Medicare Audit Challenges to Paying Nursing and Allied Health Program Pass-Through Costs

by McDermott Will & Emery

[authors: Sarah Kitchell and Peter R. Leone]

The Medicare program shares in the costs for approved nursing and allied health education programs operated by hospitals, a matter which has become a recent focus in Medicare audits of hospitals operating such programs.

Medicare Reimbursement of the Costs of Nursing and Allied Health Education Programs Operated by a Hospital

Pursuant to Medicare regulations, the program shares in the cost that hospitals incur for approved nursing and allied health education programs.  Medicare reimburses hospitals for a share of the classroom and clinical costs of their approved education programs, based on the proportion of the hospital’s patients who are Medicare beneficiaries.  Federal regulations define approved educational programs as formally organized or planned programs of study that are operated by hospitals, enhance the quality of inpatient care and meet licensing and/or accreditation requirements.  The original intent of Medicare funding for educating health professionals was the promotion of quality inpatient care and the development of a suitably trained nursing workforce.  Over the years, the number of hospital-based programs has significantly declined as a result of changes in workforce demands and hiring practices, together with changes in accreditation requirements that seem to favor educational activities based at separately incorporated institutions independent of a sponsoring hospital.  Other hospital-based programs continued, however, and, in some cases, expanded into allied health training, including training for radiologic technologists, emergency medical technicians, surgical technologists and hospital chaplains.

For a hospital to be considered the operator of an approved program, it must:

  • Directly incur the training costs
  • Have direct control of the program curriculum (the hospital may have an agreement with an educational institution to furnish basic academic courses, but the hospital must provide all of the courses relating to the theory and practice of the profession)
  • Control the administration of the program, including collection of tuition, maintenance of payroll records and responsibility for day-to-day program operation (the hospital may contract for the provision of some administrative functions, but the hospital must maintain control over all aspects of the contracted functions)
  • Employ the teaching staff
  • Provide and control both classroom instruction and clinical training (when classroom instruction is a requirement for program completion) 

With specific guidance from the Centers for Medicare & Medicaid Services, Medicare Administrative Contractors have been auditing hospital nursing and allied health education programs for compliance with these requirements. 

For hospitals that wish to continue to qualify for Medicare pass-through reimbursement, the task is further complicated by college accreditation standards, which emphasize autonomy and independence of the accredited educational program separate and apart from any sponsoring hospital or corporate parent.  In this way, the accreditation standards seem to conflict with the Medicare rules for “provider-operated” nursing and allied health education programs, which require the hospital to retain control over significant aspects of the day-to-day operations and administration of the program.  The accreditation standards can raise other issues for “provider-operated” programs; for example, accreditation standards requiring certified financial audits of the nursing or allied health education program’s operations independent of the certified financial statements of the sponsoring hospital or health system can cause difficulty for the hospital and its auditors. 

Ongoing Issues

While the elimination of Medicare pass-through payments for nursing and allied health education programs has been an ongoing concern over the past three decades, many nursing and allied health education programs have, with planning and attention to Medicare requirements, continued to successfully navigate the changes in both Medicare and college accreditation standards.  Hospitals that wish to continue to qualify for such pass-through payments in the future should be alert to these matters when approaching Medicare audits and in changes in accreditation standards.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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