Cost Report Changes to Improve Accuracy of Cost-Based DRG Weights Cost Report Workgroup Findings September 2007

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

Cost Report Workgroup FindingsSeptember 2007

Revised September 2007 Cost Report Workgroup 2

Presentation Overview

Background Hospital Technical Expert Workgroup Workgroup Recommendations Operational Approach Questions and Discussion


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


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


Background

Cost report lines grouped into 13 categories and reduced to cost using national cost-to-charge ratios for each category.

Calculated for each DRG.

1. Routine 2. Intensive3. Drugs4. Supplies/equipment5. Therapy services6. Inhalation therapy7. Operating room8. Labor & delivery9. Anesthesia10. Cardiology11. Laboratory12. Radiology13. Other


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.”


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.


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


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.


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


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


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.


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


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


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


Operational ApproachNeed to address two problems:

1. 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 charges2. 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


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


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



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


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.


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


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



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


EXAMPLE # 1

MedicareCost Charges RCC Total Cost

Worksheet COR 12,000,000 22,000,000 0.545455 OR Billable Supplies 1,500,000 2,000,000 0.750000 Total OR - Line 37 13,500,000 24,000,000 0.562500

Supplies - Line 55 2,000,000 7,500,000 0.266667

Worksheet D's274 Prosht/Ortho Dev 100,000 0.562500 56,250 275 Pace Maker 270,000 0.562500 151,875 276 Intr Ocul Lens 30,000 0.562500 16,875 278 Other Implants 200,000 0.562500 112,500 360 Oper Room -Gen 3,400,000 0.562500 1,912,500 490 ASC Gen 1,200,000 0.562500 675,000 710 Recovery Rm Gen 1,020,000 0.562500 573,750 Total OR - Line 37 6,220,000 3,498,750

270 Med surg sup - Gen'l 300,000 0.266667 80,000 271 Non Sterile Supps 700,000 0.266667 186,667 272 Med surg supplies 900,000 0.266667 240,000 Supplies - Line 55 1,900,000 506,667

SummaryTotal OR 13,500,000 24,000,000 0.562500 3,498,750 Total Supplies 2,000,000 7,500,000 0.266667 506,667

15,500,000 31,500,000 0.492063 4,005,417

UNDERSTATED SUPPLY CCR


EXAMPLE # 2UNDERSTATED SUPPLY CCR, MISMATCHED CHARGES


Worksheet COR 12,000,000 22,000,000 0.545455 OR Billable Supplies 1,500,000 2,000,000 0.750000 Total OR - Line 37 13,500,000 24,000,000 0.562500

Supplies - Line 55 2,000,000 7,500,000 0.266667

Worksheet D's360 Oper Room -Gen 3,400,000 0.562500 1,912,500 490 ASC Gen 1,200,000 0.562500 675,000 710 Recovery Rm Gen 1,020,000 0.562500 573,750 Total OR - Line 37 5,620,000 3,161,250

270 Med surg sup - Gen'l 300,000 0.266667 80,000 271 Non Sterile Supps 700,000 0.266667 186,667 272 Med surg supplies 900,000 0.266667 240,000 274 Prosht/Ortho Dev 100,000 0.266667 26,667 275 Pace Maker 270,000 0.266667 72,000 276 Intr Ocul Lens 30,000 0.266667 8,000 278 Other Implants 200,000 0.266667 53,333 Supplies - Line 55 2,500,000 666,667


15,500,000 31,500,000 0.492063 3,827,917


EXAMPLE # 3ACCURATE SUPPLY CCR, MATCHED CCR AND CHARGES


Worksheet CTotal OR - Line 37 12,000,000 22,000,000 0.545455

Supplies 2,000,000 7,500,000 0.266667 OR Billable Supplies 1,500,000 2,000,000 0.750000 Supplies - Line 55 3,500,000 9,500,000 0.368421

Worksheet D's360 Oper Room -Gen 3,400,000 0.545455 1,854,545 490 ASC Gen 1,200,000 0.545455 654,545 710 Recovery Rm Gen 1,020,000 0.545455 556,364 Total OR - Line 37 5,620,000 3,065,454

270 Med surg sup - Gen'l 300,000 0.368421 110,526 271 Non Sterile Supps 700,000 0.368421 257,895 272 Med surg supplies 900,000 0.368421 331,579 274 Prosht/Ortho Dev 100,000 0.368421 36,842 275 Pace Maker 270,000 0.368421 99,474 276 Intr Ocul Lens 30,000 0.368421 11,053 278 Other Implants 200,000 0.368421 73,684 Supplies - Line 55 2,500,000 921,053


15,500,000 31,500,000 0.492063 3,986,507


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


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


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


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 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 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 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


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.


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


Questions & Discussion

Documents

Cost Report Changes to Improve Accuracy of Cost-Based DRG Weights Cost Report Workgroup Findings September 2007