SNF Related Party Cost Reporting: Insights and Guidance

Beyond the immediate demands of resident care, running a skilled nursing facility (SNF) today requires mastering complex financial reporting. This reporting is not mere bookkeeping; it directly determines Medicare reimbursement and compliance status. Among the most scrutinized areas is the proper disclosure and handling of related party transactions.

These common transactions occur between an SNF and another entity under common ownership or control. Many facilities rely on affiliated entities, such as management companies, real estate holding firms, or staffing agencies, owned by the same parent organization.

Crucially, Medicare requires that costs reported for these relationships reflect the actual cost to the related party, not the marked-up amount charged to the SNF. Failure to properly document or adjust these costs can lead to inflated Medicare reimbursements, audit findings, or even repayment demands.

This article explores what related party reporting means for SNFs, reviews recent oversight findings, and outlines practical strategies for compliance and transparency.

Understanding Medicare Requirements

Medicare’s cost reporting rules are designed to ensure that all allowable costs, including those from related parties, reflect fair market value and are free from artificial inflation.

Under 42 CFR §413.17, a transaction between a provider and a related organization must be reported at the cost incurred by the related organization, not the price charged to the facility. Furthermore, these costs must never exceed what would be paid for comparable services in the open market.

Consider this: if an SNF’s related management company charges the SNF $500,000 for services but only spends $400,000 to deliver them, Medicare will only reimburse the SNF for the $400,000 actual cost. This rule protects program integrity, ensuring that taxpayer funds support resident care, not inflated intercompany profits.

Medicare Administrative Contractors (MACs) closely review SNF cost reports, assessing ownership disclosures, contracts, and expense details. Increasingly, MACs and the Office of Inspector General (OIG) emphasize that incomplete or inaccurate related party disclosures materially distort allowable costs and frequently lead to compliance findings.

To maintain compliance, SNFs must:

• Disclose all related organizations and the nature of the relationship.
• Provide documentation for any services, supplies, or assets purchased through those entities.
• Adjust costs to reflect the related party’s actual expense if higher prices are charged to the SNF.
• Ensure that reported costs do not exceed the price of comparable services in the open market.
  
  

Compliance Landscape: OIG Findings and CMS Guidance

In recent years, the OIG has repeatedly raised concerns about the accuracy of related party cost reporting. A notable OIG report found that some SNFs overstated allowable costs by millions of dollars simply by failing to identify or adjust these transactions properly.

In these instances, facilities such as nursing homes often contracted with sister companies (like management firms or real estate holding entities) that billed above their actual cost. Because ownership overlap wasn’t fully disclosed, Medicare reimbursements were based on inflated figures. Correctly adjusting these related party costs in Medicare cost reports is what’s necessary for compliance and to prevent overstatement.

Because of such situations, the Centers for Medicare & Medicaid Services (CMS) has acted on OIG recommendations to strengthen guidance and oversight. Providers should now anticipate greater scrutiny during audits and feel ongoing pressure to substantiate all related party expenses with documentation showing the underlying cost basis.

To put it simply, the accuracy of an SNF’s related party reporting directly impacts its reimbursement level and its compliance risk profile. Even unintentional administrative errors can trigger corrective actions, recoupments, or penalties.

Case Example 1: The Management Company Markup

Take the example of a 120-bed skilled nursing facility in Georgia. This SNF contracted with a management company that was owned by the same parent corporation. The management company charged the SNF a monthly fee for various services, including IT support and strategic consulting.

During a routine MAC desk review, auditors requested cost documentation for these fees. They discovered the management company had billed $600,000 annually but could only substantiate $450,000 in actual expenses. Since the entities were related, CMS required the SNF to adjust its cost report downward by $150,000 to reflect the true cost incurred.

The facility’s intent was not fraudulent, but the lack of proper documentation still resulted in reduced reimbursement. The SNF subsequently implemented a new intercompany accounting policy mandating detailed cost substantiation from every related entity before any charge could be included in the cost report.

This case illustrates how compliance issues can arise, even within routine corporate structures, when documentation fails to meet Medicare’s cost-basis standard.

Identifying Areas of Risk and Opportunity

It’s also important to note that SNFs risk overstating costs and triggering regulatory findings when they fail to properly identify or disclose related party relationships. This improper reporting situation can obscure the internal flow of money, making it harder to assess an entity’s true financial health. Key vulnerabilities can include:

• Incomplete ownership disclosure: Failing to report shared ownership between entities providing services to the facility.
• Insufficient cost substantiation: Not maintaining detailed cost records, such as payroll data or invoices, from the related organization.
• Improper markups: Reporting related party costs at billed rates instead of actual incurred costs.
• Ambiguous contracts: Using vague service agreements that make separating allowable from non-allowable costs difficult.

These risks, however, can also create opportunities. Improving documentation and transparency can mitigate audit exposure as well as strengthen internal financial management. A clear view of cost flows can help management teams pinpoint inefficiencies, benchmark vendor pricing, and ensure more funds are channeled toward actual resident services.

Case Example 2: The Real Estate Holding Arrangement

As another example, a Florida operator owned both its multi-facility SNFs and the real estate holding companies leasing the buildings. Each SNF paid rent to its affiliated real estate entity, but those payments were significantly higher than comparable market rates.

When the OIG reviewed these arrangements, they determined the excess rent was a form of related party profit rather than a legitimate facility cost. CMS required the operator to recalculate rent expenses based on fair market value, which led to substantial adjustments across multiple cost reports.

The organization responded by implementing a policy to obtain independent market appraisals every two years to validate rental rates. This proactive measure helped the operator maintain compliance while preserving defensible reimbursement levels.

What’s the key takeaway? Related party real estate and management agreements demand both transparency and detailed documentation. By using market comparisons and third-party validation, a facility can safeguard itself during audits.

Strengthening Internal Controls for Related Party Reporting

Strong internal controls and a clear organizational structure are the starting point for compliance. Here are some best practices we want our readers to know:

1. Maintain an Updated Related Party Register: Create a central document listing all related entities, their ownership percentages, and the nature of the relationships. This register should be updated immediately whenever corporate structures change.
2. Require Cost Documentation from Related Entities: Before recording any related party charge, the SNF must secure supporting documentation (e.g., general ledger extracts or payroll summaries) that shows the actual costs. This makes sure no markup is reported.
3. Review Contracts for Clarity: Contracts must clearly describe the services provided, the basis for charges, and the method of cost substantiation. And we suggest avoiding lump-sum or percentage-based billing structures that complicate expense tracing.
4. Train Accounting and Administrative Staff: Personnel must understand the distinction between related and non-related transactions and be familiar with CMS rules governing cost adjustments. (We at Walters often emphasize training, as quality policies and procedures can end up meaningless if staff does not implement them correctly.)
5. Conduct Periodic Internal Audits: Self-auditing related party transactions before the annual cost report is filed can catch errors early. Many providers partner with outside accounting firms (such as Walters) experienced in healthcare cost reporting to perform these pre-submission reviews. Related party reporting is complex, and even financially sophisticated SNFs often benefit from outside expertise. How?

• By identifying related entities that may not be obvious from the organizational chart.
• By evaluating whether reported costs reflect fair market value.
• By preparing supporting schedules and disclosures for the cost report.
• By developing compliance checklists for consistent annual documentation.

Engaging experienced advisors is particularly valuable when ownership structures are layered or when facilities utilize complex leasing or management arrangements with affiliates. The cost of a periodic external review is minor compared to the potential financial and reputational damage from audit findings or reimbursement recoupments.

Transparency as a Financial Strategy

Accurate related party reporting is a defensive measure against penalties, and a strategic financial practice. By clarifying the true cost of operations, SNFs can acquire more reliable data for performance benchmarking, budgeting, and strategic decision-making. Accurate cost reporting supports regulatory compliance and ensures that care is delivered efficiently and transparently with high-quality resident outcomes.

In this spirit, transparency will help leadership teams answer vital questions:

• Are affiliated vendors providing competitive value?
• Could restructuring or outsourcing reduce costs without affecting care quality?
• Are intercompany profits obscuring real operating margins?

When viewed through this lens, compliance becomes a tool for improving financial clarity.

Framework for Compliance and Sustainability

SNFs can strengthen both compliance and financial sustainability through a structured approach to related party reporting:

• Disclosure: List all related parties and controlled organizations clearly on cost report schedules.
• Documentation: Maintain evidence of the actual costs incurred by those entities.
• Adjustment: Report costs at the related party’s expense level, ensuring they reflect Medicare allowable costs.
• Review: Conduct internal or external reviews before cost report submission.
• Transparency: Communicate policies organization-wide and fully document procedures for auditors.

As regulatory scrutiny from CMS and the OIG increases, related party reporting will remain a primary focus. Skilled nursing facilities that proactively implement quality documentation systems, conduct regular reviews, and engage external advisors will be best prepared to navigate these expectations.