ular provider because of some unique circumstances or special labor market conditions in the area.

(3) Exception for services furnished by risk-basis HMO providers. For special rules concerning services furnished to an HMO's enrollees who are title XVIII beneficiaries by a provider owned or operated by a risk-basis HMO (see § 405.2001(b)) or related to a risk-basis HMO by common ownership or control see § 405.2050(c).

(g) Appeals. A request by a provider for a hearing on the determination of an intermediary concerning the therapy costs determined to be allowable based on the provisions of this section, including a determination with respect to an exception under paragraph (f) of this section, shall be made to the intermediary only after submission of its cost report and receipt of the notice of amount of program reimbursement reflecting such determination, in accordance with the provisions of Subpart R of this Part 405 (42 CFR 405.1801 et seq.).

[40 FR 5761, Feb. 7, 1975, as amended at 41 FR 49594, Nov. 9, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977]

§ 405.433 Determining allowable cost for drugs.

(a) Principle. (1) The allowable cost for any multiple-source drug (as described in paragraph (b)(1) of this section) may not exceed the lesser of:

(i) The actual cost;

(ii) The amount which would be paid by a prudent and cost-conscious buyer for such drug if obtained from the lowest-priced source that is widely and consistently available (whether sold by generic or trade name), or

(iii) The “maximum allowable cost" as defined in 45 CFR 19.5(c).

(2) The allowable cost for any other drug may not exceed what a prudent and cost-conscious buyer would pay for that particular drug.

(b) Application. (1) Multiple-source drugs. (i) The Department of Health, Education, and Welfare will publish in the FEDERAL REGISTER, from time to time, a list of specific multiple-source drugs and their "maximum allowable cost" limitations. (See 45 CFR Part 19.) For these drugs, the allowable cost (see §§ 405.402 and 405.403) may

not exceed the drug-ingredient costs incurred in purchasing such drugs that would be paid by a prudent and cost-conscious provider for such drugs if obtained from the lowest-priced source that is widely and consistently available (whether sold by generic or trade name); except that the drug-ingredient cost incurred in purchasing such drugs may, in no case, exceed the maximum allowable cost published in the FEDERAL REGISTER.

(ii) The provisions of this paragraph (b)(1) are applicable to those multiplesource drugs purchased by providers on or after the effective date of the final MAC determination pursuant to 45 CFR, Part 19. Similarly, an amendment to a maximum allowable cost determination for a drug is applicable to purchases of such drug by providers on or after the effective date of the amended determination.

(2) Other drugs. For drugs other than those described in paragraph (b)(1) of this section, the allowable cost (see §§ 405.402 and 405.403) may not exceed what a prudent and costconscious buyer would pay for that particular drug.

(3) Evaluation. The cost of any drugs will be evaluated in terms of the quantities and purchasing arrangements at which the drugs were, in fact, purchased. (4) Charge to beneficiaries. charge may be made to the beneficiary for any amount of any drug cost not reimbursed as a result of application of the rule of this section.

No

(c) Exceptions. The following exceptions may be granted but only upon the provider's demonstration that the conditions indicated are present:

(1) Exception because of medical necessity. Where a physician certifies that in his medical judgment a specific brand is medically necessary for a particular patient, the provisions of paragraph (b)(1) of this section shall not apply. However, the physician must certify in his own handwriting the medical necessity for the exception. An example of an acceptable statement would be "This brand is medically necessary-dispense as written." Merely checking a box on a form will not constitute an acceptable certifica

tion. The provider must retain such certification in its records.

(2) Exception for risk-basis HMO providers. For special rules concerning providers owned or operated by a riskbasis HMO, or related to a risk-basis HMO by common ownership or control, see § 405.2050(c).

(d) Appeals. (1) Amount of reimbursement. A provider may appeal the amount of reimbursement determined under this section (see Subpart R of this part) except that it may not appeal under Subpart R of this part:

(i) The inclusion of any multiplesource drugs on the published listing,

or

(ii) The established maximum allowable cost for any drug.

(2) Inclusion on listing or maximum allowable cost. The procedures covering the issues described in paragraphs (d)(1)(i) and (d)(1)(ii) of this section are set forth in 45 CFR Part 19.

[40 FR 34513, Aug. 15, 1975, as amended at 41 FR 49594, Nov. 9, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977]

§ 405.435 Nonallowable costs related to certain capital expenditures.

(a) Principle. Effective with respect to any capital expenditure, as defined in 42 CFR Part 100, the obligation for which is incurred after December 31, 1972, or after the effective date of an agreement executed between a State and the Secretary pursuant to section 1122 of the Act, whichever date is later, the depreciation, interest on borrowed funds, return on equity capital (in the case of proprietary providers), and any other costs attributable to such capital expenditure, where the Secretary has determined that such proposed capital expenditure has not been submitted to the designated planning agency as required, or that it has been determined by such agency to be inconsistent with the standards, plans, or criteria developed to meet the need for adequate health care facilities (as defined in 42 CFR 100.101-100.110) are not allowable. Other costs related to such capital expenditures include title fees; permit and license fees; broker commissions; architect, legal, accounting, and appraisal fees; interest, finance, or carrying charges on bonds, or notes; and other costs incurred for

borrowing funds. The reasonable costs incurred by a provider for studies, surveys, designs, plans, working drawings, specifications, and other activities essential to the acquisitions, improvement, expansion, or replacement of the plant and equipment which are conducted to enable the provider to properly determine whether the proposed capital expenditure would be in compliance with the standards, plans, or criteria developed by the designated planning agency are allowable, except if the provider makes the capital expenditure and does not receive the required approval.

(b) Applicability. Under the principle specified in paragraph (a) of this section, any costs related to capital expenditures, the obligation for which was incurred by or on behalf of a provider subsequent to 1972 (except as described in paragraph (c) of this section), are not allowable where the Secretary has determined that the capital expenditures have not been submitted to the designated planning agency as required or that they have been determined to be inconsistent with the standards, plans, or criteria developed by the designated planning agency or other health planning agency in the State to meet the need for adequate health care facilities in the area covered by the plan or plans so developed (see 42 CFR 100.101-100.110). Costs claimed by a provider in connection with capital assets which are donated or transferred to a provider are also subject to the application of such principle. Such principle also applies to the reasonable equivalent of that portion of any rental expense incurred pursuant to a lease or a comparable arrangement (and to any amounts deposited under the terms of such a lease or comparable arrangement in computing the return on equity capital) that would have been excluded had the provider acquired such a facility or equipment by purchase. The amounts excluded are not subject to reimbursement under any other provisions of Title XVIII of the Act.

(c) Exceptions. The limitation on recognition of costs attributable to capital expenditures discussed in this section does not apply to:

(1) A provider furnishing health care services as of December 18, 1970, which on such date was committed to a formal plan of expansion or replacement, with respect to such expenditures as may be made or such obligations as may be incurred for capital items included in such plan where preliminary expenditures toward the plan of expansion or replacement (including payments for studies, surveys, designs, plans, working drawings, specifications, and site acquisition, essential to the acquisition, improvement, expansion, or replacement of the health care facility or equipment concerned) of $100,000 or more, had been made during the 3-year period ending December 17, 1970, or,

(2) Christian Science sanatoriums operated, or listed and certified, by the First Church of Christ, Scientist, Boston, Massachusetts, or

(3) Capital expenditures the obligations for which were incurred by or on behalf of a provider prior to 1973, or

(4) Capital expenditures the exclusion of which the Secretary has determined would:

(i) Discourage the operation or expansion of a provider which has demonstrated its capability of providing comprehensive health care services efficiently, effectively, and economically; or

(ii) Otherwise be inconsistent with the effective organization and delivery of health services or the effective administration of Title V, XVIII, or XIX of the Act.

(d) Appeals. See § 405.1890 for appeal rights of a provider or other person dissatisfied with a determination under section 1122 of the Act (42 U.S.C. 1320a-1).

[40 FR 32743, Aug. 4, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977]

§ 405.436 Reimbursement of independent organ procurement agencies and histocompatibility laboratories.

(a) Principle. Covered services furnished after September 30, 1978 by organ procurement agencies (OPA's) and histocompatibility laboratories in connection with kidney acquisition and transplantation will be reimbursed under the principles for determining reasonable cost contained in this sub

part. Services furnished by independent OPA's and histocompatibility laboratories, that have an agreement with the Secretary in accordance with paragraph (c) of this section, will be reimbursed by making an interim payment to the transplant hospitals using these services and by making a retroactive adjustment, directly with the OPA or laboratory, based upon a cost report filed by the OPA or laboratory. (The reasonable costs of services furnished by hospital based OPA's or laboratories will be reimbursed in accordance with the principles contained in §§ 405.405 and 405.454.)

(b) Definitions. For purposes of this section:

(1) "Organ procurement agency" means an organization that meets the definition in § 405.2102(q).

(2) "Histocompatibility laboratory" means a laboratory meeting the standards and providing the services set forth in § 405.2171(d).

(3) "Independent"-An organ procurement agency or a histocompatibility laboratory is independent unless it:

(i) Performs services exclusively for one hospital; and

(ii) Is subject to the control of the hospital in regard to the hiring, firing, training and paying of employees; and

(iii) Is considered as a department of the hospital for insurance purposes (including malpractice insurance, general liability insurance, worker's compensation insurance, and employee retirement insurance).

(c) Agreements with independent OPA's and laboratories. (1) Any independent OPA or histocompatibility laboratory that wishes to have the cost of its pretransplant services reimbursed under the Medicare program must file an agreement with the Secretary, under which the OPA or laboratory agrees:

(i) to file a cost report in accordance with § 405.453(f) within three months after the end of each fiscal year;

(ii) to permit the Secretary to designate an intermediary to determine the interim reimbursement rate payable to the transplant hospitals for services provided by the OPA or laboratory and to make a determination of rea

sonable cost based upon the cost report filed by the OPA or laboratory;

(iii) to provide such budget or cost projection information as may be required to establish an initial interim reimbursement rate;

(iv) to pay to the Secretary amounts that have been paid by the Secretary to transplant hospitals and which are determined to be in excess of the reasonable cost of the services provided by the OPA or laboratory; and

(v) not to charge any individual for items or services for which that individual is entitled to have payment made under section 1881 of the Act.

(2) An independent OPA or histocompatibility laboratory whose services were being reimbursed under Medicare on October 1, 1978 and that wishes to continue being reimbursed under Medicare must file an agreement by [30 days after the date of publication].

(3) The initial cost report due from an OPA or laboratory shall be for its first fiscal year ending after September 30, 1978, during any portion of which it had an agreement with the Secretary under paragraph (c) of this section. The initial cost report shall cover only the period covered by the agreement.

(d) Interim reimbursement. (1) Hospitals eligible to receive Medicare reimbursement for renal transplantation will be paid for the pretransplantation services of an independent OPA or histocompatibility laboratory, that has an agreement with the Secretary under paragraph (c) of this section, on the basis of an interim rate established by an intermediary for that OPA or laboratory.

(2) The interim rate shall be based on the average cost per service incurred by an OPA or laboratory, during its previous fiscal year, associated with procuring a kidney for transplantation. This interim rate may be adjusted if necessary for anticipated cost changes. If there is not adequate cost data to determine the initial interim rate, it will be determined according to the OPA's or laboratory's estimate of its projected costs for the fiscal year.

(3) Payments made on the basis of the interim rate will be reconciled di

rectly with the OPA or laboratory after the close of its fiscal year, in accordance with paragraph (e) of this section.

(4) Information on the interim rate for all independent OPA's and histocompatibility laboratories shall be disseminated to all transplant hospitals and intermediaries.

(e) Retroactive adjustment. (1) Cost reports. Information provided in cost reports by independent organ procurement agencies and histocompatibility laboratories must meet the requirements for cost data and cost finding specified in § 405.453(a)-(e). These cost reports must provide a complete accounting of the cost incurred by the agency or laboratory in providing covered services, the total number of Medicare beneficiaries who received those services, and any other data necessary to enable the intermediary to make a determination of the reasonable cost of covered services provided to Medicare beneficiaries.

(2) Audit and adjustment. A cost report submitted by an independent OPA or histocompatibility laboratory will be reviewed by the intermediary and a new interim reimbursement rate for the succeeding fiscal year will be established based upon this review. A retroactive adjustment in the amount paid under the interim rate will be made in accordance with § 405.454(f). If the determination of reasonable cost reveals an overpayment or underpayment resulting from the interim reimbursement rate paid to transplant hospitals, a lump sum adjustment shall be made directly between the intermediary and the OPA or laboratory.

(f) Appeals. Any OPA or histocompatibility laboratory that disagrees with an intermediary's cost determination under this section shall be entitled to an intermediary hearing, in accordance with the procedures contained in §§ 405.1811 through 405.1833, if the amount in controversy is $1,000 or

more.

[43 FR 58373, Dec. 14, 1978]

§ 405.438 Reasonable cost for purchase, installation, maintenance and reconditioning of home dialysis equipment furnished under agreement by providers and dialysis facilities.

(a) Principle. Effective October 1, 1978, approved providers of services and renal dialysis facilities that have an agreement with HCFA under § 405.690 of this part will be reimbursed under Part B of Medicare for the full reasonable cost (without regard to the deductible and co-insurance) of the purchase, installation, maintenance, and reconditioning for subsequent use of artificial kidney and automated peritoneal dialysis chines, including supportive equipment (see 405.231 (p)), which are used exclusively by beneficiaries dialyzing at home.

ma

(b) Ownership of Equipment. (1) Ownership of dialysis equipment purchased under this section is vested in the provider or renal dialysis facility that purchased the equipment. However, if a facility owns equipment purchased under this section that is not expected to be used in the immediate future, the facility may transfer ownership of the equipment to another facility, having an agreement with HCFA under this section, for use by home-dialyzing beneficiaries. The transferring facility must give notice of the transfer to HCFA or its desig

nee.

(2) If an agreement with a provider or facility is terminated (see § 405.690(b)) or if a provider or facility ceases to use equipment purchased under the agreement in accordance with the terms of the agreement, HCFA will either recover the current fair market value of the equipment (as determined by HCFA) or direct the facility to transfer ownership of the equipment to another facility having an agreement with HCFA.

(c) Computation of allowable cost. (1) All costs attributable to purchase, installation, maintenance, and reconditioning of dialysis equipment under this section must be accumulated in a separate cost center designated on the cost report of the provider or facility. (2) The facility must use prudent and sound business practices in the

purchase of equipment under this section.

(3) Allowable cost for purchase of equipment under this section includes costs for equipment that is medically appropriate for treatment of the particular patient for whom it is purchased and that is neither excessive nor extravagant. Amounts attributable to equipment features of an aesthetic nature or of a medical nature not required by the patient's condition are not allowable. Costs of specialized equipment purchased are allowable only if a physician has certified that such equipment is medically necessary for treatment of a particular beneficiary.

(4) Determinations of allowable costs associated with equipment purchased under this section will be made in accordance with the applicable principles of reimbursement of this subpart.

(5) No allowance for depreciation may be taken on equipment purchased under this section (see § 405.514).

(6) The cost of equipment purchased under this section cannot be used in the computation of equity capital (see § 405.429).

(7) If the equipment is used at the time of purchase, allowable cost shall not exceed the lesser of the fair market value of the equipment on the date of purchase (as determined by HCFA) or the amount calculated as follows:

(i) If the provider or facility owned and leased the equipment to beneficiaries dialyzing at home prior to October 1, 1978 the original cost of the equipment less the total lease payments already received by the facility for such equipment;

(ii) If the equipment was leased by a beneficiary for home dialysis from a person or corporation other than a provider or facility owning the equipment, the cost of purchase in accordance with the terms, if any, specified in the lease, or

(iii) If equipment has been used for institutional dialysis by a facility reimbursed on a cost or cost-related basis, the book value of the equipment. However, payment will not be made under this section for purchase of equipment