Cost Report Changes to Improve Accuracy of “Cost-Based” DRG Weights

1. Cost Report Changes to Improve Accuracy of “Cost-Based” DRG Weights Cost Report Workgroup Findings September 2007

2. Presentation Overview • Background • Hospital Technical Expert Workgroup • Workgroup Recommendations • Operational Approach • Questions and Discussion Cost Report Workgroup

3. Background • August 18, 2006: CMS publishes final rule for IPPS “cost-based” DRG weights • Modifies previous DRG weighting system which used only hospital charges • CMS attempts to create DRG weights to more accurately reflect “relative resource use” by DRG Cost Report Workgroup

4. Background • Three-year transition: blend of charge-based and cost-based DRG weight methods for first two years • Two data sources used to develop hybrid system: • MedPAR files (hospital specific Medicare claims) • Hospital Medicare Cost Reports • Major financial impact for some acute care hospitals-positive and negative Cost Report Workgroup

5. Cost report lines grouped into 13 categories and reduced to cost using national cost-to-charge ratios for each category. Calculated for each DRG. Routine Intensive Drugs Supplies/equipment Therapy services Inhalation therapy Operating room Labor & delivery Anesthesia Cardiology Laboratory Radiology Other Background Cost Report Workgroup

6. Background • Final Rule Inpatient Hospital Rule for Fiscal Year 2008 expanded cost report line groupings into 15 categories. • Two additional groupings are “Emergency Room and Blood and Blood Products.” Cost Report Workgroup

7. Project Background • Final Rule Inpatient Hospital Rule for Fiscal Year 2008 changed classifications of two cost centers • EEG moved from Cardiology Category to Laboratory Category (Consistent with MedPAR Category) • Radioisotope moved from Other Category to Radiology Services. Cost Report Workgroup

8. Hospital Expert Workgroup • Project workgroup comprised of expert staff, consultants and hospital leaders representing 3 major national hospital associations • American Hospital Association • Association of American Medical Colleges • Federation of American Hospitals Cost Report Workgroup

9. Hospital Expert Workgroup • Group charge and responsibility: • Identify potential changes to the Medicare cost report and/or other input source documents to improve the accuracy of DRG weights under the new CMS “cost-based” weight method. Cost Report Workgroup

10. Workgroup Findings • Cost-based weight methodology concerns: • MedPAR data groups do not match cost report 13* categories for Medicare charges. • Hospitals group charges and costs in different departments and different lines for various reasons • CMS allows hospitals to report Medicare charges on cost reports three different ways. • The 13* CMS category groups may not yield the most appropriate cost-to-charge ratio for each cost category resulting in “charge compression.” *Expanded to 15 in FY 2008 Final IPPS Rule Cost Report Workgroup

11. Workgroup Findings • Identified methodology problems • Mismatched Medicare charges, Total Charges and Costs result in cost-to-charge ratios that may distort resulting DRG weights • Medicare cost reports were not designed to support cost estimation at the DRG level Cost Report Workgroup

12. Workgroup Recommendations • All hospitals should prepare the Medicare cost report such that Medicare charges, total charges and overall costs are aligned with each other to allow for consistency with the 15 categories utilized in developing the DRG weights. • Initial focus on medical supplies category • Hospitals should evaluate their current internal data capabilities for completing the cost report in a manner to achieve such consistency. Cost Report Workgroup

13. Workgroup Recommendations • When considering changes to the Medicare cost report, hospitals should consider other impacts this may have on reimbursement, including: • Critical access hospital costs • Sole community and Medicare dependent hospital base year costs • State Medicaid plan provisions • Other payers Cost Report Workgroup

14. Workgroup Recommendations • Educational materials should be developed and disseminated by national, state, regional and metropolitan hospital associations working in collaboration with HFMA • Augment existing Medicare cost report instructions • Implementing recommended cost reporting changes may be more complex and costly for some hospitals Cost Report Workgroup

15. Workgroup Recommendations • National hospital associations should inform CMS of Workgroup recommendations and seek CMS assistance to assure fiscal intermediary cooperation • Inform and seek cooperation and assistance from CMS and FIs • Allow for reasonable estimates to be accepted by FIs • Seek FI cooperation in allowing for reporting inconsistencies between cost report years in support of developing better input data for cost-based weights • Working with CMS, address hospital concerns of potential compliance issues related to changes to cost reporting methods Cost Report Workgroup

16. Operational Approach Need to address two problems: • Hospitals are not consistent in the grouping of Medicare charges, total charges and total costs into departments on the Medicare cost report. • May result in a mismatch within the cost-charge ratio, or • May result in a mismatch between the cost-charge ratio and Medicare charges • A significant number of hospitals do not categorize Medicare charges, total charges and total costs on the cost report in the same manner as CMS categorizes Medicare charges in the MedPAR file Cost Report Workgroup

17. Operational Approach • Goals: • All hospitals to evaluate reporting of charge and cost data used when filing Medicare Cost Reports to ensure that overall hospital costs, charges and Medicare charges are consistently categorized in the same departments • Uniform reporting methods will result in more accurate and consistent data used for “cost-based” DRG weights Cost Report Workgroup

18. Operational Approach • CMS Form 339 (Medicare Cost Report Instructions) provides for three alternative methods for reporting Medicare charges • Only using the PS&R • Using the PS&R for Department totals, then allocating based on hospital records • Only using hospital records • Currently hospitals select the method that best matches its information system, but may not accurately align Medicare charges on C/R Worksheet D-4, with overall cost and charges reported on Worksheets A and C Cost Report Workgroup

19. Operational Approach • Medical supplies cost and charges represent the most significant problem area of mismatch • Other departments, such as drugs and cardiac cath are also potential areas of concern Cost Report Workgroup

20. Operational Approach • Hospitals frequently include supply charges in different ancillary departments • Operating room, Emergency, ICU, etc. • Supply charges are billed on the UB using revenue code 27X • Medical supply charges may be mapped on the Medicare C/R to line 55 or allocated to various departments where the supplies are used. Cost Report Workgroup

21. Operational Approach • If the 27X Medicare charges on the PS&R are allocated to various hospital departments on the Medicare C/R or even to line 55, and not all of the total charges and costs are re-classified to the same departments on Worksheets A and C, Medical Supplies will be misstated (often understated). • This distorts “cost-based” weights for DRGs containing medical supply charges Cost Report Workgroup

22. Operational Approach • Hospitals are being asked to report all separately billable medical supplies on line 55 of the cost report—Medicare charges, total charges and costs • If the costs cannot be determined within the hospital’s accounting system, it should be done through an A-6 reclassification • Such a reclassification may require the use of revenue department mark-up formulas that were used to establish charges for each cost item Cost Report Workgroup

23. Operational Approach • Charges with the 27X revenue code should be reported on line 55 • Although most hospitals have the ability to report charges by revenue summary code, some hospitals may need to create special reports from their revenue management systems Cost Report Workgroup

24. EXAMPLE # 1 Cost Report Workgroup

25. EXAMPLE # 2 Cost Report Workgroup

26. EXAMPLE # 3 Cost Report Workgroup

27. Conclusions • Hospitals should examine Medicare C/R filing methods and adopt the approach of classifying all separately billable medical supply charges to line 55 of the C/R • Hospitals should also map all 27X revenue from the PS&R to only line 55 of the C/R • Costs for billable medical supplies should also be reported on, or reclassified to line 55 if they have been mapped to C/R lines other than line 55 Cost Report Workgroup

28. Conclusions • Adoption of the proposed approach is on a voluntary basis, and is a short-term effort to improve the accuracy and consistency of reporting for hospital Medical Supply costs and charges • The proposed operational approach will more accurately link Medicare cost reporting to the “cost-based” DRG weight method used by CMS • Continued work is still needed to address other aspects of hospital cost reporting, sources of data and how they are incorporated into the CMS “cost-based” DRG weight methodology Cost Report Workgroup

29. Conclusions • Hospitals should set up their accounting systems to allow their cost report to be completed as described • If internal recordkeeping/accounting systems cannot be modified, hospitals should design an estimation approach for FI approval Cost Report Workgroup

30. CMS FY 2008 Final Rule • CMS is supportive of voluntary effort • CMS will notify FIs/MACs of educational effort and provide guidance on how to request changes from current practices • Hospitals that modify their approach for matching costs and charges to accomplish consistent reporting need to disclose to FI/MAC in cover letter to cost report Cost Report Workgroup

31. CMS FY 2008 Final Rule • Cost reporting practices must continue to follow cost apportionment rules-42 CFR 413.53(a)(1) • Allowable costs shall be apportioned between program beneficiaries and other parties so that the costs borne by the Medicare Program are based on actual services received by program beneficiaries Cost Report Workgroup

32. CMS FY 2008 Final Rule • Cost reporting practices must continue to follow cost apportionment rules-PRM-1 Section 2203 • Hospital charging practices need to result in an equitable basis for apportioning costs • Charge structure must be applied uniformly Cost Report Workgroup

33. CMS FY 2008 Final Rule • Cost reporting practices must continue to follow cost apportionment rules-PRM-1 Section 2203 • The program will determine if the charges are allowable for use in apportioning costs • “Like” charges for “like” services must be maintained on the cost report Cost Report Workgroup

34. CMS FY 2008 Final Rule • CMS plans to work with finance and cost report experts to evaluate whether cost report improvement (forms or instructions) need to be made to improve DRG weights • CMS indicates that cost report changes to improve accuracy and consistency will benefit cost reimbursed hospitals as well as those reimbursed by IPPS. Cost Report Workgroup

35. CMS FY 2008 Final Rule • CMS indicates that the impact of any cost report form or instructions changes will have a three-year lag time before impacting DRG weights • CMS indicates that the addition of more revenue codes to the MedPAR File as one possible solution would be considered in the context of other priorities Cost Report Workgroup

36. Questions & Discussion Cost Report Workgroup