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Non-Allowable Expense on the Medicare Cost Report [PODCAST]

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The Hospital Finance Podcast

In this episode, we are joined by BESLER’s Senior Reimbursement Consultant, Christina Brown, to talk with us about Non-Allowable costs on the Medicare Cost Report.

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Highlights of this episode include:

  • What is a non-allowable cost
  • Type of expenses not related to patient care
  • Non-allowable revenue items 

Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. Medicare cost report plays an important role in how hospitals are reimbursed from the government for their services. To talk with us about non-allowable costs on the cost report, I’m joined by Christina Brown, a Senior Consultant on the Reimbursement Services team here at BESLER. Christina, welcome to the show.

Christina Brown: Hi. Thanks, Mike. Glad to be here.

Mike: So, Christina, why don’t you start out by explaining to us what a non-allowable cost is on the cost report?

Christina: Certainly, in summary, allowable costs are defined as necessary and proper in providing services, and most likely they are those related to patient care. A common misconception to those new to reimbursement may include the thought that all costs on the provider’s general ledger are reported on the Medicare cost report. However, unfortunately, this is not typically the case. One thing we learn early as reimbursement professionals is there is a clear difference between GAAP accounting and the accounting that we do for Medicare. For the Medicare cost report, we move things around to report items on the proper line, and we exclude and add things as necessary. And as it relates to non-allowable expenses, Medicare regulations state that activities deemed as non-allowable should actually be removed from the cost report.

Mike: Christina, what types of expenses would Medicare consider to be not related to patient care?

Christina: Well, there are many circumstances that present expenses which are not related to patient care that are considered to be non-allowable, and I’ll go over a few of those. A few of those would be that we typically see are things like the cost of meals from the cafeteria, which are typically those attributed to guest meals, as patient meals are all billable and they are directly related to patient care and are typically reclassified to the dietary cost center line. Like I said, the guest meals would be considered non-allowable. Another non-allowable item would be any travel costs that are incurred from an activity not directly related to patient care. And those could be things like travel for meetings, administrative, education, and other similar activities that aren’t patient care related.

A common expense we also see being removed are expenses associated with gifts and donations to charities and educational, medical, or political entities because those such expenses are also considered to be non-allowable, as they are also not related to patient care. Also, if there happened to be any cost incurred as a result of fines or penalties that are incurred by the provider, or if there happens to be any unsuccessful beneficiary appeals, then the expenses related to those would also need to be removed from the cost report as Medicare considered those non-allowable. Medicare is really trying to, as I said before, just pinpoint what’s related to patient care, because then the cost report is used to calculate the actual cost of patient care so that’s why we want to remove those expenses.

Mike: And you’ve been addressing expenses so far. Are there also revenue items that are non-allowable?

Christina: The simple answer to that question would be yes, and at the very basis and a key component to the Medicare cost report is the assurance that providers adhere to what is known as the matching principle. What that means for the revenue side is any revenue that is non-allowable will also need to be adjusted on worksheet A-8 and if the revenues exceed the corresponding expense, then only a portion of revenue up to the amount of the expense is to be offset. A best practice that we follow is we evaluate all revenue that is reported as other operating or non-operating income on the provider’s income statement just to verify if an offset is required on worksheet A-8. I’ll give you a common example of a revenue item where this is evident. In the case that I was referring to earlier, the cafeteria revenue, there is typically a reclass to move allowable costs to dietary because those are considered patient care and those are recorded on cost center line 10, while those meals that are not allowable and are considered mostly nonpatient care are moved to the cafeteria line and that is reported on cost center line 11. Now, Medicare identifies this as a common offset. Therefore, on worksheet A-8, there is a line present that appears and that is on line 14 of that worksheet, and it has been expected that cafeteria revenue relating to guests will then be recorded on that line 14 of worksheet A-8, and then in a column on worksheet A-8, it will be reported to offset line 11 just in order to offset the expenses that are reported on worksheet 8.

It is important to pay attention to the lines where offsets to expenses on worksheet A-8 offset more than the amount from the preceding columns. Rightly so Medicare does not allow a negative amount to be reported on any costs center line because you cannot report negative expenses. Thus, after non-allowable expenses and revenues are reported on worksheet A-8, a final review will need to be done on worksheet A. There are many other common offsets that have specific lines on worksheet A-8. Some of those are revenue and some of those are expense related and some will be applicable to most providers, while others may not be. The items that do not have a specific assigned line will be reported on subscripted lines at the bottom of the worksheet, and those subscripted lines will also need descriptions of the revenue or the expense offset. And in the webinar, we’ll also touch on the revenues as well as the impact of non-allowable revenue also has an impact on the Medicare cost report.

Mike: Christina, thank you for all of that detail and as Christina just alluded to, she’s giving a more extensive webinar on this topic. So if you’d like to take a look at the recording of that webinar, you can head up to, click on the Insights button and look for Reimbursement Resources and you’ll see it there. Christina Brown, thanks so much for joining us today on the Hospital Finance podcast.

Christina: All right. Thank you. It’s been a pleasure.

The Hospital Finance Podcast


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