Strong cost report preparation is the difference between getting paid for what your skilled nursing facility actually spends and facing a disallowance years later because you reported a marked-up price instead of the true cost. Related-party transactions sit at the center of that risk. When a SNF buys management services, real estate, pharmacy supplies, or staffing from an entity it owns or controls, Medicare does not reimburse the price billed. It reimburses the cost incurred by the related organization. Reporting anything more invites repayment demands, interest, and heightened audit scrutiny.
Quick answer: On a Medicare SNF cost report, transactions with related organizations must be reported at the related party’s actual cost, not the marked-up price charged to the facility. Under 42 CFR 413.17, costs from organizations related by common ownership or control are includable only at the cost to the related organization. Reporting a marked-up amount is the single most common driver of disallowances and repayment demands, and the new Form CMS-2540-24 expands the disclosures that expose it.
What Counts as a Related Party Under 42 CFR 413.17?
A related party is not limited to a parent company or a sibling under the same corporate roof. The regulation defines “related to provider” broadly: the provider is, to a significant extent, associated with, affiliated with, controlled by, or controlling the organization that furnishes services, facilities, or supplies. Two tests drive the analysis.
Common ownership exists when an individual or individuals possess significant ownership or equity in both the provider and the supplying organization. Control exists when an individual or organization has the power, directly or indirectly, to significantly influence or direct the actions or policies of the other entity. Control does not require majority ownership. A minority owner who sets policy, signs leases, or directs the management company can trigger the relationship.
This sweeps in the structures that are routine in skilled nursing: a real estate holding company that leases the building to the operating entity, a management company owned by the same principals, a captive staffing agency, a therapy provider, or a pharmacy under shared ownership. If the same people sit behind both sides of the transaction, the related-party rules almost certainly apply, and your cost report preparation must treat the arrangement accordingly. The owners who handle this well usually treat related-party mapping as a year-round exercise rather than a year-end scramble, which is one reason firms that focus on skilled nursing and long-term care build it into the engagement from day one.
Because the definitions turn on substance rather than labels, the analysis cannot stop at the cap table. Two entities may share no formal corporate parent yet still be related if the same individuals direct both. A management agreement that gives one party effective control over hiring, vendor selection, or budgets can establish a relationship even where ownership is split or nominal. Mapping every contract, lease, and service agreement against the ownership and control tests is the foundation that everything else in the cost report rests on.
The General Rule: Report Actual Cost, Not Marked-Up Cost
The operative language of 42 CFR 413.17(a) is direct. Costs for services, facilities, and supplies furnished to the provider by organizations related by common ownership or control are includable in the provider’s allowable cost at the cost to the related organization. The price the related entity invoices the SNF is irrelevant for reimbursement. What matters is what the related entity actually spent.
Consider a common example. A holding company owns the building and leases it to the operating SNF for $1.2 million a year. The holding company’s actual cost of ownership, meaning mortgage interest, depreciation, property taxes, and insurance, totals $800,000. On the cost report, the allowable amount is $800,000, not the $1.2 million lease payment. The $400,000 spread is the related party’s profit, and Medicare does not reimburse a related entity’s profit margin. The same logic applies to a management company that bills a percentage-of-revenue fee while its underlying salaries, benefits, and overhead come to far less.
There is one further ceiling worth knowing: even at actual cost, the amount cannot exceed the price of comparable items or services in the open market. So the rule is a two-part test. Start with the related organization’s actual cost, then confirm that figure does not exceed what an arm’s-length buyer would pay. Reporting the marked-up invoice price fails the first part of the test before you ever reach the second.
This is also why the cost basis has to be built from the related entity’s own records, not from the invoice it sends the facility. The depreciation method, the loan terms, and the overhead allocation behind the related party’s costs all flow through to what the SNF can claim. When those underlying records are thin or inconsistent, the allowable figure is hard to defend, and a reviewer is left to question the entire line.
The Limited Exception and Why It Rarely Applies
The regulation does provide an exception under 42 CFR 413.17(d), but it is narrow and the provider carries the burden of proof. To use it, the SNF must demonstrate all of the following: the supplying organization is a bona fide separate entity; a substantial part of its business is transacted with parties other than the provider and within an open, competitive market; the services, facilities, or supplies are those that the provider would otherwise obtain from an outside source; and the charge is in line with the open-market rate and no more than the supplier charges comparable customers.
Most in-house SNF arrangements fail at least one prong. A captive management company that works only for the affiliated facilities does not transact substantial business with the open market. A real estate entity that leases solely to its own operators does not either. Because the exception requires every element, a single failed prong defeats it. Treat the exception as available only after you have documented each element, never as a default assumption.
The practical consequence is that the exception is the wrong place to start. Building a filing around the hope that an in-house management company or captive real estate entity will qualify usually collapses under review, because the very feature that makes the entity captive, serving only the affiliated facilities, is the feature that defeats the open-market prong. The safer default is to report actual cost and reserve the exception for the rare arrangement that genuinely competes in the broader market.
How Did CMS-2540-24 Expand Related-Party Disclosures?
Form CMS-2540-24 is the redesigned Medicare SNF cost report, effective for cost reporting periods ending on or after September 30, 2025. It is the first revision to the SNF cost report forms in roughly fifteen years, replacing Form CMS-2540-10, and a central theme is more granular reporting. Incomplete or inconsistent related-party disclosures now correlate directly with elevated audit and disallowance risk.
The form continues to require providers to answer, on Worksheet S-2, whether they have business transactions, including management contracts, with related individuals or entities, and to attach a schedule identifying those parties and describing the transactions. The related-party cost adjustments themselves, where the markup is eliminated, flow through the Series A worksheets that reclassify and adjust the trial balance of expenses. A facility can no longer bury a marked-up lease or management fee inside an aggregate expense line and expect it to pass unexamined. The disclosure schedule on Worksheet S-2 and the adjusted expense detail must reconcile, and they must reconcile to the related party’s actual cost.
The timing matters for owners who are mid-cycle. If your fiscal year ends on or after September 30, 2025, you are filing on the new form, and the disclosures you make there will frame how your Medicare Administrative Contractor (MAC) reviews the rest of the report. Getting the related-party mapping, the cost basis substantiation, and the disclosure schedule aligned before filing is the core of defensible cost report preparation under the new form.
What the OIG Found and Why Enforcement Is Tightening
The pressure here is not theoretical. A 2024 report from the HHS Office of Inspector General examined a nonstatistical sample of 14 skilled nursing facilities and found that 3 did not properly disclose one or more related parties and 7 did not properly adjust related-party costs. The result was more than $1.7 million in overstated costs across the noncompliant facilities. You can read the findings in the OIG report.
The scale behind the sample is what drives policy attention. The OIG noted that during fiscal years 2015 through 2020, SNFs reported receiving $160.4 billion in Medicare payments while paying $65.4 billion to related parties. The report also recommended that MACs include a review of the reporting and disclosure of related-party costs as part of the normal desk review or audit process, and that CMS develop and implement guidance for SNFs on the appropriate methods to determine allowable related-party costs.
Read together with the CMS-2540-24 redesign, the direction is unmistakable. CMS is closing the visibility gap, the contractors are being directed to look harder, and the new form gives them more structured data to do it. Facilities that reported marked-up costs in prior years on the assumption that no one would check are the ones most exposed to reopening and repayment.
Building a Defensible Related-Party Cost File
Documentation is what separates an allowable cost from a disallowed one. For every related-party transaction, your file should trace the SNF’s payment back to the related organization’s books and isolate that entity’s actual cost. For a real estate lease, that means the holding company’s depreciation schedule, mortgage interest, property taxes, and insurance. For a management arrangement, it means the company’s payroll registers, benefit costs, and allocable overhead.
The cost report should then reflect the actual-cost figure, with the markup eliminated as a related-party adjustment, and the disclosure schedule should name each related entity and describe each transaction consistently with that adjustment. Keep the ownership and control analysis in the file too, because the MAC may test whether an arrangement you treated as unrelated should have been flagged. When you do claim the 413.17(d) exception, document every prong contemporaneously rather than reconstructing the argument during an audit.
This is detailed, recurring work, and it rewards a team that understands both the reimbursement rules and the operating realities of the sector. Pairing disciplined documentation with experienced cost report preparation is how SNF owners report actual cost confidently, withstand MAC review, and avoid the repayment demands that follow a marked-up filing.
Frequently Asked Questions
What is a related-party transaction on a SNF cost report?
It is a transaction in which a skilled nursing facility obtains services, facilities, or supplies from an organization that is related to it through common ownership or control, as defined in 42 CFR 413.17. Common examples include leasing the building from an affiliated real estate company, paying management fees to a company owned by the same principals, or buying therapy, staffing, or pharmacy services from a sister entity.
Why can’t I report the price my related company charges me?
Because Medicare reimburses related-party costs only at the related organization’s actual cost, not the price it invoices the facility. The difference between the invoice and the actual cost is the related entity’s profit, which Medicare does not reimburse. Reporting the marked-up price overstates allowable cost and is the most common cause of disallowances and repayment demands.
What changed with Form CMS-2540-24?
CMS-2540-24 is the redesigned SNF cost report, effective for cost reporting periods ending on or after September 30, 2025, and it is the first revision to these forms in roughly fifteen years. It expands the data and disclosure detail providers must furnish, including the related-party transaction disclosures on Worksheet S-2, giving MACs more granular data to identify marked-up costs and inconsistent reporting.
Is there any exception that lets me report the full charge?
Yes, but it is narrow. Under 42 CFR 413.17(d), the full charge may be allowable only if the supplier is genuinely separate, transacts a substantial part of its business with the open market, provides services the facility would otherwise buy outside, and charges a market rate equal to what comparable unrelated customers pay. All four conditions must be met, and the provider bears the burden of proving them, so most in-house arrangements do not qualify.
