CMS Pub. 100-16, ch. mc86c17a, § 40.1

Medicare's payment to cost-based HMO/CMPs is based on the reasonable cost of

providing Medicare-covered services to Medicare enrollees.

All necessary and proper expenses of the HMO/CMP in providing Medicare-covered

services are recognized. The share of the total HMO/CMP cost that is borne by CMS is

related to the Medicare-covered care furnished Medicare beneficiaries so that no part of

their cost would need to be borne by other enrollees or non-enrolled patients. Conversely,

costs attributable to other HMO/CMP enrollees and non-enrolled patients are not to be

borne by Medicare.

The HMO/CMP payment principles take into account the special nature of HMO/CMPs

by recognizing costs of marketing, enrollment, and certain other costs unique to the cost-based HMO/CMP form of health delivery.

Under these principles, there may be more than one method of handling a particular cost

item (including apportionment and allocation methods). The method elected by the

HMO/CMP must be consistently followed in subsequent periods. A change of method

must have advance approval from CMS. Also, any request for a change in the method of

handling a particular cost item, including the apportionment or allocation of such items,

must be made 90 days prior to the beginning of the contract year in which the new

method is proposed for use.