In healthcare there always has been a fine line between claim reimbursement and cost reimbursement – and when I say cost reimbursement, I mean providers filing Medicare “cost reports” that compute reimbursement on cost-based sums such medical education payments for teaching hospitals, Medicare reimbursement for bad debts and Disproportionate Share Hospital payments for hospitals serving large populations of poor patients. 

The charge, payment and U.S. Census data driving these cost reports comes from the Provider Statistical and Reimbursement Report, commonly referred to as the PS&R. The PS&R keeps track of claim payment data as it is processed, on a rolling basis. Providers, including skilled nursing facilities, hospitals, Federally Qualified Health Centers, rural health clinics, hospices, home health agencies and end-stage renal dialysis providers all file cost reports, usually due five months after the end of the their respective fiscal periods using the Census and payment data from the PS&R. 

Medicare Fiscal Intermediaries (now known as MACs) process and review or audit the cost reports submitted by providers. At the end of each audit or review, MACs send audit adjustments to providers. If the providers are unhappy with their audit adjustments, they can file appeals to the Provider Reimbursement Review Board, or PRRB.  If they were unhappy with their appeal results, they can file a lawsuit in federal court. 

Since the advent of the Medicare Prospective Payment System, non-cost-based payments have come from claim payment remittance. Claims also are processed by the MACs themselves. For claim payments, providers have 120 days from the date they receive payment on a specific claim to file an appeal of the payment amount. They also may seek “reopening” of claim-based payment amounts after 120 days, but the granting of reopenings has been limited. Medicare almost never has gone back into claims previously processed to make adjustments or reprocess them.

There historically has been a wall between claims and cost reimbursement, but times have changed.

In the past, when auditors reviewed claims, their recoupments would be limited to claims filed during the period under audit. If claims were adjusted, the cost reports were not reopened to reflect the impact of those adjustments. In the last four months, Zone Program Integrity Contractors (ZPICs) in Florida have instructed MACs to reopen Medicare cost reports to apply statistical findings to periods earlier than when claim data was immediately available – and to apply “disallowance percentages” determined from audits of later claims. This has enabled ZPICs to recover funds paid as far back as five years prior to the period in which the audited claims were filed. 

The scariest thing about this overreach is that, when the MACs cooperate and reopen Medicare cost reports to apply subsequent findings of ZPICs (remember, these findings also have not yet been appealed), providers often immediately delve into recoupment of the reopened cost report findings – and the appeal process as it pertains to cost reports can drag on for a long time. It can take providers years to fight these adjustments successfully.

This also has turned the process of reviewing cost report audit adjustments on its head. Since 1965, when Medicare was created, auditors have had to cite a specific Medicare regulation to support each adjustment made. The regulations governing Medicare reimbursement can be found in Section 42 of the code of federal regulations, or CFR. Statistical data reflecting paid claims traditionally came from the PS&R, and cost reports only were adjusted to reconcile settlement data with the PS&R. Again, ZPICs in Florida are ordering Medicare MACs to reopen cost reports to apply statistical findings from their audits to all cost reporting periods available for reopening.

Since Medicare cost reports usually are audited two to three years after the initial reports are submitted, and since cost reports are subject to reopening three years from the date of the first audit, cost reports susceptible to reopening may go back as far as six years. This creates a number of problems:

  • MACs can start recouping alleged overpayments from the reopened cost reports immediately, potentially bankrupting affected providers.
  • MACs do not provide regulatory codes from the CFR for claims adjustments, leaving providers unable to dispute the adjustments to their cost reports effectively.
  • Since claims data from older periods is not always available to providers, they may not be able to respond to the findings adequately.

At first glance, this seems to be a huge overreach by Medicare, and some targets may never recover from the onslaught.  If providers had time to utilize the Medicare cost report appeals process in the manner in which it was intended, the reopenings probably would not stand at hearings before the PRRB, for the following reasons:

  • Longstanding tendencies of the PRRB indicate that the board frowns upon using data from one period as a proxy for another period.
  • Medicare could have difficulty producing actual claims data from the periods being reopened, casting doubt on the notion that any individual claim filed in that period should be reopened.
  • It long has been accepted that the PSR should serve as the basis for statistical adjustments to cost reports, and the PSR typically reconciles with cost reports before adjustment.

The bad news, again, is that the appeals process can take years. More bad news is that there is precedent that financial hardship often is not considered a legitimate reason for the PRRB to engage in an accelerated appeal hearing.

What can providers do?

The single most important thing healthcare providers can do to protect themselves is to be proactive before they become the subject of an audit. First, make sure you have claims data for all your billed and paid claims. Claims typically are billed and paid electronically through electronic data interchange, or EDI. You can build your own data warehouse of claims to develop reports and analyze trends. There are also many great support systems that can provide the functionality and reporting you need to mine your claims data.


Second, do what the auditors do. Scan your data for billing and payment trends that could get you into trouble. ZPIC auditors pick their targets by using data mining to look for issues. Familiarize yourself with your unique billing trends.

Third, maintain a strong compliance program that covers coding and billing practices. This not only will help keep you out of trouble, but if you get selected for an audit, it may help convince a ZPIC that you are as worried about fraud as Medicare – so maybe their time would be better spent making someone else’s life miserable.

Remember, if you operate a skilled nursing facility, Section 6102 of the Patient Protection and Affordable Care Act of 2009 requires you to have a compliance and ethics program in place by March 23, 2013. Among other things, these provisions require each organization to take reasonable steps to achieve compliance with certain key standards, demanding that such providers utilize monitoring and auditing systems designed to detect violations by its employees and other agents (an indemnification agreement with your therapy contractor won’t protect you here).

Finally, remember that it is not if you get audited, it’s when. Build a team, starting with your reimbursement and clinical compliance consultants. Once you get hit by a ZPIC, you only have days to develop a plan and respond. So that’s a really bad time to find out that there are problems with your systems or documentation.

About the Author

Timothy Powell, CPA, is a member of the Moore Stephens long-term care group. He has more than 30 years of reimbursement experience working with the “Big 4.” He has worked in the managed care area for most of his career.

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