CMS Pub. 100-06, ch. 8, § 140.2

It is your responsibility to provide necessary guidance to providers in preparing their cost

reports. If during your desk review and field audit activities you discover certain items

(e.g., expenses or allocation statistics for cost-reimbursed providers or cost-reimbursed

areas of prospective payment system (PPS) providers, count of residents for graduate

medical education or indirect medical education payments, bad debts,) that are not

allowable, make the necessary adjustments and inform the provider. Document all such

adjustments made to the cost report.

If these same nonallowable items appear on a subsequent cost report, tell the provider

again why they are disallowed. Confirm this notification in a letter. In this letter advise

the provider that further insistence on including the same nonallowable items in the next

cost report could result in referral to the U. S. Attorney General for consideration of

criminal and/or civil prosecution. (If the provider’s payment system changed in the

current year (e.g., from cost-reimbursed to (PPS) and the item(s) disallowed in the prior

year no longer has any reimbursement impact in the current year, do not issue this letter.)

Use the following model language.

On our audit for the period ___________ to _________ certain items for which you

receive reimbursement through the cost report were disallowed because they were

determined by our auditors to be nonallowable. When we audited your cost report for the

period ___________ to _________ we found the following items which were disallowed

in the prior period that were included in the computation of your cost report

reimbursement:

In our last meeting, we advised you which specific items were not allowed and the reason

for the disallowance. Your further insistence on including these nonallowable items in

future cost reports without disclosure as protested items could result in the referral of this

situation to the U. S. Attorney General for consideration of criminal and/or civil

prosecution.

Should you have any questions, please contact (contractor name).

If the provider continues to include these nonallowable items after receipt of the letter,

follow your policies and procedures on fraud and abuse to refer the case to the Office of

Program Integrity (OPI) of the responsible regional office.

However, if you have some support that even the initial insertion of a nonallowable item

on the cost report was intended by the provider to defraud the United States government,

no warning to the provider is required before referring the matter to the Office of the

Inspector General (OIG) for investigation and possible prosecution.

Where you refer a questionable situation to the OPI or OIG, it is generally appropriate to

continue the audit while the situation is investigated by the OIG. Occasionally,

circumstances may require an audit to be discontinued pending the results of the

investigation. These questions are resolved by CMS and the OIG.

Under no circumstances should you discuss a possible fraud or abuse situation with

the provider, or take any action to disallow or resolve such questionable situation

prior to receiving instructions from the OIG.

These instructions do not apply in situations where the provider disputes the allowability

of an item and clearly indicates on the subsequent cost report that the particular item is

still claimed as a protested item to establish the basis for an appeal.