Critical Access Hospital
Billing and Reimbursement Strategies
Minnesota Rural Health Conference
July 19, 2005
Ralph J. Llewellyn, CPA, CHFP
rllewellyn@eidebailly.com
(701) 239-8594
PEOPLE. PRINCIPLES. POSSIBILITIES.
Objectives
Provide basic understanding of cost based
reimbursement
Discuss how decisions impact final reimbursement
Discuss billing and reimbursement strategies
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Reimbursable vs Non-reimbursable services
Reimbursable – Medicare participates in cost
Non-Reimbursable – Medicare does not participate in
cost
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Reimbursable
Examples
Medical/Surgical
Operating Room
Lab
Radiology
Physical Therapy
Occupational Therapy
Speech Therapy
Respiratory Therapy
Emergency Room
Cardiology
Pharmacy
Supplies
Cardiac Rehab
Swing Bed
Provider based clinic
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Non-Reimbursable Examples
Home Health
Hospice
Skilled Nursing Facility
Assisted Living
Meals on Wheels
Day Care (Some costs may be reimbursable)
Non-Provider Based Clinics
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Allowable vs. Unallowable Costs
Costs are deemed unallowable if they are not related to
patient care
Patient Phones/Television
Advertising
Physician Recruitment (except RHC)
Lobbying
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Allowable vs. Unallowable Costs
Costs in excess of established limits are unallowable
Contracted
– Physical Therapy
– Occupational Therapy
– Speech Therapy
– Respiratory Therapy
Employee or Contract
– Provider-Based Physicians
– Reasonable cost limitations apply
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Allowable vs. Unallowable Costs
Non-Patient Revenues are offset against cost as a
recovery of cost
Interest income (to extent of interest expense)
Copies of Medical Records
Cafeteria
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Cost Based Reimbursement
Medicare reimburses costs based on Medicare utilization
in the departments in which costs are reported
Direct Costs
– Salary
– Supplies
Allocated Costs (Overhead)
– Housekeeping
– Laundry
– Dietary
– Administrative and General
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Overhead Allocation Methodologies
Methodologies determine how overhead costs will be
allocated to various departments and subsequently
determine Medicare’s reimbursement of costs
Methodologies can be changed with approval from
Medicare
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Overhead Allocation Methodologies
Buildings – Square Footage
Moveable Equipment – Square Footage or Actual
Benefits – Gross Salary
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Overhead Allocation Methodologies
Administrative & General – Accumulated Cost
Fragmented Administrative & General
Maintenance & Repair – Square Footage or Time Study
Operation of Plant – Square Footage
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Overhead Allocation Methodologies
Laundry – Pounds or Patient Days
Housekeeping – Square Footage or Time Study
Dietary – Meals or Patient Days
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Overhead Allocation Methodologies
Cafeteria – Full Time Equivalents (FTEs)
Nursing Administration – Hours of Service
Medical Records – Gross Revenue or Time Study
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Cost Based Reimbursement
Interim payments made based on percentage of charges
submitted and/or per diem
Interim rates based on prior year cost to charge ratio /
per diem
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Cost Based Reimbursement
Final costs are calculated using departmental specific
cost-to-charge ratio
Routine Med/Surg and Skilled Swing Bed costs
calculated based on cost per day
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Cost Based Reimbursement
Example
Medicare will reimburse high percentage of direct costs incurred
in Med/Surg due to high Medicare utilization.
Medicare will reimburse lower percentage of direct costs incurred
in the departments with lower Medicare utilization (i.e. Emergency
Room, Physical Therapy, etc.).
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Cost Based Reimbursement
Example
Medicare will provide no additional reimbursement for direct costs
incurred in non-reimbursable cost centers
Overhead costs incurred by the entity will be reimbursed by
Medicare based on the Medicare utilization in the departments in
which the costs are subsequently allocated
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Factors impacting year-to-year cost settlements
Volume
Medicare Utilization
Changes in Charges
Changes in Expenses
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Volume
Significant increases in volume tend to lead to year-end
payable to Medicare
Significant decreases in volume tend to lead to year-end
receivable from Medicare
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Medicare Utilization
Changes in Medicare utilization impacts percentage of
costs Medicare will reimburse
Department specific
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Changes in Charges
Increases in charges that exceed increases in expenses
can result in overpayment on interim basis
Results in payable at final settlement
Decreases in charges can result in opposite effect
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Based Reimbursement
Changes in Expenses
Increases in expenses that exceed increases in charges
can result in underpayment on interim basis
Results in receivable at final settlement
Decreases in expenses can result in opposite effect
PEOPLE. PRINCIPLES. POSSIBILITIES.
Impact of Decisions on Final Reimbursement
Decisions may have unintended reimbursement
implications
Medicare may share in cost reductions
New programs may decrease profitability of existing
services due to changes in overhead allocations
PEOPLE. PRINCIPLES. POSSIBILITIES.
Billing and Reimbursement Strategies
Pricing
Supplies
Borrowing
Componentized Depreciation
Emergency Room Physicians
Cost Report Allocations
Non-Reimbursable Cost Centers
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Why have CAHs discontinued monitoring of and
updating of pricing?
Charges still important
Medicare is not the only payer
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Facilities must continue to implement annual
increases to charges unless
Facility is make too much money
Facility costs are decreasing
Proof charges are above market
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Across the board increased
Most common
Least effective
Ignores market
Ignores changes in cost
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Strategic
Various methods
Better reflect market
Better reflect costs
Ability to drive increases to bottom line
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Market Driven
Not commonly reviewed
Reveals opportunities/threats
Significant opportunity for many rural providers
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
RHC
Cost per visit myth
80% Cost / 20% Charge
Costs > $100 per visit
Charged approximately $75
Actual reimbursement
$15 – Coinsurance
$80 – Medicare
Impact varies if deductible applies
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Non-Medicare
Providers often ignore impact of charges on other payers
Believe impact minimal
Discomfort
PEOPLE. PRINCIPLES. POSSIBILITIES.
Pricing
Non-Medicare : Example
Assumptions:
$5,000,000 gross revenue
30% Non-Medicare volume
5% below market pricing
80% reimbursement rate
Market pricing provides
Market pricing = $60,000 net revenue
PEOPLE. PRINCIPLES. POSSIBILITIES.
Supplies
Routine vs non-routine
Routine supplies not billable to Medicare
Lack of comprehensive or consistent list
Negative impact of billing other payers
PEOPLE. PRINCIPLES. POSSIBILITIES.
Supplies
Current
Supply Expense = $100,000
Supply Revenue = $400,000
CCR = .25
Medicare Utilization = 50% ($200,000)
Medicare Pays = $50,000
PEOPLE. PRINCIPLES. POSSIBILITIES.
Supplies
Updated
Bill non-Medicare payers for routine supplies and
equipment
New non-Medicare revenue = $100,000
Assuming 80% reimbursement rate
$80,000 “new” reimbursement
PEOPLE. PRINCIPLES. POSSIBILITIES.
Supplies
Current
Supply Expense = $100,000
Supply Revenue = $500,000
CCR = .20
Medicare Utilization = 40% ($200,000)
Medicare Pays = $40,000
PEOPLE. PRINCIPLES. POSSIBILITIES.
Borrowing
PRM I Section 202.2 states: “Borrowing for a
purpose for which funded depreciation account
funds should be used makes the borrowing
unnecessary to the extent that funded depreciation
account funds are available at the time of the
borrowing….The burden of proof to show that there
is a financial need for the borrowing and that the
borrowing does not result in excess working capital
rests with the provider.”
PEOPLE. PRINCIPLES. POSSIBILITIES.
Borrowing
PRM I Section 226.4 adds: “Available funded depreciation
must be withdrawn and used before resorting to borrowing
for the acquisition of depreciable assets or other capital
purposes, except that, when available funded depreciation
is insufficient to cover the total cost of a major construction
project and borrowing is necessary…all available funded
depreciation need not be withdrawn and applied to
construction cost prior to borrowing. Because it is frequently
difficult to time a bond offering or other borrowing to
coincide with the exhaustion of available funded
depreciation, it is sufficient if available funded depreciation
is contractually committed to and expended during the
course of construction.”
PEOPLE. PRINCIPLES. POSSIBILITIES.
Borrowing
Need for financial managers to properly inform
Finance Committee and Board of Directors of
implications of borrowing funds.
May not always change the decision to enter into
arrangement creating unnecessary borrowing.
Includes leases considered to be capital leases
PEOPLE. PRINCIPLES. POSSIBILITIES.
Borrowing
Proper planning can result in avoiding the
disallowance of interest expense related to
unnecessary borrowing
PEOPLE. PRINCIPLES. POSSIBILITIES.
Borrowing
Not just an issue for new borrowing
FIs have not recently focused on reviewing new
borrowing
Could result in FI determining past debt was unnecessary
PEOPLE. PRINCIPLES. POSSIBILITIES.
Componentized Depreciation
Determine depreciable life by component of asset versus
asset as a whole
Reduced overall life of asset
Examples of components
Building
Roof
Electrical
Plumbing
HVAC
PEOPLE. PRINCIPLES. POSSIBILITIES.
Componentized Depreciation
Increases short term expense
Increases short term Medicare reimbursement
Cash flow impact
Better in early years
Poorer in later years
PEOPLE. PRINCIPLES. POSSIBILITIES.
Componentized Depreciation
Impact of cross-over
May be beneficial
Requires planning
CAH versus PPS impact
PEOPLE. PRINCIPLES. POSSIBILITIES.
Emergency Room Physicians
Standby services
No longer required to be onsite to claim standby costs
Time studies
Verify FI requirements : most require two – two week time
studies per year
PEOPLE. PRINCIPLES. POSSIBILITIES.
Emergency Room Physicians
Coverage by RHC physicians
How is cost allocated to Emergency Room?
Does contract address this issue?
Recommend completing analysis of impact
PEOPLE. PRINCIPLES. POSSIBILITIES.
Emergency Room Physicians
Fiscal Intermediaries focusing on PRM I 2109.3
Signed contract between hospital and physicians
Written allocation agreement and support documentation
Permanent payment records
Permanent record of all treated patients
Schedule of charges
Documentation of attempts to obtain alternative
coverage
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Report Allocations
Many providers struggle with the allocation of
salary costs to the various cost centers supported
by nursing and to smaller cost centers
Emergency Room
Nursery
Labor and Delivery
EKG
Stress Test
Respiratory Therapy
Cardiac Rehab
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Report Allocations
Compliance and reimbursement concern
Many providers have allocated these costs as a
reclassification of costs on Worksheet A-6
Allocations are often made based an estimated time per
test or estimates from department heads
Supporting documentation rarely exists to support
methodology
PEOPLE. PRINCIPLES. POSSIBILITIES.
Cost Report Allocations
Discussions with some FIs indicates they expect
these reclassifications to be made based on the
time study criteria in PRM I 2313.2.E
Same requirements for time studies used to allocate
overhead costs on Worksheet B-1
Recommend providers develop methodology to comply
with these regulations
PEOPLE. PRINCIPLES. POSSIBILITIES.
Non-Reimbursable Cost Centers
Non-reimbursable cost centers may negatively
impact facility reimbursement due to the impact of
allocating overhead costs
Nursing Homes
Home Health
Hospice
Clinics
Assisted Living
PEOPLE. PRINCIPLES. POSSIBILITIES.
Non-Reimbursable Cost Centers
Strategies
Nursing Home or TCU conversion
PPS to cost based
Works well for smaller facilities
Minnesota specific issues
Discontinue services
Community loses service
Transfer to another outside entity
PEOPLE. PRINCIPLES. POSSIBILITIES.
Non-Reimbursable Cost Centers
Strategies
Separate Corporations
New corporation houses non-reimbursable cost centers
Eliminates inappropriate allocation of overhead expenses
Duplication of costs?
How to fund losses if new corporation is not profitable
PEOPLE. PRINCIPLES. POSSIBILITIES.
Non-Reimbursable Cost Centers
Difficulties arise as organization creates separate
corporation
Cannot duplicate all services
Continue to share services
Home Office Cost Report?
No request required
No 855’s
Separate organization not required
PEOPLE. PRINCIPLES. POSSIBILITIES.
Non-Reimbursable Cost Centers
Home Office Cost Report?
Cost Allocations
Direct
Functional
Pooled
No set rules on allocations by Medicare
PEOPLE. PRINCIPLES. POSSIBILITIES.
Closing Comments
Obtaining CAH status should not be thought of as
reaching a destination. Receiving this status is the
beginning of an ever changing journey. Facilities
need to maintain awareness of new legislation,
interpretations, and strategies to assist in achieving
financial success.
PEOPLE. PRINCIPLES. POSSIBILITIES.