Why Are Medicare Cost Reports Still Required?

Many Medicare certified providers have called Marcum LLP to ask our health care professionals why they must still file a Medicare cost report even though there essentially is no longer a settlement and it does not impact Medicare reimbursement rates. Accounting firms across the country have certainly had to address these questions at some point.

Today, almost all Medicare certified providers are paid under a prospective payment system methodology (PPS). Prior to PPS, the cost based reimbursement methodology was the primary way in which providers received payment.

Currently, only about 10% of all Medicare certified providers continue to receive payment under a cost based methodology. For these providers, the Medicare cost report is essential because it settles a provider’s current interim rate and sets its future interim rate. Hence, an inaccurate exchange of information could have adverse results.

Under the PPS method, the Medicare cost report is not relied on to the same degree. So why worry about filing the cost report accurately? It doesn’t matter anymore.

This statement could not be more false. The Medicare cost report continues to have great significance, even if the forms of the document are not perfectly aligned with the current reimbursement system. These reports serve as the basis for Market Basket Updates and Medicare Adequacy Analysis. Also, for hospitals, reimbursement for disproportionate share, graduate medical education and indirect medical education is based on Medicare cost reports.

Market Basket Updates. The Centers for Medicare and Medicaid Services (CMS) use “market baskets” to measure the price inflations associated with goods and services used to care for patients in hospitals, skilled nursing facilities, home health agencies, etc.

The market basket is vital in determining future payment rates, cost limits and other components integral to PPS.

In fact, market basket weights for wages, benefits and professional liability are still calculated from data filed in cost reports.

Additionally, since market basket weights are so important, CMS still uses this information when determining the labor component of future PPS rates.

Here are some examples:

Hospital – The inpatient hospital market basket uses wage data from worksheet S-3 part I-III, salaries from Worksheet A and total allowable costs from Worksheet B.

Skilled Nursing Facility – CMS normally used Worksheet A-7 to determine a capital related cost market basket, but since less than 1,000 of 14,000 providers elected not to complete this worksheet, alternative data was used.

Medicare Adequacy Analysis. As you are aware, both CMS and MedPac work jointly to create payment adequacy analysis. These analyses are used to determine if payments are adequate to cover care provided to patients reimbursed by Medicare.

Therefore, complete and accurate cost report data is critical. CMS receives special requests for payment and cost analysis. Often, these requests come directly from Washington, D.C. and Congress and may include:

• Simulation of margins by payer source and patient day
• Analysis of payments and costs (e.g., for Connecticut providers versus United States)
• Determination of staffing ratios and percentage of FTEs to residents
• And more

The information contained in cost reports has significant meaning and influences the decisions made by Congress when determining future components of, or even entire, PPS payments. Don’t disregard its importance. Speak to your accounting professional if you have questions.