Maximizing Medicare Reimbursement: Why Medicare Cost Reports Matter

The healthcare provider of today operates under a dual mandate: 1) maintain financial solvency and 2) simultaneously achieve and sustain clinical excellence. Historically, these objectives could have been managed as separate functions, while financial operations were focused on billing and compliance and the clinical areas were focused on patient care. However, the transformation taking place within the U.S. healthcare system, principally driven by the Centers for Medicare & Medicaid Services' (CMS) shift to value-based care (VBC), fundamentally altered this dynamic. Financial success is no longer merely a product of optimized billing, cost containment, and cost reporting; that success is now inextricably tied to providers’ performance based on quality metrics, such as the CMS Star Ratings. 

The functions provide a structural framework for a merged approach, holding that the Medicare Cost Report (MCR), long seen as a compliance burden, now must be leveraged as a tool for financial optimization and revenue recovery. The resources and revenue unlocked by proactive financial management can now be strategically invested into quality improvement (QI) initiatives, which directly influence CMS Star Ratings. In turn, high CMS Star Ratings unlock substantial financial bonuses and market advantages, creating a cycle of quality-driven financial success. What remains should be detailed, actionable recommendations for providers, emphasizing the importance of breaking down silos and investing in technology driven by data and analytics, while fostering a culture of continuous quality improvement (CQI) to thrive in the ever-evolving Medicare landscape. 

Key Takeaways 

• The Medicare Cost Report (MCR) is evolving from a compliance tool to a strategic asset for financial optimization. 
• Key areas for maximizing Medicare reimbursement include proper management of Medicare Bad Debt, tracking for Disproportionate Share Hospital payments, meticulous coding for Transfer Diagnosis-Related Groups, and accurate cost allocation for full compliance and to prevent financial penalties. 
• To effectively navigate the complexities of the MCR, providers are encouraged to adopt automated systems, maintain accurate documentation, and collaborate with third-party consultants to optimize financial gains and reduce audit risks. 

What is a Medicare Cost Report? 

The MCR is a detailed financial and statistical document that Medicare-certified facilities, such as Skilled Nursing Homes (SNFs), Home Health Agencies (HHAs), and hospitals, must submit annually to the Centers for Medicare & Medicaid Services (CMS). The report captures all expenses incurred, services rendered, and operational details, which CMS subsequently uses to calculate correct reimbursement rates for Medicare-covered services.  

-It provides a comprehensive picture of a facility's financial status and cost structure, containing crucial information on facility characteristics, utilization of data, and costs and charges by cost center. 

Forms are to be submitted by the Electronic Cost Report (ECR) via the Medicare Cost Report e-Filing system (MCReF). This helps standardize and streamline the submission process, reduce the burden on providers, and eliminate common, easily avoidable issues that result in rejections It’s important to note, this report remains a high-stakes process and failure to file is critical to an organization. 

How Medicare Cost Reports Can Help Streamline Operations  

Any provider that views the MCR as nothing more than a compliance burden is overlooking a powerful tool for financial optimization and revenue recovery. The report is not just a backward-looking account of fiscal and statistical activity; it is a strategic vehicle for maximizing legal reimbursement and capturing previously uncollected revenue. By moving from a reactive to a proactive stance on cost reporting and utilizing a data-driven approach, providers can obtain previously uncaptured revenue.  

Medicare Bad Debt

One of the most significant revenue opportunities lies in properly claiming Medicare Bad Debt. Providers are eligible for a 65% reimbursement for unpaid and uncollectible cost-sharing amounts, including deductibles and coinsurance, from Medicare beneficiaries. To optimize this revenue stream, providers must distinguish between allowable and unallowable claims. For example, bad debts from Medicare Advantage and HMO plans are not eligible for reimbursement on the cost report. Furthermore, a provider’s efforts to collect must be wholly documented as "reasonable" and consistent with the efforts made to collect from non-Medicare patients.  

One significant challenge is the lack of internal expertise and resources to navigate these complexities. Many providers are turning to third-party consultants and automated systems to streamline the identification, documentation, and submission of these claims, which can lead to a 2% increase in allowable and nearly a 100% Medicare Administrative Contractor (MAC) audit pass rate. 

Medicare Disproportionate Share Hospital (DSH) Payments 

DSH payments provide crucial financial support to hospitals that serve a high proportion of low-income inpatients, particularly those covered by Medicaid. This can represent a substantial portion of a hospital's Medicare revenue. To improve DSH reimbursements, providers must specifically verify patient records to capture all Medicaid-eligible patient days and stay current on evolving DSH regulations.  

Transfer Diagnosis-Related Group (DRG) Coding Accuracy 

Coding errors on Transfer DRGs are a critical aspect of Medicare billing, leading to significant underpayments and exposing hospitals to Medicare audits. Let’s say the average underpayment due to incorrect Transfer DRG coding can be around $2,800, with some single claims having underpayments up to $70,000. Prioritizing coding accuracy in this area is a high-impact strategy that can lead to millions in increased revenue and a significant reduction in audit risk. 

Accurate Cost Allocation 

The very foundation of a cost report is the proper allocation and classification of costs. Common mistakes include miscalculating the assignment of the expenses between Medicare and non-Medicare patients, misclassifying administrative costs as operational, or failing to account for wages and salaries properly. These types of errors can result in reduced reimbursements and penalties. Meticulous record-keeping, including invoices and time sheets, and a deep understanding of CMS rules are essential to maintain compliance and avoid financial consequences. 

The MCR is not just a document to be completed, but a strategic asset to be managed by providers. The financial gains from optimizing these areas can be substantial, providing the capital necessary to invest in the next phase of a provider's strategic evolution: quality improvement. 

Challenges and Mitigating Risks of Medicare Cost Reports  

Mistakes can lead to delayed reimbursement, financial penalties, and audits, making a proactive risk mitigation strategy essential. Research highlights critical mistakes providers must avoid, including the misapplication of cost report worksheets, failure to account for disallowed costs (e.g., marketing expenses, fines), and inconsistent reporting of wages and salaries. 

In the event of a provider receiving an unfavorable settlement after a cost report is audited, a formal appeals process exists. The Provider Reimbursement Review Board (PRRB) handles the appeal for facility-related Medicare payment issues. Appeals can be either "fact-based," which typically revolve around documentation disputes, or "policy-related," which challenge the underlying payment policy. For policy issues, providers can consider joining "group appeals," which present a united front to CMS and provide a more economical avenue to resolution by dividing the legal and administrative costs among many providers. This highlights the need for a sophisticated understanding of the regulatory and legal landscape. 

Financial Optimization via the Medicare Cost Report 

There are several best practices and key actions that providers can take to optimize their Medicare Cost Reports. Key actions include: 

Medicare Bad Debt 

• Reimbursement for 65% of the unpaid Medicare beneficiary deductibles and coinsurance for covered services. 
• Recovers a significant revenue stream that is often missed due to complexity. Prevents a loss of revenue from uncollected patient balances. 
• Implement automated systems to identify eligible claims and meticulously document of collection efforts. This distinguishes between allowable (Medicare) and unallowable (MA) claims. 

Disproportionate Share Hospital (DSH) Payments 

• Financial support for hospitals serving a high proportion of low-income patients, primarily those on Medicaid. 
• It can constitute a substantial portion of Medicare revenue, and hospitals are compensated for the additional costs of serving a financially disadvantaged population. 
• Accurately track and document all Medicaid-eligible patient days.  
• Remain current on the latest DSH regulations to avoid under-coding or missed opportunities. 

Transfer Diagnosis-Related Group (DRG) Coding 

• A critical component of Medicare billing that verifies accurate payment for patients transferring to or from another facility. 
• Correcting coding errors can lead to millions of dollars in increased revenue and significantly reduce the risk of costly Medicare audits. 
• Prioritize coding accuracy through staff training and internal audits. Invest in proactive technology to identify and correct coding errors. 

Accurate Cost Allocation 

• The proper assignment of expenses between different cost centers and between Medicare and non-Medicare services. 
• Prevents penalties and underpayment due to misclassified costs, and that expenses directly related to Medicare are correctly apportioned for reimbursement. 
• Maintain meticulous, organized records (invoices, timesheets). Use up-to-date CMS worksheets and promote consistency in reporting, particularly for salaries and benefits. 

Timely Filing 

• The annual submission of the cost report must be made within five months of the fiscal year-end. 
• Prevents the withholding of Medicare reimbursement, which can severely impact cash flow.  
• Avoids financial penalties for delays 

Working with a Trusted Advisor 

It can be tough to navigate the complex, evolving healthcare landscape. At EisnerAmper, our team is dedicated to delivering proactive support to help providers adequately optimize their cost reports.  

To learn more about our specialized services and how we can help you, contact us below.