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Department of HHS OIG

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The Medicare Cost Report (“Cost Report”) is one of the high risk areas that Compliance Officers often overlook.  The OIG has flagged Cost Reports as a high risk area since its original compliance guidance for hospitals.  These Cost Reports are subject to CMS audits, thereby warranting special attention from institutional providers.  Medicare-certified institutional providers must submit annual Cost Reports to a Medicare Administrative Contractor (MAC).  These reports provide Medicare with provider information such as facility characteristics, utilization data, cost and charges by cost center, Medicare settlement data, and financial statement data.  Although many provider claims are paid through a prospective payment system (PPS), CMS continues to pay several items 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.  Those Medicare Program facilities 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) and Outpatient Therapy Facilities (OPTs) (non-fee schedule services only).

Medicare Cost Report Audits

Medicare Cost Report audits are meant to safeguard payments made to institutional providers who settle their costs through their annual Medicare Cost Report.  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.  This review, audit, and settlement process provides CMS with a method to detect improper payments and identify the reasons these improper payments have occurred. Once identified, the reasons for the improper payments can provide CMS with insight into potential payment vulnerabilities.  CMS can then use such information to strengthen and focus the Medicare program integrity response.

CMS uses Medicaid Administrative Contractors (MACs) to provide the audit services.  MACs annually receive over 50,000 Medicare Cost Reports.  This includes initial Cost Report filings as well as amended filings.  Approximately half of the Cost Reports result in settlements.

Common examples of cost report issues include the following:

  • 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; and
  • Wage data (used for future period PPS payments).

The institution’s administrator must certify that the Cost Report complies with Medicare regulations.  Fraudulent certifications may lead to false claims violations under the False Claims Act.  Despite these risks, many Compliance Officers overlook this area when addressing ongoing monitoring and auditing.  Although program managers are responsible for performing monitoring tasks, Compliance Officers should ensure that both auditing and monitoring are taking place on an ongoing basis.

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