With Medicare cost-based reimbursement going the way of the dinosaur, it would be logical to assume that the highly complex data-reporting requirements that are part of the process also would become extinct.
But that hasn't happened. In fact, the record-keeping burden on providers has increased over the years as new requirements have been added. The government now estimates it takes the average hospital 656 hours to complete the mammoth Medicare cost report, which was used to set rates going back to the dawn of Medicare in 1966. A cost report can run thousands of pages when all supporting documents are included.
Under cost-based reimbursement, the government paid rates that were based on what it deemed to be the provider's actual cost of providing a particular service. The system required providers to show the government their costs and prove that they were reasonable. For example, Medicare wouldn't pay for expenses such as direct advertising or executive pay that it considered excessive.
But even as the government has shifted nearly all services to prospective payment, the cost report remains. For inpatient hospital care, prospective payment has been in effect since 1984.
Tony Fay, vice president of government affairs of Province Healthcare Co. based in Brentwood, Tenn., has been completing cost reports since 1980. "I have seen them grow exponentially in the amount of data required over the years, even though the amount of reimbursement tied to the cost report has gone down exponentially," he says.
Fay estimates that his company, which owns or manages 58 rural hospitals, employs the equivalent of 19 full-time workers to prepare cost reports. For teaching hospitals and other complex institutions, the burden is probably three or four times greater, he says.
This year, with a new administration in Washington that is sympathetic to the cause of government simplification, providers see a golden opportunity to reverse the trend. The Federation of American Hospitals and the American Hospital Association are lobbying HHS to reduce Medicare reporting requirements. Although the exact pathway isn't clear, the AHA believes most changes can be made administratively, without new regulations or laws.
In the past few weeks, both groups sent letters to HHS Secretary Tommy Thompson outlining recommendations. At the heart of their proposals is a move to a financial reporting system that is based on generally accepted accounting principles rather than the "reasonable cost methodologies" that are unique to Medicare. Many states already use GAAP in their own reporting systems for hospitals.
A few modest changes in the cost report are under way. In testimony before the House Ways and Means Committee this summer, Thompson alluded to some changes that will take effect for the fiscal year ending Sept. 30, 2002 (See chart, p. 32). The changes are expected to reduce the time it takes an average hospital to complete a cost report by about 10%.
But major changes, such as eliminating Medicare's allowable costs, which require hospitals to keep special accounts, could take a few years and are likely to be the subject of debate. The cost report itself will be around at least until January 2004, when cost-based reimbursement for outpatient services is scheduled to be completely phased out.
Providers argue that much of the data the cost reports collect are unnecessary, and the reports are so difficult to compile that much of the information is many months, or even years, old by the time it's released. GAAP figures are already used by hospitals to report their financial results to their boards and administrators, investors and other government agencies.
"The problem with a lot of the cost report data is it doesn't reflect the financial situation of the hospital," says Marc Lowry, a director at Clark, Lowry & Koortbojian in Sacramento, Calif., a consulting firm that specializes in cost reports and has advised the AHA. He estimates the Medicare cost report could be slimmed down by at least a half.
Fay says the cost reports take so much time because all transactions must be evaluated to determine how they should be treated for Medicare accounting purposes. Medicare has its own capital-depreciation schedules and its own rules for calculating expenses for leases and interest payments, which are different from those used in the rest of the business world.
He argues that in states such as California and Florida, where hospitals are required to report financial data every quarter, both the government and the industry are better informed about how hospitals are performing. He acknowledges that public access to timely financial results can have a drawback. Namely, the information could be used by health plans to negotiate more-favorable contract terms with providers. Nevertheless, "It's good information to have," he says.
Although some providers have proposed eliminating the cost report, such a move could come back to bite them. Congress eliminated the reports for hospices in 1989 because they were deemed an unnecessary paperwork burden on hospices, which have always been paid prospectively. But cost reports for hospices were resurrected 10 years later after the hospice industry said it was losing money on Medicare patients. The National Hospice and Palliative Care Organization supports some form of cost reporting as a way to measure whether reimbursements are keeping pace with costs, although it would like the reports simplified, says Stephen Connor, the group's vice president of research and development.
One key party that has yet to weigh in publicly on the matter is the Medicare Payment Advisory Commission, which advises Congress on Medicare rates. Jack Ashby, MedPAC's hospital research director, says cost reporting in some form is critical. "Lacking that information, you have no way of assessing the adequacy of the payments we make," he says.
Some version of reform appears inevitable. MedPAC recently decided to study to what extent simplification would compromise accuracy, Ashby says. The commission expects to reach some detailed conclusions within the next year.