Medicare Cost Report Audit Considerations: What 42 CFR 413.24 Requires of the Provider's Records

A provider paid on reimbursable cost files a cost report, and the report's numbers have to come from books that a qualified auditor can verify. That is the rule in 42 CFR 413.24, and it frames the work of a CPA firm whether it audits the provider's financial statements, reviews the cost report or supports the settlement receivable. This guide sets out what the regulation says about the data, the method, the calendar and the certification, and turns it into file checkpoints. For the audit of the settlement receivable itself, see Medicare cost reports and third-party settlements.

The principle: verifiable records

Section 413.24(a) requires providers to furnish adequate cost data. The data must be based on financial and statistical records that qualified auditors can verify. They must use an approved cost-finding method and the accrual basis of accounting. A governmental institution that keeps its books on a cash basis may submit cash-basis data, subject to proper treatment of capital expenditures.

Section 413.24(c) adds that cost information must come from the provider's records to support payments for services to beneficiaries, and that it must be accurate and detailed enough for its purpose. Records stay consistent across periods, though a desirable change in accounting procedure is allowed when there is reason for it.

Two audit consequences follow:

• The cost report is not a standalone schedule. It is only as good as the books and statistics behind it. A cost report prepared from a trial balance that disagrees with the audited financial statements is a finding.
• Statistics, such as square feet, patient days and hours, are records under the regulation. They need support and a consistent basis from year to year.

Accrual basis

Section 413.24(e) calls the accrual basis the most accurate basis for determining costs. The definition in paragraph (b) is that revenue and expense are recorded in the period earned or incurred, regardless of when cash moves. When a client keeps cash records during the year and converts at year-end, the conversion is part of the evidence for the cost report.

Cost finding

Section 413.24(b) defines cost finding as recasting data from the provider's ordinary accounts to determine the cost of each type of service, through direct-cost allocation and indirect-cost proration. Section 413.24(d) describes the methods:

• Step-down. Costs of nonrevenue-producing centers are allocated to all centers they serve, including revenue-producing ones. The center that serves the most other centers while receiving the fewest benefits goes first, and is then treated as closed.
• Double apportionment. After a preliminary allocation, nonrevenue centers stay open, and their remaining costs are apportioned to the revenue-producing centers. It requires contractor approval.
• More sophisticated methods. These require contractor approval, and the request is submitted before the end of the fourth month of the prospective reporting period.
• Combination method. A modified method using bases and forms prescribed by CMS. Alternative forms need prior CMS approval.

Section 413.24(d)(8) tells providers not to include a statistic unrelated to administrative and general expenses if it causes improper overhead distribution.

The cost report and its calendar

Under 413.24(f), cost reports cover a consecutive 12-month period of the provider's operations. Under 413.24(f)(1), a provider that terminates or changes ownership files a report ending on that date.

Under 413.24(f)(2), reports are due on or before the last day of the fifth month following the close of the period covered. For a period ending on a day other than the last day of a month, the deadline is 150 days after the period ends. Extensions are limited to significant adverse effects from extraordinary circumstances outside the provider's control, such as flood or fire.

Certification and acceptable submission

Section 413.24(f)(4)(iv)(B) requires the administrator or chief financial officer to sign a certification that the report is true, correct, complete and prepared from the books and records of the provider. It carries a warning about misrepresentation. The certification makes the tie to the books a signed statement. A CPA firm should not draft a cost report that a client's officer certifies without the officer's own review.

Under 413.24(f)(5), the provider must complete the required forms with all signatures and supporting documents. A report missing required items is rejected for lack of supporting documentation, the contractor decides acceptability within 30 days, and a rejected report is treated as though it was never filed.

The contractor stores the as-filed electronic report unchanged and works from a working copy for desk review, audit adjustments and final settlement (413.24(f)(4)(iii)). The as-filed file stays unchanged, so the provider's own numbers remain on record next to the contractor's adjustments. For the due date, an electronic cost report is not considered filed until the contractor accepts it (413.24(f)(4)(iii)).

Section 413.24(j) states the substantive reimbursement requirement. To receive or potentially qualify for reimbursement for an item, the cost report must include an appropriate claim for it, by claiming full reimbursement or by properly self-disallowing it as a protested amount.

Worked example

Meadowlark Community Hospital has a cost reporting period ended September 30, 2024 and keeps books on the accrual basis.

1. Due date. The period ends on the last day of the month, so the report is due on or before Friday, February 28, 2025, the last day of the fifth month after September. A sister facility with a period ending September 15, 2024 has a 150-day deadline of Wednesday, February 12, 2025.
2. Records tie-out. The trial balance used for the cost report differs from the audited trial balance by $184,000 of accrued vacation recorded after the audit. The firm requires the cost report to start from the audited balances, with the entry carried through the worksheets.
3. Statistics. Housekeeping cost is allocated on square feet. The square footage schedule was last updated in 2022, and a wing was converted to storage. The firm asks for a current measurement and a memo on consistency with the prior year's basis, as 413.24(c) calls for.
4. Protested item. The facility believes a cost is not reimbursable under CMS policy but wants to preserve the claim. Under 413.24(j), the item is included as a properly self-disallowed protested amount, not omitted.
5. Certification. The CFO reviews the report and signs the certification. The firm's file records what the CFO reviewed and when.

File checklist

• Tie the cost report's starting trial balance to the audited statements, with a reconciliation of every difference.
• Obtain the statistical schedules, source records and prior-year comparison for each allocation basis.
• Document the cost-finding method used and any contractor approval for double apportionment or other methods.
• Calendar the due date for each reporting period, including 150-day periods.
• Retain the as-filed report and the version certified.
• List protested and self-disallowed items, with the support for each.
• Record the officer's review before certification.

Related reading

For how the cost report estimate enters the financial statements, see healthcare entity presentation and malpractice claims under ASC 954.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including trial balance to cost report reconciliations and statistics tie-outs. The firm keeps the client, the review and the signature. See /us.

Sources

• Legal Information Institute, 42 CFR 413.24, Adequate cost data and cost finding: https://www.law.cornell.edu/cfr/text/42/413.24

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error