1. Minnesota Rural Health Conference July 19, 2005 PEOPLE. PRINCIPLES. POSSIBILITIES. Critical Access Hospital Billing and Reimbursement Strategies Ralph J. Llewellyn, CPA, CHFP rllewellyn@eidebailly.com (701) 239-8594

2. PEOPLE. PRINCIPLES. POSSIBILITIES. Objectives Provide basic understanding of cost based reimbursement Discuss how decisions impact final reimbursement Discuss billing and reimbursement strategies

3. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Reimbursable vs Non-reimbursable services Reimbursable – Medicare participates in cost Non-Reimbursable – Medicare does not participate in cost

4. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Respiratory Therapy Emergency Room Cardiology Pharmacy Supplies Cardiac Rehab Swing Bed Provider based clinic Reimbursable Examples Medical/Surgical Operating Room Lab Radiology Physical Therapy Occupational Therapy Speech Therapy

5. 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

6. 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

7. 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

8. 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

9. 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

10. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Overhead Allocation Methodologies Methodologies determine how overhead costs will be allocated to various departments and subsequently determine Medicares reimbursement of costs Methodologies can be changed with approval from Medicare

11. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Overhead Allocation Methodologies Buildings – Square Footage Moveable Equipment – Square Footage or Actual Benefits – Gross Salary

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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.).

18. 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

19. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Factors impacting year-to-year cost settlements Volume Medicare Utilization Changes in Charges Changes in Expenses

20. 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

21. PEOPLE. PRINCIPLES. POSSIBILITIES. Cost Based Reimbursement Medicare Utilization Changes in Medicare utilization impacts percentage of costs Medicare will reimburse Department specific

22. 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

23. 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

24. 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

25. PEOPLE. PRINCIPLES. POSSIBILITIES. Billing and Reimbursement Strategies Pricing Supplies Borrowing Componentized Depreciation Emergency Room Physicians Cost Report Allocations Non-Reimbursable Cost Centers

26. PEOPLE. PRINCIPLES. POSSIBILITIES. Pricing Why have CAHs discontinued monitoring of and updating of pricing? Charges still important Medicare is not the only payer

27. 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

28. PEOPLE. PRINCIPLES. POSSIBILITIES. Pricing Across the board increased Most common Least effective Ignores market Ignores changes in cost

29. PEOPLE. PRINCIPLES. POSSIBILITIES. Pricing Strategic Various methods Better reflect market Better reflect costs Ability to drive increases to bottom line

30. PEOPLE. PRINCIPLES. POSSIBILITIES. Pricing Market Driven Not commonly reviewed Reveals opportunities/threats Significant opportunity for many rural providers

31. 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

32. PEOPLE. PRINCIPLES. POSSIBILITIES. Pricing Non-Medicare Providers often ignore impact of charges on other payers Believe impact minimal Discomfort

33. 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

34. 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

35. PEOPLE. PRINCIPLES. POSSIBILITIES. Supplies Current Supply Expense = $100,000 Supply Revenue = $400,000 CCR =.25 Medicare Utilization = 50% ($200,000) Medicare Pays = $50,000

36. 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

37. PEOPLE. PRINCIPLES. POSSIBILITIES. Supplies Current Supply Expense = $100,000 Supply Revenue = $500,000 CCR =.20 Medicare Utilization = 40% ($200,000) Medicare Pays = $40,000

38. 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.

39. 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.

40. 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

41. PEOPLE. PRINCIPLES. POSSIBILITIES. Borrowing Proper planning can result in avoiding the disallowance of interest expense related to unnecessary borrowing

42. 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

43. 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

44. 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

45. PEOPLE. PRINCIPLES. POSSIBILITIES. Componentized Depreciation Impact of cross-over May be beneficial Requires planning CAH versus PPS impact

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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 855s Separate organization not required

56. PEOPLE. PRINCIPLES. POSSIBILITIES. Non-Reimbursable Cost Centers Home Office Cost Report? Cost Allocations Direct Functional Pooled No set rules on allocations by Medicare

57. 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.