General cost principles

1. For ratesetting purposes, a cost must: a. Be ordinary, necessary, and related to resident care; b. Be what a prudent and cost-conscious business person would pay for the specific good or service in the open market in an arm's-length transaction; and c. Be for goods or services actually provided in the facility. 2. The cost effects of transactions which circumvent these rules are not allowable under the principle that the substance of the transaction prevails over form. 3. Costs incurred due to management inefficiency, unnecessary care, unnecessary facilities, agreements not to compete, or activities not commonly accepted in the basic care industry are not allowable.