Transcript Hospital Cost Principles

Title 45
Code of Federal Regulations
Part 74.91
Also known as:
45 CFR Part 74 Appendix E
© Partners HealthCare System, Inc., 2011
Learning Objectives
 To gain familiarity with cost principles applicable to
hospitals
 Become comfortable with the guidance, to be able to find
answers when needed
 Gain understanding of the terms used in costing
 To have a better understanding of direct vs. indirect now
known as facilities and administrative costs
An Introduction to 45 CFR Part 74
 Title 45 – Public Welfare
 Part 74 – Uniform Administrative Requirements for
Awards and Sub-awards
 Appendix E to Part 74 – Principles for Determining Costs
Applicable to Research and Development Under Grants
and Contracts With Hospitals
An Introduction to 45 CFR Part 74
 Here is how you will normally see the cost principles referenced in
an award:
 Cut and paste from an NIH R01, SECTION IV – HG Special Terms
and Conditions – 5R01HG00XXX-03
 5. This award is issued without direct cost categorical breakdowns.
Recipients are required to allocate and account for costs by category in
accordance with applicable cost principles. (Reference NIH Guide,
Volume 24, Number 38, October 27, 1995.)
 You will find the same vague reference in proposal guidelines, it is
up to us to know which cost principles apply to us (A-21 for Higher
Ed, FAR for commercial organizations, A-122 for not-forprofits/foundations).
Purpose and Scope
 Objectives: Applies to grants and contracts awarded by
DHHS - NIH Centers and Institutes
 Each hospital is expected to employ sound management
practices
 Application of these principles shall be in conformance
with generally accepted accounting practices of hospitals
Purpose and Scope, cont.
 It is essential that consistent procedures for determining
reimbursable costs for similar services be employed
without regard to program differences (health services
projects, Medicare, sponsored research)
 Both the direct and indirect costs of a research project
must be accounted for within their respective cost center
 All operating agencies within DHHS sponsoring work in
hospitals, will apply these principles
Purpose and Scope, cont.
 These principles and policy guides shall be used in
determining costs incurred for work under grants and
cost reimbursement type contracts and subcontracts
 They shall also be used as a guide in the pricing of fixedprice contracts and subcontracts
Definitions of Terms
 Organized Research – All research activities of a
hospital that may be identified whether the support for
such research is from a federal, non-federal or internal
source
 Departmental Research – Research activities that are
not separately budgeted and accounted for. Such
activities, including all research activities not
encompassed under the term Organized Research, are
regarded as part of the patient care activities of the
hospital.
Definitions of Terms, cont.
 Research Agreement - Any valid arrangement to
perform federally sponsored research or development
including grants, cost-reimbursement type contracts,
cost reimbursement type subcontracts, and fixed price
contracts and subcontracts
 Instruction and Training – The formal or informal
programs of educating and training technical and
professional health services personnel, primarily medical
and nursing training
Definitions of Terms, cont.
 Other Hospital Activities – all organized activities of a
hospital not immediately related to patient care, research
and instructional and training functions which produce
identifiable revenue from the performance of these
activities.
 Patient Care – Those departments or cost centers which
render routine or ancillary services to in-patients and/or
out-patients, as the costs of these services apply to
patients involved in research programs
Definitions of Terms, cont.
 Allocation – In regard to these cost principles, allocation
means the process by which the indirect costs are
assigned between; organized research, patient care
including department research, instruction and training,
and other hospital activities
 Cost Center – An identifiable department or area
(including research) within the hospital which has been
assigned an account number in the hospital accounting
system for the purpose of accumulating expenses
Basic Considerations
 The tests for allowability of costs:
 They must be reasonable; the nature of the goods or
services acquired or applied would pass the prudent
person test. Necessary, and consistent with hospital
policies and practices.
 They must be assigned to research agreements
under the standards and methods provided in these
guidelines.
 They must be accorded consistent treatment through
application of the generally accepted accounting
practices appropriate to the circumstances.
Basic Considerations, cont.
 They must conform to any limitations or exclusions set
forth in these principles or in the terms of the research
agreement as to types or amounts of cost items.
 They must be allocable to a particular cost center in
accordance with relative benefits received or other
equitable relationship. They must be incurred solely to
advance the work or necessary to the overall operations
of the hospital.
 Costs allocable to a particular research agreement may
not be shifted to other research agreements to meet
deficiencies caused by overruns or other fund
considerations or for other reasons of convenience.
Basic Considerations, cont.
 “Applicable credits” refers to negative expenditure type
transactions which operate to reduce expense items
allocable to research agreements. Examples – purchase
discounts, rebates, allowances, sales of scrap or
incidental services.
 In some instances, applicable credits where such items
are provided for a benefit of a particular hospital activity,
should be treated as an offset to the indirect costs
apportioned to that activity.
Direct Costs
 Direct costs are those costs that can be identified
specifically with a particular cost center.
 Compensation for employees for the time or effort devoted to the
performance of work under the research agreement
 Staff benefit and pension plan costs
 The costs of materials consumed or expended in the
performance of the work
 Other items of expense incurred for the research agreement
such as extraordinary utility consumption
Indirect Costs
 Costs that have been incurred for common or joint
objectives and thus are not readily subject to treatment
as direct costs of research agreements or other ultimate
or revenue producing cost centers.
 Depreciation (buildings, fixed and movable
equipment)
 Administrative and general, including fringe (i.e.
hospital accounting, information centers, purchasing)
Indirect Costs, cont.
 Operation of plant (power plant operations, general utility
costs, elevator operations, protection services and
general parking lots)
 Maintenance of plant (ordinary repair and maintenance
of buildings and general equipment)
 Laundry and linen service (including salary and wage for
laundry services staff or to outside laundry or linen
services)
Indirect Costs, cont.
 Housekeeping (salary and wage for all maids, porters,
janitors and other housekeeping employees. Also
includes all supplies needed to carry out the
housekeeping functions)
 Dietary (operation of all hospital cafeterias)
 Medical records and library (medical record clerks and
librarians, including all supplies to create and house
medical records)
 Also covered in this section is the guidance on how to
prepare the indirect cost proposal.
General Standards for Selected Items of Cost
 This section provides standards to be applied in
establishing the allowability of certain items involved in
determining cost.
 Failure to mention a particular item of cost in the
standards is not intended to imply that it is either
allowable or unallowable. Rather, determination as to
allowability in each case should be based on the
treatment or standards provided for similar or related
items of cost.
General Standards for Selected Items of Cost, cont.
 In case of discrepancy between the standards provided
and the provisions of a specific research agreement, the
provisions of the research agreement shall govern.
 It is important to seek agreement with the Government in
advance of the incurrence of special or unusual costs in
categories where reasonableness and allocability are
difficult to determine.
Selected Items of Cost
 Advertising costs
 Recruitment for a sponsored agreement, procurement of scarce items
needed to perform research, disposal of scrap or surplus used in
research are allowable costs.
 Bad debts
 Only when patient related (caused by a research patient requiring
clinical care and is approved by the awarding agency).
 Bonding costs
 Allowable when required by a sponsored research agreement or by the
hospital in the general conduct of its business.
 Capital expenditures
 Allowable only as provided for in a sponsored research agreement.
Selected Items of Cost, cont.

Civil defense costs
 Allowed when reasonable and when distributed to all activities of the institution
(first-aid training, fire fighting training, exit notices and directional signs).

Communication costs
 Local and long distance phone, postage and the like are generally allowable.

Compensation for personal services
 Includes salaries, wages, staff benefits and pension plan costs are allowable
when reasonable and in conformance to the consistently applied institutional
policies. *Includes effort reporting requirements which we will talk about later.

Contingency provisions are unallowable costs
 Unless specifically stated in the application guideline (construction grants).

Depreciation and use allowances
 Generally not considered (see listing for specifics and exceptions).
Selected Items of Cost, cont.
 Employee morale, health and welfare costs and credits
 Expenses for the improvement of working conditions,
employee/employer relations, employee morale (EAP) and employee
performance are allowable.
 Entertainment costs
 Including transportation, lodging and gratuities are unallowable.
 Equipment and other facilities
 Allowable on a direct charge basis when approved by sponsor and
provided for in the terms of the agreement.
 Fines and penalties
 Unallowable unless as a result of compliance with specific provisions of
a research agreement or written instructions from the sponsor.
Selected Items of Cost, cont.
 Insurance and indemnification
 Allowable when required by the sponsor and terms of agreement.
 Interest, fund raising and investment management costs
 Generally unallowable unless related to the physical custody and control
of monies and securities.
 Labor relations costs
 Including labor management committees and publications are allowable.
 Losses on research agreements or contracts
 Excess costs are unallowable, including cost shares.
 Maintenance and repair costs
 Both normal and extraordinary maintenance and repair costs are
allowable. Rehabilitation costs are allowable only on a depreciation
basis.
Selected Items of Cost, cont.
 Material costs
 Costs incurred for purchased materials, supplies and fabricated parts
directly or indirectly related to a research agreement are allowable.
 Memberships, subscriptions and professional activities costs
 Allowable including costs of meals, transportation, facility rental and
other incidental costs for meetings and conferences.
 Organization costs
 Incorporation fees, attorney fees, accountant fees, broker fees, and
fees to promoters and organizers are generally unallowable.
 Other business expenses
 Such as recurring expenses as registry and transfer charges, costs of
shareholder meetings, publication of related reports and submission of
reports and forms for taxing and regulatory bodies are allowable costs
when allocated on an equitable basis.
Selected Items of Cost, cont.

Patient care
 Routine and ancillary or special services to research patients is an allowable
direct cost for research agreements.

Routine services
 Regular room, dietary and nursing services, minor medical and surgical supplies
and the use of equipment and facilities are allowable.

Patent costs
 Preparing disclosures, reports and other documents as well as prior art search
expenses are allowable costs.

Pension plan costs
 Allowable when incurred in accordance with established hospital policies as long
as they are reasonable and non-discriminatory.

Plan security costs
 Wages, uniforms and equipment for personnel are allowable when incurred to
comply with government security requirements.
Selected Items of Cost, cont.

Pre-research agreement costs
 Unallowable unless specifically set forth and identified in the terms of a research
agreement.

Professional services costs
 For services rendered by members of a particular profession who are not
employees of the hospital are allowable under certain circumstances. Please see
the guidelines for specifics.

Profits and losses on disposition of plant equipment or other assets
 These costs shall be excluded when computing research agreement costs.

Proposal costs
 These costs should be treated as indirects and allocated currently to all activities.

Public information services costs
 Unallowable unless specifically authorized by the sponsoring agency.
Selected Items of Cost, cont.
 Rearrangement and alteration costs
 Both ordinary and special rearrangement and alteration of facilities are
allowable when previously approved by the sponsor.
 Reconversion costs
 Restoration or rehabilitation of the institutions facilities to address fair
wear and tear are allowable when the wear was caused through
conducting sponsored research.
 Recruiting costs
 Help wanted ads, recruitment expenses including travel and relocation
allowances, and employment office services are allowable when
pursuant to a well managed recruitment program.
 Rental costs
 Including the sale and lease back of facilities are generally allowable
when reasonable.
Selected Items of Cost, cont.
 Royalties and other costs for use of patents
 Allowable unless the Government has a license or the right to free use
of the patent, the patent has been deemed invalid or unenforceable, or
has expired.
 Severance pay
 Severance pay costs are allowable only to the extent what such
payments are required by law, by agreement or by established policy or
circumstances of employment.
 Specialized service facilities operated by the hospital
 Highly complex and specialized facilities such as super computers and
reactors are allowable when meeting conditions defined in the
guidelines.
 Special administrative costs
 General public relations activities, catalogs and services are
unallowable.
Selected Items of Cost, cont.
 Staff and/or employee benefits
 Annual leave, sick leave, military leave and the like are allowable when
in proportion to the relative amount of time and effort actually devoted to
each.
 Taxes
 Generally allowable, see guideline for specifics.
 Transportation costs
 In bound freight, express, postage and other transportation services
relating to goods purchased, in process or delivered are allowable.
 Travel costs
 When incurred by employees in travel on official business of the hospital
are allowable. See guideline for specifics.
*Remember your own entity and the Partners travel policies*
Selected Items of Cost, cont.
 Termination costs applicable to contracts
 These costs are generally allowable except when they are for the costs
of common items of material that are reasonably usable on the
hospital’s other work.
 Voluntary services
 The value of voluntary services by sisters or other members of religious
orders is allowable provided the amounts do not exceed that paid other
employees for similar work.
Effort Reporting
 Charges for salaries and wages of individuals other than members
of professional staff will be supported by daily time and attendance
and payroll records.
 Professional staff – current and reasonable estimates of the
percentage distribution of their total effort may be used as support in
the absence of actual time records.
 The term professional staff includes physicians, research
associates, and other personnel performing work at responsible
levels of activities.
 The competent performance of these activities usually requires
persons possessing degrees from accredited institutions of higher
learning and / or state licensure.
Effort Reporting, cont.
 To qualify as current and reasonable, estimates must be made no
later than one month after the month in which services were
performed. Our hospitals are on a waiver for semi-annual
certification.
 These estimates of effort on each research agreement should be
prepared by the individual who performed the services or by a
responsible individual such as a department head or supervisor
having first hand knowledge of the services performed on each
research agreement.
 The estimate of effort spent may include activities such as;
preparing and delivering lectures about the research, writing
research reports and articles, participating in appropriate research
seminars, consulting with respect to related research, attending
scientific meetings and conferences.
Effort Reporting, cont.
 All other hospital activities include departmental research,
administration and committee work, and public services undertaken
on behalf of the hospital.
 The estimates must show the allocation of effort between organized
research and all other hospital activities.
 Estimates determined before the performance of services do not
qualify as estimates of effort spent.
 Part time work done on research by staff members having only parttime appointments will be determined at a rate not in excess of that
for which they are regularly paid for their part time staff assignment.
Where to Find the Full Text
 The full text of 45 CFR Part 74 Appendix E can be found
at:
http://www.nhtsa.gov/nhtsa/whatsup/tea21/GrantMan/HTML/29d
_OMB_CostPrnHosp_45CFR_Prt74.html
Questions?
Robin Cyr
Director of Training and Policy
[email protected]
© Partners HealthCare System, Inc., 2011