False Nursing Home Cost Reports: What the Facility Paid, What the Supplier Spent

Nursing home cost report related party costs belong at the supplier’s actual cost, capped at the price of comparable purchases elsewhere. False reports can hide the ownership connection or carry the supplier’s profit into the reported cost of care. If you prepare the report, approve vendor invoices or allocate payroll, you may know exactly where the figures stopped matching the business behind them.

Centers Healthcare’s July 2025 resolution put that problem in concrete terms. The company agreed to pay $6,063,500 over Medicare cost reports associated with 44 skilled nursing facilities. Centers admitted that the reports contained false statements or material omissions about related-organization transactions. It also admitted that management reviewed the reports and knew or reasonably should have known of the false statements. Taxpayers were entitled to an honest account of money meant for care.

Related Organizations and Hidden Control

The operating facility receives payments for care. A property company receives rent. A management company receives fees, and a staffing, therapy or pharmacy company receives payment for its services. When those businesses share ownership, an expense on the facility’s books can be revenue elsewhere in the same enterprise. The money has changed accounts while staying within the group.

A related organization is a supplier connected to the nursing home through common ownership or control. The connection can run through an owner, a management company or people directing both businesses.

That is why the ownership records belong beside the lease, management agreement and supplier invoice. Consolidated accounts and the entries eliminating transactions within the group show what happened beyond the facility’s own books. The cost report then shows what the facility told Medicare about that relationship and those costs.

The Centers for Medicare & Medicaid Services instructions for freestanding skilled nursing facilities require annual cost reporting and identification of home-office or chain relationships. The related-organization worksheet, A-8-1, connects the expense to the supplier and the ownership or control relationship.

When a Nursing Home Cost Report Reports Related Party Charge Instead of Actual Cost

When a nursing home cost report reports related party charge instead of actual cost, the supplier’s markup can survive as a reported care expense. The federal reporting instructions require the underlying cost to the related supplier, excluding markup and profit, with a ceiling at the price of comparable services, facilities or supplies available elsewhere.

The form makes the comparison explicit. It separates the allowable cost supported by the related organization’s books, the amount included in the facility’s expense accounts, and the adjustment between them. The supplier’s invoice establishes what it charged. Its books establish what it spent. Those are different records answering different questions.

A home office can sit between the facility and another related business. The agency’s own example describes a home office leasing a nursing home’s building from a related property company. The worksheet connects that lease expense to the property company. Following only the home-office charge would leave the business providing the building out of view.

The Related-Supplier Exception Depends on Its Business

The supplier must be a real separate business, with substantial comparable sales to unrelated customers in an open market. Its services must be ones nursing homes commonly buy outside, rather than basic care they ordinarily provide themselves. Its price must be in line with the market and no higher than it charges others in comparable circumstances.

The HHS Office of Inspector General described a facility that treated its related home health agency as covered by an exception even though it had never requested one from its Medicare contractor. The claimed exception itself had become a reason to leave the relationship off the report. The supplier’s other customers, prices and exception documentation belong in the same examination as its ownership.

A Related Organization Omitted From a Nursing Home Medicare Cost Report

A related organization omitted from a nursing home Medicare cost report can leave both the relationship and the required cost adjustment out of view. The Inspector General’s December 2024 audit found undisclosed related parties at three facilities in its nonstatistical sample. Seven of the 14 selected facilities failed to adjust some related-party costs properly, producing $1,703,734 in overstated costs.

One facility had not told its cost-report preparer about payments to a medical equipment supplier under common ownership. The preparer therefore neither disclosed the supplier nor adjusted the associated costs. At the same facility, a related therapy provider went unnamed on the disclosure worksheet even though a therapy-cost adjustment appeared elsewhere in the report.

Disclosure and adjustment each do work. Naming the supplier identifies the relationship. Adjusting the charge removes amounts that do not belong in allowable cost. Completing one leaves the other question open.

The audit also found that the Medicare contractors had missed the errors because their reviews did not examine the related-party disclosures and costs. It identified insufficient guidance from the Centers for Medicare & Medicaid Services as another cause. In the Centers resolution, the additional fact was management’s admitted review and what it knew or reasonably should have known about the false statements.

Labor Allocation Can Change What the Report Says Was Spent on Care

Labor allocation determines which services and cost centers bear an expense. The report starts with the facility’s books and trial balance, separates employee wages from contract labor, adjusts costs, and distributes shared overhead to the departments receiving the services.

The step-down allocation worksheets carry both the expenses and the figures used to distribute them. Floor area, for example, can supply the basis for allocating building costs. The allocation schedule and its supporting records show why a cost landed where it did.

Current reporting also separates direct-care labor supplied by employees, contractors and the home office or chain. Home-office salary allocations depend on the work provided to the facility. Payroll records, contract invoices and time records can connect the person doing the work to the service and the amount reported.

For someone in finance, the useful comparison reaches past the total payroll expense. It connects the staff member, the work, the period, the cost center and the allocation. In the historical cases, the discrepancy was often hours assigned to Medicare residents that had not actually been devoted to their treatment.

Nursing Labor Costs Falsely Allocated to Medicare Residents Before PPS

Nursing labor costs falsely allocated to Medicare residents before PPS increased the costs attributed to Medicare under the earlier payment system. The nursing hours in the report could contradict the work recorded by staff. The civil settlements below show how that discrepancy became a case.

Beverly Enterprises agreed to a $170 million civil settlement. The civil agreement describes allegations that its reports assigned labor hours to Medicare units that had not actually been spent treating Medicare beneficiaries. The alleged inflation came from where the company assigned the labor.

Horizon West agreed to pay $14.7 million in 2006 to resolve allegations that its reports inflated nursing hours spent on Medicare patients from 1991 through 1998. A former employee brought the whistleblower case, and the government joined it.

National HealthCare agreed to pay $27 million in 2000 over allegations that its reports overstated staff time devoted to Medicare patients. The Justice Department said the nursing staff’s time records contradicted the reported hours. It also alleged that some personnel were billed as performing therapy they did not perform. A former nursing home administrator brought the case. The time records supplied a direct comparison with what the company reported.

The Payment System Changed, and the Reports Still Matter

Medicare began moving skilled nursing facilities from reasonable-cost reimbursement to prospective payment for reporting periods beginning July 1, 1998.

The March 1999 Monthly Labor Review article Health services industry: still a job machine? described the initial transition as a blend of a facility-specific rate and a federal rate.

Under prospective payment, Medicare pays a predetermined daily rate based on the patient’s classification. The Inspector General explains that the payment is not directly tied to the facility’s incurred costs. Cost reports still supply information the Centers for Medicare & Medicaid Services uses to update payment rates. Inflated costs can feed into future rates.

Medicaid Cost Reports Follow the State’s Payment Method

Medicaid nursing-facility payment methods vary by state. Some use allowable costs with limits. Others use cost reports to set a price for future care.

Blackhawk Lifecare Center agreed to repay $500,000 in 2014. The government alleged that it billed Medicare for therapy unjustified by residents’ conditions and then included those therapy costs in Medicaid cost reports, inflating those reports. The allegations followed the same services into a Medicare claim and a Medicaid cost report.

Signature Care Centers agreed to pay $415,044 in 2015 to resolve civil allegations of inaccurate Medicaid cost reports for fiscal years 2008 and 2010.

What Evidence Is Needed to Prove Fraud?

Our whistleblower experts work with you to connect a false cost report to the transactions behind it, what management knew and how the program used the figures. The filed report shows the representation. The supplier’s books, invoice and ownership records show the cost and relationship behind it. Payroll and time records show the work behind a labor allocation.

The strongest comparison follows the same transaction through those records. A lease connects the building to its landlord. A management contract identifies the services charged to the facility. The allocation schedule shows where shared expenses went. The report shows which relationships and adjustments reached Medicare. Management’s review and the information given to the preparer connect the discrepancy to the people who understood it.

Those are the comparisons we examine with you to build a health care fraud case around the cost report. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

When You Know What Went Into the Report

If you know why the supplier costs, ownership links or staff hours in a filed report differ from the underlying records, speak with our whistleblower experts about that discrepancy. We stay beside you through the case to build your strongest cost-report case and bring in healthcare fraud whistleblower lawyers who understand related-party accounting and nursing-facility reimbursement.