Revising your PPS base year costs.

there's still time

You say those 1995 costs have put the pinch on your 1999 Medicare reimbursement? You might be able to do something about it

Most skilled nursing facilities (SNFs) have now entered their first PPS cost reporting period and will be paid a Medicare rate based, in part, on a facility-specific payment, as provided for in the Balanced Budget Act of 1997 (BBA). providers may think that, by this time, nothing can be done to change or improve this rate. However, as with any notification from Medicare that significantly affects reimbursement, providers should carefully consider all opportunities to enhance Medicare payments.

We will focus on the base year provisions of the BBA and advise providers to explore potential opportunities - possibly still available to them - to significantly increase their Medicare payments during the transition period by revising their base year cost reports.

Base Year

The BBA provides for a comprehensive PPS payment to SNFs effective for cost reporting periods beginning on or after July 1, 1998. While the law refers specifically to a cost reporting "period," for most providers this relates to a cost reporting "year," and this article assumes that transition periods are cost reporting years.

Let's briefly review the facts of the situation. The BBA provides for a three-year transition to PPS rates for SNFs that were participating in the Medicare program before October 1, 1995. Reimbursement rates paid to these "old" facilities will be a blended rate between the facility's base year per-diem cost and the federal PPS rates, based on the by now very familiar schedule:

                              Federal           Facility-
                                PPS             Specific

Year 1                          25%                75%
Year 2                          50%                50%
Year 3                          75%                25%

By the fourth year, all SNFs on this schedule will be paid the federal PPS rates.

"New" SNFs, or those that started receiving Medicare reimbursement after October 1, 1995, have been paid the federal PPS rates commencing the first cost reporting period beginning on or after July 1, 1998. The federal PPS rates have been adjusted for differences in case mix, depending on the individual patient's assessment as determined by the facility and categorized into 44 Resource Utilization Groups (RUGs). The federal PPS rates are further adjusted for regional wage differences and facility location (rural or urban). The facility-specific rate, however, remains the same throughout the 44 RUG categories.

Because of the way the laws affect SNFs, those with relatively high base year costs will realize significant reimbursement advantages during the transition period. It logically follows, then, that SNFs that are able to revise upward, for whatever reason, their base year costs will also realize significant reimbursement advantages.

For example, consider a $20 per diem increase in the facility-specific rate during the base year. What impact would this have during the base year and the transition period? The impact on the base year is fairly easy to calculate. Assuming 3,000 patient days, the additional reimbursement would equal $60,000 ($20 increase times 3,000 patient days).

Calculating the effect on Medicare payments during the transition period is a little more complex. Excluding the market basket adjustment factor, the answer would be $20 times the sum of 75%, 50% and 25% times the number of Medicare patient days during the transition period. If the SNF averages 3,000 patient days per year, a $20 increase in the base year facility-specific rate would equal $90,000 ($20 times 150% [75% plus 50% plus 25%] times 3,000). Half of this would be realized in the first transition year.

In total, the facility would increase its Medicare payments by $150,000 over a three-year period.

Remember, the base year is defined by BBA as the cost reporting year beginning during the federal fiscal year ended September 30, 1995. For calendar year providers, this would be the cost reporting year ended December 31, 1995.

You may think that, in either case, your base year cost report is finalized, and there is nothing you can do to correct or otherwise revise it. This is not necessarily true. Regulations allow various alternatives to remedy this situation. Taking them in sequence:

Review your base year cost report

Because of the complexity of the cost report and the applicable Medicare regulations, there are various items that, when changed, will result in additional reimbursement. Among these are the number of patient days, costs incorrectly classified in the cost report or trial balance, home office costs, if any, and allocation statistics (allocations to overhead cost centers, such as square footage, patient days, number of meals). Also, consider routine cost limit exception requests that may be in the base year cost report, which have a much more significant effect on facility reimbursement when viewed in light of the BBA.

If errors are noted that, when corrected, increase the Medicare costs in the base year cost report, the next step is to determine if and how to reflect such corrections so that your facility-specific portion of the blended rate can be revised upward.

Cost report not finalized

Medicare regulations require your fiscal intermediary to make a final determination regarding each cost report (See 24 CFR [section]405.1803). This is referred to as the "final settlement" or Notice of Program Reimbursement (NPR), which indicates if the Medicare program owes the facility money or vice versa. If the cost report has not been finalized, any significant errors can generally be corrected during discussions with the fiscal intermediary. This is not always easy, so be prepared to provide an explanation of the proposed changes, with related supporting documentation.

Cost report recently finalized

Formal appeal rights become available on the NPR date. Regulation allows the provider to appeal any determination with which it disagrees within 180 days of the NPR date (See 42 CFR [section]405.1841). There are some exceptions to this if the cost report has been reopened (see below) and subsequently revised. If there are significant adverse audit adjustments in the base year cost report, your decision to dispute such adjustments needs to include the reimbursement impact on the base year and on the PPS transition years. In the previous example, a $60,000 ($20 times 3,000 patient days) reimbursement enhancement in the base year would potentially become a $150,000 issue ($60,000 plus $90,000) during the transition periods.

Appeal rights not available

If you determine that there are significant errors, but the appeal date has passed, don't despair quite yet. One avenue yet remains. Regulations provide that in the case of a significant error, the provider may request the subject cost report be reopened so that the error maybe corrected (See 42 CFR [section]405.1885(b)). This option is only available for three years after the NPR date.

For example, a calendar year facility completes and submits its 1995 cost report on May 20, 1996. The intermediary performs the review and issues the NPR on September 30, 1996. The facility can then request a reopening until September 30, 1999. HCFA is also aware of these regulations and will reopen any finalized cost report if a significant error is discovered in favor of the program. Of course in the case of a provider's request to reopen, the intermediary has the option of denying such a request, although such denial can give rise to appeal rights in some districts.

Pitfalls

A short note of caution: Now that you have reviewed your base year cost report, and have identified specific corrections that, when reflected, will increase reimbursement, consider if you really want the fiscal intermediary to examine that old cost report again. There is always the chance that the Medicare auditors reviewing your base year cost report will find other areas of audit exposure they missed before. While this is unlikely, it remains a possibility, so be careful.

In summary, as many facilities have learned, sometimes the hard way, the BBA has significantly increased the importance of the base year cost report for "old" providers. Nevertheless, various alternatives remain for providers to correct errors in the base year, and these corrections can significantly enhance reimbursement during the PPS transition period.

Scott C. Jolley, CPA, is the owner of Pinnacle Healthcare Consulting, Salt Lake City, Utah. For further information, [e-mail].