In the Inpatient Prospective Payment System (IPPS) rulemaking for fiscal year (FY) 2019, the Centers for Medicare and Medicare Services (CMS) announced that it would begin auditing the charity care and bad debt costs reported by hospitals on Worksheet S-10 of their Medicare cost reports starting in fall of 2018. 83 Fed. Reg. 41144, 41424 (Aug. 17, 2018). It would appear that CMS is delivering on that promise. In the past month, hospitals across the country have reported receiving requests from Medicare Administrative Contractors (MACs) to answer questions and produce data in support of the charity care and bad debt reported on Worksheet S-10 of the cost reports they filed in FY 2015. Hospitals would be wise not to take these audits lightly, as they will inevitably affect Medicare reimbursement in the near future.
Charity care and bad debt costs reported in Worksheet S-10 are used to determine the uncompensated care component of the Medicare Disproportionate Share Hospital (DSH) payments to hospitals. Each year, as required under the Affordable Care Act (ACA), CMS estimates the aggregate dollar amount that hospitals would have received in Medicare DSH payments under the payment methodology that preceded the ACA. That amount is then reduced by 25 percent (Factor 1), reduced again by the percent change in uninsured individuals (Factor 2), and then divided among eligible hospitals based on their proportionate share of uncompensated care (Factor 3). In FY 2018, CMS began using charity care and bad debt costs reported on Worksheet S-10 to measure each qualifying hospital’s proportionate share of uncompensated care. That is, CMS determines a given hospital’s Factor 3 by comparing the charity care and bad debt costs reported by the hospital over a span of three years to the charity care and bad debt costs reported by other hospitals during that same period.
The Worksheet S-10 data from FY 2015 will be one of the three years of data used to determine Factor 3 for qualifying hospitals in FYs 2019 through 2021. The Worksheet S-10 audits for FY 2015 should only affect hospitals’ Factor 3s for FYs 2020 and 2021. The Factor 3s for FY 2019 were finalized in August 2018. CMS appears to be motivated to complete the Worksheet S-10 audits for FY 2015 in time for the FY 2020 rulemaking. In all reported cases, hospitals selected for audit were given only two weeks to respond to the MAC’s questions and requests for data, which is a remarkably short timeframe given the breadth of the information requested.
MACs are asking hospitals to explain how the charity care they provided and reported was consistent with their financial assistance policies. In addition, hospitals must explain how they identified the charity care and bad debt they reported on Worksheet S-10. Then hospitals have to produce up to twenty data points for each charity care charge and bad debt expense so identified, including information about the patient, other payors, dates of service, revenue codes, write off date, and patient payments. Hospitals are also required to reconcile the bad debts from their financial accounting records to the bad debts reported in Worksheet S-10. In addition, hospitals are asked to provide a comparison of their FY 2014 and FY 2015 charity care charges from their audited financial statements and explain any significant changes between those years.
Hospitals selected for audit should tread carefully when preparing their responses to the MAC’s questions and requests for data, because it is not clear at this point the extent to which hospitals will have opportunities to communicate with contractors or informally appeal the adjustments they make to the costs reported on S-10. Any answer or production that does not fully address the MAC’s questions or requests could, therefore, result in an unfavorable adjustment that could be “baked in” to the hospital’s Factor 3 for the next two years.
