Section 3: Considerations in Developing a Cost Allocation Model

A review of previous efforts to build cost allocation models have either: (1) presumed that the entity using the model is a governmental grant recipient and will adhere to the cost principles articulated by the Office of Management and Budget (OMB); or (2) did not address the subject of cost principles at all. Without guidance on cost principles, any cost allocation model will have inherent problems:

• Cost inputs may violate cost allowability guidelines for any Federal
  program, including Medicaid
• Costs can be purposefully misstated to achieve some specific outcome (e.g., enhance profit or to output an artificially low cost to generate more trip assignments)

Additionally, the Centers for Medicare and Medicaid (CMS) has indicated, in a statement concerning Medicaid coverage principles, that Medicaid may only pay for the least costly mode of transportation suitable to meet beneficiaries’ needs.1 This implies that Medicaid agencies and/or their brokers must conduct some comparative assessment of costs in arranging for NEMT. Such decisions should be based on unbiased, uniform cost assessment procedures. Adopting cost principles, in combination with the use of a uniform costing model, will provide State Medicaid agencies, brokers, and others an objective basis for making provider selections. 

Three factors combine to create obstacles to a uniform cost allocation model. These factors include:

• Deficiencies in provider cost accounting
• An expansive range of modes and types of services necessary to meet beneficiary needs
• A marketplace that includes different segments of the economy, including
  governmental entities, nonprofit corporations, for-profit companies, and private individuals