Under the Social Security Act, Medicaid Disproportionate Share Hospital (DSH) payments to hospitals cannot exceed the uncompensated cost of providing inpatient and outpatient hospital services to Medicaid-eligible and uninsured individuals.

The 2008 DSH final rule required state reports and audits to ensure the appropriate use of DSH payments and compliance with the DSH limit imposed at Section 1923(g) of the Social Security Act. This rule also defined uninsured individuals as those who have no health insurance or other third-party coverage for the services provided. Individuals with insurance coverage, even if they don’t have coverage for the services provided, cannot be counted in the calculation of uncompensated cost for the Medicaid DSH payments. This is applied on an individual basis.

Proposed Rule Broadens the Definition of ‘Uninsured’

The proposed rule, released in the January 18, 2012, Federal Register, broadens the definition of “uninsured” to include the following:

1. Services furnished to individuals covered under the Indian Health Service (IHS) are considered covered only to the extent that the services are directly from IHS or when IHS has authorized coverage. Otherwise, these individuals are considered uninsured.
2. Services provided to individuals who have reached their lifetime insurance limits or who have exhausted their benefits are considered uninsured.
3. Services provided to individuals with health insurance that does not cover a medically necessary service also are considered uninsured.

Bad Debts & Unpaid Coinsurance/Deductibles & Inmates

The Centers for Medicare & Medicaid Services (CMS) clarified that cost associated with bad debts, unpaid coinsurance/deductibles and payor discounts cannot be included in the calculation of the uncompensated care for Medicaid DSH. This is due to the fact that these individuals had a source of third-party coverage for the service—the unpaid amount actually represents uncollected revenues.

In addition, the proposed rule supports previous definitions that inmates are not considered uninsured. Inmates are those in secured custody, and the appropriate federal, state or local law enforcement agency is legally liable for their care.

Effect on Hospitals

CMS did not prepare an analysis as prescribed by various regulations because it does not anticipate the rule change will have a significant financial effect on state Medicaid programs. They indicated the proposed change does not modify the DSH allotment amounts. Finally, CMS indicated the proposed rule may affect the calculation of the hospital-specific DSH limit by increasing the cost provided to uninsured individuals. This may affect the hospital’s DSH Medicaid payment if the hospital has its DSH Medicaid payment limited to the uncompensated care cost.

Please note:  CMS is accepting comments on the proposed rule until February 17, 2012. For more on this proposed rule, contact your BKD advisor or Kevin Wellen at kwellen@bkd.com.

On October 20, 2011, the Centers for Medicare and Medicaid Services (CMS) issued its final rule for Accountable Care Organizations (ACO) under the Medicare Shared Savings Program enacted in 2010 as part of the Patient Protection and Affordable Care Act. The proposed rule for this program, published April 7, 2011, created a large number of comments that have led to several significant changes to the final regulations. Many of these changes are intended to encourage the provider community to participate in ACOs.

Significant changes in the final rule include the following:

• A significant area of concern for the provider community in the proposed rule was the retrospective assignment process of beneficiaries to ACOs—an ACO could not identify its assigned beneficiaries until after the end of any agreement period. In the final rule, the beneficiary assignment process has been modified to provide ACOs with information regarding assigned beneficiaries on a quarterly, rolling-year basis, with final determination of assigned beneficiaries at the end of a given agreement year. This change offers ACOs more timely information regarding potential assigned beneficiaries, although final determination remains on a retrospective basis.
• In the proposed rule, CMS required all ACOs—even those electing a one-sided risk arrangement known as Track 1—be subject to sharing both savings and losses in the third year of their initial program participation term. Under the final rule, ACOs electing a Track 1 arrangement participate in shared savings for the initial three-year term without participating in shared losses.
• In the proposed rule, primary care services for Medicare beneficiaries in a rural health clinic (RHC) or federally qualified health center (FQHC) participating in an ACO were not considered in the process of assigning beneficiaries to that ACO. The final rule considers such services within the assignment process, creating an opportunity for RHCs and FQHCs to play a greater role in an ACO and even to independently form an ACO in some circumstances. As a result, the final rule also eliminates the separate incentives within the shared savings calculation associated with including an RHC or FQHC in an ACO.
• The number of quality measures required to be reported by an ACO were reduced from 65 to 33 in the final rule. Additionally, the phase-in for adjusting shared savings and losses by performance on certain quality measures was delayed from Year Two of the initial agreement term to Year Three for seven measures and after Year Three for one measure.
• In order to prevent ACOs from being paid for shared savings for normal variances in the cost of beneficiary care from year to year, the proposed rule set a minimum savings threshold of two percent that must be achieved before savings were shared on amounts greater than that threshold. The final rule changes this methodology to allow for all savings to be shared if the two percent threshold is met.
• The proposed rule included a required 25 percent withhold of shared savings paid to an ACO in any given agreement year, to be held by CMS until the end of any three-year agreement period. The final rule eliminates this withhold provision.
• Medicare direct medical education (DME) and disproportionate share (DSH) reimbursements were included in program costs for benchmark and actual expenditure purposes in the proposed rule, but are not included in the final rule.
• In the final rule, CMS has allowed two alternative dates to begin participating in the shared savings program—April 1, 2012, and July 1, 2012. ACOs beginning on April 1 will have their first performance period be 21 months, and ACOs beginning on July 1 will have their first performance period be 18 months. ACOs wishing to begin participation after July 1, 2012, will have an opportunity to begin on January 1 of each successive year.
• The proposed requirement that 50 percent of an ACO’s primary care physicians achieve “meaningful use” of certified electronic health record (EHR) technology has been eliminated in the final rule. The EHR criteria remain a heavily weighted quality measure in the final rule to encourage adoption.

Several other regulations recently have been released from the Federal Trade Commission, U.S. Department of Justice and IRS to address issues related to ACO formation. In addition, CMS and the Office of Inspector General have issued an interim final rule for establishing waivers under the federal Stark, anti-kickback and civil monetary penalty laws for ACOs.

Health care organizations should remain aware of the development of ACOs and the Medicare shared savings program, which may result in significant changes to the provider landscape. Health care organizations should continue to ask questions such as the following:

• Is becoming an ACO in our organization’s future? If not, where should we focus to make ourselves desirable to a forming ACO when the appropriate time comes?
• How strong is the primary care physician component of our proposed ACO? (Primary care is the driver of the beneficiary assignment to an ACO, and ACOs will have difficulty succeeding without a strong primary care physician base.)
• How effective can our potential ACO be at controlling costs for organizations not in our ACO but providing services to potentially assigned beneficiaries?
• Is the benefit of shared savings distributions greater than the potential increased cost and oversight of an ACO? Each organization needs to evaluate this early in the process, as ACO formations are anticipated to require significant time and resources.

For more information on the final ACO rules, please contact your BKD advisor.

Recent changes to Medicare Part A mean skilled nursing facilities (SNFs) and their therapists must remain vigilant to make sure therapy services are provided consistently. The Centers for Medicare & Medicaid Services clarified an End of Therapy Other Medicaid Required Assessment (OMRA) must be completed for Medicare Part A patients who miss three consecutive days of therapy services, using an assessment reference date (ARD) of the first, second or third day after the last therapy treatment. The approaching holidays may create difficulties delivering therapy services on a regular schedule as therapy staff take time off or skilled residents spend extra time with family.

SNFs also are now required to perform an “informal assessment” every seven days to determine if the amount of therapy being delivered is consistent with the Resource Utilization Group (RUG) minutes on the last prospective payment system scheduled or unscheduled assessment. If the RUG group has changed, the facility must complete a Change of Therapy (COT) OMRA to adjust the reimbursement rate. Again, the upcoming holidays could impact levels of therapy delivered.

Providers should discuss staffing with their therapy provider prior to the holiday season to ensure staff will be available to accommodate resident needs. This may prevent headaches in the days and weeks to come. For more information, contact your BKD advisor or email Lori Brunholtz at lbrunholtz@bkd.com.

Independent hospitals have successfully faced difficult circumstances in the past, but new challenges are pushing the hospital industry onto more difficult footing. Fundamental, long-term industry challenges, including competitive disadvantages in size and scale, limited access to capital and competition for and with physicians, have increased the need for independent hospitals to re-examine their operational and financial strengths and weaknesses. In addition to these historic challenges, the industry also faces sweeping regulatory and third-party reimbursement changes as the focus increases on reducing cost, increasing quality and adjusting to outcomes-based payment structures. Combined, these challenges are contributing to wide-reaching changes in the American health care delivery model.

A Measured Approach

Independent hospitals should develop a proactive, strategic approach to address these challenges. As health care leaders know, an ounce of prevention is worth a pound of cure, but when related to strategic planning in the current environment, the phrase should be “an ounce of proactive planning is worth a pound of reactive effort.” An assessment of the hospital’s current position and strategic objectives is the foundation on which a comprehensive plan to provide health care in the community can be built.

After assessing its current operating and financial condition, the hospital should ask some fundamental questions. Can the hospital’s operations be sustained and enhanced under its current structure? If not, what options are available to the hospital? Some hospital leaders can answer in the affirmative and quickly move on to enhancing the hospital. However, leaders at some hospitals will answer in the negative or with significant question marks, and those leaders should be aware of the broad range of available options. Providing health care under America’s changing delivery model may look different depending on a community’s specific needs and characteristics and those of its hospital. National market and reimbursement forces are encouraging some independent hospitals to explore relationships with other hospitals and health systems.

Available Options

Strategic relationships in the hospital industry are taking a variety of forms, from loose affiliations to acquisitions. However, no relationship is one-size-fits-all. Every hospital has strengths, weaknesses, opportunities and threats. Through the wide range of collaborative relationships and transaction types and a managed negotiation process, many hospitals can reach an agreement addressing weaknesses and using strengths. The following diagram provides an overview of the most widely used organizational structures, along with the degree of control retained by the community and strategic benefit to the hospital.

Choosing to remain unaffiliated provides local control and community-based decision making. However, some unaffiliated hospitals may struggle to manage issues associated with lack of operational and financial scale and scope. Merging with or being acquired by another organization can provide significant operational and financial opportunities, but typically leads to significant loss of independent decision making for independent hospitals. Affiliations, joint operating agreements (JOA) and leases, found near the middle of the diagram, provide opportunity for hospitals to both maintain a measure of independence and gain operational and financial scale and scope.

Affiliations

Affiliations include a range of potential transaction structures, from loose cooperation agreements to virtual mergers. Most loose cooperation agreements are based around operations and patient care and can be unwound by either party at almost any time. Strong affiliation agreements, often cited as virtual mergers, typically build on a base of operations and patient care items to include financial and governance components. There are examples in the marketplace where strong affiliations contained significant financial components, including broader access to capital markets, funds for renovation or expansion, cost savings from shared back-office services and other financially beneficial arrangements. These virtual mergers can include a high degree of clinical integration, and strategic governance is typically collaborative while maintaining overall governing board independence. Financial, work force, material property acquisition and disposition and other broad strategic decisions are often shared by a joint board or by ex-officio board representation among the affiliates’ boards.

Joint Operating Agreements

A JOA typically provides a stronger financial footing for an undercapitalized hospital or a hospital seeking operational resources, while allowing the hospital to retain a separate board of directors and identity. The JOA allows hospitals to coordinate patient care services, financial decisions, construction and the purchase of strategic fixed assets, while allowing the hospitals to maintain some of their own policies. Under a JOA, religious hospitals can gain many of the benefits of a non-religious health care system and still retain their religious association. The converse applies to a community hospital executing a JOA with a religious system. Typically, the stronger of the hospitals or a new joint operating company is charged with operational responsibility, but assets and liabilities continue to be maintained separately, and the hospitals continue to be individually governed.

Leases

Fixed assets and related liabilities are maintained by the lessor under a lease agreement, but strategic governance and operation of the facility is vested in the lessee. Lease agreement negotiation is a critical factor in crafting a positive outcome for the community. Through the negotiation process, the hospital board could negotiate a broad range of items including continued or additional health care services for the community, contracts for key employees, initial staffing level commitments and the transaction price structure. The structure of the lease includes at least the term and lease rate, but might also include the purchase of furniture, fixtures and equipment and working capital, assumption of some assets, liabilities and contracts, a loss-share agreement, a no-shop clause, a right-of-first-refusal clause or a purchase option.

Risk Management & Planning to Succeed

Even as they are influenced by market forces, hospitals must be acutely aware of the risks associated with these strategic moves. Most leaders see the potential pitfalls in a tightly binding agreement, but even loose, informal relationships should be carefully considered because of their potential far-reaching effects. For example, moving to formalize an agreement with one organization could negatively impact a hospital’s relationship with other friendly competitors.

In addition to managing risks, hospitals must focus on planning for success. No strategic move should be taken without proper planning and guidance—this is a clear instance where failing to plan is planning to fail. Assuming the organization has objectively and proactively assessed the opportunities and threats to the hospital and health care in the community, there are three broad steps before moving toward a potential relationship:

1)  Establish goals for the relationship that are specifically identifiable with the hospital’s goals and community needs.

2)  Form a team of board members, executives and experienced outside advisors to guide the process.

3)  Create agreed-upon, phased decision points throughout the process.

Once these steps are complete, the organization can identify a list of potential candidates for a relationship and negotiate an agreement with the most appropriate relationship structure based on the goals of both parties.

While a specific outcome is never assured, a proactive, strategic discussion and approach by community health care leaders is the best option to ensure their community health care needs are met for years to come. For more information about strategic hospital relationships, contact your BKD advisor.

On October 5, 2011, the Department of Health and Human Services Office of Inspector General (OIG) issued its work plan for 2012, which outlines specific focus areas for the OIG next year.

Focus Areas

The 2012 OIG Work Plan includes increased focus on hospital quality measures, “present-on-admission” data, same-day readmissions, payment for outpatient services performed in the 72-hour window of an inpatient admission, hospice and home health care services, billing and payment for durable medical equipment (DME) and the professional component billing of evaluation and management (E/M) services. In addition, there will be renewed interest in whether services billed under the “incident-to” guidelines meet the Centers for Medicare & Medicaid Services (CMS) criteria.

The Medicaid program also will be elevating its audit activities to include focus on home health billed and paid services, hospice billed and paid services, DME, transportation services, i.e., ambulance, and family planning services.

A list of some focus areas by facility, provider and supplier type is provided below.

All Hospitals

• Reliability of hospital-reported quality measures data
• Hospital admissions with conditions coded as “present-on-admission” as well as accuracy of present-on-admission indicators submitted on Medicare claims; although critical access hospitals (CAHs) are not as affected because these facilities are not reimbursed through the DRG system, some state Medicaid programs as well as state Blue Cross Blue Shield insurers reimburse on a DRG system, so CAHs also are responsible for collecting this data
• Medicare inpatient and outpatient payments to acute care hospitals
• Hospital outlier payments and reconciliation of outlier payments
• Hospital claims with high or excessive payments
• Hospital same-day readmissions
• Acute-care inpatient transfers to inpatient hospice care
• Duplicate Graduate Medical Education (GME) payments
• Hospital occupational mix data used to calculate inpatient hospital wage indexes
• IPPS and non-IPPS payments for nonphysician outpatient services, i.e., 72-hour rule

Critical Access Hospitals

• Appropriateness of payments to CAH, i.e., meeting designation criteria and conditions of participation, as well as review of profile variations in size, services and distance from other hospitals

Nursing Facility

• Quality of care, safety of residents and quality of post-acute care
• Review of whether Medicare and/or Medicaid certified nursing homes have implemented compliance plans and whether those plans meet criteria set forth in the OIG compliance program guidelines
• Medicare Part A payments to skilled nursing facilities
• Trends of hospitalizations and repeat hospitalizations of residents
• Questionable billing patterns during non-Part A nursing home stays

Hospice

• Marketing practices and associated financial relationships with nursing facilities
• Inpatient hospice care claims from 2005–2010, specifically inpatient claims and drug claims billed under Part D

Durable Medical Equipment Suppliers

• Payment for replacement DME supplies, home blood glucose testing supplies and effectiveness of contractor edits to prevent payments to multiple suppliers of home glucose testing supplies as well as questionable testing supply billing
• Compliance with the competitive bidding process

Physicians/Medical Practice and Other Services

• Billing for ambulance services
• Compliance with Medicare assignment rules
• Trends of billing for high levels of service or high complexity services resulting in high Part B payments
• Place of service errors, i.e., reporting place of service office instead of hospital outpatient, resulting in inaccurate reimbursement
• Services billed under the incident-to criteria that have been performed by unqualified staff and/or resulted in incorrect billing
• Consistent billing of high E/M service levels without supporting documentation and billing in error for related E/M services within an operative global period
• Payment for Part B imaging services
• Services billed by independent physical therapy providers
• Payment for polysomnography, i.e., sleep studies
• Part B payments for Hemoglobin A1C testing and increased lab service utilization
• Physician-administered drugs and biologicals

Conclusion

The annual OIG Work Plan should be part of your compliance library and should serve as a vital reference for your compliance officer and committee. Compliance officers and committees should evaluate the OIG’s focus areas and consider them as part of an annual risk assessment and development of an annual compliance work plan. This offers the ability to develop internal or external compliance review processes around the focus areas, identify potential areas of risk and develop a course of action related to the evaluation. This can help improve charge capture and billing processes, facilitate staff education and improve the overall compliance program.

For more information on the 2012 Work Plan, contact your BKD advisor or email Joe Watt at jwatt@bkd.com.

The final rule for changes to the hospital inpatient acute care prospective payment system (PPS) for federal fiscal year 2012 was released by the Centers for Medicare & Medicaid Services (CMS) in early August. This release included two changes related to the amount of defined benefit pension costs a hospital is allowed to claim on its Medicare cost report. One of the changes relates to calculating allowable pension costs claimed on a PPS hospital’s wage index. BKD released an Insights article in September that examined this aspect in depth.

The second change relates to the calculation of allowable pension costs for cost-finding purposes. Two different methodologies are necessary to appropriately address the goal of each. The wage index is used to measure a hospital’s labor costs across areas, while cost-finding procedures determine the actual costs incurred at individual hospitals. The current maximum amount of defined benefit pension costs claimed for cost-finding purposes, as detailed in Section 2142.5 of the Provider Reimbursement Manual (PRM), is based on actuarial accrued liability, normal costs and unfunded actuarial liability. To be allowable, costs must be computed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The current period liability for pension cost also must be funded. Finally, funding in excess of a current period liability can be carried forward and recognized in a future period.

Under the Pension Protection Act of 2006 amendments made to ERISA, there is no longer a standard actuarial cost basis used by all types of plans. Therefore, changes have been made in calculating allowable defined benefit pension costs. These changes will be effective for cost-reporting periods beginning on and after
October 1, 2011.

The final rules state a provider’s pension cost for cost-finding purposes will be the sum of cash basis contribution deposits (which must be made within the current cost-reporting period and not reflected as a pension cost for a prior cost-reporting period) and any carryforward contributions. This total cost is subject to a limitation. To determine the limitation amount, providers need to calculate their average pension contributions for the three highest consecutive cost-reporting periods out of the five most recent cost-reporting periods. This average, multiplied by 150 percent, becomes a provider’s pension cost limitation for the current cost-reporting period.

If a provider has a newly adopted plan, the three-year and five-year periods described above will be limited to the number of cost-reporting periods the defined benefit pension plan has been in place. There is a provision within the final policy allowing providers exceeding the 150 percent limit to submit documentation showing that all or a portion of the excess amount is reasonable and necessary and should be reported in the current period as allowable pension costs.

Any pension contributions in excess of the amount reported in the current period can be carried forward to be reported in a subsequent cost-reporting period, again subject to the 150 percent limitation. CMS encourages providers to establish a carryforward balance to account for contributions (on a cash basis) made prior to the effective date of this change that were not reported as pension costs in a prior period. This balance should be updated annually to reflect changes and to lessen the chances for duplication of recognized contributions. Finally, CMS states it is the providers’ responsibility to document and maintain, for audit purposes, the data used to establish the carryforward balance and any changes to that balance.

As a result of this new policy, Section 2305 of the PRM-I, liquidation of liabilities provision, will be changed to exclude qualified defined benefit pension plan costs. This provision will continue to apply only to contributions made to liquidate pension costs for cost-reporting periods prior to the change in policy.

CMS has established a FY 2012 Final Rule Home Page where the final rule and related data files are available for download.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) has made some very restrictive interpretations of what costs are eligible for electronic health records (EHR) incentive payments for critical access hospitals (CAHs). These interpretations could seriously limit CAH options for obtaining, financing and paying for a viable EHR system and limit the incentive payments Medicare will pay.

The problems revolve around the language in Section 1814(l)(3)(C) of the Social Security Act. This section describes EHR costs as cost “for the purchase of certified EHR technology to which purchase depreciation (excluding interest) would apply” if payment was made under normal CAH payment rules. CMS is using a very literal definition of “purchase” and “EHR technology.”

To be allowed for the incentive payment, per CMS, a CAH must buy the asset. It cannot be leased, as noted in the FAQ on CMS’ EHR webpage. Even a capital lease will not make the asset eligible for the incentive payment. This severely limits a CAH’s options for financing the technology needed to implement an EHR system. Many CAHs will be forced to use less favorable financing options and incur additional interest expense—which would not be eligible for the incentive payment—to acquire the needed assets.

CMS also is limiting the cost of the EHR asset to the purchase price of the asset itself. Items such as installation, shipping, equipment testing, building modifications needed to accommodate the new equipment and any other cost normally capitalized under generally accepted accounting principles as part of the asset will not qualify as an EHR cost.

The CMS interpretation of what qualifies as cost for incentive payment is extremely restrictive. To become a meaningful user, a hospital must incur a large amount of cost to implement and maintain a certified EHR system. For a CAH, however, CMS will not pay an incentive on the cost the hospital must incur to make the system functional. All of these CMS interpretations mean it will be paying the incentive bonus on just a small fraction of the cost of implementing an EHR system in a CAH. This will leave many CAHs struggling to figure out how to pay for the system.

Discussions with CMS on its interpretation are ongoing with several organizations, although CMS has not changed its position.

Contact your BKD advisor for guidance on how your hospital might be affected by this CMS interpretation and to discuss possible options for limiting the impact. We also encourage you to contact your local hospital association and let that group know how this matter will affect your EHR allowable capital asset amounts.

The U.S. Department of Defense (DOD) is attempting to reduce active military and veteran health care costs by reducing reimbursement to sole community hospitals (SCHs) for inpatient services provided to TRICARE beneficiaries. The reduction comes by way of changes to the reimbursement methodology—which currently comprises a negotiated rate for network providers or billed charges for non-network providers—and is projected to save DOD more than $200 million annually once fully implemented.

Negotiated rates at network providers and billed charges for non-network providers are generally greater than the Medicare diagnosis-related group (DRG) rate, resulting in significantly higher payments to SCHs than what Medicare pays for equivalent care. The goal of the July 5 proposed rule is to transition TRICARE reimbursement to a methodology consistent with Medicare reimbursement to SCHs. These changes are applicable to all SCHs as defined by Medicare, except for Maryland hospitals paid by Medicare and TRICARE under a cost containment waiver.

Medicare reimburses SCHs for inpatient care at the greater of the Medicare DRG for all Medicare discharges, or the amount the SCH would have been paid if it were paid the average cost per discharge at that SCH in fiscal years 1982, 1987, 1992, 1996 or 2006, updated to the current year, for all Medicare discharges. DOD noted, however, that establishing a methodology exactly like Medicare is not practical. While the aggregate DRG reimbursement for all TRICARE discharges can be calculated, using the Medicare cost per discharge would not be appropriate for TRICARE because of differences in the TRICARE and Medicare beneficiary case mix. Also, applying an annual update to a TRICARE base-year average doesn’t make sense because of the relatively low number of TRICARE discharges in any given year—fewer than 20 at nearly half of SCHs. The average cost per discharge in any one year may not be a good measure of the average cost in future years.

As a result, DOD determined the most appropriate methodology will be to pay SCHs the greater of what the SCH would have been paid under the DRG method for all TRICARE discharges or an amount equal to the SCH’s specific cost-to-charge ratio (CCR), multiplied by the SCH’s billed charges for TRICARE services. To reduce the effect in any one year, the new methodology will be phased in, with a maximum 15 percent annual reduction allowed for non-network SCHs and 10 percent annual reduction allowed for network SCHs. For example, if a network SCH currently had a TRICARE allowed-to-billed ratio of 100 percent, that SCH would be paid 90 percent in Year One, 80 percent in Year Two, 70 percent in Year Three and so on, until it reaches the SCH’s CCR.

Final settlement of TRICARE claims will occur through submission of an annual cost report. New SCHs will be paid using the average CCR for all SCHs calculated in the most recent year until they file a Medicare cost report. SCHs with no previous inpatient TRICARE claims will be paid based on their Medicare CCR.

DOD anticipates the first-year impact of this change will result in a $31 million reduction of payments to SCHs. The change in reimbursement methodology is expected to take effect for discharges in federal fiscal year 2012, though the final rule has not been issued.

For assistance in measuring the impact of this change on your SCH, contact your BKD advisor.

On August 1, 2011, the Centers for Medicare & Medicaid Services (CMS) published the final rule for changes to the hospital acute care prospective payment system (PPS) for federal fiscal year (FY) 2012. As was discussed in a prior BKD article on this topic, CMS included several changes affecting the hospital wage index computation for FY 2013.

One of the more significant wage index changes is the changing of methodology in computing allowable pension cost. Currently, the Provider Reimbursement Manual (PRM) defines maximum allowable pension costs as those requiring pension costs that must be funded to be allowable; that excess funding can be carried forward for recognition in a subsequent period. PRM currently requires allowable pension cost to be determined according to the Employee Retirement Income Security Act of 1974 (ERISA), even if the hospital is not subject to ERISA. However, recent regulatory changes to ERISA resulted in a lack of standard actuarial basis used by ERISA and non-ERISA plans.

Under the new methodology, allowable pension cost will not rely on the plan’s actuarial computation, but compute cost based on historical cash contributions. CMS decided not to follow general accepted accounting principles (GAAP) for determining allowable pension expense, citing different versions of GAAP as well as GAAP’s uncertain future.

With the new rules, allowable pension costs will equal the three-year average of contributions made to the pension plan. CMS believes this three-year average will add stability to allowable wage-related costs. For example, the FY 2013 wage index will be based on cost reporting periods that began in FY 2009. The new methodology requires not only pension plan contribution data for the existing base cost reporting year (FY 2009), but also contributions data for FY 2008 and FY 2010 cost reporting periods to determine the three-year average that will be used to determine allowable pension cost for the FY 2013 wage index. It is important to note this is only a change for wage index purposes; allowable costs for the annual Medicare cost report will be computed using separate rules. It is also important to note, although it is solely hospital data used to calculate this wage index, most other Medicare payment systems, including outpatient PPS, inpatient rehab and psychiatric, skilled nursing facilities and home health, use the same wage index.

As a result of the public comment period, CMS is developing a transition policy permitting a hospital to determine a “prefunding balance” based on pension contributions made but not reflected in the wage index. The transition policy will allow hospitals to establish a prefunding balance equal to (A) minus (B), where (A) equals the sum of cash contributions made during a period of consecutive cost reporting periods no earlier than October 1, 2002 (the cost reporting period applicable for the FY 2007 wage index), and ending with the cost reporting period applicable for the FY 2012 wage index, and (B) is the sum of pension costs actually reflected in the wage index for the same cost reporting periods. The transition policy will allow 10 percent of the prefunding balance to be included in allowable cost, starting with the FY 2013 wage index and ending with the FY 2022 wage index.

CMS has established a FY 2012 final rule home page, where the final rule and related data files are available for download.

If you have additional questions or would like more information on these matters, contact your BKD advisor.

Long-Term Care M&A Activity Accelerates

With consecutive increases in transaction volume each of the last six quarters, long-term care (LTC) mergers and acquisitions (M&A) volume has been on a torrid pace following the 40-transaction jolt in fourth quarter 2009. This accelerated deal volume can be traced to a number of factors affecting buyers and sellers.

What’s driving sellers:

• Increased regulation and reimbursement pressures
• Uncertainty about future reimbursement
• Aging facilities needing major renovations or replacement
• Improving valuations
• Beginning wave of baby boomer owners nearing retirement age

What’s driving buyers:

• The need to spread overhead costs due to regulatory and reimbursement changes
• Availability of cheap financing
• The impending wave of baby boomers needing future care

As the graphs below illustrate, after 110 transactions in 2010, there have already been 74 reported through the first half of 2011. Deal volume for this period topped deal volume for the same period in 2010 by an eye-popping 57 percent. Even with a relatively conservative second half of 2011, we could still see a greater number of transactions this year than during the last LTC M&A peak in 2007.

Source:  Irving Levin Associates, Inc.

With the Centers for Medicare & Medicaid Services (CMS) recently announcing plans to cut skilled nursing facility (SNF) Medicare payments by 11.1 percent and continued uncertainty with federal and state budgets, coupled with the Federal Reserve’s recent pledge to keep interest rates low at least into 2013 and the fact that people and facilities continue to age, the same factors driving today’s market should continue to drive LTC M&A activity for the foreseeable future.

Public Comparables

Note:  LTM=Last Twelve Months; EV=Enterprise Value; EBITDAR=Earnings Before Interest, Taxes, Depreciation, Amortization and Rent

Historical Transaction Cap Rates

After average valuations for SNFs increased 30 basis points in the second quarter of 2010, they remained relatively flat through the rest of the year. Although the first quarter of 2011 saw a slight decrease in average valuations, with cap rates hitting 13.3 percent, data for the second quarter of 2011 is expected to show a slight correction to lower cap rates in the 13 percent range.

After the assisted living and independent living sectors gained 70 basis points and 100 basis points, respectively, from the second quarter of 2010 to the fourth quarter of 2010, they have leveled off a bit. These sectors should at least hold these gains over the next few quarters, with continued improvement more likely coming from the independent living sector.

Source: NIC – Seniors Housing & Care Industry

Recent Select Transactions

Skilled Nursing

• July 2011 – A private investor purchased a 107-bed SNF from a Catholic not-for-profit provider in Illinois for $6.1 million, or $57,000 per bed. Built in 1972, the facility had a 75 percent occupancy rate and annual revenues of $5.9 million.
• May 2011 – An undisclosed buyer purchased a 140-bed Illinois SNF for approximately $6.1 million. The facility was built in 1975 and had an 80 percent occupancy rate. The pro forma cap rate for the transaction was between 12 percent and 13 percent.
• May 2011 – A regional operator acquired a 74-bed Kansas nursing facility for approximately $1.3 million, or $17,500 per bed. The facility comprises 55 skilled beds and 19 residential care beds and was originally built in 1963, with a number of renovations and additions through the years. The facility had revenues and EBITDA of approximately $2.7 million and $180,000, respectively, representing a cap rate of 13.9 percent.
• April 2011 – A St. Louis, Missouri-based regional operator purchased a 96-bed Missouri SNF for approximately $5.5 million, or $57,000 per bed. The facility was nearly 25 years old and had a 90 percent occupancy rate. With $683,000 in EBITDA on $4.5 million in revenue, the cap rate was 12.5 percent.

Assisted/Independent Living

• July 2011 – Bickford Senior Living teamed up with Harrison Street Real Estate Capital to purchase a portfolio of six assisted living facilities in Illinois, Iowa, Nebraska and Missouri. The portfolio included 342 total units and was purchased for approximately $62.5 million, or $183,000 per unit.
• June 2011 – A local operator sold a 42-unit assisted living facility in Ohio to an undisclosed regional operator for approximately $4.4 million, or just more than $104,000 per unit. This facility was operating at 100 percent occupancy and, based on EBITDA of $377,000, yielded a cap rate of 8.6 percent.
• May 2011 – Four assisted/independent living facilities (419 total units) were purchased in Utah by MBK Senior Living for approximately $76.2 million, or approximately $182,000 per unit. Occupancy rates averaged 85 percent, and the cap rate was estimated at slightly less than 8 percent.
• May 2011 – Five Star Quality Care announced the acquisition of six senior living communities in Indiana. The facilities were approximately eight to 12 years old and included 525 assisted living units, 191 independent living units and 22 Alzheimer’s units. The private seller will receive approximately $123 million, or $166,667 per unit, with the cap rate believed to be around 8 percent.
• May 2011 – Senior Living Management sold an 89-unit assisted living facility in Georgia to Wakefield Capital and Bluerock Real Estate for $15.5 million. Based on estimated revenues and EBITDA of $3.73 million and $1.47 million, respectively, the cap rate for this transaction came in at 9.5 percent. The facility was built in 1997 and had a 94 percent occupancy rate.

Source:  Irving Levin Associates, Inc.

For more information on this market update or related matters, please consult your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including health care, financial institutions, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

The Centers for Medicare & Medicaid Services (CMS) issued proposed rules to update the End-Stage Renal Disease (ESRD) prospective payment rates and quality incentive program (QIP) and ambulance fee schedules, as well as proposed changes to the definition of Durable Medical Equipment (DME).

CMS projects payment rates for dialysis treatments will increase by 1.8 percent, representing a projected inflation (or ESRD market basket) increase of 3 percent, less a projected productivity adjustment of 1.2 percent as required by statute, effective for dialysis treatments furnished for calendar year 2012.

The final rule on the ESRD QIP was published January 5, 2011. It outlines the initial quality measures and policies under which providers or facilities that did not meet or exceed a total performance score of 26 points would have payments reduced by 0.5 percent to 2 percent for payment year 2012.

The proposed new ESRD QIP requirements would affect the PY 2013 and PY 2014 program years. Along with proposing changes to the existing performance measures for PY 2013, CMS proposes eight measures for PY 2014, to continue its effort to determine whether patients with ESRD are receiving high-quality care:

1. Anemia Management Measure (Hemoglobin Greater Than 12 g/dL)
2. Kt/V Dialysis Adequacy Measure
3. Vascular Access Type Measure
4. Vascular Access Infections Measure
5. Standardized Hospitalization Ratio—Admissions Measure
6. National Healthcare Safety Network (NHSN) Dialysis Event Reporting Measure
7. Patient Experience of Care Survey Usage Measure
8. Mineral Metabolism Reporting Measure

The proposed rule also includes two proposals for scoring a facility’s performance under the ESRD QIP. One relates to the two-measure framework proposed for PY 2013, while the second outlines how CMS would score facilities under the eight-measure program proposed for PY 2014. The proposed PY 2013 scoring methodology would more closely align the ESRD QIP with the scoring methodology adopted for the Medicare Hospital Inpatient Value-Based Purchasing Program. This would make it easier to adopt new measures and reward facilities not only for delivering high-quality care, but also for improving the standard of care they deliver over time.

The proposed rule includes clarifications to the Low-Volume Adjustment Policy under ESRD PPS. To receive the low-volume adjustment, an ESRD facility would need to provide attestation to its fiscal intermediary or Medicare Administrative Contractor (FI/MAC) that it has met the criteria to qualify as a low-volume facility prior to November 1 of each year. The FI/MAC would verify the ESRD facility’s low-volume attestation for the three consecutive years preceding the payment year, using the ESRD facility’s most recent final-settled or as-filed 12-month cost reports. If the FI/MAC does not receive an ESRD facility’s attestation that the facility is eligible for the low-volume adjustment on or before November 1 prior to the payment year, the facility would not receive the adjustment for that payment year.

Lastly, the proposed rule included items not related to ESRD or QIP. These items include a proposal to conform the regulations to agree to the Medicare and Medicaid Extenders Act of 2010 on a one-year extension of certain payment rate increases for both ground and air ambulance services until January 1, 2012. There also is a proposed three-year minimum lifetime for equipment to be considered durable for purposes of payment under the durable medical equipment benefit category. CMS also continues to analyze recommendations on how to improve the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program, since CMS did not include any changes in this proposed rule.

CMS will accept comments on the proposed rule until August 30, 2011, and respond to them in a final rule to be issued by November 1, 2011.

For more information on these proposed rules, contact your BKD advisor.

Have you received notification from your Medicare Administrative Contractor (MAC) to revalidate your Medicare enrollment information? If not, be prepared for it.

Section 6401(a) of the Patient Protection and Affordable Care Act requires all enrolled providers and suppliers to revalidate their enrollment information under new enrollment screening criteria. This revalidation effort applies to providers and suppliers enrolled prior to March 25, 2011. Newly enrolled providers and suppliers submitting enrollment applications to the Centers for Medicare & Medicaid Services (CMS) on or after March 25, 2011, are not affected. Between now and March 23, 2013, MACs will regularly send out notices to begin the revalidation process for each provider and supplier.

Providers and suppliers should submit revalidation only after receiving the request from their MAC to do so. Providers and suppliers will have 60 days from the date of the letter to submit the required completed enrollment forms. Failure to submit enrollment forms as requested may result in the deactivation of Medicare billing privileges. Revalidation can be completed through the Internet-based Provider Enrollment Chain and Ownership System (PECOS) or a paper application; currently, federally qualified health centers only may submit paper enrollment applications. Please note: CMS forms 855A, 855B, 855I, 855O, 855R and 855S all have been revised as of July 1, 2011, and should be used for the provider enrollment revalidation. The new forms can be found by searching “855” on the CMS website.

When you receive notification from your MAC to revalidate, you will need to complete the following steps:

• Update your enrollment through Internet-based PECOS or complete the appropriate CMS 855 paper application.
• Sign the certification statement on the application.
• Submit an enrollment fee ($505 for federal fiscal year 2011) via http://www.pay.gov.
  • On the pay.gov website, enter “CMS” into the field under “Search Public Forms.” Click “Go,” and then click the “CMS Medicare Application Fee” link.
  • The enrollment fee is imposed on institutional providers that are newly enrolling, re-enrolling/re-validating or adding a new practice location; the fee only applies to applications received on or after March 25, 2011.
  • Physicians, non-physician practitioners, physician group practices and non-physician group practices (unless enrolling as a DMEPOS supplier) are not subject to the enrollment fee.
  • Payments may be submitted by electronic check or debit/credit card.
  • Fees for future years will be adjusted by the percentage change in the consumer price index (for all urban consumers) for the 12-month period ending on June 30 of the prior year.
  • If necessary, a request for a hardship exception to the application fee can be made.
• Mail the form, supporting documents and certification statement to your MAC.
  • If using PECOS, enrollment forms are not required to be mailed to your MAC, but the certification statement and other supporting documents are required.
  • Providers and suppliers are strongly encouraged to submit a copy of their pay.gov receipt with their application. This enables the contractor to more quickly verify that payment has been made.

Additional details related to Medicare provider enrollment revalidation can be found in this CMS MLN Matters article and the Federal Register.

If you need further guidance or assistance, please contact your BKD advisor or Rebekah Wallace at rwallace@bkd.com.

On July 29, 2011, the Centers for Medicare & Medicaid Services (CMS) issued its final rule for federal fiscal year 2012 to update payment rates under the prospective payment system (PPS) for skilled nursing facilities (SNFs). The following are highlights of the final rule.

Payment Rate Updates

The most significant element of the final rule relates to cuts in payment rates for FY 2012, which CMS projects to be an overall net reduction of $3.87 billion, or approximately 11.1 percent. The cuts are only applicable to RUG rates paid for rehabilitation services, equating to a decrease of roughly $70 per patient day on average. Considerations in the net reduction in payment rates include the following:

• Effective October 1, 2011, all rate categories will be updated for the full market basket increase of 2.7 percent, less a 1 percent productivity adjustment required by Section 3401(b) of the Patient Protection and Affordable Care Act (ACA), for a net increase of 1.7 percent, or approximately $600 million. There was no “forecast error” correction for FY 2012 relating to the difference between forecasted and actual market basket increases.
• The biggest component of the rate adjustments pertains to the recalibration of nursing case-mix indexes in the therapy RUG categories so that they “more accurately reflect parity in expenditures between RUG-IV and the previous case-mix classification system” (RUG-III). The result of this recalibration is a projected reduction in Medicare Part A payments to SNFs of 12.6 percent, or approximately $4.47 billion, before offsetting the increase for market basket mentioned above.
• This is CMS’ attempt to adjust for unanticipated increases in payments to SNFs resulting from the transition from MDS 2.0 and RUG-III to MDS 3.0 and RUG-IV, which occurred October 1, 2010. The FY 2011 change in assessment and payment systems was intended to be budget-neutral. Unfortunately, CMS rejected suggestions by industry associations and others to phase in payment rate reductions in lieu of implementing such a significant hit in one year.
• The 128 percent per diem rate add-on for SNF AIDS patients remains in effect for FY2012.
• CMS will continue using the inpatient hospital wage index to adjust the labor-related portion of federal rates and continue to apply the alternative urban and rural methodologies for geographic areas with no hospitals.
• SNF PPS rates and wage indices contained in the final rule apply to free-standing SNFs, rural swing-bed hospitals and hospital-based skilled nursing units. However, critical access hospitals will continue to be paid on a reasonable cost basis for SNF services furnished under a swing-bed agreement.

Group Therapy

CMS feels the current method of reporting group therapy minutes creates an inappropriate payment incentive to perform group therapy instead of providing one-on-one individual therapy, because group therapy time is currently not required to be allocated among patients participating in a group session. To compensate for anticipated increases in group therapy utilization, CMS has modified its definition of group therapy, which is now defined as therapy provided simultaneously to four patients performing similar therapy activities. In addition, the final rule requires group therapy minutes to be allocated among four group therapy participants, regardless of the actual number of patients participating in group therapy.

SNFs will continue to report the total unallocated group therapy minutes on the MDS 3.0 for each patient; however, for RUG classification, the individual’s group therapy time will be divided by four and added together with individual therapy minutes along with any allocated concurrent therapy minutes to determine total reimbursable therapy time. Group therapy continues to be limited to 25 percent of total therapy provided.

MDS 3.0 Assessment & OMRA Changes

In the final rule, CMS made several changes to the assessment process, including changing the acceptable time frame for completing assessments as well as creating new Other Medicare Required Assessments (OMRAs). Details of these changes and clarifications effective October 1, 2011, include the following:

• CMS will shorten the assessment reference date (ARD) windows and reduce the number of available grace days for the 14-day through the 90-day MDS assessment types. The table below recaps the MDS 3.0 assessment schedules:

• CMS  reiterated in the final rule an End of Therapy (EOT) OMRA must be completed once therapy services cease or were missed for three consecutive days, regardless of the reason and regardless of whether therapy services are available and offered by the SNF five days per week or seven days per week.
• The final rule creates an End of Therapy Resumption (EOT-R) OMRA. This OMRA can be used in lieu of a Start of Therapy OMRA in cases where therapy ceases and an EOT OMRA was completed, but therapy subsequently resumes within five consecutive calendar days at the same RUG classification in effect prior to the EOT OMRA. Completing the optional EOT-R eliminates the requirement for the therapist to perform a new evaluation or establish a new plan of care if the resident resumes treatment at the previous level.
• CMS also has created a new Change of Therapy (COT) OMRA, required for patients in a therapy RUG classification where the intensity of therapy changes to the extent that the recent assessment’s RUG classification no longer accurately reflects the patient’s clinical condition and intensity of therapy services. The ARD of the COT OMRA would be set for Day Seven of a COT observation period, a successive seven-day window beginning on the day following the ARD set for the most recent scheduled or unscheduled PPS assessment (or beginning the day therapy resumes in cases where an EOT-R OMRA is completed), and ending every seven calendar days thereafter. This will require providers to monitor the amount of therapy delivered and the minutes allowed to be counted toward the thresholds that determine RUG categories on a rolling seven-day window beginning the day after the ARD of the most recent PPS assessment to look for changes. CMS says a COT OMRA also is required in cases where a therapy discipline is discontinued and results in a patient no longer meeting the required number of disciplines for the current RUG category, as well as in cases where the required number of therapy days for classification in a particular RUG category has changed. A COT OMRA also would be required where changes in therapy services would result in a change in rehab RUG category, even if the patient is classified into a non-rehab RUG category due to index maximization. Note that a COT OMRA is required not only when the amount of therapy decreases to a lower RUG level but also when therapy increases to a potentially higher RUG level.

Other

Beginning in FY 2012, CMS removes the requirement that a therapy student in an SNF setting must be under the “line-of-sight” supervision of the professional therapist. Instead, CMS indicated “each SNF would determine for itself the appropriate manner of supervision of therapy students consistent with applicable state and local laws and practice standards.” However, CMS says such students must be qualified based on specific guidelines, adding the supervising therapist should have ultimate authority to determine whether the student can adequately treat patients without line-of-sight supervision. CMS also clarified, for the purpose of billing, the therapy student is treated as simply an extension of the supervising therapist rather than being counted as an additional practitioner—adding this policy change would not change the manner in which therapy minutes currently are recorded on the MDS or cause the student’s time to become separately billable.

CMS indicated a separate final rule—addressing revisions to reporting requirements SNFs must disclose at time of enrollment or when any change in ownership occurs, in accordance with ACA Section 6101—will be published in early 2012.

Effective October 1, 2011, the drug Treanda will be excluded from consolidated billing requirements.

While many aspects of the final rule, including the significant payment reduction, do not come as welcome news to skilled nursing providers, facility staff must be well-trained on the rule’s components, including changes to the assessment completion window, the additional required and optional assessments and changes in group therapy minutes, to minimize further payment reductions.

For more information on how these rules might affect your organization, contact your BKD advisor.

BKD will be hosting a webinar, “Potential Effects of the SNF PPS Final Rule,” on August 24. Click here for more information or to register.

On July 19, 2011, the Centers for Medicare & Medicaid Services (CMS) published the Calendar Year 2012 Physician Fee Schedule (PFS) proposed rule.

While the proposed rule includes significant changes, it does not address changing the methodology in place for updating the PFS conversion factor. Earlier this year, CMS estimated the CY2012 conversion factor (and thus Medicare-allowable reimbursement under the PFS) will be reduced by 29.5 percent effective January 1, 2012, under existing regulations, due in large part to existing Sustainable Growth Rate provisions. While some lawmakers have indicated a desire to change this methodology—and historically have temporarily limited its effects—this remains a fluid situation not clarified by the proposed rule.

Highlights of the proposed rule include updates to Relative Value Units, Geographic Practice Cost Indices, the Physician Quality Reporting System and the Electronic Prescribing Incentive Program. Many of the updates are budget neutral to the Medicare program by mandate, meaning their financial effect will likely be a change in reimbursement levels between provider specialties.

Relative Value Unit (RVU) Updates

• Updates various RVU weights, including:
  • Increases for procedures typically involving moderate sedation performed in a non-facility setting
  • Reductions for certain group education and therapy codes
  • Increases for malpractice RVU weights of certain cardiothoracic procedures
• Further clarifies incorrectly valued code initiatives endorsed by the Patient Protection and Affordable Care Act, including elimination of the formal five-year reviews of work and practice expense RVUs, which are now included in the annual update process
• Clarifies process for code review requests submission and identification of codes being reviewed in CY2012
• Updates handling of multiple procedure payment reductions, including expansion of reductions into the professional component of advanced imaging services, and proposals to expand reductions into other imaging and diagnostic modalities in the future

Geographic Practice Cost Indices (GPCI) Updates

• Allows floor for Physician Work GPCI of 1.0 to expire January 1, 2012 (except for Alaska, Hawaii and “frontier” states)
• Expands geographic adjustment effect on Practice Expense GPCI
• Implements the second transition year for the sixth GPCI update changes
• Continues study but does not change GPCI localities
• Reweights from Physician Work component to Practice Expense component

Physician Quality Reporting System (PQRS) & Electronic Prescribing Incentive (eRx) Program Updates

• Changes definition of group practice allowed to report using the Group Practice Reporting Option (GPRO) to groups with at least 25 providers billing under one taxpayer identification number (from two-provider minimum in CY2011)
• Clarifies process to become qualified to use GPRO
• Expands reporting options required to report over a 12-month period as opposed to the current six-month period
• Reaffirms CMS plans allowing option to report through current three methodologies (claims-based, registry-based and EHR-based) in future
• Clarifies requirements to become qualified registry
• Defines core and individual quality measures along with various quality measures included in measures groups to be reported under the PQRS program in CY2012
• Defines PQRS quality measures required to be reported under GPRO for CY2012
• Clarifies requirements for earning 0.5 percent PQRS incentive payment for reporting in relation to maintenance of certification requirements, in addition to meeting PQRS reporting requirements
• Clarifies requirements associated with eRx Program and implements payment incentive levels for successful participation, as well as payment penalties (for first time) for non-participation as defined in earlier rulemaking
• Expands hardship criteria and defines process to submit hardship requests to CMS to avoid payment penalties under the eRx Program

Other Medicare Part B/PFS Updates

• Updates and clarifies Telehealth billing and payment policies, including inclusion of smoking cessation and emergency room consultation codes, and clarification of documentation submitted to request CMS review of other related changes
• Updates and clarifies drug payments under Medicare Part B involving effect of relationships between average sales price, widely available market price and average manufacturer price
• Continues budget neutrality reductions for certain chiropractic procedures
• Eliminates technical component billing from independent laboratories for pathology services furnished to a hospital inpatient or outpatient, effective January 1, 2012
• Updates Annual Wellness Visit rules to require inclusion of a Health Risk Assessment (HRA) and defines HRA requirements
• Establishes a PQRS-Medicare EHR Incentive Pilot program to integrate PQRS reporting with required quality measures to achieve EHR incentive payments
• Discusses future plans for physician feedback reporting and associated value-based payment initiative, similar to the PPS Hospital Value-Based program; baseline periods for such a system will likely commence in CY2013
• Clarifies certain aspects of the Three-Day Payment Window policy including handling of services performed by wholly owned or wholly operated physician practices of a hospital provider

The comment period for the proposed rule closes on August 30, 2011.

The estimated effect of the proposed changes (excluding the potential 29.5 percent conversion factor reduction) varies widely by specialty, with maximum estimated effect ranging from -9 percent for radiation therapy centers to 5 percent for nurse anesthetists and physical/occupational therapy. In addition, GPCI methodology changes could have significant effects on reimbursement levels between geographic areas. Providers should analyze the effects of these changes on their historical activity to better understand potential reimbursement effects for CY2012.

If you have questions about this or other PFS issues, contact your BKD advisor.

The debt limit crisis was resolved with the enactment of the Budget Control Act of 2011.  The good news for Medicare providers is there are no immediate cuts to provider payment.  In a best-case scenario, there may not be any in the longer term, either, but the bad news is such cuts are more likely than not to occur.

The new law mandates more than $900 billion in reductions over 10 years to discretionary spending. While these reductions do not affect either Medicare or Medicaid, which are entitlement—i.e., non-discretionary—outlays, health care providers may be indirectly affected. For example, the Medicare contractor budget is subject to the annual discretionary appropriations process, as are grants for the National Institutes of Health and the research budget for Centers for Medicare & Medicaid Services.

Most importantly, unless certain events occur between now and year-end, Medicare (but not Medicaid) providers may be subject to across-the-board payment reductions of up to 2 percent, starting in 2013. These reductions, called “sequesters,” would work very similarly to those in effect in the 1980s, pursuant to the Gramm-Rudman-Hollings Act.

A sequester can be avoided three ways, two of which are created by this new law.[i] The first, passage by Congress of a balanced budget amendment to the U.S. Constitution, is considered highly unlikely to occur. (The new law requires a vote in both houses of Congress by year-end.)

The second way sequesters can be avoided is pursuant to a special legislative process to take place between Thanksgiving and Christmas this year. The new law creates a special congressional joint committee. If the joint committee’s report passes both houses of Congress through expedited consideration and is signed by the president, sequester will be avoided.

The joint committee legislation must reduce the deficit by $1.5 trillion through some combination of budget cuts and revenue enhancements; nothing is off the table. On the other hand, no particular category of government spending must be included. In other words, a legislative free-for-all is on the horizon.

Joint committees are not unusual; for example, there has been a Joint Committee on Taxation for many years. What is unique about this joint committee is its real legislative power; it can vote out a massive piece of legislation, rather than merely holding hearings or issuing reports.

A joint committee, by definition, is bicameral, so identical bill language will go to the floors of both houses.[ii] As noted above, a “fast-track” process is mandated for consideration in both houses. Importantly, this bill cannot be filibustered in the Senate.

The committee members will be appointed by the majority and minority leadership in both houses. Each of the four party leaders will pick three from his or her caucus, meaning 12 members are to be named.[iii] Since seven votes are required to vote out a bill, at least one committee member will have to agree to cross party lines. Whether that will occur is the great unknown.

Sequesters could happen at many points. If the committee fails to report out a bill, sequesters are mandated. If a bill makes it out of this committee but is defeated on a floor vote, sequesters are triggered. If the bill passes Congress but is vetoed by the president, sequesters are in order.[iv]

Providers should know the current expectation is that Medicare will bear the brunt of some of the cuts, as will Medicaid. Indirect medical education and graduate medical education programs will certainly be scrutinized, as will bad debts. The special treatment of critical access hospitals, Medicare dependent hospitals and sole community hospitals likewise is in the crosshairs. Medicaid provider tax schemes have long been a target and will be again.

By the way, Congress also must deal with the so-called “doc fix” by year-end. It is not clear whether this will happen in separate legislation or as part of this special process.

In short, it is going to be a very busy and interesting autumn in the nation’s capital.

[i] The third way is for the Congress, pursuant to regular order, to pass legislation saving $1.5 trillion before the sequestration takes place on 1/2/13.

[ii] A specific timetable has been established by the new law.

[iii] Committee members must be named by August 16.

[iv] Of course, Congress retains its constitutional prerogative to override a veto. Also, as noted in footnote No. 1, Congress could pass separate legislation that achieves the savings.

Recently issued IRS Notice 2011-52 addresses community health needs assessment (CHNA) requirements added to the Internal Revenue Code by the Patient Protection and Affordable Care Act (ACA). While CHNA requirements are not effective until tax years beginning after March 23, 2012, the IRS is issuing guidance for hospital organizations wishing to start the process now.  Guidelines in the notice refer to any CHNA made widely available to the public and any implementation strategy adopted on or before a date six months after the IRS issues further guidance. The IRS also is requesting comments regarding its intent in applying the CHNA rules.

Notice 2011-52 addresses CHNA requirements under IRC Section 501(r)(3). These requirements apply to hospital organizations operating a state-licensed hospital facility and any other organizations the Secretary determines have the provision of hospital care as their principal function or purpose giving the basis for their exemption under IRC Section 501(c)(3). Until future guidance is issued, the notice says only organizations operating state-licensed hospital facilities will be considered “hospital organizations” and need to meet the CHNA requirements. In addition, the IRS intends to apply the requirements under IRC 501(r)(3) to any 501(c)(3) organization that operates a state-licensed hospital through a disregarded entity, joint venture, limited liability company or other entity treated as a partnership for federal income tax purposes. Based on this expanded applicability, the IRS is requesting comments regarding the CHNA requirements for an organization with a small ownership interest (other than a general partnership interest) in an entity treated as a partnership for federal tax purposes operating a hospital facility.

The IRS intends to apply the 501(r) requirements to all hospital organizations described under 501(c)(3), including government hospitals with dual-exempt status under Section 115. The IRS is requesting comments on alternative methods for government hospitals to satisfy the 501(r)(3) requirements.

Hospital organizations with multiple hospital facilities should conduct a CHNA and develop implementation strategies for each facility. Under section 501(r)(2)(B), if any hospital facility fails to meet the CHNA requirements, the organization as a whole fails to meet the requirements. In future guidance, the IRS intends to address potential consequences of failure to satisfy these and other requirements under section 501(r) with respect to one or more hospital facilities.

A CHNA must be conducted at least every three years. The IRS will require hospital organizations to document compliance with CHNA requirements for each of their facilities in a written report that includes:

• A description of the community served
• A description of the process and methods used to conduct the assessment
• A description of methods used to include input from people representing the broad interests of the community served
• A prioritized description of all community health needs identified in the CHNA, as well as a description of the process and criteria used in prioritizing such needs
• A description of existing health care facilities and other resources in the community available to meet the needs identified in the CHNA

A CHNA is considered conducted in the taxable year the written report is made widely available to the public. A CHNA satisfies the requirements if a hospital facility identifies and assesses the health needs of, and includes input from people who represent the broad interest of, the community served by that specific facility. A hospital organization may base its CHNA on information collected by other organizations, including public health agencies or not-for-profit organizations. A CHNA may be conducted in conjunction with other organizations, including related organizations, other hospital organizations, for-profit and government hospitals or state and local agencies such as public health departments.

A hospital organization may take into account all relevant facts and circumstances to determine the community the hospital facility serves. The IRS is requesting specific comments on whether future regulations should define the geographic community of a hospital facility as the Metropolitan Statistical Area or Micropolitan Statistical Area in which the facility is located. For rural facilities, the county in which the facility is located would be the geographic community for CHNA purposes.

The CHNA must take into account input from:

• Persons with special knowledge of or expertise in public health
• Federal, tribal, regional, state or local health or other departments or agencies with current data or other information relevant to the health needs of the community served by the hospital facility
• Leaders, representatives or members of medically underserved, low-income and minority populations and populations with chronic disease needs in the community served by the hospital facility

Others may provide input for the CHNA, including health care consumer advocates, not-for-profit organizations, academic experts, local government officials and other health care providers.

The CHNA must be made widely available to the public, which the IRS says is accomplished by posting the written report of the CHNA findings on the hospital facility’s website. If the hospital facility does not maintain a website separate from the hospital organization that operates it, the CHNA written report may be posted on the hospital organization’s website. A written report may be posted on a website established and maintained by another entity if the hospital organization’s website provides a link to the website where the CHNA resides or by providing the direct website address to any individual requesting a copy of the written report. The website on which the CHNA is posted must provide instructions for downloading the written report. The downloaded report must be an exact image of the original report, and special computer hardware or software may not be required for the format of the report other than free software available to the general public. The report must be provided free of charge to the person downloading the report, and it must be available until the subsequent CHNA for that hospital facility is widely available to the public.

Each hospital facility must adopt a separate implementation strategy—a written plan addressing each of the needs identified in the CHNA for that particular facility. The plan should describe how the facility plans to meet the identified health need or explain why the hospital does not intend to meet a particular need. The organization must attach the implementation strategy to its annual Form 990 for each hospital facility. The implementation strategies may be developed in collaboration with other organizations, other hospital organizations, for-profit and government hospitals or state and local agencies as long as the implementation strategy identifies all participating organizations.

The implementation strategy is considered adopted on the date it is approved by an authorized governing body of the hospital organization. The strategy must be adopted by the end of the same taxable year in which the CHNA was conducted. An excise tax of $50,000 will be assessed for each hospital facility failing to meet the CHNA requirements.

To comply with CHNA reporting requirements, the IRS has added new questions to Schedule H of Form 990. These additional questions are optional for tax years beginning on or before March 23, 2012.

Comments on the new CHNA requirements should be submitted to the following address no later than September 23, 2011:

Internal Revenue Service, CC:PA:LPD:PR (Notice 2011-52), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

For additional information on how these requirements could affect your organization, contact your BKD advisor.

Two significant updates to Medicare Part A claims for skilled nursing facilities (SNFs) and hospital swing-bed providers will occur with dates of service beginning August 1, 2011. The Centers for Medicare & Medicaid Services (CMS) is making the following changes through Change Request 7339:

• Any Part A claim reporting an End of Therapy Other Medicare Required Assessment (OMRA) must include Occurrence Code 16 and the date of the last therapy service.
• Therapy units reported with revenue codes 0420, 0430 or 0440 on Part A claims are changed to represent the number of calendar days of therapy provided by discipline, regardless of the number of minutes or types of therapy services provided. According to the CMS Division of Institutional Claims Processing, therapy evaluations will continue to be reported separately under revenue codes 0424, 0434 and 0444.
  For example, if a resident was covered by Medicare Part A from August 1 to August 4, 2011, and received physical therapy and occupational therapy services each day during that period, the August claim would include four units of physical therapy and four units of occupational therapy. The number of minutes and types of therapy services for Part A-covered residents is irrelevant for determining the number of units on the claim.

To prepare for these changes, providers should discuss these issues with their software vendor and therapy services provider to determine how information will flow into billing software programs and to Medicare Part A claims.

If you have any questions about this or other SNF Medicare billing issues, contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) has proposed a rule to establish, for the first time, conditions of participation (CoPs) required for community mental health centers (CMHCs) in the Medicare program. The proposed CoPs are part of an effort to improve the safety and quality of all care provided to Medicare beneficiaries, regardless of the setting. CMS, which has revised regulations for hospitals, nursing homes and other providers, believes the proposed CMHC CoPs would help ensure consistent protections for clients as they move from one type of care to another. The new CoPs also would enable CMS to survey CMHCs for compliance with health and safety requirements.

The federal government is the largest U.S. health care services payor; in 2007, 224 certified CMHCs billed Medicare for partial hospitalization services for 25,087 Medicare beneficiaries. CMHCs are Medicare-certified and Medicare-enrolled based on CMS Regional Office determination that they meet the definition of a CMHC. CMS claims many participating CMHCs never had an on-site CMS visit after their initial certification, and that most states either have no certification or licensure program or have regulatory regimens applying only to CMHCs receiving state funding. CMS believes basic CMHC health and safety standards should be established to protect patients and their families, and these proposed CoPs would allow CMS to establish a survey process promoting safe and quality client care from Medicare-certified CMHCs.

The six proposed CMHC CoPs are personnel qualifications; client rights; admission, initial evaluation, comprehensive assessment and discharge or transfer of the client; treatment team, active treatment plan and coordination of services; quality assessment and performance improvement; and organization, governance, administration of services and partial hospitalization services. The proposed rule offers definitions and descriptions of each CoP.

Many CMHCs already may have implemented these requirements in their current practice, so adoption of the CoPs will not have a significant impact. However, CMS estimates the proposed changes will cost CMHCs approximately $4.1 million, or $18,475 per CMHC, in the first year of implementation and approximately $2.6 million, or $11,566 per CMHC, annually. Careful review of the proposed requirements is necessary to ensure compliance.

CMS is taking comments on the proposed CoPs through August 16, 2011, with the proposed effective date coming 12 months after publication of the final rule.

The Centers for Medicare & Medicaid Services (CMS) recently released the final regulations of the value-based purchasing (VBP) program, affirming much of what was proposed in January. Specifically, CMS confirmed the following key provisions of the proposed rule, which were discussed in detail in our February article:

• The value-based purchasing program will impact all short-term acute care hospitals and exclude critical access hospitals, psychiatric, rehabilitation, long-term care, children’s and cancer hospitals. Although the current rule doesn’t specifically address how this will impact hospitals paid on their hospital-specific rate, such as sole community hospitals, CMS intends to implement special rules for these hospitals in future rules.
• Beginning October 1, 2012, discharge payments will be reduced by 1 percent to create the VBP pool. Reductions will increase by 0.25 percent annually until reaching 2 percent in federal fiscal year 2017. The reduction will be based on operating diagnosis-related groups (DRG) and excludes add-on payments such as indirect medical education, disproportionate share, outlier and low-volume payments.
• The overall Three Domain of Care approach methodology, including the Clinical Process of Care & Outcome Measures and Patient Experience of Care Survey, will be used to determine a hospital’s total performance score.
  • CMS affirmed the initial weights for FFY2013:  70 percent for clinical process of care measures and 30 percent for the patient experience of care survey. Weights may be adjusted in future years, given additional measures or domains such as outcome measures and efficiency domain.
  • CMS affirmed the definitions and calculations of achievement and improvement standards, as well as achievement thresholds and benchmarks, which were published in the final rule for the baseline period. A review of the thresholds and benchmarks is available here.
  • The baseline period was confirmed as the period from July 1, 2009, through March 31, 2010, and the performance period was confirmed as the period from July 1, 2011, through March 31, 2012.
  • CMS affirmed the use of the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey and its eight dimensions:  nurse communication, doctor communication, cleanliness and quietness, responsiveness of hospital staff, pain management, communications about medications, discharge information and overall hospital rating.
  • Hospitals having a minimum of 10 cases per measure, a minimum of four measures and 100 patient experience of care surveys during the performance period are considered eligible for the value-based purchasing program.
  • VBP incentive payments will be reallocated to hospitals based on the total performance scores ranked in a linear scale, so that hospitals with higher total performance scores will receive larger incentive payments.
• CMS intends to validate quality data submitted through selection of random hospitals. There must be a 75 percent correlation for a hospital’s data to be deemed reliable. CMS will treat hospitals that fail the 75 percent test as if they did not report quality data and reduce payment by 2 percent.
• CMS affirmed its timeline for implementation of the program:
  • Hospitals will receive their preliminary VBP score no later than August 1, 2012, via CMS QualityNet accounts.
  • Base-operating DRG will be reduced by 1 percent beginning October 1, 2012.
  • Hospitals will learn their final VBP score on November 1, 2012, and have 30 days to review and submit corrected information.
  • VBP incentive payments will begin January 1, 2013, with retroactive adjustments for any FFY2013 discharges paid prior to that date.

Based on comments to CMS regarding the proposed rule, CMS revisited certain provisions and made the following changes:

• CMS originally proposed to include 17 clinical process of care measures in the initial VBP scores and excluded seven, as they were considered “topped out.” (Topped out measures are those on which CMS feels all but a few hospitals have achieved a similarly high level of performance; their inclusion in the VBP program would have no meaningful effect on total performance scores.) CMS received several comments requesting it to rerun its analysis of topped out measures with more recent data to determine if any other measures also met the definition. Based on analysis of data from July 1, 2009, through March 31, 2010, three additional measures were deemed topped out:  AMI-2, Aspirin Prescribed at Discharge; HF-2, Evaluation of LVS Function; and HF-3, ACEI or ARB for LVSD. In addition, CMS is retiring PN-2,  Pneumococcal Vaccination, and PN-7,  Influenza Vaccination, from the Hospital Inpatient Quality Reporting Program. Therefore, after removal of these measures, 12 of the 17 measures proposed will be implemented as a part of the VBP program. A list of the program’s final measures is available here.
• Beginning in FFY2014, CMS proposed to include multiple outcome measures in the VBP score, including three 30-day mortality measures, nine AHRQ Patient Safety Indicators, Inpatient Quality Indicators, various composite measures and eight hospital-acquired conditions. After reviewing comments, CMS concluded certain measures captured duplicate information. Therefore, the final rule outcome measures to be implemented in FFY2014 will include three 30-day mortality measures, two AHRQ composite measures and eight hospital-acquired conditions. A list of the final outcome measures for the program is available here.
• The 30-day mortality rate outcome measure’s performance period was originally July 1, 2011, through December 31, 2012. CMS changed this measurement period to 12 months:  July 1, 2011, through June 30, 2012, with a baseline period of July 1, 2009, through June 30, 2010.
• The hospital-acquired conditions and AHRQ composite measure were included on the Hospital Compare website on March 3, 2011. CMS finalized the beginning of a performance period for these measures as March 3, 2012, one year after they were posted to the website. CMS plans to propose the end of the performance period in the 2012 Outpatient Prospective Payment System (OPPS) proposed rule.
• Many comments provided to CMS opposed the use of a “subregulatory process” to add or retire measures, calling on the agency to instead use full notice and comment rulemaking. CMS noted it understands the importance of stakeholder input to ensure the VBP program and its measures improve the quality of care and patient safety. However, CMS believes it must act quickly and deliberately to expand the pool of measures used in the program. For this reason, CMS believes it should adopt measures for the VBP program relevant to improving care, particularly measures directed toward improving patient safety, as quickly as possible. In addition, retirement of measures from the VBP program should be just as fast to ensure it does not detract from more significant measures improving patient health. Therefore, in response to comments, CMS has not finalized the subregulatory process for adding and retiring measures. Instead, it has proposed in the FFY2012 Inpatient Prospective Payment System (IPPS) proposed rule to simultaneously adopt one or more measures for both the Hospital IQR and Hospital VBP programs.

IPPS 2012 – Efficiency Domain

CMS included a new Efficiency Domain in the 2012 IPPS proposed rule, effective for FFY2014, to measure Medicare spending per beneficiary. Scoring this measure would be similar to the clinical process of care and outcome measures through achievement and improvement standards and baseline and performance scores. In determining Medicare spending per beneficiary, CMS proposes the following:

• Episodes are proposed to run from three days prior to an inpatient PPS hospital admission through 90 days after hospital discharge.
• Three types of payment are included in an episode of care:
  • Medicare Part A and Part B payments for services during the episode period, including Medicare Advantage plans
  • Payments made by beneficiaries for deductibles and coinsurance
  • Transfers, readmissions and additional admissions during the 90-day, post-discharge window
• Type of payments excluded from an episode of care include:
  • Episodes during which the individual was not enrolled in both Medicare Part A and Part B
  • Individuals covered by Railroad Retirement Board
  • Medicare secondary payer claims
• CMS’ proposed adjustments to standardize payments include age, severity of illness and geographic payment rate differences, i.e., wage index neutral, and exclude payment differentials such as hospital-specific rates, indirect medical education and disproportionate share payments.

Future Regulation

It will be increasingly important to monitor new regulations, as numerous references to future rulemaking were included in the final rule:

• Additional clinical measures and the end of the performance period for the hospital acquired conditions and AHRQ measures are planned for the 2012 OPPS proposed rule.
• Additional operational and payment information should be included in the 2013 IPPS proposed rule.
• Future rules also will describe how VBP will affect hospitals paid on their hospital-specific rate, though timing of these decisions has not been defined.

To learn more about how the final VBP rule will affect your hospital, contact your BKD advisor.

As part of the Patient Protection and Affordable Care Act (PPACA), tax-exempt hospitals must meet new requirements to maintain exempt status. To document compliance with these new requirements, the IRS added Section B under the facility information reporting section of Schedule H. A recently released announcement notifies hospitals that the newly created Schedule H, Part V, Section B will be optional for the 2010 Form 990. All other sections of the Schedule H must be completed for the 2010 tax year. Attaching audited financial statements will remain a requirement for a complete and accurate filing; only Section B reporting is optional.

According to the IRS, the entire Part V, Section B will be optional “to give the hospital community more time to familiarize itself with the types of information the IRS will be collecting.” The IRS will continue accepting comments regarding Schedule H “to improve the clarity and reduce the burden of reporting.” Various organizations have urged the IRS to withdraw and reissue the form after a proper comment period with improved instructions.

Hospitals were notified earlier this year to not file 2010 Form 990 before July 1 as the IRS worked to finalize Schedule H and instructions to include the new tax-exemption reporting requirements arising from PPACA.  This automatic three-month extension is not affected by the notice.

The effective dates of Internal Revenue Code provisions added by Section 9007 of PPACA remain in effect. This includes 501(r) requirements that detail new requirements for conducting and reporting community health care needs assessments. The section also addresses what must be included in financial assistance policies and emergency medical care policies, imposes rules and limitations on charges for medical care and enacts billing and collection rules hospitals must follow. Schedule H, Part V, Section B includes questions on all of these areas for each of the organization’s facilities.

For more information on how these requirements could affect your business, contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) recently released proposed rules for the skilled nursing facility prospective payment system (SNF PPS) for fiscal year 2012. This proposal outlines two options for payment rates under SNF PPS for FY2012.  Option 1 would create an 11.3 percent, or $3.94 billion, net reduction in payments to nursing home providers. Option 2 would result in a 1.5 percent, or $530 million, net increase in provider payments based on a projected market basket increase.

First-quarter claim data for FY2011 shows parity adjustments made with implementation of Minimum Data Set (MDS) 3.0 and RUGS IV created higher-than-expected payments to providers and did not achieve the projected budget neutrality. Claim data also show a significant decrease in concurrent therapy and a significant increase in individual and group therapy use as compared to historical data. If this trend continues, CMS claims it will need to apply a 19.81 percent reduction to the nursing components of all therapy RUG classifications. This adjustment would result in the aforementioned $3.94 billion net reduction in payments for Option 1.

In addition, CMS also is proposing assessment changes that, if approved, would take effect October 1, 2011. According to the proposed rule, the current PPS assessment would be modified to reflect new assessment windows and grace days. This proposal would shorten the assessment reference date (ARD) window and grace day periods. CMS claims this would eliminate duplicated information on assessments with overlap of days and allow more time between resident interviews.

Completion of Other Medicare Required Assessments (OMRAs) are clarified in these proposed rules. An End of Therapy (EOT) OMRA still will be required for residents in therapy RUG classifications when therapy ends and skilled nursing care continues. This assessment will continue to calculate a non-therapy RUG score for use in billing services on the first non-therapy day. The proposed rule clarifies the need for completion of an EOT OMRA when a resident in a therapy RUG classification receives no therapy services for three consecutive days, regardless of the reason. Every facility would be treated as a seven-day-a-week therapy provider to calculate the need for this assessment.

The rule proposed creation of an End of Therapy Resumption (EOT-R) OMRA. This assessment would be optional and could be used for residents who had an EOT OMRA completed but had therapy resume within five consecutive calendar days at the same RUG classification level in place prior to the EOT OMRA. If therapy resumes more than five days after therapy cessation, or within five calendar days at a changed RUG level, the EOT-R OMRA would not be applicable. In these situations, the facility would need to perform a new therapy evaluation and complete a Start of Therapy (SOT) OMRA or wait until the next scheduled PPS assessment to reclaim a therapy RUG classification. To accommodate the EOT-R OMRA, items O0450A and O0450B would be added to the OMRA item set.

CMS also has proposed the use of a Change of Therapy (COT) OMRA, required for residents in a therapy RUG classification when the intensity of therapy changes to the extent that the RUG classification from the most recent PPS assessment no longer accurately reflects the intensity of therapy services being provided. This would require facilities to evaluate total Reimbursement Therapy Minutes (RTM), or the actual number of therapy minutes used by the software to determine RUG categories, on a rolling seven-day window beginning the day after the ARD of the most recent PPS assessment to look for a change. The ARD of the COT OMRA would then be set for Day 7 of the COT observation period.

To calculate RTMs, CMS also has proposed a new definition of group therapy for Medicare payments:  four participants who are performing similar therapy activities. This would be consistent with the proposed rule allocating group therapy minutes across the four group participants when RUG classifications are calculated.

These proposed rules were posted in the May 6, 2011, Federal Register. Public comments on the proposal will be accepted through June 27, 2011.

For more information on how these rules might affect your organization, contact your BKD advisor or Bob Lane at rlane@bkd.com.

The Centers for Medicare & Medicaid Services (CMS) issued a final rule on May 5, 2011, offering hospitals and critical access hospitals (CAHs) the option to streamline the credentialing and privileging process for physicians and nonphysician practitioners providing telemedicine services. The revised guideline will allow small hospitals and CAHs to expand access to specialty patient care services provided by remote practitioners and receive those services from another Medicare-participating hospital or other distant-site telemedicine entity in a timely manner.

Telemedicine Defined

Telemedicine is defined in the final rule as “provision of clinical services to patients by practitioners from a distance via electronic communications. The distant-site telemedicine physician or practitioner provides clinical services to the hospital or CAH patient either simultaneously, as is often the case with teleICU services, or nonsimultaneously, as may be the case with many teleradiology services.”

“Simultaneous” telemedicine services are performed in real time, similar to medical services provided during a face-to-face encounter.

“Nonsimultaneous” telemedicine services are requested by the patient’s attending physician or practitioner and may involve interpretation of diagnostic testing. The interpreting telemedicine practitioner does not assess the patient in real time, but transmits the interpretation results to the attending physician or practitioner for patient diagnosis or management.

A “distant-site telemedicine entity” is defined in the final rule as “one that (1) provides telemedicine services; (2) is not a Medicare-participating hospital (therefore, a non-Medicare-participating hospital that provides telemedicine services would be considered a distant-site telemedicine entity also); and (3) provides contracted services in a manner than enables a hospital or CAH using its services to meet all applicable CoPs, particularly those requirements related to the credentialing and privileging of practitioners providing telemedicine services to the patients of a hospital or CAH.”

Current Guidelines

Under the current condition of participation (CoP), all hospitals must credential and assess privilege for all physicians or nonphysician practitioners who provide services to their patients, including telemedicine practitioners. The hospital’s governing body is responsible for accepting practitioners to its medical staff and granting privileges after thorough examination, verification of credentials and evaluation of specific criteria. CAHs that are members of a rural health network must follow a similar process, but also must maintain an agreement with another hospital that is a member of the same health network, a Medicare Quality Improvement Organization (QIO) or another qualified entity. The CAH credentialing and privileging process also requires assessment and approval of its medical staff by this outside entity. CMS recognized the process was burdensome and that small hospitals and CAHs might not have the resources or clinical expertise within their medical staff to evaluate and assign privileges to specialists providing telemedicine services.

Revised Guidelines

Effective July 2, 2011, the final rule revised sections of the CoP for hospitals and CAHs to allow the governing body (or responsible individual for CAHs) to accept the “credentialing and privileging decisions made by the distant-site telemedicine entity” for individual physicians or nonphysician practitioners asked to provide telemedicine services. In addition, the governing body must obtain a written agreement specifying the distant-site entity as a “contractor of services” and stating the distant-site entity ensures all furnished services will comply with applicable CoP criteria for hospitals or CAHs.

There is an exception to the requirement for a CAH to have an agreement with one or more Medicare-participating providers or suppliers. The CoP now allows for an agreement with a distant-site, non-Medicare-participating entity providing telemedicine services. Specifically, the final rule says an agreement can exist “between a CAH and a distant-site telemedicine entity for the entity’s distant-site physicians and practitioners to provide telemedicine services to the CAH’s patients.”

Conclusion

The final rule for credentialing and privileging of telemedicine services is a significant advancement for specialty medical care providers, particularly rural hospitals and CAHs. Facilities considering implementing this streamlined process may experience initial cost in developing agreements with the distant-site telemedicine entity. Essentially, the benefits of expanding access to specialty services should outweigh any administrative cost.

A copy of the final rule is available online. For more information, please contact your BKD advisor or Sherry Witzman at switzman@bkd.com.

The Centers for Medicare & Medicaid Services (CMS) issued the final rule related to payment updates for inpatient psychiatric facilities (IPF) for Rate Year (RY) 2012 on May 5, 2011. The final rule includes a 15-month update period beginning July 1, 2011, to transition the RYs to coincide with the federal fiscal year, similar to inpatient acute and rehabilitation hospital updates. The change in RYs allows CMS to consolidate Medicare update publications and align with ICD-9-CM updates effective October 1 of each year.

The market basket update of 3.2 percent is reduced by a 0.25 percentage decrease mandated by provision of the Patient Protection and Affordable Care Act (PPACA) and a 0.9995 budget neutrality to establish a federal per diem base rate of $685.01 and electroconvulsive therapy (ECT) per treatment rate of $294.91. This equates to a 2.9 percent increase from the 2011 federal base rate of $665.71 and ECT rate of $286.60. The outlier threshold amount is updated to $7,340 to ensure the estimated outlier payments are approximately 2 percent of total estimated IPF payments. The labor portion of the base rate decreased from 75.4 percent in 2011 to 70.137 percent in 2012, which benefits IPFs in areas with a wage index of less than 1.

Changes were not made to the facility, variable per diem, age, MS-DRG and comorbidity adjustment factors for 2012. As CMS noted throughout the rule, it has delayed making refinements to the IPF prospective payment system (PPS) until it has adequate data. CMS now believes it has adequate data—approximately five years into IPF PPS—to begin an analysis to better understand the IPF industry. The agency will be able to present their analysis in the 2013 rulemaking to determine whether IPF PPS refinements are appropriate, allowing the possibility of major changes in the FY2013 rules.

In addition, quality measures are being developed for reporting by IPFs for each RY beginning in 2014, in accordance with PPACA. For those IPFs not reporting quality data, the annual update to the base rate will be reduced by 2 percent. The Medicare Payment Advisory Commission (MEDPAC) also will evaluate facility margins and likely make recommendations regarding appropriate IPF updates for the first time, and CMS is interested in obtaining feedback on these future refinements.

Lastly, CMS incorporated a regulation allowing a temporary update to an IPF’s full-time equivalent cap for displaced medical residents for cost reporting periods beginning on or after July 1, 2011. A copy of the final rule is available for download on the CMS website.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

On April 25, 2011, the Centers for Medicare & Medicaid Services (CMS) issued its proposed rule for inpatient rehabilitation facility (IRF) prospective payments. Not only did the proposed rule identify proposed annual payment updates, it identified the proposed implementation of the IRF Quality Reporting Program and the elimination of repetitive and obsolete rules IRFs and IPFs created by changes in reimbursement methodology to a PPS.  The elimination of the repetitive and obsolete rules also will apply to inpatient psychiatric facilities (IPF).

Proposed IRF Payment Updates

The long-term care hospital PPS market base update is 1.5 percent, comprising 2.8 percent minus a proposed Money Follows the Person (MPF) program adjustment of 1.2 percent minus a 0.1 percent required reduction. The proposed IRF Standard Payment Conversion factor increased 4.82 percent to $14,528, and the outlier threshold amount increased to $11,822. The proposed rule also reduces the low-income payment (LIP) adjustment factor from 0.4613 to 0.1897.

The changes result from a change in CMS methodology, which has switched from a weighted to unweighted regression analysis for the calculation of both the standard payment conversion factor and the LIP factor. From a practical standpoint, this shifts reimbursement out of the LIP adjustments and puts it into the base CMG payments. CMS believes this will help stabilize payments to IRFs.

Proposed IRF Quality Reporting

For FY2014 payment determinations, the rule proposes IRFs submit data on two quality measures:  Catheter-Associated Urinary Tract Infections (CAUTIs) and pressure ulcers that are new or have worsened, beginning October 1, 2012. CMS also is developing a 30-Day Comprehensive All-Cause Risk Standardized Readmission Measure it intends to include in future rulemaking for FY2014 payment determinations. Annual updates to the standard federal rate for discharges in FY2014 will be reduced by 2 percent for any IRF not complying with quality data submission.

Other Proposed Rule Changes in Size & Square Footage of IRF & IPF

Under current rules, any expansion must be made at the beginning of a cost reporting period and is subject to other restrictions on the number of beds that could be added. CMS proposes to allow IRFs and IPFs to increase or decrease the number of beds or square footage at any time in the cost reporting period, but only one time per period.

In addition, if an IRF or IPF has delicensed or decertified beds, it must wait a full 12-month cost reporting period before it can add new beds. The IRF or IPF must notify the Medicare Appeals Council and CMS Regional Office 30 days before the proposed date of change.

An IRF or IPF can be considered new if it has not been paid under the PPS for at least five calendar years. This makes it easier for a facility that closed its unit in the past to reopen a new unit. Beds added to an IRF or IPF are now considered new if they meet the applicable State Certificate of Need and State Licensure laws and if they get written approval from CMS. The notification to CMS is so the agency can verify they meet the full 12-month cost report requirement noted above.

A change in ownership, where the new owner accepts the exiting provider agreement, would allow the IRF to retain its excluded status. If the new owner does not accept the provider agreement, the excluded status is terminated, and the new owner must reapply. In this case, the IRF does not have to wait five years to reapply for excluded status.

For more information, contact your BKD advisor.

On April 19, 2011, the Centers for Medicare & Medicaid Services (CMS) posted proposed rule changes to the hospital acute care prospective payment system for federal fiscal year 2012. In addition to proposed payment rate changes, the rule discusses CMS’ commitment to quality initiatives by proposing changes to existing quality measures and coordinating quality reporting mechanisms. CMS is accepting comments on the proposed rule through June 20, 2011.

Payment Rate Updates

CMS has proposed a 1.5 percent update to the federal operating standardized amount. This is based on a 2.8 percent market basket update, reduced by two factors mandated by the Patient Protection and Affordable Care Act (PPACA):  a 1.2 percent economy-wide productivity adjustment and an additional 0.1 percent reduction. CMS proposes additional adjustments for budget neutrality and documentation and coding. After all items are considered, the proposed operating standardized amount is $31.75 less than the 2011 rate, a decline of 0.61 percent.

Hospitals not reporting quality data will have a 2 percent reduction applied to their standardized amount update factor. The difference in the standardized amount for hospitals reporting and not reporting quality data is $101.13.

CMS proposes applying all of the same adjustments to the hospital-specific rates of sole community and Medicare-dependent hospitals. Due to the impact of prior update factors and budget neutrality adjustments, hospitals paid using their hospital-specific rate will see a reduction in payments of 1 percent in 2012.

Among the other payment factors addressed in the proposed rule:

• CMS proposes setting the 2012 outlier threshold at $23,375, a change from $23,135 in 2011.

• The proposed national capital standard federal payment rate of $422.54 is up 0.60 percent from 2011.

CMS has used several estimates when computing the proposed payment rates. For example, the 2.8 percent market basket update is referred to as an estimate by CMS. In addition, in recognition of the expected settlement of a recent court case, CMS proposes a 1.1 percent adjustment to the standardized amount related to budget-neutrality calculations, in recognition of a recent court case. Hospital-specific rates will increase by 0.9 percent for this matter. CMS notes the case driving this change is not yet finalized, so this adjustment may change.

Changes to the Hospital Wage Index for Acute Care Hospitals

CMS included several changes that will affect the hospital wage index computation for federal FY2013. Some of the more significant changes include:

• Defined Benefit Pension Costs: CMS is proposing to change the methodology to compute the allowable pension costs for wage index purposes starting with 2013. Currently, the Provider Reimbursement Manual defines maximum allowable pension costs, including requirements that pension costs must be funded to be allowable and that excess funding can be carried forward for recognition in a subsequent period.

In the proposed 2012 rules, CMS recommends a new methodology for wage index purposes that would not rely on a plan’s actuarial computation, but would compute costs based on historical cash contributions. CMS believes using a three-year average will add stability to allowable wage-related costs.

Under CMS’ proposed rule, allowable pension costs will be equal to the three-year average of contributions made to the pension plan. For example, the FY2013 wage index would be based on cost reporting periods that began during FY2009. The proposal would not only require pension plan contribution data for the existing base cost reporting year (FY2009), it would require pension plan contributions data for the cost reporting periods immediately preceding (FY2008) and following (FY2010) the base cost reporting period to determine the three-year average annual contributions. This three-year average of contributions is what will be used in determining the allowable pension costs for the FY2013 wage index. It is important to note this is only a wage index change; allowable costs for the annual cost report will be computed using separate rules.

• Occupational Mix Survey: The 2012 rule continues to use the Occupational Mix Survey (OMS) from the 2007–2008 data submission. A new OMS using 2010 data is due from providers by July 1, 2011.

• MGCRB Reclassifications: Consistent with prior years, hospitals reclassified by the Medicare Geographic Classification Review Board (MGCRB) may withdraw the election, but this must be done within 45 days of the issuance of the proposed rule. It is important for reclassified hospitals to review the proposed wage index data to ensure they want to keep their reclassification. For hospitals filing a reclassification request for FY2013, applications are due September 1, 2011. CMS anticipates forms will be available on the CMS website in mid-July 2011.

• Section 508 Reclassifications: Hospitals reclassified under Section 508 receive reclassifications for wage index purposes they may not otherwise qualify for. Originally scheduled to sunset after three years, Section 508 had been extended by Congress through September 30, 2011. No further extensions have been passed by Congress, and Section 508 hospitals will revert to the rural wage index in 2012 unless they qualify for reclassification under other provisions.

• Out-Migration Adjustment for Lugar Hospitals: The proposed rule clarifies Lugar hospitals must waive their Lugar urban status to receive the out-migration adjustment. If Lugar hospitals waive their status, they do so for all payment items, including disproportionate share hospital (DSH) payments. Depending on a hospital’s DSH percentage, the benefit of the out-migration adjustment could be offset by the DSH cap placed on rural hospitals.

• PPACA Report: Under PPACA, CMS is required to report to Congress by December 31, 2011, on potential changes to the wage index. In the proposed rule, CMS states it is seeking comments regarding the definition of labor markets. These comments will not be in the final 2012 Federal Register, but will be considered for the report due to Congress.

Hospital Inpatient Quality Reporting (IQR) Program

CMS proposes retiring eight measures and adding four new measures for the 2014 payment determination period. Two of these relate to healthcare-associated infection (HAI) measures, one is based on Medicare spending per beneficiary, and the last is based on a new structural measure requiring hospitals to report participation in a cardiac surgery registry. The HAI measures will be collected through the National Healthcare Safety Network. Medicare spending per beneficiary will be calculated by CMS and standardized to remove payment variance such as wage index, DSH, indirect medical education (IME) and case mix.

CMS proposes reducing the quarterly submission deadline for chart-abstracted quality measures from 135 days to 104 days. CMS also proposes moving patient satisfaction survey (HCAHPS) submissions up one week for quarterly submissions to 13 weeks after the close of a quarter.

Changes to Value-Based Purchasing (VBP)

Under the proposal, the new Medicare spending per beneficiary measure would be added to value-based purchasing scoring. After standardizing Medicare spending per beneficiary, CMS will calculate the VBP score similar to proposed scoring for its clinical processes-of-care measures. There will be an attainment score, assuming an achievement threshold is met, and/or an improvement score, assuming a benchmark is met.

As currently structured, the VBP program calculates a hospital’s score using 70 percent of the clinical process-of-care domain score and 30 percent of the patient experience of care domain score. As proposed, Medicare spending per beneficiary will be added to a third “efficiency domain.” CMS would include the new domain weighting in the 2012 Hospital Outpatient Prospective Payment System proposed rule.

Proposed Hospital Readmissions Reduction Program

PPACA established the “Readmissions Reduction Program,” effective for discharges from an “applicable hospital” on or after October 1, 2012. Hospitals with excess readmissions will be subject to payment reductions, which CMS plans to outline in detail in the 2013 proposed rule.

In this year’s proposed rule, CMS goes into great detail about how it will measure readmission rates and how it will determine if a hospital’s readmissions warrant a payment reduction.

Payment Adjustment for Low-Volume Hospitals

Under temporary changes included in PPACA, during FY2011 and FY2012, hospitals with fewer than 1,600 admissions could qualify for a low-volume adjustment. The proposed rule includes an updated list of hospitals with fewer than 1,600 Medicare discharges that could qualify for this payment in FY2012. Newly qualifying hospitals must submit a request by September 1, 2011, to qualify for the payment adjustment beginning October 1, 2011.

Hospitals that previously qualified for the low-volume adjustment in 2011 must verify in writing to their Medicare Administrative Contractor by September 30, 2011, that they still meet the mileage criteria to continue receiving the payment adjustment during 2012.

Medicare DSH & IME

CMS proposes to exclude patient days associated with hospice patients receiving hospice services in an inpatient hospital setting from the Medicare and Medicaid fractions of the Disproportionate Share Payment Percentage (DPP) and from the counts of available beds for purposes of the DSH and IME adjustments. For urban hospitals with just more than 100 beds, this change could subject DSH payments to the 12 percent cap applicable to smaller hospitals.

High Percentage of End-Stage Renal Disease (ESRD) Payments

The proposed rule amends the definition of the denominator used in the high percentage ESRD payment. As proposed, the denominator will include all patients entitled to Medicare Part A by including discharges for beneficiaries whose benefits were exhausted, discharges for beneficiaries whose stay was not covered by Medicare and discharges for beneficiaries under Medicare Advantage.

Changed Pension Cost Reporting Requirements for Medicare Cost-Finding Purposes

In addition to the aforementioned wage index changes related to pension costs, CMS addresses allowable pension costs for cost-finding purposes. Due to changes required by the Pension Protection Act of 2006, CMS does not believe plans are using common methods to report pension costs. CMS proposes revising its policies to allow for a standardized approach for cost reporting periods beginning on or after October 1, 2011.

Under CMS’ proposed policy, defined benefit costs must be funded to be allowable and will be subject to a cap based on 150 percent of the average of the highest three of the prior five years’ costs. If a hospital’s costs exceed the cap, they will be allowed to carry these costs forward or submit information explaining why the “excess” costs are necessary.

Bundling Payments for Services Provided to Outpatients Later Admitted as Inpatients

CMS also proposes changing the application of certain “three-day window” payment limits for physician services in clinics wholly owned or operated by a hospital (regardless of whether or not the clinic is provider-based). Current regulations require certain diagnostic and nondiagnostic services provided to patients within three days of admission to be bundled into the inpatient bill and related payment. This bundling does not include physician services.

In the proposed rule, CMS asserts because the overhead, staff and equipment of hospitals are paid for in the inpatient rate, physicians in wholly owned or operated clinics should bill at the reduced facility rate for services to patients that fall under the three-day window. By using the lower fee schedule rate, CMS believes hospitals will not be paid twice for these overhead costs.

Also, if a hospital believes nondiagnostic services provided within the three-day window are unrelated to the admission, they may bill separately for these services using condition code 51, though the hospital must maintain documentation to support why these services are not related.

Critical Access Hospital (CAH) Ambulance Services

The proposed rule changes the application of the 35-mile rule used for a CAH to qualify for cost-based ambulance reimbursement. CMS currently measures the distance to the nearest ambulance service from either the hospital building or anywhere the CAH ambulance service has a station. Under proposed interpretation, the 35-mile criterion will be measured from the CAH building.

If the only ambulance service within a 35-mile drive of a CAH is the ambulance service the CAH owns, it will qualify for cost-based reimbursement. If the CAH’s ambulance service is stationed more than 35 miles from the CAH, it must be the closest service to the CAH to qualify for the cost-based reimbursement. The new interpretation is effective for cost report periods beginning on or after October 1, 2011, and should result in additional CAHs qualifying for cost-based ambulance payments.

CMS has established a 2012 IPPS Proposed Rule home page where the proposed rule and related data files and tables are available for download.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

BKD advisors Craig Steen, Kevin Wellen, Mick Welscher, Sally Hardgrove, Sue Brammer and Sherry Witzman contributed to this article.

The May 5, 2011, Federal Register includes the Centers for Medicare & Medicaid Services’ (CMS) proposed rule changes to the Long-Term Care Hospital Prospective Payment System (LTCH PPS) for federal fiscal year 2012. In addition to proposed payment rate changes, the rule expands quality reporting to long-term care hospitals (LTCHs) and provides clarification of two existing policies.

Among the changes in the proposed rule:

• LTCH Rate Updates: Similar to the inpatient PPS market basket update, the LTCH PPS market base update is 1.5 percent. The proposed LTCH PPS standard rate increased 1.22 percent from the prior year to $40,082.61, and the fixed-loss threshold amount increased slightly over the prior year to $19,270.
• LTCH Quality Reporting Program: For 2014 payment determination, the rule proposes LTCHs submit data on three quality measures:  Catheter-Associated Urinary Tract Infections (CAUTIs), Central Line Catheter-Associated Bloodstream Infection (CLABSI) and pressure ulcers that are new or have worsened for services provided in FY2012. CMS is requesting public comment on the proposed reporting cycles for LTCHs. Annual updates to the standard federal rate for discharges in 2014 shall be reduced by 2 percent for any LTCH not in compliance with quality data submission.
• Clarifying Average Length of Stay: CMS proposed clarifying two existing policies related to the greater than 25 days average-length-of-stay requirement:
  1. Where an existing LTCH has changed ownership, the hospital will continue to be paid LTCH PPS for the cost report period beginning with the change of ownership only if, for at least five of six months immediately preceding the change of ownership, the hospital meets the required average length of stay. If the hospital fails to meet the required average length of stay criterion, after its evaluation, and if it is an acute-care hospital, it will be paid under IPPS effective on the day of the change of ownership—the start of the new owner’s cost report period.
  2. The rule clarifies the calculation of the average length of stay to specify all data on all Medicare inpatient days, including Medicare Advantage (MA) days, should be included in the average length-of-stay calculation.
• Proposed LTCH Moratorium on Increase in Beds to LTHCs and Satellite Facilities: The rule proposes, effective October 1, 2011, moratoriums on the establishment or classification of new LTCHs and LTCH satellite facilities and on the increase in the number of LTCH beds in existing hospitals and satellite facilities be applied to the subset of LTCHs and LTCH satellite facilities established via the exception process subsequent to December 29, 2007. Essentially, CMS proposes to limit the number of beds in these facilities to the number of beds certified by Medicare at the LTCH or satellite facility when it was first paid under the LTCH PPS.

The May 5, 2011, Federal Register containing the proposed rule is available for download. CMS is accepting comments on the proposed rule through June 20, 2011.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

On March 31, 2011, Centers for Medicare & Medicaid Services (CMS) released its proposed rule for implementing the provisions of the Patient Protection and Affordable Care Act relating to the Medicare Shared Savings Program (MSSP) and associated accountable care organizations (ACO). Under these provisions, service providers and suppliers to Medicare beneficiaries can continue to receive their traditional Medicare reimbursement while also being eligible for additional payments for shared savings to an ACO. These regulations are currently being proposed, and final rules for implementation are expected this summer after CMS evaluates the comments received on these proposed regulations.

The MSSP is an attempt to redesign the delivery of health care intended to provide better care for individuals, better health for populations and lower growth in Medicare expenditures.

Eligibility & Governance

ACOs are legal entities comprising an eligible group of Medicare-enrolled ACO participants that work together to manage and coordinate care for Medicare beneficiaries. ACO professionals are physicians or mid-level practitioners, i.e., physician’s assistants, nurse practitioners or clinical nurse specialists. ACO participants can be ACO professionals in a group practice, networks of individual ACO professionals, partnerships or joint ventures between hospitals and ACO professionals or hospitals employing ACO professionals. All hospitals that employ ACO professionals and are paid under the prospective payment system (PPS), as well as critical access hospitals (CAHs) billing Method II for physician services, would be eligible to form an ACO. Rural health clinics (RHCs) and federally qualified health centers (FQHCs) are not eligible to form an ACO, but they are allowed to be part of an ACO formed by eligible participants; in fact, ACOs, including RHC/FQHC members, can receive an enhanced percentage of shared savings.

ACOs must file an application with CMS to participate in the MSSP and agree to participate in the program under a three-year agreement. Due to the beneficiary assignment process, all agreement periods will start on January 1 of a given year. The ACO must have shared governance giving all ACO participants proportionate control over their decision-making process, including at least 75 percent control of the governing body, which also must include Medicare beneficiary representation. Additional structural and operational criteria must be met, such as requiring at least 50 percent of an ACO’s primary care physicians to be meaningful users of electronic health records.

Assignment of Medicare Beneficiaries

Approved ACOs must have at least 5,000 Medicare fee-for-service beneficiaries (not Medicare Advantage) receiving the plurality of their primary care services (defined as allowable charges for billed evaluation and management Healthcare Common Procedure Coding System codes) from ACO professionals who are primary care physicians (defined as physicians with the specialty of internal medicine, general practice, family practice or geriatric medicine only). Plurality of primary care services will be based on which primary care physician provided services with the highest amount of allowed charges to a specific beneficiary regardless of whether it is a majority of such services or not. CMS will determine the Medicare beneficiaries assigned to an ACO in each year of participation on a retrospective basis based on National Provider Identifier (NPI) information for ACO professionals meeting the definition of primary care physicians and billing under a Tax Identification Number (TIN) of an ACO participant. While all physician specialties and mid-level practitioners are ACO professionals, the assignment of beneficiaries will be based only on primary care physician data. Also note primary care services performed in an RHC/FQHC setting will not be used for the assignment of beneficiaries due to limited coding information available on RHC/FQHC claims. When a Medicare beneficiary is assigned to an ACO for a given year, the ACO will be held accountable for the quality, cost and overall care of that beneficiary.

ACO participants other than primary care physicians can be in multiple ACOs, but to avoid assigning beneficiaries to multiple ACOs, primary care physicians can only be in one ACO. It is important to note the assignment of a beneficiary to an ACO can have no effect on the benficiary’s ability to seek services from any Medicare-enrolled provider whether in the ACO or not; improper restriction of this right can lead to termination of the ACO from the MSSP.

Quality & Reporting Requirements

For ACOs to participate in shared savings distributions, they must meet minimum quality and reporting requirements. Sixty-five data elements must be submitted, and beginning in Year 2 of the agreement, ACOs with higher quality scores will be eligible for higher shared savings distributions. Year 1 payment distributions will be based on meeting reporting requirements rather than quality thresholds.

CMS intends to monitor the quality of ACOs closely and has the ability to remove ACOs from the program (future participation also may be prohibited at CMS’ discretion) if quality measures are not at an expected level and are not improving.

Shared Savings Distributions/Loss Repayments

ACOs can choose between two tracks during their first three-year agreement period. Track 1 will allow the ACO to participate in a maximum of 52.5 percent potential shared savings distributions during the three-year period and participate in a maximum of 47.5 percent potential shared loss repayments in the third year only. Track 2 will allow the ACO to participate in a maximum of 65 percent potential shared savings distributions while participating in a maximum of 35 percent potential shared loss repayments for all three years. Agreements beyond the initial three-year period will all be under Track 2. Track 1 ACOs that meet all quality and reporting standards can receive a 50 percent share of the savings achieved, and if the ACO has a RHC/FQHC in its organization, the distributions will increase by a maximum of 2.5 percent, depending on the percentage of beneficiaries with visits to the RHC/FQHC. Track 2 ACOs that meet all quality and reporting standards can receive a 60 percent share of the savings achieved, and if the ACO has a RHC/FQHC in its organization, the distributions will increase by 5 percent, depending on the percentage of beneficiaries with visits to the RHC/FQHC.

At the start of each three-year agreement period, a cost-per-beneficiary benchmark will be established for all beneficiaries that would have been assigned to the ACO (a second option provided for comment would change this to those beneficiaries actually assigned) for the prior three years using the actual expenditures from the prior three-year period weighted toward the most recent year. This benchmark will then be adjusted each year by an expense trend factor and a factor for variations in the complexity and severity of the beneficiaries, as well as to effect for changes in the assigned beneficiaries. In years where the ACO manages the CMS cost per beneficiary below the benchmark, the ACO will receive a share of these savings. For Track 2 ACOs, the ACO will pay a share of the losses in years where the CMS cost per beneficiary exceeds the established benchmark.

In establishing the benchmark, CMS has proposed to include all relevant Medicare costs, including enhanced payments for disproportionate share hospitals, indirect medical education payments, hospital specific rate payments and incentive payments for hospitals that achieve “meaningful use” of an electronic health record (physician bonus payments for electronic health record and other quality initiatives are excluded from the benchmark). Therefore, evaluating the Medicare reimbursement landscape for current and anticipated payments is an important factor to consider when deciding whether to enter into the MSSP.

To receive a shared savings distribution, the ACO must reduce cost by a “minimum savings rate.” CMS is concerned normal fluctuations in annual costs could result in a shared savings distribution when real change in efficiency of care did not occur. To adjust for this, they have established minimum savings thresholds, ranging from 3.9 percent for the smallest ACOs to 2 percent for the largest organizations and all Track 2 ACOs, which must be exceeded before distributions can be calculated. All ACOs exceeding their minimum savings rate threshold will receive sharing distributions on savings exceeding a 2 percent threshold. There are exceptions for ACOs with fewer than 10,000 assigned beneficiaries, which are entitled to sharing distributions on all savings if any of the following conditions apply:

• The ACO is comprised only of medical practitioners in group practice or networks of individual practices
• 75 percent of the assigned beneficiaries are in rural counties outside of Metropolitan Statistical Areas
• 50 percent of the assigned beneficiaries are related to primary care services from a Method II CAH
• 50 percent of the assigned beneficiaries had at least one encounter with an RHC/FQHC

The maximum amount of shared savings each year will be limited to 7.5 percent of an ACO’s benchmark for Track 1 ACOs. Track 2 ACOs, along with Track 1 ACOs that have transitioned to Track 2 in Year 3 of their agreement period, will have a maximum shared savings amount of 10 percent each year.

Each year, 25 percent of the shared savings distribution will be withheld by CMS to protect against their ability to be repaid in years where shared losses occur. At the end of the three-year agreement, the withheld amounts will be distributed to the ACOs as long as they do not have shared loss amounts that need repaid. If an ACO does not complete its three-year agreement, the ACO would forfeit any of the withheld amounts.

CMS strongly believes that, to get real and meaningful change in efficiency and care for patients, ACOs need to be exposed to some risk of shared losses. Therefore, it is requiring all ACOs to become exposed to some risk by at least the third year of their initial agreement period. In addition, while this proposed rule does not address any partial capitation models, it is clear the CMS Innovation Center will continue to design and test partial capitation models and may introduce those concepts in future rulemaking.

Shared losses will be computed similarly to the above shared savings description, with the following exceptions:

• Minimum loss thresholds will be 2 percent for all ACOs.
• Maximum loss rates will be phased in starting at 5 percent in Year 1, 7.5 percent in Year 2 and 10 percent in Year 3; Track 1 ACOs will have a maximum loss rate of 5 percent in Year 3 of their agreement period.
• Shared loss percentage is equal to 1 minus the shared savings percentage.

After the first three-year agreement is completed, a new benchmark will be set for the next agreement period. It is important to realize that cost reductions in the initial agreement period will result in a lower benchmark for the next agreement period. Therefore, ongoing savings may be difficult to obtain while the ACO absorbs increased risk for shared losses. In addition, the proposed regulations preclude future participation in the MSSP for any ACO that generates a shared savings loss for the initial three-year term, so potential ACOs must be ready to effectively manage care when joining the program.

Anticipated Impact

CMS is predicting this proposed rule will result in 75–150 ACOs joining the MSSP, generating an overall savings to the Medicare program of $510 million over the 2012–14 period, covering up to 4 million Medicare beneficiaries. The first-year additional operating expense of an ACO is estimated at $1.7 million. The estimated shared savings distributions, net of shared loss repayments, are $760 million over three years.

Coordination of Proposed Regulations with Other Agencies

Concurrent with the issuance of the MSSP proposed regulations, several other federal agencies issued proposed regulations regarding potential waivers and interpretations of portions of various statutes primarily related to the shared savings payments and coordination of services associated with participation in an ACO in the MSSP. These proposed regulations included a joint CMS/Office of Inspector General waiver design of the civil monetary penalties law, federal anti-kickback statute and the physician self-referral law; a proposed Antitrust Policy Statement issued by the Federal Trade Commission and Department of Justice; and an IRS notice soliciting comments regarding the need for additional guidance for tax-exempt organizations participating in ACOs. Organizations considering the formation of an ACO are encouraged to further investigate these proposals and consider potential risks associated with these statutes in consultation with their legal representatives.

Conclusion

This proposed rule for ACOs to participate in the MSSP may be the first step in significant change throughout the health care industry. Organizations contemplating participation in the program have many factors to consider, but some of the most critical include:

• How strong is the primary care physician complement of our proposed ACO? Primary care is the driver of the beneficiary assignment to an ACO. It will be difficult for an ACO to be successful without a strong primary care physician base.
• What does Medicare reimbursement for our potentially assigned beneficiaries look like over the next few years? Receipt of meaningful use incentive payments, wage index trends and other factors need to be considered when evaluating if future cost savings to the Medicare program can be achieved.
• How effective can your potential ACO be at controlling costs for organizations that are not components of your ACO but provide services to your potentially assigned beneficiaries?
• Is the benefit of shared savings distributions greater than the potential increased cost and oversight of an ACO and assumption of risk on shared losses? Each organization needs to evaluate this early in the process, as formations of ACOs are anticipated to require large time investments by individuals throughout an organization.
• Can my organization have at least 5,000 Medicare beneficiaries assigned based on the plurality of primary care without the ability to include RHC/FQHC services in the calculation?
• For hospitals that employ primary care physicians outside of an RHC, will we be allowed to participate in multiple ACOs under the proposed rules?

For more information on the new ACO rules, please contact your BKD advisor.

As the impact of the Affordable Care Act (ACA) on providers continues to unfold, the tools the legislation provides to reduce fraud, waste and abuse are being implemented. The Centers for Medicare & Medicaid Services (CMS) has issued a final rule, effective March 25, 2011, that increases the scrutiny placed on medical service and medical supply providers applying for enrollment or revalidation as a Medicare provider.

Based on CMS experience with various types of providers and its assessment of risk of fraud, waste and abuse, providers and suppliers will be classified into limited-, moderate- and high-risk categories. Each category has corresponding screening levels. Click here to see where you fall in the risk matrix, along with related screening requirements.

Screening levels for providers and suppliers in the limited-risk category are largely unchanged from existing screening measures. These procedures include verification of provider-specific requirements as established by Medicare, license verifications and various database checks. Moderate-risk providers and suppliers will be subject to additional screening procedures, including unannounced site visits. Finally, the screening procedures for providers and suppliers in the high-risk category will be extended to include fingerprint-based criminal history checks of key individuals, including owners and managing employees.

To cover the costs of additional screening procedures, CMS will begin charging institutional providers a $505 application fee in 2011; this fee will be adjusted annually for inflation. If the fee is not submitted, the application will be rejected or billing privileges revoked, as applicable. “Institutional provider” includes any provider or supplier submitting a paper Medicare enrollment application using the CMS-855A form, CMS-855B form, not including physician and nonphysician practitioner organizations, CMS-855S form or the associated Internet-based Provider Enrollment, Chain, and Ownership System (PECOS) enrollment applications.

The final rule also enables CMS to impose incremental six-month moratoria on the enrollment of new Medicare providers and suppliers in certain situations, including:

• Instances where CMS has identified trends that could be indicative of fraud, waste and abuse, including a disproportionate number of providers relative to the number of beneficiaries and rapid increase in enrollment applications within a particular provider category
• A state-imposed moratorium on enrollment in a particular geographic area or a particular provider type
• CMS, in conjunction with the Office of Inspector General (OIG), identifying a significant risk of fraud, waste and abuse in a particular provider type or geographic area

The ACA also gives CMS greater authority in the suspension of payments to providers during an investigation of credible fraud allegations. Existing rules allowing CMS to suspend payments for 180 days with a one-time 180-day extension will be relaxed and will no longer apply if the case is being considered by the OIG for administrative action. Extensions beyond 180 days also can be granted if requested by the U.S. Department of Justice due to an ongoing investigation.

CMS efforts to reduce fraud, waste and abuse continue to evolve, and health care providers should consider the implications of this final rule. For more information, please contact your BKD advisor.

Although federally qualified health centers (FQHCs) and rural health clinics (RHCs) are not eligible at the organizational level for the Medicare and Medicaid Electronic Health Record (EHR) Meaningful Use (MU) incentives, certain providers within those facilities may qualify. Providers practicing at FQHCs or RHCs are eligible for the Medicaid program if they meet the case-mix requirements. Some providers may qualify for Medicare incentives for services billed under the Medicare Physician Fee Schedule (PFS).

Medicare eligible professionals (EPs) who demonstrate meaningful use of certified EHR technology for calendar years 2011 through 2016 can receive up to $44,000 over five years under the Medicare EHR Incentive Program. To receive the maximum EHR incentive payment, Medicare EPs must begin participation in the EHR MU incentive program by 2012. For 2015 and later, Medicare EPs not successfully demonstrating meaningful use will have a payment adjustment to their Medicare reimbursement. The payment reduction starts at 1 percent and increases each year a Medicare EP does not demonstrate meaningful use, to a maximum of 5 percent.

Since FQHCs and RHCs are not eligible to receive the incentives, these organizations will not be subject to a Medicare fee reduction or penalty at the institutional level for nonadoption of an EHR.

The Medicaid EHR Incentive Program is administered voluntarily by states and offered to EPs as early as 2011 and continuing through 2021. EPs can participate for six years throughout the duration of the program. The last year to begin participation in the Medicaid EHR Incentive Program is 2016. EPs must meet the Medicaid patient volume requirements—at least 20 percent for pediatricians and at least 30 percent for all other health professionals—for a 90-day period. Medicaid EPs can receive up to $63,750 over six years under the Medicaid EHR incentive program for calendar years 2011 through 2021. Medicaid EPs practicing at FQHCs/RHCs must show more than 50 percent of their clinical encounters occurred at an FQHC/RHC over a six-month period and that a minimum of 30 percent of their patient volume came from needy individuals.

The criteria for MU will be staged in three steps over the next five years. Stage 1 (2011–12) sets the baseline for electronic data capture and information sharing. Stage 2 (expected to be implemented in 2013) and Stage 3 (expected to be implemented in 2015) will expand on this baseline and be developed through future rulemaking. MU requirements include a core and menu objectives specific to EPs or eligible hospitals and critical access hospitals. There are a total of 25 MU objectives for EPs. To qualify for an incentive payment, 20 of these 25 objectives must be met. Of the 25 objectives, 15 are required core objectives; the remaining five objectives can be selected from a list of 10 menu objectives.

There are many questions you should consider if your EPs plan to take part in the EHR MU incentive programs. Are your EPs:

• Using certified EHR technology?
• Enrolled in the Physician Enrollment Chain and Ownership System?
• Registered online to participate in the Medicare EHR Incentive Program?
• Successfully demonstrating MU for each required reporting period (90 days in the first year, full calendar year for subsequent years) of participation?
• Medicare EPs who predominantly furnish services in a designated Health Professional Shortage Area?
• Planning to switch back and forth between the Medicare and Medicaid EHR incentive programs?
• Planning to assign their payments to another entity, e.g., a group practice, if they so choose?

Additional details and key dates related to EHR MU incentives can be found at the CMS website and with your respective state Regional Extension Center (REC).  RECs provide education, outreach and technical assistance to help providers in their geographic service area select, successfully implement and meaningfully use certified EHR technology to improve the quality and value of health care.

If you need further guidance or assistance, please contact your BKD advisor, Mike Schnake at mschnake@bkd.com or Jeff Allen at jeallen@bkd.com.

As the IRS works to implement changes under the Patient Protection and Affordable Care Act of 2010, the agency issued Announcement 2011-20 directing tax-exempt hospital organizations required to file Form 990, Schedule H – Hospitals, to delay filing their 2010 Form 990 until July 1, 2011, or later. The delay applies to hospital organizations filing electronic or paper returns. The IRS requested the delay to allow more time to complete changes to required forms and systems needed for additional reporting requirements for charitable hospitals under the new law.

Charitable hospitals are granted an automatic three-month extension to file Form 990. The automatic extension applies only to hospital organizations required to file Schedule H with the 2010 Form 990 due before August 15, 2011.

Hospital organizations affected by Announcement 2011-20 are not required to file Form 8868, Application for Extension of Time to File an Exempt Organization Return. No late-filing penalties will apply to tax year 2010 Forms 990 (with Schedule H attached) filed by hospital organizations on or before their extended due dates. Recently formed hospital organizations that did not complete Form 990, Schedule H, in 2009 are encouraged to file an extension to reduce the risk of incorrectly receiving a penalty notice. If a hospital organization determines additional time beyond the automatic three-month extension is needed to file its Form 990, the hospital may request an additional (not automatic) three-month extension by properly completing, signing and filing Form 8868.

The delay does not apply to any other tax-exempt organization required to file Form 990. It is important to note that the delay does not apply to Form 990-T filings. If a hospital organization required to file Form 990, Schedule H, also files Form 990-T and needs additional time to complete Form 990-T beyond the original due date, a Form 8868 should be filed for the 990-T.

Please contact your BKD advisor if you have any questions.

With the passage of the Affordable Care Act (ACA) in 2010, Congress directed the Centers for Medicare & Medicaid Services (CMS) to implement a Value-Based Purchasing (VBP) program. The goal of VBP is to revamp how Medicare services are paid to better reward value, outcomes and innovations instead of basing payment merely on volume. Proposed regulations released by CMS in the January 13, 2011, Federal Register give providers a first look at how CMS plans to implement VBP and provide quality incentives.

As proposed, the VBP program generally applies to all short-term acute care hospitals other than critical access hospitals. Other hospital types excluded from VBP include psychiatric, rehabilitation, long-term care, children’s and cancer hospitals. The VBP program also does not apply to hospitals that have not reported quality data under current regulations and, therefore, already have received a 2 percent Medicare payment reduction.

CMS proposes that, beginning with federal fiscal year (FFY) 2013, i.e., payments for discharges on or after October 1, 2012, hospital operating diagnosis-related group (DRG) payments will be reduced by 1 percent to create a VBP payment pool. The reduction will increase 0.25 percent per year to a full reduction of 2 percent in FFY 2017. This reduction will be reallocated to hospitals in a budget-neutral manner based on each hospital’s total performance score under the proposed VBP measurement criteria. The VBP payment will be made by increasing each hospital’s base DRG payment amount by its VBP incentive payment add-on.

CMS proposed using the “Three Domains of Care” approach to assess quality, which includes clinical process of care measures, outcome measures and patient experience survey results. For FFY 2013, the program will only include the clinical process of care and the patient experience survey domains, with the outcome measures domain starting in FFY 2014. CMS will determine a hospital’s “total performance score” based on its results in each of the three domains.

Clinical Process of Care & Outcome Measures

Under the clinic process of care and outcome measure domains, hospitals will earn two scores for each performance measure—an achievement score and an improvement score. The achievement score will be based on a hospital’s performance on each measure compared to other hospitals during that reporting period, while the improvement score will compare the hospital’s current measures to those achieved in the baseline period.

The clinical process of care and outcome measures will focus on four topics:  Acute Myocardial Infarction (AMI), Heart Failure (HF), Pneumonia (PN) and Surgical Care Improvement (SCIP). For a complete listing of clinical processes included, click here.

Seventy percent of a hospital’s total performance score will be based on the 17 clinical processes of care and outcomes measures (once implemented). In instances where the hospital has fewer than 10 cases in any measurement category, that category is excluded from the total possible points.

Because CMS must determine each hospital’s VBP incentive add-on before the start of an FFY, it has proposed to use measurement and baseline periods for the nine months ending March 31 of each year. The initial baseline period is July 1, 2009, to March 1, 2010, and the initial performance period is July 1, 2011, to March 31, 2012.

For each measure, CMS will set an achievement threshold and benchmark threshold. The achievement threshold represents the median score of all hospitals on a particular measure during the performance period. The benchmark threshold represents the performance mark equal to the mean of the top decile of hospitals for that measure during the performance period.

For the achievement score, CMS will use a 10-point scoring method for each measure. Hospitals exceeding the benchmark would receive 10 points for the measure. Hospitals scoring above the achievement threshold but below the benchmark would receive between one and nine points, depending on its location within that range. Hospitals failing to reach the achievement threshold would receive no points for the achievement score.

For the improvement score, CMS will also use a 10-point scoring method. Hospitals exceeding the benchmark will receive a 10-point score. In addition, CMS will establish a hospital-specific improvement range using a hospital’s baseline performance. A hospital improving its score on a measure will receive one to nine points, based on a sliding scale between the performance in the baseline period and current period benchmark.

Hospitals will receive the higher of the achievement or improvement score for each measure. The sum of these scores is aggregated and divided by the possible total points—10 points for each category that applies to the hospital.

CMS intends to expand the clinical process of care measurements in future years. Beginning in FFY 2014, it will include three mortality outcome measures currently reported on the Hospital Compare website:  MORT-30-AMI, MORT-30-HF and MORT-30-PN. Additional current and long-term priority topics include prevention and population health, safety, chronic conditions, high-cost and high-volume conditions, elimination of health disparities, healthcare-associated infections and other adverse healthcare outcomes, improved care coordination, improved efficiency, improved patient and family experience of care, effective management of acute and chronic episodes of care, reduced unwarranted geographic variation in quality and efficiency and adoption and use of interoperable health information technology.

Before additional topics can be added to the specific clinical process of care and outcomes, each must be published on the Hospital Compare website (www.hospitalcompare.hhs.gov) for one year. CMS has suggested new measures will be implemented to have their respective performance period begin immediately after the display period on the website is complete.

Patient Experience Score

The remaining 30 percent of the VBP payment will be based on a patient experience score as determined through a survey. CMS will use the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey (www.hcahpsonline.org), which contains 18 core questions about critical aspects of patients’ hospital experiences. These items include communication with nurses and doctors, responsiveness of hospital staff, cleanliness and quietness of the hospital environment, pain management, communication about medicines, discharge information and overall rating of the hospital.

The random survey is administered to a sample of adult patients across medical conditions between 48 hours and six weeks after discharge and is not restricted to Medicare beneficiaries. Each of the questions is grouped into eight dimensions and compared to the related achievement performance standards of the 50th and 95th percentile. Hospitals with ratings above the 95th percentile will receive 10 points. Ratings between the 50th and 95th percentile will receive one to nine points, and those below the 50th percentile will receive no points. Hospitals also will be scored based on improvement; hospitals will be awarded between one and nine points if their scores improve over their baseline period. The higher of a hospital’s achievement or improvement score will be awarded, with a maximum of 80 points.

The scoring process also includes a consistency variable, where hospitals earn consistency points ranging from zero to 20 points based on how many of their dimension scores meet or exceed achievement thresholds. If all dimensions are above the 50th percentile, the hospital will receive 20 points. The total patient experience score is equal to the sum of dimension points and consistency points, for a total of 100 possible points.

Total Performance Score

The total performance score is determined by combining the clinical process of care and outcomes score (weighted at 70 percent) and the HCAHPS survey results (weighted at 30 percent). The total performance score is then ranked in linear scale with other hospitals to determine incentive payments. Hospitals with a higher total performance score will receive higher incentive payments than those with lower scores. Currently, all hospitals will be ranked together. There is no differentiation between hospitals for size or Medicare designations such as urban, rural, sole community or Medicare dependent hospitals.

Other Matters

Hospitals will be notified of their preliminary VBP score no later than August 1, 2012, via CMS QualityNet accounts. CMS will notify hospitals of their final VBP score by November 1, 2012, and hospitals will have 30 days to review and submit correct information. CMS will adjust payment rates for the VBP incentive amount starting January 1, 2013, with retroactive adjustments for any FFY 2013 discharges paid prior to January 1, 2013.

CMS proposes to validate the accuracy of quality data submissions through random selection of hospitals and will select approximately 20 percent of hospitals and request 12 cases per quarter. CMS will re-abstract the quality measure data elements and compare the results to information submitted by the hospital. The hospital must achieve a correlation of at least 75 percent for its data to be considered reliable. If the hospital fails to meet this 75 percent mark, CMS will treat the hospital as if it did not report quality data and reduce payments by 2 percent.

Hospitals should take the following steps now to prepare for VBP:

• Review current hospital clinical care and outcome measures and survey of patients’ hospital experiences as submitted and reported on the Hospital Compare website to national averages.
• Identify those clinical care and outcome measures below national averages and focus on how to increase these measures for the upcoming performance period beginning in July 2011. Remember hospitals are not only awarded for absolute outcomes, but also improvement compared to the baseline period.
• Review quality data submitted for accuracy and completeness as presented on the Hospital Compare website. Hospitals may want to engage outside assistance to validate their information.

For more assistance reviewing the impact of Value-Based Purchasing on your hospital, contact your BKD advisor.

The Patient Protection and Affordable Care Act (PPACA) clearly states the current Medicare payment system for Federally Qualified Health Centers (FQHCs) will change to a new Prospective Payment System (PPS) in 2014. Beginning January 1, 2011, claim submission requirements for FQHC services changed based on PPACA mandates.

When billing Medicare services dated on or after January 1, 2011, FQHCs must report all pertinent services provided and list the appropriate Healthcare Common Procedure Coding System (HCPCS) code for each line item, along with revenue codes for each FQHC visit. If service lines do not contain valid HCPCS codes, the claim will be returned to the provider, except for those revenue codes that do not permit HCPCS code reporting. When claims service lines contain a valid HCPCS code but not a revenue code, the claim will be returned to the provider. Until the FQHC PPS is implemented in 2014, the Medicare claims processing system will continue to make payments under the current FQHC interim per-visit payment rate system.

Please note that the updates provided in Change Request 7038 (CR7038) and detailed in Medicare Learning Network’s MLN Matters article MM7038 do not affect claims for supplemental payments to FQHCs under contract with Medicare Advantage Plans. In addition, preventive services covered by Medicare for beneficiaries were expanded effective January 1, 2011.

For FQHCs to respond to these changes, extra effort may be required for organizations to update or modify practice management systems or claims submission processes. In addition, expanded billing and coding training for clinicians and billing staff may be necessary to address changes that could affect your organization’s ability to receive appropriate reimbursement.

Additional details of CR7038 can be found in the attached MLN Matters article and with information provided by your respective fiscal intermediary or Medicare Administrative Contractor.

If you need additional assistance, please contact your BKD advisor or click on one of the photos below to email one of our community health center professionals.

On November 2, 2010, the Centers for Medicare and Medicaid Services (CMS) issued the final rule on the 2011 update for the Medicare Home Health Prospective Payment System (PPS) rates—yet another document issued in 2010 to send ripples through the home health provider community. This rule, combined with the Patient Protection and Affordable Care Act of 2010 (PPACA), has created the furthest-reaching changes facing home health agencies since the implementation of the original home health PPS in 2000.

The home health industry has been thrust into the government spotlight with repeated reports from the Medicare Payment Advisory Commission (MedPAC) about excessive profit margins and accusations of questionable business practices. With this negative attention, home health took its fair share of the hit as our government looked to reform health care with the passing of PPACA in March. CMS also has taken matters into its own hands with payment reductions and implementation of additional compliance requirements for home health.

The 2011 home health payment rule was used as a vehicle to implement some of the home health provisions within PPACA. Therefore, a refresher on those provisions will help provide the groundwork to better understand the rule’s changes.

Home Health Provisions in PPACA

PPACA included specific rules for updating home health payment rates, new Medicare coverage requirements for home health services and directives for the Department of Health and Human Services (HHS) and MedPAC to perform studies on home health payment methodologies. Items affecting home health payment rates include:

• A 3 percent rural add-on effective for Medicare episodes ending on or after April 1, 2010, and before January 1, 2016
• Indefinite continuance of the agency-specific 10 percent outlier payment cap
• A 2.5 percent 2011 reduction to the Medicare home health PPS base rates due to realigning outlier budget of 5 percent versus outlier spending target of 2.5 percent
• A 1 percent reduction in the annual Medicare home health market basket update for the years 2011 through 2013
• Rebasing of payment rates to better approximate costs over a four-year phase-in beginning with 2014, with a maximum reduction of 3.5 percent per year
• Reduction of the annual Medicare home health market basket update by a productivity adjustment, beginning in 2015

New coverage requirements for Medicare home health services include:

• For certifications for Medicare home health services made by a physician, the certifying physician must have documentation supporting that the physician has had a face-to-face encounter with the individual prior to such certification and within a reasonable time frame
• For home health certifications made on or after July 1, 2010, the physician ordering home health services must be enrolled in Medicare
• Beginning with services on or after January 1, 2010, timely filing requirements are one year from date of service (by December 31, 2010, for all services provided prior to January 1, 2010)

HHS and MedPAC are required to report on or perform studies on various home health payment methodologies, including:

• The Secretary of HHS must report to Congress by October 1, 2011, the plan for implementing value-based purchasing for Medicare home health
• The Secretary of HHS must report to Congress by March 1, 2014, the results of a study on the development of Medicare home health payment revisions to ensure access to care and payment for severity of illness. If the study (and demonstration project) deems that revisions to the Medicare home health payment methodology are appropriate, the revisions are required to begin no later than January 1, 2015, and be carried out over a four-year period
• MedPAC must report to Congress by January 1, 2015, on its study of the effects of the rebasing effort

Home Health Payment Rule – Payment Updates

The base home health 60-day episode payment rate, prior to case-mix and wage-index adjustment, is decreased by 5.2 percent. The decrease consists of the following three components:

• 1.1 percent market basket increase (2.1 percent market basket index minus one percentage point as required by PPACA)
• 2.5 percent decrease for the outlier cap as required by PPACA
• 3.79 percent decrease for case mix creep as determined by CMS

Wage index changes can vastly change the ultimate effect on a specific geographic area’s payment rates. Some areas are receiving wage index decreases that double the decrease in their payment rates, while other areas are receiving wage index increases that virtually wipe out the base rate decrease.

The non-routine supply (NRS) payment and low utilization payment adjustment (LUPA) payment rates were both decreased by 1.5 percent, as they are not impacted by the case mix creep adjustment. The outlier payment provisions are unchanged, and the agency-specific 10 percent outlier payment cap is retained as required by PPACA.

Rural payment rates receive a 3 percent rural add-on as specified in PPACA. This add-on is included in the rural base rates as well as the NRS and LUPA rural payment rates.

As mentioned above, the 2011 payment rule not only provided the update for the Medicare home health PPS payment rates, it also addressed several non-rate issues. These non-rate issues address compliance concerns and implement PPACA requirements.

Physician Face-to-Face Encounters

For Medicare home health admissions on or after January 1, 2011, the certifying physician must have a face-to-face encounter with the patient either within 90 days prior to or 30 days after admission. The encounter must be performed by a qualified certifying physician or other qualified nonphysician practitioner and must be related to the primary reason the patient is being admitted to home health. Appropriate documentation must be in place as a condition of payment.

Therapy Standards

The payment rule addressed therapy standards in home health, as therapy utilization continues to be a focus of concern of CMS and others. According to clarification within the requirements, therapy documentation should focus on functional, measurable and objective goals and progress being made towards these goals. New standards require qualified therapists, excluding assistants, to assess, measure and document progress toward goals at least every 30 days, or prior to the 13th and 19th total therapy visits. Additional guidance also is provided on the coverage of maintenance therapy. These heightened therapy standards are not effective until April 1, 2011.

Additional HCPCS Codes

Effective January 1, 2011, new Healthcare Common Procedure Coding System (HCPCS) codes are to be used on Medicare claims. These new HCPCS codes include new “G” codes to be used for maintenance therapy visits as well as for visits performed by therapy assistants. New “G” codes also will be required for nursing visits for management and evaluation, observation and assessment and training and education. The intent of these new codes is to help provide CMS with a better understanding of the home health services being provided.

Capitalization

To protect patient care of new-start agencies, additional capitalization requirements were set forth in the payment rule. New-start agencies now must prove that three months’ operating capital is in place at three points: upon application, at the time of survey and when enrolling in Medicare. CMS will require cost report data of comparable agencies as a basis to determine the necessary capitalization.

36-Month Rule

The 36-month rule was actually put in place under the 2010 payment rule, but the 2011 payment rule provides further guidance on the application of the rule after a year of confusion. The 36-month rule prohibits the conveyance of the home health provider agreement to a buyer if the selling agency started within 36 months or a prior change of ownership took place in the last 36 months. Under these circumstances, the buyer must enroll in Medicare as a new, or initial, agency. The 2011 payment rule confirms it does apply to both asset and stock transactions. However, it will only be applied to changes in “majority” ownership, and several exceptions to the rule are provided, including death of an owner, indirect ownership changes and changes in entity structure.

Take Action Now

Agencies must move quickly to prepare for these far-reaching changes. Preparation should include education, assessment of opportunities to improve operational efficiencies and implementation of policies and procedures to ensure compliance. Contact your BKD advisor for further information.

Section 1833(t)(17)(A) of the Social Security Act requires hospitals failing to submit outpatient quality indicators incur a 2 percent reduction to their outpatient prospective payment system (OPPS) market basket update for the year at issue. The act requires the Centers for Medicare & Medicaid Services (CMS) to conduct validation audits of the submitted data to ensure participating hospitals are submitting accurate data, and 800 hospitals will be randomly chosen to help with the validation process.

Although participation in the Hospital Outpatient Quality Data Reporting Program (HOP QDRP) is voluntary for Critical Access Hospitals (CAHs), those that choose to participate are not subject to the validation audit requirement.

In the fiscal year 2011 OPPS Final Rule, published in the November 24, 2010, Federal Register, CMS outlined the new validation audit procedures applicable to the update for federal FY2012. The audit methodology is similar to that in place for the FY2011 update, with some modifications intended to ease administrative burden. For example, hospitals with fewer than five cases in a quarter for a particular quality indicator are not required to report patient level data for that indicator. Hospitals with volumes exceeding a certain threshold for an indicator are permitted to sample cases and submit data for the sample rather than all applicable cases. The hospital is required to follow the sampling methodology and submission requirements as published in the Hospital Out Patient Department Specifications Manual at least three months in advance of the quarterly deadline.

In FY2011, the HOP QDRP permits CMS to randomly select 800 hospitals (approximately 20 percent of all participating PPS hospitals) for validation audits to confirm the data reported to OPPS Clinical Warehouse is accurate and reliable. (Click here to download the list.)

All hospitals that have elected to participate in the 2012 payment update are eligible for review. Per the rule, 800 hospitals will be randomly selected for the validation audit. In the past, the audit consisted of five cases per hospital in the OPPS Clinical Warehouse. CMS believes that a larger sample from only a percentage of hospitals would provide a representative sample of every type of hospital and increase the reliability of data, while reducing the burden of compliance for hospitals overall. This would improve CMS’ ability to project the finding across the entire provider base.

For each randomly selected hospital, CMS will randomly select 12 cases per quarter. CMS chose 48 cases as it is close to 50, the sample size considered adequate for a probe sample used to identify trending relationships. CMS believes this specified number of cases will provide increased reliability in estimating the validity of data submitted by the hospital. With each of these 48 cases, CMS will re-abstract the quality measure data elements and compare the results to information submitted by the hospital. The hospital must achieve a correlation of at least 75 percent for its data to be considered reliable and to receive the full 2012 OPPS payment update. If the hospital fails to meet the 75 percent threshold, it will be as though the hospital failed to report. Dates of service under review to validate the 2012 update are April 1, 2010, to March 31, 2011.

CMS’ interest is whether the information submitted by the hospitals is accurate and reliable in reflecting patient care given and documented in medical records. The agency is not interested in accuracy by measure or topic area, so the sample will not be stratified by indicator.

Once the data is requested by CMS, the hospital has 45 calendar days to submit the requested information. If the hospital fails to do so within the allotted time, it will receive a 2 percent reduction in its 2012 payment update factor. Note that this reduction will only affect the payment year audited.

There is a reconsideration process available to hospitals where audit results indicate failure to provide accurate and reliable data. Under this process, the hospital must submit a Reconsideration Request form (available here) to CMS by February 3, 2012. If the hospital is not satisfied with the result of the reconsideration decision, there also is an appeal process available.

If you are one of the 800 hospitals randomly selected and CMS requests data for a validation audit, it is in your best interest to comply. The extra effort required for the audit is well worth the opportunity to receive the full 2012 payment update.

If you have questions about this new reporting requirement, please contact your BKD advisor, or Sally Hardgrove at shardgrove@bkd.com.

M&A Activity Continuing to Gain Traction

From the start of the economic downturn in late 2008 through the majority of 2009, merger and acquisition (M&A) activity in the long-term care (LTC) market was hard to come by, and many of the sales that did take place were of the distressed variety. Similar to other industries, contributing factors to the LTC M&A slowdown included:

• Poor operating performance
• Reimbursement uncertainty
• Tight credit markets
• Sellers holding out for a better market

As the economy begins to piece itself back together and lenders carefully evaluate new loan opportunities, the LTC market is regaining its luster as an attractive investment in the competitive M&A market.

As illustrated in the graph below, 3Q 2010 represented the fifth consecutive quarter with a quarterly year-over-year increase in LTC deal volume. Although the market made significant gains in the second half of 2009, the continued gains seen throughout 2010 have been impressive. There were 68 LTC transactions reported during the first three quarters of 2010, compared to only 49 for the same period in 2009, representing a 39 percent increase. Furthermore, the dollar volume nearly tripled during the same time period to more than $2.1 billion. As we continue through the fourth quarter, it appears likely this growth will continue, as both buyers and sellers appear ready to take advantage of improving debt markets and low interest rates.

Source:  Irving Levin Associates, Inc.

In addition to the improving debt markets that have helped ease the bottleneck of deals, a number of other contributing factors should help spur continued M&A activity in the LTC sector, the largest of which may be the increasing cost of compliance. With the new requirements enacted through the Patient Protection and Affordable Care Act, skilled nursing facilities (and possibly assisted living facilities in the future) will see compliance costs rise. This in itself will be difficult for smaller independent facilities to absorb. As a result, to achieve economies of scale in increasing compliance costs, independent facilities will likely consider merging with larger regional or national chains at some point in the near future. Other factors contributing to increased activity include aging facilities, low interest rates, aging baby boomers and increasing valuations.

With the increased deal activity, there is a good chance cap rates will continue to decline and valuations will become stronger. As the “risk-free” rate remains relatively low with the sputtering economy, higher valuations and lower expected returns on investment may become more appropriate for an industry that’s performed relatively well throughout the recession.

In summary, with more regional and national LTC chains actively seeking acquisition targets, valuations continuing to improve, the cost of compliance rising and the number of baby boomers getting closer to retirement age, the LTC M&A market should continue to become increasingly active.

Public Comparables

Skilled Nursing

Assisted/Independent Living

Note:  LTM=Last Twelve Months; EV=Enterprise Value; EBITDAR=Earnings before Interest, Taxes, Depreciation, Amortization and Rent

• Although the skilled nursing and assisted/independent living public comparables indices saw capitalization rates rise 30 basis points and 40 basis points, respectively, from 2Q 2010 to 3Q 2010, the capitalization rates already have improved by 20 basis points for skilled nursing and 30 basis points for assisted/independent living during the first month of 4Q 2010.

• Publicly traded cap rates are still off their recent lows from 1Q 2010; however, the market’s improvement over the last few months is expected to continue through the remainder of 2010.

Recent Transaction Cap Rates (06/30/10)

Source:  NIC-Seniors Housing & Care Industry

Recent Select Transactions

Skilled Nursing

• October 2010 – Radius Management Services purchased six Massachusetts skilled nursing facilities (SNFs) from Health Care REIT. The properties total 837 skilled nursing beds and 27 assisted-living (AL) units that averaged an occupancy rate of 92 percent and sold for $88.5 million, or $102,500 per bed.
• September 2010 – Kindred Healthcare announced the acquisition of three nursing and rehabilitation centers with a total of 405 beds in the Dallas-Fort Worth market for $38 million, or approximately $93,800 per bed. Annualized revenues and EBITDA were $24 million and $3 million, respectively.
• September 2010 – Covenant Care purchased a 102-bed SNF in Iowa for $2.5 million, or $24,500 per bed. Revenues for the facility were approximately $3.4 million, and the facility operated just above break-even. The new ownership should be able to leverage its expertise to improve efficiency and return on this facility.

Assisted/Independent Living

• October 2010 – Wilkinson Group sold a Tennessee facility consisting of 59 assisted-living (AL) units, 42 independent living (IL) units and 15 memory care units to a Florida-based real estate investment company for $8.5 million, or $72,300 per unit. Revenue and EBITDA were approximately $3.5 million and $800,000, respectively, based on a 97 percent occupancy rate.
• September 2010 – Five Star Quality Care purchased a campus of three buildings (AL with 48 units, memory care with 27 units and IL with 35 units) in Wisconsin for $14.7 million, or approximately $133,600 per unit. Revenues and EBITDA for the facilities were approximately $4 million and $1.3 million, respectively. Overall occupancy on the campus was around 98 percent.
• September 2010 – MBK Senior Living acquired a 135-unit IL facility in Olympia, Washington. The purchase price of $16 million equates to a per-unit price of $118,500. Occupancy was approximately 85 percent at the time of the sale. MBK plans to convert up to 40 of the units to assisted living to improve occupancy statistics.

Health Care Reform Spurs Increase in M&A Activity

Since the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 passed in mid-March, there have been 28 deals involving 57 hospitals for a combined total of $3.3 billion. Prior to this, only five deals had been announced in 2010, totaling $94.2 million, according to data from Irving Levin Associates, Inc. The suppressed level of activity in 2009 and beginning of 2010 clearly was a result of hospitals and investors waiting to gauge the new reform’s effect on operations. This legislation, and its impact on hospitals, will most likely cause a dramatic increase in the level of M&A activity for the remainder of 2010 and beyond.

Recommendations for Hospitals Considering a Sale, Merger or Acquisition

Most analysts expect a continued increase in the number of hospitals looking to sell, merge or reposition their facilities. Here are some key factors hospitals should consider when assessing their future:

Sale

• Be proactive – The sooner you can identify issues that need to be addressed, the better chance you have to receive full value for the facility.
• Accentuate your strengths – When the decision is made to sell, it is important to aggressively promote the positive attributes of the business.
• Keep an open mind – We are in unprecedented economic times, and the deal community recognizes this. What may have been “standard” deal terms in the past, may not be standard today.

Merger

• Verify common objectives – Make sure all parties agree on expectations, services, strategies and the future of the business.
• Consider all options – A merger is an important and difficult decision. Make sure all prospective partners have been considered.
• Determine new roles – It is vitally important to determine which entity will have a predominant role early in the negotiation process.

Acquisition

• Understand the big picture – Aside from the financial aspect of the transaction, make sure the nonfinancial areas have been addressed and the deal has been deemed an appropriate merger or acquisition.
• Thoroughly research the investment – Evaluate the short- and long-term possibilities of the acquisition to determine if the return on invested capital is adequate.
• Assess every detail – Deals are difficult, but bad deals can be fatal to an organization. Don’t be afraid to walk away.

National Health Expenditures

In 2009, despite difficult economic conditions in nearly all industries, national health expenditures (NHE) in the United States increased by 5.8 percent to $2.5 trillion. At this level, NHE totaled 17.3 percent of total gross domestic product (GDP), up from 16.2 percent in 2008. It also represents the largest single-year increase in several years. Looking forward, and as a result of the implementation of recent legislative and regulatory changes, the Centers for Medicare & Medicaid Services is projecting NHE to have an annual average growth rate of 6.3 percent for 2009–19. These increases will result in NHE totaling $4.5 trillion in 2019, representing 19.6 percent of GDP. The following chart summarizes NHE 2004–09, as well as the corresponding percentage of GDP.

Source:  Centers for Medicare & Medicaid Services, Office of the Actuary; 2009 represents estimated results

Public Hospital Systems – Historical Stock Performance

Below is a summary of stock performance for five of the largest hospital systems over the past four years. The first graph illustrates the percentage change compared to their stock price as of December 31, 2006. The second graph aggregates these public companies into an index based on market capitalizations and compares them to the S&P 500. As shown, the S&P has outperformed the index fairly consistently over this period, but as of September 30, 2010, the gap has closed.

Historical M&A Activity and Recent Transactions

Within the health care services industry in 2009, hospitals accounted for 14 percent of the overall M&A activity, with a total transaction volume of $1.6 billion. While this activity level has continued in 2010, the recent health care reform legislation has most experts believing that consolidation activity will increase dramatically within the hospital sector. It is believed the large 501(c)(3) hospitals and for-profit hospitals, including those backed by private equity, will lead this consolidation.

Below is a summary of M&A activity within the health care services industry over the past four years and preliminary results through June 2010. Also included is a summary of some of the larger hospital M&A deals that occurred in the second quarter of 2010, according to information from Irving Levin Associates.

Source:  Irving Levin Associates, Inc.

For more information on the health care market update, please consult your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including financial institutions, health care, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

As part of the health care reforms passed earlier this year, Congress created a new tax credit available to eligible small employers (ESEs) for nonelective contributions to purchase health insurance for their employees. The credit is available for taxable years beginning after 2009. For-profit companies as well as tax-exempt employers may be able to benefit from the credit starting with their 2010 tax returns.

Who Is an Eligible Small Employer?

To qualify for the credit, a taxpayer must meet the following criteria:

• Total number of full-time equivalent (FTE) employees is 25 or fewer. The number of FTE employees is calculated by dividing the total number of hours worked by both full-time and part-time employees by 2,080. The result is rounded down to the next whole number. If an employee works more than 2,080 hours, excess hours are excluded. Hours worked by seasonal workers are not included in the calculation unless the seasonal worker worked for the employer more than 120 days during the year. Hours worked by certain owner-employees, i.e., self-employed individuals, greater than 2 percent shareholders of an S corporation, 5 percent owners and employees related to owner-employees, also are excluded from the calculation. Based on how total FTEs are calculated, employers with more than 25 employees may still qualify as an ESE if a portion of the employees work part time or are excluded from the “employee” definition.
• Average annual wages of employees are $50,000 or less. Average annual wages are determined by dividing total wages paid to employees (not including wages paid to employees excluded from FTE calculation) by the number of FTEs. The result is rounded to the next lowest multiple of $1,000. For purposes of this credit, wages are defined the same way as for purposes of the Federal Insurance Contributions Act.
• The employer has a qualified health care arrangement in effect. For tax years 2010 through 2013, a qualified health care arrangement requires an employer to make nonelective contributions of at least 50 percent of the premium cost on behalf of each employee who enrolls in a qualified health plan offered by the employer. For tax years beginning after 2013, the arrangement must be through a state exchange. Under the health care reforms, each state is required to establish an exchange by January 1, 2014, to facilitate the purchase of qualified health plans. The IRS has provided transitional relief for tax years beginning in 2010 to make it easier for a health care arrangement to qualify. First, an employer that pays at least 50 percent of the premium for each employee enrolled in coverage is deemed to satisfy the qualifying arrangement requirement even if it pays a higher percentage of premiums for certain employees.  Second, the 50 percent premium requirement applies to the premium for single (employee-only) coverage. Therefore, if an employee is enrolled in more expensive family or self-plus-one coverage, the employer satisfies the 50 percent requirement if the amount it pays for the more expensive coverage is at least 50 percent of the single coverage premium.

For purposes of the above criteria, certain related taxpayers must be treated as a single employer. In other words, a taxpayer cannot circumvent the FTE and wage limitations through the use of multiple entities.

Calculation of Credit

For tax years 2010 through 2013, the maximum credit is equal to the lesser of 35 percent of contributions the ESE made on behalf of its employees during the year for qualifying health coverage or 35 percent of contributions the employer would have made during the year if each employee had enrolled in coverage with a small business benchmark premium. The benchmark premium is the average premium for the small group market on a state-by-state basis as determined by the Department of Health and Human Services. (Click here for the 2010 benchmark premiums.) For taxable years beginning after 2013, the maximum credit percentage increases to 50 percent but will be available only for two years and only for ESEs that purchase coverage through an insurance exchange.

The credit is reduced for ESEs with more than 10 employees or if average employee wages are more than $25,000. If total FTEs are more than 10, the credit is reduced by approximately 6.67 percent for each employee in excess of 10 and is fully phased out at 25 or more FTEs. If total average wages are more than $25,000, the credit is reduced by 4 percent for each $1,000 of average annual wage in excess of $25,000 and is fully phased out once average wages equal or exceed $50,000. For employers with both more than 10 FTEs and average wages greater than $25,000, the credit must be reduced by the sum of both phase-out amounts.

The amount of credit is calculated on Form 8941, Credit for Small Employer Health Insurance Premiums. The IRS has released a draft of the 2010 form.

The small employer health insurance credit is treated as a general business credit and can be used to offset income tax liability. Any unused credit can be carried back one year and forward 20 years. In addition, the health insurance credit can be used to offset alternative minimum tax liability.

Special Rules for Tax-Exempt Entities

While most tax-exempt entities do not pay any income tax, they may still benefit from the small employer health insurance credit by treating it as a refundable credit. To qualify, the exempt entity must meet the same criteria to be treated as an ESE and must be an organization described in Internal Revenue Code Section 501(c). Similar credit phase-out rules apply to exempt organizations. However, the credit is limited to 25 percent of contributions the ESE made on behalf of its employees for taxable years 2010 through 2013 and 35 percent for tax years after 2013. Further, the credit is limited to the total income and Medicare tax the employer is required to withhold from employee’s wages for the year and the employer share of Medicare tax on employees’ wages for the year.

Exempt organizations that qualify for the small employer health insurance credit will compute the credit on Form 8941 but will claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T is used by exempt organizations to report and pay tax on unrelated business income. The IRS will revise Form 990-T for the 2011 filing season to enable exempt organizations to claim the small employer health insurance credit.

Conclusion

Determining whether your business qualifies as an ESE and calculating the allowable credit can be complex. In addition, accurate calculations will likely require the assistance of your payroll department. Businesses expecting to meet the ESE criteria should start making initial calculations to determine potential benefit. While the actual credit is not claimed until the income tax return is filed, businesses can recognize an immediate cash flow benefit by reducing quarterly estimated tax payments for the anticipated credit.

Additional information on the small employer health insurance credit, including examples and answers to frequently asked questions, can be found on the IRS website.

For more information on the small employer health insurance credit and assistance in calculating the credit, please contact your BKD advisor.

The health care reform law enacted earlier this year includes a health insurance mandate effective for months beginning after December 31, 2013. This mandate will require certain “large employers” to offer and pay for a portion of employees’ health insurance or pay a penalty. This article will examine which employers are potentially subject to the excise tax and how the penalty is calculated.

Who Is a Large Employer?

A business must first determine whether it meets the definition of “large employer.” A large employer is generally defined as an employer with at least 50 full-time employees during the preceding calendar year. A full-time employee is any individual, for any month, working an average of 30 hours or more per week. Total hours worked by part-time employees for each month must be aggregated and divided by 120 to determine full-time equivalents. Special rules also apply for seasonal workers in determining whether the 50-employee threshold is met.

Calculation of Excise Tax

If an employer meets the definition of “large employer,” the next step is to determine whether the penalty applies. Generally, the employer is subject to a nondeductible penalty if it does not offer a health care plan or offers a plan failing to meet certain criteria.

• Employer does not offer a health care plan. If an employer does not offer a health care plan to employees and at least one full-time employee receives health coverage assistance, i.e., a premium tax credit or cost-sharing reduction, the employer will be assessed penalties each month the failure occurs. The IRS has not issued guidance on the frequency of assessed penalty payments but is authorized to collect payments on an annual, monthly or other periodic basis. In 2014, the monthly penalty is one-twelfth of $2,000, i.e., $166.67, multiplied by the number of full-time employees in excess of 30. For example, in 2014, an employer has 90 full-time employees but does not offer a health care plan. Ten employees received premium tax credits. The employer would owe a nondeductible penalty of $120,000 for 2014, which is calculated by multiplying 60 employees (the number above 30) by $2,000. The $2,000 amount is indexed for inflation after 2014.
• Employer offers health care but does not meet certain criteria. Even if the employer offers health care to employees, the penalty could still apply if the plan does not provide “minimum essential coverage.” In general, minimum essential coverage is not met if at least one full-time employee receives a premium credit or cost-sharing reduction in a state exchange plan because the employee’s required premium under the employer health care plan exceeds 9.5 percent of his or her household income, or the employer-offered plan pays for less than 60 percent of covered health care expenses. Under this scenario, the monthly penalty for 2014 is one-twelfth of $3,000, i.e., $250, multiplied by the number of employees who received a premium tax credit or cost-sharing reduction, but is capped at the penalty the employer would owe if no health care plan were provided. For example, in 2014, an employer has 90 full-time employees, 10 of whom received premium credits for enrolling in a state exchange plan. The employer would owe a nondeductible penalty of $30,000 for 2014, which is calculated by multiplying 10 employees times $3,000. The cap amount does not apply since the penalty is less than the $120,000 the employer would have owed if no coverage were provided. The $3,000 amount is indexed for inflation after 2014.

Conclusion

Calculation of the penalty is complex, and the dollar amounts could be substantial. While the 2014 effective date may seem far into the future, it is important to know well in advance whether the mandate will apply to your business.

For more information on the penalty and potential impact on your business, please contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) recently issued the notice Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities for FY 2011 in the July 22, 2010, Federal Register.  Following are a few highlights from this notice.

Market Basket Increase for FY2011

The notice provides for a full market basket increase of 2.3 percent beginning October 1, 2010, but CMS also calls for a reduction in Medicare Part A payments of 0.6 percent in fiscal year 2011, which is a “forecasting error” adjustment related to a difference between the forecasted and actual change in the FY2009 market basket. The net increase in Part A payments to skilled nursing facilities (SNFs) is projected to be 1.7 percent, or approximately $542 million in FY2011.

Delay of Resource Utilization Group – Version 4 (RUG-IV) But Not Minimum Data Set (MDS) 3.0

The FY2010 SNF Prospective Payment System (PPS) final rule, published in the Federal Register in August 2009, contained provisions applicable to 2011, including implementation of the new MDS version 3.0, along with the transition to the RUG-IV reimbursement system, effective October 1, 2010.  However, as previously reported, the Patient Protection and Affordable Care Act (PPACA) postpones implementation of the RUG-IV case-mix classification system by one year, to October 1, 2011.  Although RUG-IV implementation has been delayed, PPACA did not delay implementation of MDS 3.0 or certain other RUG-IV related provisions, including:

• Limiting the capture of “look-back” services to only those provided after admission to the SNF
• The requirement to allocate concurrent therapy minutes across patients
• Changes in the MDS 3.0 RAI manual that eliminates section T and projected therapy minutes
• Changes that exclude supervised therapy aide treatments from qualifying as skilled services

Although the August 2009 Federal Register called for the transition in payment for FY2011 to be “budget neutral,” the combination of full implementation of MDS 3.0 and the provisions outlined above, while delaying  the use of the  RUG-IV case-mix classification, has the potential for significant decrease in payments to SNFs for FY2011.  CMS is attempting to address this issue as follows:

Introduction of HR-III

Currently, an RUG-53 grouper that uses MDS 3.0 does not exist; MDS 3.0 was designed to be implemented in conjunction with RUG-IV, which would have 66 RUG categories. CMS further notes that “no grouper currently exists that incorporates the particular combination of features mandated by the statute:  the use of the new RUG-IV revisions on concurrent therapy and the look-back period as well the MDS 3.0, but within the overall context of the existing RUG-53 system.”

In addition, CMS has stated a modified grouper will not be ready by October 1, 2010.  Therefore, it is implementing a two-step approach:

1. Effective October 1, 2010, CMS will pay claims on an interim basis under RUG-IV, as though it were fully implemented.
2. Once the necessary payment system infrastructure is in place, it “will then retroactively adjust claims to reflect a ‘hybrid’ RUG-III (HR-III) system, which incorporates RUG-IV’s specific revisions on concurrent therapy and the look-back period within the framework of the existing RUG-53 system, along with the use of the MDS 3.0.”  In other words, providers will be paid on an interim basis under RUG-IV, and at some point in the future there will be retroactive settlements based on a recalculation under HR-III.

CMS further states that payments under the two systems will be “budget neutral” so that aggregate payments under either system will be approximately the same.  Please note that although aggregate payments are expected to be budget neutral, many individual providers could be negatively or positively affected by payment under RUG-IV and/or retroactive adjustment to the hybrid HR-III.

In the July 2010 Federal Register notice, CMS posted both RUG-IV and HR-III rates for urban and rural locations effective October 1, 2010, along with wage indices.  However, because of the many variables involved in the assessment, payment and settlement process, it will be difficult for individual providers to predict the ultimate impact on their reimbursement.

Looking Ahead

CMS, along with certain trade associations and stakeholders, continues to work with Congress in passing legislation that would repeal certain provisions of PPACA, so that RUG-IV can be fully implemented effective October 1, 2010.

Please contact your BKD National Health Care Group long-term care advisor to discuss your training needs and to learn more about coming changes in Medicare reimbursement.

The Inpatient Prospective Payment System (IPPS) final rule for federal fiscal year 2011 published in the August 16, 2010, Federal Register included changes related to the wage index and related geographic reclassifications. Its wage index provisions did not change significantly from the proposed rule. The primary emphasis of the wage index changes this year relates to incorporating changes from the Affordable Care Act (ACA). Key provisions include:

• Change in Reclassification Criteria – The FY2009 IPPS final rule began phasing in higher thresholds for hospitals to qualify for reclassification by the Medicare Geographic Classification Review Board (MGCRB). The ACA returned the criteria to pre-FY2009 levels, and this change was effective for reclassifications to be effective for FY2011. Those reclassification applications had to be filed by September 1, 2009. The final rule states only hospitals that had previously requested to be reclassified, and failed to meet the higher criteria but now meet the revised lower criteria, would be granted these previously filed requests for FY2011. Hospitals should carefully evaluate their options with regard to reclassification. Requests for reclassification for FY2012 are due to the MGCRB by September 1, 2010.

• Budget Neutrality Adjustment – The FY2009 IPPS rule also changed the budget neutrality adjustment (BNA), gradually moving from a nationally computed adjustment to a state-specific adjustment by FY2011. However, the ACA returned the BNA to a nationally computed adjustment starting in FY2011. This is favorable to states with a low state-specific BNA because of urban areas subject to the rural floor.

• Frontier States – The final rule includes a provision to establish a wage index of at least 1.0 for frontier states. For FY2011, the frontier states are Montana, Wyoming, North Dakota, Nevada and South Dakota.

• Section 508 – Section 508 of 2003 legislation commonly called the Medicare prescription drug bill established special reclassification provisions, which had been extended only through FY2009. The ACA extended these provisions through 2010. Since they expire September 30, 2010, the final rule notes that they will not be applicable to FY2011.

• Occupational Mix Survey – The Centers for Medicare & Medicaid Services (CMS) will continue to use the 2007-08 occupational mix survey (OMS) for FY2011 for the occupational mix adjustment factor. As a reminder, there will be a new OMS required for FY2013 based on data collected for the 2010 calendar year. This OMS is due July 1, 2011.

• Wage Index Methodology – The final rule included no significant changes to the CMS methodology used to compute the wage index for FY2011. With regard to the future of the wage index, the ACA requires the secretary of Health and Human Services to report recommendations to Congress by December 31, 2011, taking into consideration the original intent of the Medicare Payment Advisory Commission’s (MedPAC’s) report. Changes could be significant and redistributive, but would not be effective until after Congress acts on the report. Since 2012 is an election year, implementation before FY2014 is considered unlikely. Therefore, it is important to continue to evaluate your hospital’s wage index information.

Immediate next steps include evaluating opportunities for reclassification for FY2012. The deadline for such requests is September 1, 2010. All PPS hospitals also should evaluate their FY2012 wage index information. While CMS has not yet released the FY2012 timeline, changes are typically due to the Medicare Administrative Contractor or fiscal intermediary by early December. Now is a good time to make sure your system is capturing the OMS information you will need for the current calendar year as noted above.

Contact your BKD advisor for more information on how these changes could affect you.

While the new reporting requirements under Internal Revenue Code Section 501(r) affect 501(c)(3) hospitals, governmental hospitals are unsure whether 501(r) applies to them. Many governmental hospitals have dual-exempt status under 501(c)(3), and 501(r) indicates that all hospitals with 501(c)(3) status are required to comply with the new reporting requirements. In IRS Notice 2010-39, the IRS asked for written comments regarding the new reporting requirements.

Section 501(r) requires charitable hospitals to:

• Conduct a community health needs assessment once every three years
• Establish a financial assistance policy and an emergency medical care policy
• Limit the amount charged for emergency or other medically necessary care provided to individuals eligible for assistance under the organization’s financial assistance policy
• Make reasonable efforts to determine whether an individual is eligible for assistance under the organization’s financial assistance policy
• Provide the following information to the IRS each tax year:
  • Description of the organization’s actions to address needs identified in its community health needs assessment
  • Audited financial statements

Hopefully, the IRS will address the 501(r) reporting requirements as they relate to governmental hospitals with dual-exempt status under 501(c)(3). In the interim, governmental hospitals should find out if they have received a 501(c)(3) determination letter from the IRS. Many governmental hospitals may have received an exemption to access certain employee benefit plans. Others may issue bonds as a 501(c)(3) issuer as opposed to a governmental issuer. In many cases, dual status was requested years ago, and current members of the hospital’s management team may not be aware of the additional 501(c)(3) exemption. If hospital officials are unsure if the organization has received a 501(c)(3) determination letter, they may search IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, by clicking here. Organizations also may check the Guidestar website for an indication of their exempt status.

Finally, new filing requirements for exempt organizations may pose additional complications for governmental hospitals with dual-exempt status. The IRS now requires most exempt organizations to file Form 990, Form 990-EZ or Form 990-N. Form 990-N (electronic postcard for small organizations) is required every year. As a result of these new requirements, the IRS plans to automatically revoke exempt status for most organizations that have not filed one of the above referenced forms for three consecutive years. While governmental hospitals are exempt from filing Form 990, many governmental entities with dual status have been included in the IRS database for automatic revocation. While the database should only include the dual status under 501(c)(3), governmental hospitals should remain aware of this issue. The IRS is sending filing reminders to affected organizations, and organizations should check the National Center for Charitable Statistics website to see if their tax-exempt status is in jeopardy. The IRS also has published a database of at-risk organizations categorized by state. If a governmental hospital finds it is at risk of having its tax-exempt status revoked, the organization should act quickly to notify the IRS in writing to correct the database.

For more information on this issue or related matters, please consult your BKD advisor.

On July 13, 2010, the Centers for Medicare & Medicaid Services (CMS) issued its final rule implementing provisions of the American Recovery and Reinvestment Act of 2009 regarding incentive payments to eligible hospitals and professionals.

CMS received more than 2,000 comments on its January 13, 2010, proposed rule. While CMS did not make dramatic changes from the proposed rule, there were several important changes, including:

• Critical access hospitals (CAHs) will be eligible to receive Medicaid incentive payments. Like other acute care hospitals, CAHs will be eligible to receive both Medicare and Medicaid incentive payments. CMS instructs states to pay incentive payments using the acute care methodology.

• CMS also clarified the criteria acute care hospitals, including CAHs, must meet to receive Medicaid incentive payments. They must demonstrate that 10 percent of their encounters are Medicaid patients; an encounter is defined as either an inpatient discharge or an emergency room visit. Including outpatients should allow many more hospitals to meet the 10 percent requirement.

• CMS eased the burden and added flexibility for meeting the meaningful use criteria in Stage 1. In the proposed rule, CMS listed 25 objectives for eligible professionals (EP) and 24 for hospitals, all of which must be met to demonstrate meaningful use.

  In the final rule, CMS divided the objectives between a core set and menu set of objectives. There are now 15 core objectives for EPs and 14 for hospitals. To demonstrate meaningful use, an EP or hospital must meet all objectives in the core set. EPs and hospitals can elect to defer up to five objectives in the menu set, but must meet at least one of the population and public health measures.

• The final rule implemented the provision contained in the Continuing Extension Act of 2010 that allows certain provider-based physicians to be eligible for incentive payments. However, physicians who furnish 90 percent or more of their Medicare or Medicaid services in a hospital inpatient setting or emergency room will not be eligible for the incentive payments.

One controversial position that did not change in the final rule was allowing incentive payments for multicampus hospitals that use a single provider number; incentive payments will still be tied to the Medicare provider number. Strong opposition to this item continues, and U.S. Sen. Charles Schumer of New York has introduced legislation that would allow multicampus hospitals using a single provider number to receive incentive payments.

Although CMS issued the final rule, many issues remain unclear. Hospitals should carefully review these changes and contact their BKD National Health Care Group advisor for more information on these matters.

When the 2011 Inpatient Prospective Payment System (IPPS) proposed rule was released May 4, 2010, it was noted throughout the provisions that the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010, known collectively as the Affordable Care Act (ACA), were not included.

On July 8, 2010, the Centers for Medicare & Medicaid Services (CMS) released Change Request (CR) 7029, which included changes for IPPS hospitals for federal fiscal year 2010, long-term care hospitals (LTCHs) for rate year 2010, Inpatient Rehabilitation Facilities (IRFs) for FY2010 and Outpatient Prospective Payment System (OPPS) hospitals for calendar year 2010 due to the ACA, which was enacted in March 2010. Provisions included in this CR relating to IPPS hospitals are being retroactively implemented for federal FY2010. These provisions replace data originally detailed in the Federal Register released August 27, 2009, and the correction notice released October 7, 2009.

Extension of Section 508 Reclassifications & Special Exceptions Wage Indices

Section 508 reclassifications and special exceptions wage indices have been retroactively extended through September 30, 2010, under Sections 3137(a) and 10317 of the ACA. This would include discharges occurring on or after October 1, 2009, through discharges on or before September 30, 2010.

Section 508 was originally enacted as part of the Medicare Modernization Act of 2003 to enable hospitals not meeting general criteria for wage index reclassification to be reclassified to a nearby area, if certain criteria were met. Also effective April 1, 2010, Section 10317 of the ACA states that the wage index data for hospitals qualifying for reclassification will be included in the reclassified wage index data only if they result in ahigher reclassified wage index. The wage indices originally published for federal FY2010 have been updated as a result of these changes. This includes a change to the statewide rural floor budget neutrality adjustment factors. For Section 508 and special exceptions hospitals, the change will be for all of FY2010. For all other IPPS hospitals, it will be effective for only the second half of FY2010, which includes discharges occurring on or after April 1, 2010, and on or before September 30, 2010.

Effective October 1, 2009, Section 508 and special exceptions hospitals will be given an individual special wage index. This wage index will be the higher of its wage index value from the FY2010 IPPS final rule (74 FR 44032-44078, August 27, 2009) and correction notice released on October 7, 2009, or its wage index value under the revised FY2010 wage index values effective April 1, 2010. This wage index will be effective for the entire federal FY2010.

Updated IPPS wage index tables reflecting revised wage indices effective April 1, 2010, through September 30, 2010, can be found on the CMS website.

Market Basket Update Reduction for IPPS

As part of the ACA, Section 3401(a) imposes a 0.25-percentage-point reduction to the IPPS market basket update for federal FY2010. This reduction is applied to the operating standardized amounts and hospital-specific rates for sole community hospitals (SCHs) and Medicare-Dependent Hospitals (MDHs). The IPPS standardized amounts, budget neutrality factors and outlier thresholds had to be updated as a result of this provision. These updates apply only to payments made for discharges occurring on or after April 1, 2010, through discharges occurring on or before September 30, 2010.

For SCHs and MDHs, the DRG Reclassification and Recalibration Budget Neutrality Factor to be applied to the hospital-specific rate have changed as follows:

Additional changes to the IPPS rates and outlier thresholds are noted below:

Information contained in CR 7029 relating to LTCHs, IRFs and OPPS hospitals will be released under separate cover. Hospitals should carefully review these changes and contact their BKD National Health Care Group advisor for more information on these matters.

On July 15, 2010, the Centers for Medicare & Medicaid Services (CMS) issued Change Request 7029 (CR 7029), which outlines changes appearing in upcoming Federal Register notices as a result of the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010, collectively known as the Affordable Care Act (ACA).  Many of these changes, which impact payments for Outpatient Prospective Payment System (OPPS) hospitals, are effective retroactively as if they were included in the calendar year (CY) 2010 OPPS Final Rule included in the Federal Register dated November 20, 2009.

Market Basket Update

The ACA reduces the 2010 market basket, an adjustment to payment rates reflecting inflation, by .25 percentage points for OPPS hospitals.  This changes the originally published market basket of 2.1 percent to 1.85 percent, applicable to all OPPS services furnished during CY2010.

Wage Index

Section 508 of the Medicare Modernization Act of 2003 allowed providers not meeting the general criteria for obtaining a reclassified wage index to appeal to the Medicare Geographic Classification Review Board to take advantage of the increased payments of the reclassified area.  In addition, for several years, certain providers have been granted special exceptions to the reclassification requirements.  Congress previously extended the original expiration dates for these provisions.  The ACA further extends reclassifications under Section 508 and the wage index for special exception providers through September 30, 2010.

Section 508 and special exception hospitals will receive additional payments if their wage index applicable from October 1, 2009, through March 31, 2010, is less than for the period April 1, 2010, through September 30, 2010, to compensate for the differences between the wage indices.

Beginning July 1, 2010, under the OPPS, hospitals located in a Core Based Statistical Area that includes Section 508 or special exception providers will be paid based on a revised wage index that excludes Section 508 and special exception wage data if doing so results in an increased wage index.

Impact on Payments

Changes to the market basket and post-reclassification wage index values directly impact the calculation of the CY2010 OPPS conversion factor.  As such, the originally published conversion factor of $67.406 was reduced to $67.241.  Payment rates, calculated based on the conversion factor, will be changed to reflect the revised conversion factor effective January 1, 2010.  In addition, any calculations based on payment rates, such as co-payment rates and certain offset calculations, also will be revised.  However, co-payment rates remain limited to a maximum of 40 percent of the OPPS payment rate and the $1,100 inpatient deductible.

Transitional Outpatient Payments

Upon implementation of the PPS for outpatient services on August 1, 2000, transitional outpatient payments (TOPs) were established to limit provider losses associated with changing payment systems.  Well after transitioning to the new system, Congress has allowed certain types of hospitals to continue to receive these payments.

Immediately preceding the ACA, sole community hospitals (SCHs) and Essential Access Community Hospitals (EACHs) qualified for TOPs only if they had 100 or fewer beds.  Under the ACA, SCHs and EACHs with more than 100 beds now have the opportunity to receive TOPs at 85 percent of the hold-harmless amount (the difference between pre-OPPS and OPPS payments) effective January 1, 2010, through December 31, 2010.

Small rural hospitals with 100 or fewer beds will continue to receive payments at 85 percent of the hold-harmless rate through December 31, 2010.

Changes Unrelated to ACA

Effective April 1, 2010, a correction will be made to payment amounts for three Healthcare Common Procedure Coding System (HCPCS) codes for drugs and biologicals:  C9258, C9262 and J1540.

While many of these changes are effective retroactively, CMS has not yet provided instructions on how to handle past claims paid under pre-ACA requirements.

Contact your BKD National Health Care Group advisor with questions or for more information on these matters.

The Patient Protection and Affordable Care Act (PPACA), signed into law March 23, 2010, establishes new timely filing provisions for filing Medicare fee-for-service (FFS) claims (including Medicare Part A and Medicare Part B services), which could significantly affect health care providers.

Under the new law, claims for services furnished on or after January 1, 2010, must be filed within one calendar year of the date of service.  The law also mandates claims for services furnished before January 1, 2010, must be filed by December 31, 2010.

Claims with dates of service before October 1, 2009, must follow the pre-PPACA timely filing rules, which allowed claims for services furnished during the first nine months of a calendar year to be filed on or before December 31 of the following year.  Claims for services furnished during the last three months of a calendar year were to be filed on or before December 31 of the second following year.  Claims with dates of service October 1, 2009, through December 31, 2009, must be submitted by December 31, 2010.

Examples include:

• A claim with dates of service from September 1, 2009, through September 27, 2009, must be submitted by December 31, 2010.
• A claim with dates of service from November 3, 2008, through November 20, 2008, must be submitted by December 31, 2010.
• A claim with dates of service from November 3, 2009, through November 20, 2009, must be submitted by December 31, 2010.
• A claim with dates of service from February 4, 2010, through February 28, 2010, must be submitted by February 28, 2011.

Although PPACA does allow for very limited exceptions to the one-year filing deadline, as a practical matter, fee-for-service providers should plan to file all claims with pre-January 2010 dates of service by December 31, 2010.

BKD can assist skilled nursing facilities, home health agencies and hospice providers with accounts receivable analysis and recovery.  The firm also can provide billing outsourcing services; we have successfully assisted numerous providers with collection of aged third-party accounts receivable balances.

For further information or assistance, please contact your BKD advisor.

Congress has included new Medicare payment incentives for hospitals and other providers under the Health Information Technology for Economic and Clinical Health Act. These incentives are designed to encourage the adoption of comprehensive electronic health record (EHR) systems. Many hospitals will undergo expensive software implementation projects over the next few years as EHR readiness deadlines approach. These projects also may require ongoing licensing agreements. Accounting methods for these projects and agreements often are complex and require providers to monitor activities throughout the process.

Implementation Project Costs

Many providers are unclear about which costs can be capitalized vs. those that must be categorized as an EHR implementation expense. Accounting Standards Codification (ASC) Topic 350-40, Internal-Use Software, provides the authoritative guidance for costs related to software developed or obtained for internal use. ASC Topic 350-40 lists three stages of computer software development:

1. Preliminary project stage
2. Application development stage
3. Post-implementation and operation stage

Activities associated with these stages are more common in health care organizations that either develop their own EHR system or customize an “off-the-shelf” package. However, these projects likely will be a significant investment for all health care organizations, including those that acquire ready-to-use software packages. As such, all health care organizations should understand the accounting rules for the activities associated with each stage of a software implementation project.

1. Preliminary Project Stage

Internal and external costs incurred during the preliminary project stage should be expensed as they are incurred. Common activities included in this stage include development of an organization’s EHR strategy and vendor research (such as site visits), interviews and final vendor selection.

2. Application Development Stage

Most costs incurred during the application development stage should be capitalized. The application development stage includes activities such as coding, installation of hardware and testing of software (including running parallel environments).

Common costs that may be capitalized include:

• External direct costs of materials and services consumed in developing or obtaining internal-use computer software
• Payroll and payroll-related costs (for example, employee benefit costs) related to the time employees devote to the project on application development tasks, such as coding and testing. Similarly, external consultant costs related to these activities should be capitalized.
• Interest costs incurred while developing internal-use computer software

Capitalization of costs begins when both the preliminary project stage is completed and management authorizes and commits to funding the project and project completion is probable.

3. Post Implementation and Operation Stage

Finally, costs incurred during the post-implementation and operation stage, such as internal and external training costs and maintenance costs, must be expensed as incurred. Data conversion costs also must be expensed as incurred; however, the cost of obtaining or developing software to assist in data conversion should be capitalized.

Additional Considerations

In many instances, providers will incur costs that fit into one of these three areas concurrently. For example, it is not unusual for training costs and certain data conversion activities to occur throughout the application development stage. It is important to remember that accounting for these costs is based on the nature of the activity or cost, not the time frame in which it occurs.

If software is upgraded or enhanced, capitalization is appropriate only if it is probable the upgrades and enhancements will result in additional functionality. If so, then the guidance discussed above should be followed.

Amortization of the capitalized costs begins when the software is ready for its intended use, regardless of whether the software is placed in service at that time. Computer software is ready for its intended use after all substantial testing is completed and all modules needed to make it functional are complete.

Software Licensing Arrangements

EHR software often includes companion licensing agreements. These agreements may include payment structures that attempt to match cash outflows with anticipated EHR supplemental payments.

Software licensing agreements are accounted for in a manner similar to lease agreements (ASC Topic 840, Leases) and are often classified as operating leases. License fees are expensed on a straight-line basis over the term of the agreement and, if significant, the lessee-licensee should disclose its commitment under the agreement. This straight-line requirement could result in recognition of expenses well in advance of license payments under the agreement.

Accounting for EHR projects and agreements can be complicated and may require additional expertise. Contact your BKD advisor for assistance applying these rules to your specific situation.

The Therapeutic Discovery Project Credit (TDPC) was established under Section 48D of the Internal Revenue Code as a result of Section 9023(a) of the Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act). This credit may provide significant value to small and midsize (up to 250 employees) biotechnology and life sciences companies.

Under this newly enacted legislation, companies may receive—as either a tax credit or grant—50 percent of the amount of qualified investments made in taxable years beginning in 2009 and 2010. Because a grant can be received in lieu of a credit, companies that would not benefit from a credit can still receive a cash benefit from this program.

Qualifying Expenses & Projects

The TDPC defines a qualifying therapeutic discovery project as a project that meets at least one of the following conditions:

• Treats or prevents diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies or carrying out research protocols aimed at securing FDA approval of a product
• Diagnoses diseases or conditions
• Determines molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions
• Develops a product, process or technology to further the delivery or administration of therapeutics

Eligible expenses include research costs as well as capital equipment used in a qualified project. Certain types of costs not eligible for the credit include compensation paid to certain highly compensated employees, interest expense, facility maintenance expenses, e.g., mortgage or rent payments, insurance payments, utility and maintenance costs and costs of employing maintenance personnel, certain indirect costs (including personnel), data processing and accounting costs and any other expenses determined by the Treasury to be appropriate for exclusion.

Application

A maximum in $1 billion in credits and grants will be awarded to companies for qualifying projects. The program will expire once the budget has been reached. Applications will be reviewed by the IRS and Department of Health and Human Services (HHS) to determine the allocation of benefits among competing companies. Code Section 48D directs the IRS and HHS to take into account several factors when making determinations. Companies will need to demonstrate a project has a reasonable potential to meet at least one of the following conditions:

• Results in new therapies to treat areas of unmet medical need or to prevent, detect or treat chronic or acute diseases or conditions

• Reduces long-term health care costs in the United States
• Significantly advances the goal of curing cancer within the 30-year period beginning in May 2010

The IRS also is directed to take into consideration which projects have “the greatest potential (i) to create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States, and (ii) to advance United States competitiveness in the fields of life, biological, and medical sciences.”

Issued May 21, 2010, Notice 2010-45 provides background regarding the TDPC and timeline for submitting an application. The application was released June 21, 2010, and the final date for submitting completed applications and project information memorandums is July 21, 2010. There is a brief window of opportunity for companies to reap the benefit of the TDPC. Notice 2010-45 provides companies with the information they need to get a head start on compiling information to ensure timely filing of the application.

Clients who may qualify for the TDPC program should begin documenting their qualified projects and expenses immediately. To determine if you may qualify, contact your BKD advisor.

On May 4, 2010, the Centers for Medicare & Medicaid Services (CMS) published the 2011 Inpatient Prospective Payment System (IPPS) proposed rule for acute and long-term care hospitals, noting throughout that provisions of the two health care reform bills enacted in March were not included. The Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010, together known as the Affordable Care Act (ACA) were enacted in March 2010, and on June 2, 2010, CMS published a supplemental proposed rule that included some ACA provisions.

The proposed rules include a 2.4 percent market basket update, reduced 0.25 percent by ACA provisions. CMS further reduced rates 2.9 percent for a documentation and coding adjustment discussed below. After these adjustments plus budget neutrality and other adjustments, the proposed standardized amounts are actually lower than the fiscal year 2010 rates. The FY2011 operating standardized amount is $5,154, 1.3 percent below the 2010 rate, and the capital standardized rate of $422.18 is 1.9 percent below the 2010 final rate. Long-term care hospital (LTCH) standardized amounts are 0.84 percent below 2010 rates.

CMS has proposed to establish the fixed-loss outlier threshold at $24,165, up about $1,000 from the 2010 threshold.

CMS estimates payments to all hospitals will decrease by an average of 0.9 percent under the provisions of the proposed rules, with rural hospitals experiencing a 1.4 percent decline.

Some key components of the proposed rules include:

Documentation & Coding Adjustment

When CMS adopted the MS-DRG payment system, it anticipated hospitals would change coding patterns to increase payments under the new system. To avoid paying for coding changes not representing true increases in patient severity, CMS also implemented significant reductions to payment rates called documentation and coding adjustments. Congress reduced CMS’ adjustments for FY2008 and 2009. However, Congress also mandated that CMS recoup by the end of FY2012 any overpayments made in those two years as a result of the reduction and reduce rates prospectively, if necessary.

CMS currently estimates a recoupment of 5.8 percent of annual payments would be necessary to recover 2008 and 2009 overpayments, and a prospective rate adjustment of 3.9 percent also is necessary. CMS proposes to recover half the 5.8 percent overpayment amount in FY2011 with a 2.9 percent rate reduction. CMS does not indicate their intentions in future years with regard to the remaining 2008 and 2009 overpayment and prospective rate adjustment.

One possible scenario is for CMS to continue the 2.9 percent reduction in FY2012 to recoup the remaining overpayment, after which the 2.9 percent could be added back to the base. Then, when the 2.9 percent is added back, the base could be reduced 3.9 percent (a net 1 percent reduction at that time) to satisfy the mandate to reduce rates prospectively. This scenario would be the least disruptive to the payment system.

These adjustment provisions are highly controversial. Many contend CMS’ estimates significantly overstate both the overpayment and prospective adjustment needed. In addition, CMS proposes making similar adjustments to sole community and Medicare dependent hospitals’ hospital-specific rates, even though CMS previously acknowledged it lacks statutory authority for such adjustments.

Quality Indicators

A significant portion of the proposed rules discuss how DRGs were re-weighted and quality standards proposed for the next several years. While a detailed discussion of these measures is beyond the scope of this article, CMS has proposed to remove, modify and add various items to the required quality reporting matrix. Hospitals should closely monitor these provisions to ensure they don’t become subject to the 2 percent penalty for failure to report all required quality measures.

The proposed rule includes adding five conditions to the Hospital Acquired Conditions (HAC) listing. Unless these conditions are documented as present on admission, a hospital will not receive incremental payments for the increased severity caused by these or other HACs.

Payment for Transfer Cases

Under existing regulations, hospitals may be subject to a payment reduction if a patient is transferred to another IPPS hospital before the patient reaches the geometric mean average length of stay minus one day. In the proposed rule, CMS proposes to expand the transfer payment reductions to include transfers to critical access hospitals (CAHs) and to hospitals that do not participate in the Medicare program. Hospitals will be required to use discharge status code “66” for transfers to a CAH and status code “02” for transfers to another short-term general acute care hospital regardless of that hospital’s Medicare participation status.

Providers should note that transfers to CAH swing-bed programs continue to be exempt from the transfer payment reductions.

Critical Access Hospitals

The proposed rules include two significant changes for CAHs. First, implementing a technical correction included in ACA, CMS is revising regulations so a CAH electing Method II billing continues to receive 101 percent of allowable cost for outpatient services.

CMS also proposes to change the process for CAHs electing outpatient Method II billing. Under existing rules, a CAH must make a Method II election annually. Under the proposed rule, the election will stay in place until the hospital notifies CMS that it wants to terminate that status.

Medicare Dependent Hospitals (MDHs)

The proposed rule also would change what is counted to meet the 60 percent Medicare utilization criteria to qualify as an MDH. Current regulations only allow hospitals to include days related to patients “receiving” part A benefits when determining if Medicare is 60 percent of inpatient utilization. The proposed rule would change the requirement to patients “entitled to” Part A benefits, which would allow a hospital to include Medicare Advantage days, exhausted Part A benefit days and Medicare secondary payer days in the computation. This should allow more hospitals to qualify for MDH status.

The proposed rule also notes the MDH program has been extended another year, through October 1, 2012.

IPPS Hospital Low Volume Adjustment

The low volume adjustment rule has been temporarily expanded to allow many more hospitals to qualify for enhanced payments. A hospital with fewer than 1,600 Medicare acute discharges that is also more than 15 miles from another acute care hospital will qualify for an add-on to inpatient operating payments. The add-on can be as much as 25 percent for hospitals with less than 200 Medicare acute discharges, declining to 1.6667 percent for hospitals with 1,500 to 1,599 Medicare discharges. Similar to the MDH provisions, a hospital must count all discharges for patients entitled to Part A benefits, not just those paid by Part A.

Additional Payments to Hospitals in Low Cost Areas

The ACA creates a pool of $400 million to be paid over two years to hospitals located in counties in the lowest quartile of adjusted Medicare spending per beneficiary. The proposed rules contain a list of 415 hospitals CMS has currently identified as qualified to receive such payments.  Payments to the hospitals will be based on the ratio of each hospital’s Medicare reimbursement to the total Medicare reimbursement of all qualifying hospitals.

Certified Registered Nurse Anesthetist (CRNA) Reimbursement

CMS proposes to allow hospitals, including CAHs, that elected to reclassify from urban to rural status using 42 CFR 412.103 to meet the location criteria to receive cost reimbursement for CRNA services. Previously, CMS required a hospital to be physically located in a designated rural area to receive payment.  CMS is not proposing to extend this provision to hospitals located in Lugar counties.

Provider Taxes for CAHs

Many states levy taxes on hospitals and other providers to help fund state Medicaid programs. Other states are developing such programs. CMS proposes to “clarify” that such taxes may be considered allowable costs for a CAH, but that Medicare Administrative Contractors (MACs) have the authority to determine on a case-by-case basis if reductions in some portion of the tax should be disallowed as a reimbursable cost. MACs apparently will have the ability to reduce the allowable component of the tax to account for payments the hospital receives that are associated with the assessed tax in some cases. CMS’ proposal is vague and nebulous, making it impossible to discern the nature of the clarification and providing no guidance to ensure a consistent application. Hospitals that include such taxes in their allowable costs and receive substantial amounts of cost reimbursement, especially CAHs, should monitor this proposal.

Changes to Cost Report Forms

CMS proposes to expand the standard cost reporting departments to include CT, MRI and cardiac catherization. If finalized, providers offering these services should make sure they can separately track activities related to these departments.

Wage Index

The proposed rules primarily reference the recent changes as part of the ACA that will impact the wage index. Subsequent Federal Registers will be issued to address the changes further. Key changes related to wage index include the following:

• Change in Reclassification Criteria – The final FY2009 IPPS rules phased in higher percentage thresholds hospitals had to meet to seek reclassification. As a result of the ACA, the criteria will return to pre-FY2009 levels. Hospitals should carefully evaluate their options with regard to reclassification. Consistent with prior years, it is important to evaluate any current reclassification requests.

• Budget Neutrality Adjustment – The FY2009 IPPS rules also changed the budget neutrality adjustment (BNA) from a nationally computed adjustment to begin phasing to a state-specific adjustment by FY2011. However, the ACA returns the BNA to a nationally computed adjustment starting with FY2011. This is favorable to states with a low state-specific BNA as a result of having urban areas subject to the rural floor.

• Occupational Mix Survey – CMS will continue to use the 2007-2008 occupational mix survey (OMS) for FY2011 for the occupational mix adjustment factor. The proposed rules do not include significant changes to the methodology CMS has used historically. As a reminder, there will be a new OMS required for FY2013 based on data collected for the 2010 calendar year. This OMS is due July 1, 2011.

• Wage Index Methodology – The proposed rules do not include significant changes to the methodology used by CMS to compute the wage index. The proposed rules’ wage index tables are based upon the March 2010 public use files. Therefore, consistent with prior years, the wage index will change with the final rules and use of the subsequent public use files. With regard to the future of the wage index, the ACA requires the Health and Human Services Secretary to report to Congress by December 31, 2011, recommendations with regard to the wage index process, taking into consideration the original intent of MedPac’s report. Changes would not be effective until after Congress acts on the report. Therefore, it is important to continue to evaluate your hospital’s wage index information.

Medicare’s Proposed Rules to Impact Sub-Acute & Specialty Providers

When CMS issued the FY2011 proposed rules, it included numerous provisions that will affect LTACHs and sub-acute providers. Some of these provisions include:

• Proposed Changes to Medicare Conditions of Participation Affecting Hospital Rehabilitation Services & Respiratory Care Services – New regulations for ordering rehabilitation and respiratory care services will be the same going forward, but the new conditions of participation would allow physicians of medicine or osteopathy, nurse practitioners or physician assistants to order such services as long as they are also in accordance with state law and hospital policies.

• Proposed Changes to the Accreditation Requirements for Medicaid Providers of Inpatient Psychiatric Services for Individuals under Age 21 – CMS proposes to remove the requirement that psychiatric hospitals and hospitals with inpatient psychiatric programs providing services to individuals under age 21 must obtain accreditation from The Joint Commission to provide these services under the Medicaid program. CMS also proposes to revise the accreditation requirements for psychiatric residential treatment facilities (PRTFs) by removing any specific references to accreditation organizations. This would afford them flexibility in obtaining accreditation by a national accrediting organization whose program has been approved by CMS or by any other accrediting organization with comparable standards recognized by the state.

• LTCH Payment Provisions – The proposed rules also include numerous provisions that affect LTCHs. Among these are modifications to the LTCH expansion and new hospital moratorium. CMS also proposes to modify regulations related to LTCHs that receive a substantial number of admissions from a single referral source.

Overall, the proposed rules include a number of positive but temporary payment provisions for providers. The rules also include payment reductions that will not reverse in future periods. Hospitals should continually review their operations and monitor rule changes in light of significant changes yet to come from the March 2010 health care reform legislation.

Contact your BKD National Health Care Group advisor with questions or for more information on these matters.

Co-authors Sue Brammer and Kevin Wellen, of BKD, LLP, contributed to this article.

The Patient Protection and Affordable Care Act along with the Health Care Education Reconciliation Act of 2010, known collectively as Health Care Reform, are thought to have made some of the biggest changes ever to the delivery and payment of health care services. The numerous provisions of Health Care Reform are extremely complex and will take years for health care providers to understand and implement. A snapshot into the future of Health Care Reform shows additional health insurance coverage for individuals as well as a focus on quality reporting and revised payment systems that will be tied to quality outcomes.

Health Care Reform provides for expanded Medicaid coverage so more individuals will qualify for Medicaid. This will benefit health care providers because patients who could not pay for services will now be covered by Medicaid. However, to pay for the expanded Medicaid coverage, Health Care Reform provides for a substantial amount of Medicare cuts. Health care providers may see an increase in their Medicaid revenue, but they will see a decrease in their Medicare revenue.

Another component of Health Care Reform is the introduction of value-based purchasing programs (VBP). Starting October 1, 2012, hospital Medicare payments would be tied to certain performance and quality measures for common and high-cost conditions as defined by the Health and Human Services Secretary. Hospitals that receive the highest performance scores will receive an increase in Medicare payments. Hospitals with the lowest performance scores will see a reduction in Medicare payments. If hospitals do not submit their quality data, they will be subject to a 2 percent reduction in Medicare payments. VBPs will be introduced for other subacute providers, such as long-term care facilities and home health agencies. VBP pilot programs will be developed for other types of providers.

Beginning in 2014, long-term care hospitals, rehabilitation hospitals and hospice programs will receive a
2 percent reduction in Medicare payments if not reporting quality measures based on expected quality measures that are to be published no later than October 1, 2012. Beginning in 2015, physicians receive up to a 2 percent decrease in Medicare payments if they are not participating in the submission of quality data. However, there is a plan to develop a system where physician payments will include a modifier that provides for an adjustment to Medicare payments based upon quality of care furnished compared to the cost.

If you look deep into the future of Health Care Reform, another concept introduced is the development of a national pilot program on Medicare payment bundling by January 1, 2013. The concept is to develop a program that would provide a Medicare-bundled payment to cover three days prior to admission, the acute care/hospital stay and 30 days of post-acute care, including physician services. Payment bundling would require significant effort and collaboration among physicians, hospitals and other subacute providers to provide a comprehensive delivery of care in which all providers would share the payment.

The future of Health Care Reform is still unknown, as several details in the legislation have not developed. However, what you can deduce about the future of Health Care Reform is that organizations that deliver health care services will have to change the way they do business. Health care organizations will have to be creative to focus on accountability, quality and collaboration with fewer resources available to pay for the delivery of care.

In 2005, Congress authorized a demonstration project for use of Recovery Audit Contractors (RAC) in Section 306 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. In general, the Department of Health and Human Services (HHS) was directed to demonstrate the use of RACs in identifying and correcting overpayments and underpayments under the Medicare program. The project was to cover at least two states with three contractors and last for no more than three years. The project initially covered three states—Florida, New York and California—and was eventually expanded to also include Massachusetts, South Carolina and Arizona.

In section 302 of the Tax Relief and Health Care Act of 2006, Congress required HHS to enter contracts with RACs in all states by no later than January 1, 2010, making the demonstration project permanent.

Medicare Overpayments & Underpayments

The purpose of the RAC contracts is to identify underpayments and overpayments and recoup overpayments under Part A or B of the Medicare program. RACs are paid on a contingent basis for detecting and correcting improper payments. Correcting includes both collecting overpayments from providers and refunding underpayments to providers.

The RAC review process is similar to that used by existing Medicare claims processing contractors. The RACs have performed two types of reviews:  automated reviews and complex medical reviews. The automated reviews were designed to identify the “low-hanging fruit” and used data mining techniques to identify multiple units billed, missing modifiers and payments for discontinued HCPC/CPT codes. The complex medical reviews reviewed the medical record or other documentation. They have caused payment denials mainly due to lack of medical necessity and missing records or documentation.

As of March 27, 2008, RACs had succeeded in correcting more than $1.03 billion in improper Medicare payments. Approximately 96 percent were overpayments collected from providers. Most of these overpayments (85 percent) were collected from inpatient hospital providers.

Impact on Health Care Providers

Until January 2010, unless providers were located in one of the demonstration states, they were not subject to a RAC audit nor had they received notice of a RAC audit. However, some providers have established reserves. They did so by recording a liability (or reduction of a receivable) in a due to or from third-party payer account and a related contractual allowance for uncollectible payments (contra revenue) for the possibility of a RAC audit and the potential for repayment of Medicare overpayments. We will hereafter refer to this activity collectively as an allowance.

Accounting Implications

Accounting Standards Codification (ASC) Topic No. 954-605 addresses revenue recognition for health care entities. Highlights of 954-605-25-2 through 25-6 include:

• Revenue usually is recorded when the service is provided and gross service revenue is recorded on an accrual basis at the provider’s established rates, regardless of expectation of collection
• Provisions for contractual adjustments and discounts are recognized on an accrual basis and deducted from gross service revenue to determine net service revenue
• Amounts realizable from third-party payers for health care services are usually less than the provider’s full established rates for those services
• Estimates of contractual adjustments, other adjustments and the allowance for uncollectible accounts shall be reported in the period during which the services are provided even through the actual amounts may become known at a later date

ASC Topic No. 954-310 addresses receivables for health care entities. Similar to the revenue recognition guidance discussed above, this section states that contractual adjustments, discounts and an allowance for uncollectible accounts shall be recorded in the period during which services are provided. This is to measure the receivables for health care services initially at net realizable value.

Based on the above accounting guidance, providers may wonder whether it is appropriate to record an estimated allowance for overpayments or uncollectible payments for RAC audits. The answer is no, unless the provider is able to provide sufficient appropriate evidence based on its own experience and assumptions as discussed further below.

AICPA Statement of Position 00-1 (SOP 00-1), Auditing Health Care Third-Party Revenues and Related Receivables, is the primary source of authoritative auditing literature for the remainder of this discussion. Its provisions are based on and consistent with the relevant ASC sections and clarify the provider-specific evidence requirement.

The SOP states in part, “Management is responsible for assuring that revenues are not recognized until their realization is reasonably assured. As a result, management makes a reasonable estimate of amounts that ultimately will be realized, considering—among other things—adjustments associated with regulatory reviews, audits, billing reviews, investigations or other proceedings. Estimates that are significant to management’s assertions about revenue include the provision for third-party payer contractual adjustments and allowances.”

Management may estimate an allowance for a potential RAC audit, subject to the considerations discussed further below, to avoid recording revenue that is not reasonably assured of being realized. As discussed in paragraphs 16-17 of SOP 00-1, the measurement of estimates is inherently uncertain and depends on the outcome of future events. That information related to the outcome of a future RAC audit does not exist does not necessarily lead to a conclusion that the evidential matter supporting management’s assertions is not sufficient to support management’s estimates.

In other words, management may make an estimate based on specific evidential matter supporting the necessity for and amount of the accrual. Par. 28 of SOP 00-1 states in part, “The fact that an entity currently is not subject to a governmental investigation does not mean that a recorded valuation allowance for potential billing adjustments is not warranted. Nor do these emerging industry trends necessarily indicate that an accrual for a specific entity is warranted.”

Therefore, while an allowance may be warranted for providers not yet subject to a RAC audit, it must be based on evidence other than the industry trends that have emerged as a result of the RAC demonstration project, i.e., the actual experience of providers in the demonstration states. A general allowance should not be recorded, but a specific allowance supported by provider-specific billing may be appropriate.

The bottom line is an accrual based on an estimated percentage of Medicare revenues consistent with the results of the demonstration project is not sufficient appropriate evidence. Instead, a provider’s estimates must be based on its own experience and assumptions, such as:

• The results of an internal billing/coding, medical records or other review
• The results of external billing/coding, medical records or other review
• The results of other internal analysis

Other Related Matters

Providers who identify potential overpayments should seek immediate assistance from legal counsel and compliance experts to determine what, if any, notice to give to third parties or additional action to take.

Conclusion

If it is appropriate to record an allowance for RAC audits based on appropriate, provider-specific evidence, then the allowance would be considered an accounting estimate and subsequent changes in the recorded allowance would be accounted for as a change in accounting estimate. The allowance should be recorded as a component of amounts due from or to third-party payers on the balance sheet and a deduction in arriving at net patient service revenue shown on the statement of operations (or statement of revenues, expenses and changes in net assets).

Contact your BKD advisor with any questions regarding RAC audits and related accounting considerations.