Updated 1/8/25

Related party costs on a Medicare cost report are costs for services which were provided by a related organization.  A related organization might be a management company, a therapy company, a real estate company, or even a nurse or administrator.  If the party which provides the services either owns part of the facility or is related to a facility owner, facility administrator, or key person who works for the facility, then costs must be reported on the cost report.

Medicare regulations allow related parties to be compensated for their expenses, but not for any profit.  Therefore, the preparer will need to calculate how much of the amount paid to the related party is profit in order to figure out how much was actually allowable.

Each cost report form has a separate worksheet for entering related party information.  For example, on the SNF form 2540-10 and the new 2540-24, Hospice form 1984-14, HHA form 1728-20, and RHC form 222-17 this is Worksheet A-8-1. On FQHC form 224-14 this is  Worksheet A-2-1.

The related party worksheet has one column for costs from the trial balance and one for allowable costs.  For the first, simply enter the amount the facility paid as it shows up on the trial balance.  For example, if the facility paid $100,000 for therapy to a related party therapy company, then enter $100,000 as the trial balance amount.

To calculate allowable costs, obtain an income statement from the related party company.  If the company is showing a net loss for the year, then the entire amount which the facility paid the related company is allowable, since they did not make any money on it.  In the above example, the preparer would enter $100,000 as the amount allowable.

If the related party has net profit for the year, divide the net income by the total income.  This is the company’s profit percent.  Multiply the profit percent by the amount paid by the facility.  In the above example, if the therapy company has a profit percent of 10%, then the profit portion of the rent was $10,000 ($100,000 X 10%).  Subtract the profit amount from the total expense to get amount allowable, in this case, $100K – $10K = $90,000.  The preparer would enter $90,000 as the allowable amount.

For related party employees, such as nurses, in general, the amount allowable may be whatever the regular rate other such employees in that urban area would be compensated for similar services.

If a related party company only services this provider, then allowable costs would be calculated differently.  In this case, the related party’s total expenses, per their income statement, would be the allowable costs.  For example, if there is a related party real estate management company, to which the facility pays rent, and the real estate management company does not rent to anyone else, then the facility would enter said management company’s total expenses as allowable expenses. This would be the case even if the expenses are greater than the amount paid by the facility as rent, meaning that the adjustment amount would be a positive onset on A-8-1 (see below regarding the allocation method).

If a related party services multiple providers, a different method often used, other than the profit percentage, is the allocations method.  The related party prepares a schedule of all of the providers and allocates expenses to each based on a ratio determined by a uniform measure, such as patient days.  The allowable expenses for a given facility would be that facility’s allocated expenses on the schedule.

A prime example of the allocation method is a home office, where the home office expenses are allocated by facility via its cost statement. In this case, sometimes allowable expenses are greater than actual expenses. This means that the actual expenses incurred by the home office for a given facility, per its allocation schedule or cost statement, are greater than the amount the facility paid to the home office. In this case, the A-8-1 adjustment will be positive, effectively onsetting the extra costs.

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Disclaimer: This blog does not contain legal advice. What it does contain are our best
explanations, advice, and suggestions to help facilities and cost report preparers to understand the cost report forms and reporting process and offer suggestions for their preparation. Progressive Provider Services assumes no legal responsibility for the content of this blog, nor for cost reports or other reports prepared based on the content herein.