one or more of the conditions in §355.105(b)(4)(D) of this title (relating to General Reporting and Documentation Requirements, Methods, and Procedures); or
  (2) the cost report would represent costs accrued during a time period immediately preceding a period of decertification, if the decertification period was greater than either 30 calendar days or one entire calendar month.
(b) Exclusion of and adjustments to certain reported expenses. Providers are responsible for eliminating unallowable expenses from the cost report. HHSC reserves the right to exclude any unallowable costs from the cost report and to exclude entire cost reports from the reimbursement determination database if there is reason to doubt the accuracy or allowability of a significant part of the information reported.
  (1) Cost reports included in the database used for reimbursement determination.
    (A) Individual cost reports will 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.
    (B) In the event that all cost reports submitted for a specific facility are disqualified through the application of subparagraph (A)(i) and/or (ii) of this paragraph, the facility will not be represented in the reimbursement database for the cost report year in question.
  (2) Adjustments and exclusions of cost report data include, but are not necessarily limited to:
    (A) Fixed capital asset costs.
      (i) HHSC staff determine fixed capital asset costs as detailed in this section.
      (ii) Fixed capital asset costs are reimbursed in the form of a use fee calculated as described in §355.307 of this title (relating to Reimbursement Setting Methodology). The following fixed capital charges are excluded from the reimbursement base:
        (I) building and building equipment depreciation and lease expense;
        (II) mortgage interest;
        (III) land improvement depreciation; and
        (IV) leasehold improvement amortization.
    (B) Limits on other facility and administration costs. To ensure that the results of HHSC's cost analyses accurately reflect the costs that an economic and efficient provider must incur, HHSC may place upper limits or caps on expenses for specific line items and categories of line items included in the rate base for the administration and facility cost centers. HHSC sets upper limits at the 90th percentile in the array of all costs per unit of service or total annualized cost, as appropriate for a specific line item or category of line item, as reported by all contracted facilities, unless otherwise specified. The specific line items and categories of line items that are subject to the 90th percentile cap are:
      (i) total buildings and equipment rental or lease expense;
      (ii) total other rental or lease expense for transportation, departmental, and other equipment;
      (iii) building depreciation;
      (iv) building equipment depreciation;
      (v) departmental equipment depreciation;
      (vi) leasehold improvement amortization;
      (vii) other amortization;
      (viii) total interest expense;
      (ix) total insurance for buildings and equipment;
      (x) facility administrator salary, wages, and/or benefits with the cap based on an array of nonrelated-party administrator salaries, wages, and/or benefits;
      (xi) assistant administrator salary, wages, and/or benefits with the cap based on an array of nonrelated-party assistant administrator salaries, wages, and/or benefits;
      (xii) facility owner, partner, or stockholder salaries, wages, and/or benefits (when the owner, partner, or stockholder is not the facility administrator or assistant administrator), with the cap based on an array of nonrelated-party administrator salaries, wages, and/or benefits;
      (xiii) other administrative expenses including the cost of professional and facility malpractice insurance, advertising expenses, travel and seminar expenses, association dues, other dues, professional service fees, management consultant fees, interest expense on working capital, management fees, other fees, and miscellaneous office expenses; and
      (xiv) total central office overhead expenses or individual central office line items. Individual line item caps are based on an array of all corresponding line items.
    (C) Occupancy adjustments. HHSC adjusts the facility and administration costs of providers with occupancy rates below a target occupancy rate. The target occupancy rate is the lower of:
      (i) 85%; or
      (ii) the overall average occupancy rate for contracted beds in facilities included in the rate base during the cost reporting periods included in the base.
    (D) Cost projections. HHSC projects certain expenses in the reimbursement base to normalize or standardize the reporting period and to account for cost inflation between reporting periods and the period to which the prospective reimbursement applies as specified in §355.108 of this title (relating to Determination of Inflation Indices).
  (3) 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 paragraph (1)(A)(i) of this subsection.
(c) Reimbursement determinations and allowable costs. Providers are responsible for reporting only allowable costs on the cost report, except where cost report instructions indicate that other costs are to be reported in specific lines or sections. Only allowable cost information is used to determine recommended reimbursement. HHSC excludes from reimbursement determinations any unallowable expenses included in the cost report and makes the appropriate adjustments to expenses and other information reported by providers.
(d) General information. In addition to the requirements of this section, cost reports will be governed by the information in §355.101 of this title (relating to Introduction), §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), §355.106 of this title (relating to Basic Objectives and Criteria for Audit and Desk Review of Cost Reports), §355.107 of this title (relating to Notification of Exclusions and Adjustments), §355.108 of this title (relating to Determination of Inflation Indices), §355.109 of this title (relating to Adjusting Reimbursement When New Legislation, Regulations, or Economic Factors Affect Costs), and §355.110 of this title (relating to Informal Reviews and Formal Appeals).
(e) Final cost reports for change of ownership. When a facility changes ownership, for a provider who participates in the rate enhancement program, the prior owner must submit a final Staffing and Compensation Report as described in §355.308 of this title. When a facility changes ownership, for a provider not participating in the rate enhancement program, the prior owner is excused from submitting a final cost report and, if its prior cost report is pending audit completion, the audit will be suspended and the cost report excluded from the final cost report database.
(f) Requirements for cost report completion. A completed nursing facility cost report must:
  (1) meet the definition of completed cost report specified in §355.105(b)(4)(A) of this title;
  (2) have attached the property appraisal used to determine the allowable appraised property value as described in subsection (g) of this section;
  (3) not report figures for days of service and number of beds that reflect occupancy of greater than 100%;
  (4) have a management contract attached, if applicable; and
  (5) have a lease agreement attached, if applicable.
(g) Allowable appraised property values. Allowable appraised property values are determined as follows:
Cont'd...