Provider Cost Report Audits

A High Risk Area Not To Be Overlooked

One high risk area often overlooked by compliance officers involves the cost report. This area continues to be important for institutional providers, particularly because it is subject to audit by CMS. Although many providers have their claims paid through a prospective payment system (PPS), several items continue to be paid on an interim basis with the final payment made through the cost report reconciliation process. The cost report includes calculations of the final payment amount for items such as direct graduate medical education (GME) and indirect medical education (IME), disproportionate share hospital (DSH) payments, and Medicare bad debts. Some providers, such as critical access hospitals and cancer hospitals, are paid based on the information included in their cost reports. Facilities participating in the Medicare Program that are required to submit cost reports include:

• Hospitals
• Skilled Nursing Facilities (SNFs)
• Home Health Agencies (HHAs)/Hospices
• Mental Health Facilities
• Federally Qualified Health Centers (FQHCs)
• Rural Health Clinics (RHCs)
• End Stage Renal Disease Facilities (ESRDs)
• Comprehensive Outpatient Rehab Facilities (CORFs)
• Outpatient Therapy Facilities (OPTs) (non-fee schedule services only)

The purpose of cost report audits is to safeguard payments made to institutional providers whose costs are settled through the submission of an annual Medicare cost report. This cost report review, audit, and settlement process provides a method to detect improper payments and identify the reasons these improper payments have occurred. Once identified, the reasons for the improper payments provide insight to potential payment vulnerabilities that can be used to strengthen and focus the program integrity response.

Cost Report Process

John Hapchuk has been a leading expert on cost reports going back to his days in the OIG Office of Audit Services, where he was in charge of cost report auditing. Hapchuk is now a consultant assisting clients with issues relating to cost reports. He explained that the audit process includes the timely receipt and acceptance of provider cost reports, a desk review, the audit, and the final settlement of the provider cost reports. The audit and settlement process determines whether providers are paid in accordance with CMS regulations and instructions. These days, CMS uses Medicaid Administrative Contractors (MACs) to provide audit services. MACs annually receive upwards of 50,000 Medicare cost reports. This includes initial cost report filings as well as amended filings. Approximately half of cost reports result in settlements of some sort. Hapchuk noted the following common examples of cost report issues:

• Medicare bad debts (at 70%)
• Indirect and direct medical education costs
• Allied health costs
• Disproportionate share Medicare hospital payments
• Additional payments for Medicare dependent hospitals
• Additional payments for sole community hospitals
• Organ transplant costs
• Outpatient transitional corridor payments (TOPs)
• Qualification for 340B Drug Program
• Calculation of health information technology reimbursement
• Wage data (used for future period PPS payments)

Steve Forman, CPA has more than 30 years experience at the OIG, as a compliance officer, and with providing advisory services. He notes that the OIG has flagged cost reports as a high risk area going back to its original compliance guidance for hospitals. Yet many compliance officers overlook this area when addressing ongoing monitoring and auditing. This does not mean that compliance officers have to perform the monitoring, which is a program manager’s responsibility, or even the auditing—but it does mean that they should be ensuring both auditing and monitoring are taking place on an ongoing basis.

Connect With a Compliance Consultant

Strategic Management has decades of experience designing compliance programs to monitor cost reports. If you are looking to implement a new program, or need someone to review a current one, contact us online or give us a call at (703) 683-9600 to speak to a compliance expert today.