Pub. 100-20, Transmittal 321, CR# 5928

SUMMARY OF CHANGES

The purpose of this CR is to inform the fiscal intermediaries and Medicare administrative contractors of the hospital/medical association’s initiative on encouraging hospitals to modify their cost-reporting practices with respect to costs and charges, in an effort to improve the consistency of the cost-based IPPS DRG relative weights. We agree that it would be beneficial for hospitals to consistently report costs and charges in their appropriate cost centers, and in a manner that is consistent with the way in which charges are grouped in the Medicare Provider and Review (MedPAR).

Effective Date: Cost-reporting periods ending on or after September 30, 2007

Implementation Date: March 31, 2008

General Information

• Background : In the FY 2007 Final Rule (71 FR 47882), Centers for Medicare & Medicaid Services (CMS) began to implement significant revisions to Medicare’s inpatient hospital rates by basing the relative weights on hospitals’ estimated costs rather than on charges. The Medicare Provider and Review (MedPAR) files and the Medicare cost report are the data sources utilized to develop the cost-based weights.

Some industry groups have expressed concerns about potential bias in cost weights due to “charge compression,” which is the practice of applying a lower percentage markup to higher cost services and a higher percentage markup to lower cost services. There is concern that cost-based weights may undervalue high cost items and overvalue low cost items if a single cost-to-charge ratio (CCR) is applied to items of widely varying costs in the same cost center (e.g., for medical supplies and devices).

CMS commissioned RTI International (RTI) to conduct a study on charge compression. The RTI’s draft interim report was posted on the CMS Web site https://cms.hhs.gov/reports/downloads/Dalton.pdf in March 2007. The RTI report made several recommendations, including a short-term recommendation to expand the number of distinct hospital department CCRs from 13 to 19.

In the FY 2008 IPPS proposed rule (72 FR 24712), CMS did not propose to implement RTI’s short-term recommendation for FY 2008 to expand the number of national CCRs from 13 to 19, although CMS solicited public comments on this issue. After considering the public comments, CMS added two national CCRs for a total of 15 CCRs.

The comments received on the proposed rule from several hospital and medical associations included recommendations on how the impact of charge compression might be mitigated through improvement in cost reporting by hospitals. A workgroup convened by the American Hospital Association, the Association of American Medical Colleges, and the Federation of American Hospitals found that CMS groupings of hospital charges on MedPAR differ from how hospitals group Medicare charges, total charges, and overall costs on their cost reports. This mismatch between MedPAR charges and cost report CCRs can distort DRG weights. For example, the workgroup found that reporting of chargeable medical supplies costs and charges on the cost report (line 55 of Worksheets C, Part I and D-4) to be a significant problem area because some hospitals report chargeable medical supply charges and costs in various ancillary departments on the cost reports, but report those charges on the medical supplies revenue code on the claim.

These hospital/medical associations have launched an educational campaign to encourage hospitals to report costs and charges, particularly for supplies, in a way that is consistent with the way that charges are grouped in MedPAR. Their suggestions include that hospitals should adopt an approach of classifying all billable medical CMS/CMM/MCMG/DCOM Change Request Form: Last updated 08 November 2007 supply costs and charges to line 55 of the cost report and mapping the 27X Revenue Summary codes from the Provider Statistical and Reimbursement Report (PS&R) only to line 55.

Therefore, the purpose of this Change Report is to inform the fiscal intermediaries and Medicare administrative contractors of the hospital/medical associations’ initiative on encouraging hospitals to modify their cost reporting practices with respect to costs and charges, in an effort to improve the consistency of the cost-based IPPS DRG relative weights. CMS agrees that it would be beneficial for hospitals to consistently report costs and charges in their appropriate cost centers, and in a manner that is consistent with the way in which charges are grouped in MedPAR.

• Policy : The Provider Reimbursement Manual (PRM), Part I, §2202.4 requires that costs and charges for a given service be matched and placed in the same cost center. Charges refer to the regular rates established by the provider for services rendered to both beneficiaries and to other paying patients. Furthermore, it states that charges should be related consistently to the cost of the services and uniformly applied to all patients whether inpatient or outpatient. Transmittal 18 of the hospital cost report will reaffirm this policy through the instruction in §3620 for Worksheet C, on which charge ratios are calculated.

Section 2203 of the PRM I states that in order to assure that Medicare's share of the provider's costs equitably reflects the costs of services received by Medicare beneficiaries, the intermediary, in determining reasonable cost reporting, evaluates the charging practice of the provider to ascertain whether it results in an equitable basis for apportioning costs. So that its charges may be allowable for use in apportioning costs under the program, each facility should have an established charge structure which is applied uniformly to each patient as services are furnished to the patient and which is reasonably and consistently related to the cost of providing the services. While the Medicare program cannot dictate to a provider what its charges or charge structure may be, the program may determine whether or not the charges are allowable for use in apportioning costs under the program.

• Reporting and Review