Recognizing that improvements are needed to make the new Medicare diagnosis-related group (DRG) cost-based weights more accurate, an industry workgroup has identified certain changes to hospitals’ Medicare cost reporting practices. The workgroup identified the following as obstacles to a more accurate calculation of DRG weights:
- The method used by the Centers for Medicare and Medicaid Services (CMS) to group hospital charges for the Medicare Provider Analysis and Review (MedPAR) files is different than that used by hospitals to group Medicare charges, total charges, and overall costs on the cost report.
- Hospitals’ grouping of their Medicare charges, total charges, and overall costs in different departments on their cost reports for various reasons.
- Hospitals’ completion of their cost reports in different ways as allowed by CMS.
- CMS’s new approach for categorizing all charges and costs into 13 specific categories may not yield the most appropriate cost-to-charge ratio for each cost category.
It was found that the mismatch between MedPAR charges and cost report cost-to-charge ratios can distort the resulting DRG weights; also, it is important to note, the cost report was not designed to support the estimation of costs at the DRG level.
The workgroup recommended the following steps to overcome the most significant problems with the current methodology:
- All hospitals should prepare their Medicare cost reports so that Medicare charges, total charges, and overall costs are aligned with each other and with the categories currently used in the MedPAR file.
- This approach should be supported by educational materials to be developed and disseminated by the national, state, regional, and metropolitan hospital associations in collaboration with HFMA.
- Hospitals should focus on the reporting of medical supply costs and charges on the cost report as the most significant problem area because of two issues:
- First, many hospitals include medical supply charges in different ancillary departments. Because of inconsistencies in how these flow through the cost report, the cost-to-charge ratio for medical supplies is, for the typical hospital, often misstated (usually understated). Such misstatements distort the cost-based weights for DRGs containing significant medical supply charges.
- Second, problems can occur when hospitals choose (as allowed by CMS) to allocate total charges and costs on the cost report for some medical supplies to the departments where the supplies are used. Supply costs and charges might be allocated to the operating room (OR) and the emergency department (ED) in addition to the medical supply cost center. Many of these hospitals achieve consistency in their cost reports by allocating the Medicare charges on the Provider Statistical and Reimbursement (PS&R) report to the OR, ED, and medical supply cost center. Although this practice is allowed by cost report instructions, it will result in charge groupings that do not match the way charges are grouped in the MedPAR file. MedPAR groups all medical supplies on line 55 of the cost report. Because the MedPAR groupings are used to establish the 13 categories used to set the cost-based DRG weights, the practice described above will result in cost-to-charge ratios that do not match the charges to which they are applied.
- Hospitals should examine how they are completing their cost reports and adopt the approach of classifying all billable medical supply costs and charges to line 55 of the cost report and mapping the 27X Revenue Summary codes from the PS&R report only to line 55. Although it is preferable to do this within the hospital’s accounting systems, it also can be accomplished through a reclassification on worksheet A-6 of the cost report. It is the workgroup’s understanding that most, if not all, hospital revenue accounting systems have the ability to report charges by Revenue Summary code by department. Charges containing the 27X Revenue Summary codes would be reclassified to line 55 from any department mapped to lines other than 55. In addition, the cost of the billable medical supplies should also be reclassified to line 55 from any department mapped to lines other than line 55.
In the inpatient prospective payment system final rule, CMS has given its backing to the workgroup’s recommendations, which are also supported by HFMA, the American Hospital Association, the Association of American Medical Colleges, and the Federation of American Hospitals. Read the cost report workgroup’s recommendations.
