Many hospitals depend on the Medicare Cost Report for reimbursement, but the annual report also helps to determine a hospital’s eligibility for 340B Drug Program discounts, captures its allowable costs, and conveys its compliance with Medicare regulations. The Centers for Medicare & Medicaid Services (CMS) uses the reports to set future Medicare payment rates.
Simply stated, cost reporting is critically important to get right.
Q&A: Medicare Cost Report, Disproportionate Share Hospitals, and More
PYA takes an in-depth look at the Medicare Cost Report and its impact on and use in Disproportionate Share Hospital (DSH) payments, the 340B Drug Program, physician time studies, and more.
A Deep Dive into the Medicare Cost Report
Q: Why does the Medicare Cost Report still play such a critical role in hospital reimbursement today?
A: While the Medicare Cost Report is most directly involved in the reimbursement of Critical Access Hospitals (CAHs), the reimbursement of all hospitals—even those paid on the Prospective Payment System (PPS)—is still affected by the cost report. CAHs are reimbursed for Medicare claims at 101% of the Medicare allowable cost, less sequestration. This means that all costs reported on the Medicare Cost Report have a direct effect on a CAH’s reimbursement for Medicare patients.
But even the reimbursement of a standard acute PPS hospital is affected by the cost report. For example, a PPS hospital’s future Uncompensated Care (UCC) DSH payments and outlier payments are affected by the costs on its Medicare Cost Report. While these effects are not often seen immediately, a hospital’s cost-to-charge ratio is a factor in determining its future UCC DSH and outlier payment rates.
Q: Where do hospitals most commonly underreport or miss allowable costs on the Medicare Cost Report?
A: One of the most common ways hospitals underreport allowable costs is on Worksheet A-8-2 of the Cost Report, which is for Provider-Based Physician Adjustments. On this worksheet, amounts paid to a physician for services to individual patients (the “professional component”) must be removed from the Medicare Cost Report, which reduces the hospital’s total allowable costs. However, certain physician costs (known as the “provider component”) are allowable, such as time spent on administrative activities for the hospital, medical directorships, and emergency room (ER) availability status or standby time.
To claim these costs as allowable on the cost report, hospitals must maintain supporting documentation, which can include physician time studies, physician contracts, and ER logs to support the time physicians spent in the ER.
Q: What is a physician time study, and why is it so important for hospital reimbursement?
A: A physician time study is a record of the time spent on certain activities by a physician or group of physicians within the same specialty. Physician time studies are important for a hospital’s Medicare reimbursement because the costs associated with certain types of physician time are considered allowable on the Medicare Cost Report. By accurately tracking and recording physicians’ time, hospitals can keep allowable costs on their cost report, which can increase their Medicare reimbursement.
Q: Why do physician time studies often fail audit review?
A: Physician time must be tracked in the format of Exhibit 1 from Section 4004.2, Pg. 52, of the Provider Reimbursement Manual (PRM). The guidelines require a time study for one week per month for each physician or group of physicians within the same specialty, signed by the physician or the head of the physician department. The time studies must be for alternating weeks (i.e., they cannot be for the first week of each month of the year), and Exhibit 1 must agree to the hours used to identify the allowable (provider component) dollars on the Medicare Cost Report. If all the requirements specified in the PRM are not met, the auditor may disallow any physician costs that were included on the cost report.
Q: How often should hospitals reassess their cost reporting methodologies and why?
A: Hospitals should assess their cost reporting methodologies each time they file a Medicare Cost Report. While most methodologies will likely not need to change regularly, hospitals should think critically about the impact the cost report data has on their reimbursement, and they should consider whether they can update methodologies to increase accuracy.
A Deep Dive into Disproportionate Share Hospitals
Q: How can hospitals optimize Medicare Disproportionate Share Hospitals (DSH) reimbursement?
A: Hospitals should ensure they are claiming the maximum allowable Medicaid-eligible days on their Medicare Cost Report. One strategy is to run the Medicaid eligibility checks for their inpatient roster as late as possible before the cost report deadline to obtain the most up-to-date results.
Hospitals should also ensure they are checking the Medicaid eligibility of their out-of-state patient population because the hospital can claim a patient as eligible for the DSH calculation if they are eligible for Medicaid in their home state, even if Medicaid did not pay for the claim.
Hospitals should also think strategically when determining whether and how to operate departments with high Medicaid utilization, such as obstetric units and non-distinct part psychiatric units.
Finally, providers should make every effort to obtain accurate and complete demographic data (e.g., Social Security number, Medicaid ID, and date of birth) from their patients, as this will increase the chance of receiving a match when performing Medicaid eligibility lookups.
Q: How will the expected decrease in Medicaid volume affect certain hospitals’ Medicare DSH percentage, and how can hospitals prepare for the impact?
A: A decrease in a hospital’s Medicaid volume leads to a decrease in its Medicare DSH percentage. If a hospital is close to the qualifying threshold, the decrease could cause it to no longer qualify for 340B Drug Program discounts. Additionally, if a hospital is close to the threshold for qualifying for the DSH add-on payment itself, it could lose its DSH payments altogether.
Hospitals should proactively assess their Medicaid volume trends to anticipate any potential effects of a decrease in their Medicare DSH percentage. They also should implement the strategies noted above to ensure they are claiming the maximum allowable Medicaid-eligible days on their Medicare Cost Report.
Q: How does a hospital’s Medicare DSH percentage affect its qualification for the 340B Drug Program discounts, and how can accurate cost reporting help?
A: The Medicare DSH percentage is crucial because it determines a hospital’s eligibility for 340B Drug Program discounts. The 340B qualification threshold for many hospital types is a DSH percentage of 11.75%, but Sole Community Hospitals and Rural Referral Centers qualify with a DSH percentage of 8.00% (though qualification at the lower threshold results in a loss of discounts for orphan drugs).
A hospital will become ineligible for the 340B program on the day it files a cost report with a DSH percentage below the applicable eligibility threshold, so a hospital must submit its initial cost report with complete and accurate DSH data.
Q: What other impacts does a hospital’s Medicare DSH percentage have, other than qualification for 340B Drug Program discounts?
A: In addition to the discounts hospitals receive from the 340B Drug Program, the DSH percentage also affects the add-on payment that a hospital receives on each Medicare inpatient claim. The higher the hospital’s DSH percentage, the higher its add-on payment. As a result, complete and accurate reporting of Medicaid-eligible days on the Medicare Cost Report is crucial for maximizing allowable DSH reimbursement.
PYA Can Help
Ramzi Fadayel, Reimbursement Consulting Manager, holds the designation, Certified Hospital Cost Report Specialist, a certification administered by the Healthcare Financial Management Association (HFMA). This credential, which reflects specialized knowledge of complex Medicare payment methodologies and cost reporting requirements, complements Ramzi’s deep cost report experience. He and all experts in PYA’s Managed Care and Reimbursement Services provide a comprehensive range of services to support coordinated managed care, reimbursement, and revenue cycle strategy.
