PERSPECTIVE HEALTHCARE WIPFLI. Critical Access Hospital Medicare Cost Report - Annual Checkup. December 2007

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1 WIPFLI HEALTHCARE December 2007 expert advice innovative solutions performance improvement PERSPECTIVE Critical Access Hospital Medicare Cost Report - Annual Checkup While filing a Medicare cost report is a necessary to do for all critical access hospitals, it can also serve as an important strategic tool for ensuring that you are receiving the reimbursement you are entitled to. Completing a Medicare cost report is an annual ritual. It takes a lot of work and data crunching, and on the surface, there does not appear to be much reward for all of the effort. However, just like a routine physical, an annual checkup of your Medicare cost report is a healthy idea. This checklist is a tool for evaluating your Medicare cost report, assuring proper reimbursement for your hospital, and potentially boosting your overall financial performance. Have you elected all-inclusive/method II billing? If yes, have you made the required annual election? What is all-inclusive/method II billing? Applies to physician services in outpatient space, where physician reassigns billing to CAH; for example: Pathology Radiology Emergency room Outpatient surgery Outpatient clinics Payment for professional services at 115% of Medicare fee schedule after Part B deductible and coinsurance Additional payment for HPSA Bonus (10%) and Physician Scarcity Bonus (5%) Payment for mid-levels at 115% of mid-level payment (85% of the physician fee schedule) Does not include rural health clinic services Additional reimbursement File the annual election with the intermediary 30 days before the beginning of the cost report year Bill professional services on a UB-92 Are you eligible for cost reimbursement for CRNA services? If yes, have you made the required annual election? How do you qualify for cost reimbursement for CRNA services? Provide less than 800 surgical procedures requiring anesthesia Be located in a rural area Have total hours furnished by CRNA(s) of less than 2,080 Have CRNAs sign an agreement that they will not bill for services Additional reimbursement Determine the number of surgical procedures based on annualizing procedures through September 30 Submit your annual request to the intermediary by December 1 Have you properly matched revenue and expenses by cost center? What is proper matching of revenue and expenses? General ledger expense accounts are recorded on work sheet A of the cost report by cost center General ledger revenue accounts are recorded on work sheet C of the cost report by cost center The revenue and expenses related to a particular cost center need to match up on the same cost report line Affiliations & alliances Audit & accounting Board governance/education CAH implementation strategies & conversion analysis Hospital-physician integration

2 Wipfli Health Care Perspective Page 2 A mismatch between revenue and expense or total charges and Medicare charges may result in an error in reimbursement Review general ledger account grouping for expenses on work sheet A and revenue on work sheet C Compare cost-to-charge ratios to prior-year cost reports Understand why the cost-to-charge ratios changed between years Explain cost-to-charge ratios above 1.0 because they may be scrutinized by your fiscal intermediary Have you analyzed your advertising expense account? Why is this important? Certain types of advertising expense are allowable for cost reimbursement Additional reimbursable costs Establish separate general ledger accounts for allowable and nonallowable advertising expenses Record advertising expenses based on the following table Allowable Advertising Costs Ads representing good public image and related to patient care Recruiting nursing, administrative, and clerical personnel Informational listing (yellow pages) Informational materials about the provider s operation Ads for new services Nonallowable Advertising Costs Fund-raising ads General public ads that seek to increase patient utilization of services General ads designed to invite physicians to utilize a provider s facility Maintain copies of advertising media for fiscal intermediary audit Is your fixed asset capitalization policy at $5,000? What does this mean? Policy for capitalizing or expensing fixed assets Medicare allows a threshold of $5,000 Higher threshold allows for faster recoupment of capital costs Caution: This results in an impact on the bottom line from additional depreciation expense, unless a separate depreciation report is kept for financial statement purposes and reimbursement purposes Board of Directors or appropriate committee needs to approve the new policy Monitor impact on Medicaid SNF reimbursement Be aware of whether you need additional controls for those items previously capitalized that are now expensed Have you established funded depreciation accounts? What is funded depreciation? Funds set aside for the acquisition of depreciable assets used to render patient care or for other capital purposes related to patient care Required to offset interest income to the extent of interest expense except for funded depreciation, thereby resulting in additional reimbursable interest expense Accounts designated as funded depreciation MUST be approved by the Board of Directors and documented in the Board minutes Document withdrawals from funded depreciation accounts to support acquisitions of depreciable assets Deposits must be held for six months prior to withdrawal for capital acquisitions Funded depreciation must be used before additional dollars are borrowed; otherwise, interest expense on that portion of the borrowing is disallowed (i.e., unnecessary borrowing) IT & business consulting Investment advisory services Lean process improvement Organizational development Performance improvement Physician strategies

3 Wipfli Health Care Perspective Page 3 Do you allocate physician time between professional and provider components on work sheet A-8-2 of your cost report? What does professional and provider components mean? The costs associated with time spent providing direct patient care (including charting) are the professional component and are not reimbursable (direct patient care services are paid based on a fee schedule) The cost associated with administrative and standby time is the Provider Component and is reimbursable (as long as proper documentation is maintained) Reimbursement for on-call emergency room providers has been expanded to include physician assistants, nurse practitioners, and clinical nurse specialists Additional reimbursable costs Requires properly documenting provider component time through the use of time studies: Time studies: o Time study requirements from the Provider Reimbursement Manual, are as follows: Must submit a written plan to the fiscal intermediary no later than 90 days prior to the start of the cost reporting period Must be one full workweek each month of the year Must use alternating weeks (i.e., Week 1 in first month, Week 2 in second month, etc.) Time study must be signed by the physician o Emergency room logs or reduced time study requirements (only one week per quarter) may be acceptable by some intermediaries Do you provide contracted therapy services? What types of therapy services are included? Contracted therapy services include physical therapy, respiratory therapy, occupational therapy, and speech therapy Contracted therapy means a nonemployee is providing the service Medicare has established a limit on the dollars available for reimbursement Accurate completion of your cost report Accurate information may result in actual costs exceeding the therapy limitations and thus eliminate any cost disallowance Establish a method for obtaining information required on work sheet A-8-4 of the cost report Review therapy service contracts to ensure costs do not exceed established reimbursement limitations Have you recently reviewed your cost report statistics? Why is this important? General service costs or overhead costs are a significant component of total expense; the allocation of these expenses has a direct impact on reimbursement An accurate allocation of overhead department expense based on the methodology of the cost report Focus on whether the department receiving the cost is utilizing the services of the overhead department Educate department managers responsible for gathering statistics on the reimbursement impact of accurate reporting Do you fragment certain overhead cost centers to allow for less cost allocation to noncost-reimbursed and nonreimbursable cost centers? What departments should be considered for fragmenting? Two common cost centers to fragment include: Buildings and fixtures to separately identify depreciation expense (i.e., new building additions) Administrative and general for: o Communications o Data processing o Purchasing, receiving, stores o Admitting o Cashiering and accounts receivable o Other administrative and general cost centers Affiliations & alliances Audit & accounting Board governance/education CAH implementation strategies & conversion analysis Hospital-physician integration

4 Wipfli Health Care Perspective Page 4 Elimination of allocation of costs to departments not benefiting from the service Evaluate the benefit of fragmenting cost centers Obtain prior approval from the fiscal intermediary Submit your request 90 days prior to the end of the cost reporting period Establish a statistical basis for fragmented departments Have you evaluated the reimbursement impact of electing the simplified method for the allocation of general service/overhead cost centers? What is the simplified method? Uses the following prescribed statistics (no changes allowed) Cost Center/Department Recommendation Simplified Method Standard Building and fixtures Square feet Square feet Movable equipment Square feet Depreciation expense or square feet Maintenance and repairs Square feet Square feet Operation of plant Square feet Square feet Housekeeping Square feet Square feet or time study Employee benefits Salaries Gross salaries Cafeteria Salaries FTEs Administrative and general Accumulated costs Accumulated costs Laundry and linen Patient days Laundry pounds Dietary Patient days Meals Social service Patient days Time study or patient days Nursing administration Nursing salaries Nursing FTEs Central services Costed requisitions Costed requisitions Pharmacy Costed requisitions Costed requisitions Medical records Gross patient revenue Gross patient revenue or time study More general service costs are allocated to the adults and peds department Adults and peds typically has a higher Medicare utilization compared to the ancillary departments Less time and cost to accumulate statistics Evaluate the reimbursement impact of electing the simplified cost method Obtain approval 90 days prior to the end of the cost reporting period, unless first year (period) as a CAH Once elected, continue to use simplified method for no less than three years, unless a change of ownership occurs Are you tracking bad debts for reimbursement on your cost report? What is an eligible bad debt? Bad debts can be claimed on a cost report if the following criteria are met: Amount is written off within the cost reporting period Amount pertains to Medicare uncollectible deductible and coinsurance amounts Bad debt does not relate to physician professional services Is only for Medicare bad debts (does not include Medicare HMO beneficiaries) Unless patient has been determined to be indigent, write-off should not be less than 120 days after the first billing to the beneficiary Collection efforts must be the same for all payors Any recoveries for bad debts claimed in prior years are offset against amounts claimed in the current year Bad debts can be claimed without collection efforts for: Medicare/Medicaid crossover patients Indigent patients Deceased patients Bankrupt patients Medicare bad debts are reimbursed at 100% Retain all documentation related to eligible bad debts Maintain an electronic listing that includes the following information: Patient name HIC number Dates of service (admit and discharge) Date of first bill to beneficiary after discharge excludes crossover claims Remittance advice dates Date of write-off IT & business consulting Investment advisory services Lean process improvement Organizational development Performance improvement Physician strategies

5 Wipfli Health Care Perspective Page 5 Deductible and coinsurance amounts Amount of write-off An indicator of whether the patient is indigent Are you affiliated with another organization? What is an affiliated organization? An organization that directly or indirectly, through one or more means, controls, is controlled by, or is under common control with another organization Receipt of allocation of home office costs in the cost report Track related-party transactions throughout the year Establish a method to adjust related-party transactions to cost Prepare an annual home office cost report Include any allocated costs on work sheet A-8-1 of your cost report Are you offsetting contributions or grants on your cost report? What does this mean? Contributions, either restricted or unrestricted, and all grants are not required to be offset against allowable expense Interest income on contributions is not offset if the contributions are segregated and not commingled with other investments Accurate cost reporting if contributions or grants have been offset in the past Record contributions and grants in separate general ledger accounts Do not include contributions or grants on the filed cost report Conclusion In today s competitive environment, CEOs and CFOs of critical access hospitals should be doing everything possible to help ensure the financial health of their organizations. Viewed as a compliance exercise, the completion and filing of your Medicare cost report is just one more task added to your to-do list, but by using this practical list, the cost report can be a powerful tool in making sure your hospital is receiving the reimbursement it is entitled to. Holly Pokrandt hpokrandt@wipfli.com Holly has dedicated her 18-year career in public accounting to serving clients in the health care industry, including hospitals (PPS and CAH), nursing homes, providerbased clinics, home health agencies, and assisted-living facilities. Holly s experience includes financial statement audits, Medicare cost report preparation and analysis, feasibility and projection studies, and operational reviews. Kathy has 22 years experience working with health care clients. Her auditing background has resulted in her unique ability to consult with clients on reimbursement issues, including: CAH, provider-based, and rural health clinic analysis; reimbursement strategies; physician/ hospital relations; and contract negotiations. Kathy LaBrake klabrake@wipfli.com Reimbursement consulting Service-line planning Staffing analysis Strategic planning Strategy & balanced-scorecard development Turnaround management