Minnesota Rural Health Conference July 19, 2005 PEOPLE. PRINCIPLES. POSSIBILITIES. Critical Access Hospital Billing and Reimbursement Strategies Ralph.

Minnesota Rural Health Conference

July 19, 2005

PEOPLE. PRINCIPLES. POSSIBILITIES.

Critical Access HospitalBilling and Reimbursement Strategies

Ralph J. Llewellyn, CPA, CHFPrllewellyn@eidebailly.com

(701) 239-8594

Objectives

Provide basic understanding of cost based reimbursement

Discuss how decisions impact final reimbursement

Discuss billing and reimbursement strategies

Cost Based Reimbursement

Reimbursable vs Non-reimbursable services

Reimbursable – Medicare participates in cost

Non-Reimbursable – Medicare does not participate in cost

Respiratory TherapyEmergency RoomCardiologyPharmacySuppliesCardiac RehabSwing BedProvider based clinic

Reimbursable Examples

Medical/SurgicalOperating RoomLabRadiologyPhysical TherapyOccupational TherapySpeech Therapy

Non-Reimbursable ExamplesHome HealthHospiceSkilled Nursing FacilityAssisted LivingMeals on WheelsDay Care (Some costs may be reimbursable)Non-Provider Based Clinics

Allowable vs. Unallowable CostsCosts are deemed unallowable if they are not related to patient care

Patient Phones/Television

Advertising

Physician Recruitment (except RHC)

Lobbying

Allowable vs. Unallowable CostsCosts 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

Allowable vs. Unallowable CostsNon-Patient Revenues are offset against cost as a recovery of cost

Interest income (to extent of interest expense)

Copies of Medical Records

Cafeteria

Medicare Cost Based ReimbursementMedicare 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

Overhead Allocation MethodologiesMethodologies 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

Overhead Allocation MethodologiesBuildings – Square Footage

Moveable Equipment – Square Footage or Actual

Benefits – Gross Salary

Overhead Allocation MethodologiesAdministrative & General – Accumulated Cost

Fragmented Administrative & General

Maintenance & Repair – Square Footage or Time Study

Operation of Plant – Square Footage

Overhead Allocation MethodologiesLaundry – Pounds or Patient Days

Housekeeping – Square Footage or Time Study

Dietary – Meals or Patient Days

Overhead Allocation MethodologiesCafeteria – Full Time Equivalents (FTEs)

Nursing Administration – Hours of Service

Medical Records – Gross Revenue or Time Study

Medicare Cost Based ReimbursementInterim payments made based on percentage of charges submitted and/or per diem

Interim rates based on prior year cost to charge ratio / per diem

Medicare Cost Based ReimbursementFinal costs are calculated using departmental specific cost-to-charge ratio

Routine Med/Surg and Skilled Swing Bed costs calculated based on cost per day

Medicare Cost Based ReimbursementExample

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.).

Medicare Cost Based ReimbursementExample

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

Factors impacting year-to-year cost settlements

VolumeMedicare UtilizationChanges in ChargesChanges in Expenses

VolumeSignificant 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

Medicare UtilizationChanges in Medicare utilization impacts percentage of costs Medicare will reimburse

Department specific

Changes in ChargesIncreases 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

Changes in ExpensesIncreases 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

Impact of Decisions on Final Reimbursement

Decisions may have unintended reimbursement implications

Medicare may share in cost reductionsNew programs may decrease profitability of existing services due to changes in overhead allocations

Billing and Reimbursement Strategies

PricingSuppliesBorrowingComponentized DepreciationEmergency Room PhysiciansCost Report AllocationsNon-Reimbursable Cost Centers

Pricing

Why have CAHs discontinued monitoring of and updating of pricing?

Charges still important

Medicare is not the only payer

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

Pricing

Across the board increasedMost common

Least effectiveIgnores marketIgnores changes in cost

Pricing

StrategicVarious methods

Better reflect market

Better reflect costs

Ability to drive increases to bottom line

Pricing

Market DrivenNot commonly reviewed

Reveals opportunities/threats

Significant opportunity for many rural providers

Pricing

RHCCost per visit myth80% Cost / 20% ChargeCosts > $100 per visitCharged approximately $75Actual reimbursement

$15 – Coinsurance$80 – MedicareImpact varies if deductible applies

Pricing

Non-MedicareProviders often ignore impact of charges on other payers

Believe impact minimalDiscomfort

Pricing

Non-Medicare : ExampleAssumptions:

$5,000,000 gross revenue30% Non-Medicare volume5% below market pricing80% reimbursement rateMarket pricing provides

Market pricing = $60,000 net revenue

Supplies

Routine vs non-routineRoutine supplies not billable to Medicare

Lack of comprehensive or consistent listNegative impact of billing other payers

Supplies

CurrentSupply Expense = $100,000Supply Revenue = $400,000CCR = .25Medicare Utilization = 50% ($200,000)Medicare Pays = $50,000

Supplies

UpdatedBill non-Medicare payers for routine supplies and equipment

New non-Medicare revenue = $100,000

Assuming 80% reimbursement rate$80,000 “new” reimbursement

Supplies

CurrentSupply Expense = $100,000Supply Revenue = $500,000CCR = .20Medicare Utilization = 40% ($200,000)Medicare Pays = $40,000

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.”

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.”

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

Borrowing

Proper planning can result in avoiding the disallowance of interest expense related to unnecessary borrowing

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

Componentized Depreciation

Determine depreciable life by component of asset versus asset as a whole

Reduced overall life of asset

Examples of componentsBuildingRoofElectricalPlumbingHVAC

Increases short term expense

Increases short term Medicare reimbursement

Cash flow impactBetter in early years

Poorer in later years

Impact of cross-overMay be beneficial

Requires planning

CAH versus PPS impact

Emergency Room Physicians

Standby servicesNo longer required to be onsite to claim standby costs

Time studiesVerify FI requirements : most require two – two week time studies per year

Coverage by RHC physiciansHow is cost allocated to Emergency Room?

Does contract address this issue?

Recommend completing analysis of impact

Fiscal Intermediaries focusing on PRM I 2109.3

Signed contract between hospital and physiciansWritten allocation agreement and support documentationPermanent payment recordsPermanent record of all treated patientsSchedule of chargesDocumentation of attempts to obtain alternative coverage

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 RoomNurseryLabor and DeliveryEKGStress TestRespiratory TherapyCardiac Rehab

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

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

Non-Reimbursable Cost Centers

Non-reimbursable cost centers may negatively impact facility reimbursement due to the impact of allocating overhead costs

Nursing HomesHome HealthHospiceClinicsAssisted Living

StrategiesNursing Home or TCU conversion

PPS to cost basedWorks well for smaller facilitiesMinnesota specific issues

Discontinue servicesCommunity loses serviceTransfer to another outside entity

StrategiesSeparate Corporations

New corporation houses non-reimbursable cost centersEliminates inappropriate allocation of overhead expensesDuplication of costs?How to fund losses if new corporation is not profitable

Difficulties arise as organization creates separate corporation

Cannot duplicate all servicesContinue to share services

Home Office Cost Report?No request requiredNo 855’sSeparate organization not required

Home Office Cost Report?Cost Allocations

DirectFunctionalPooledNo set rules on allocations by Medicare

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.

Minnesota Rural Health Conference July 19, 2005 PEOPLE. PRINCIPLES. POSSIBILITIES. Critical Access Hospital Billing and Reimbursement Strategies Ralph.

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