Healthcare Compliance
CMS undertakes Medicare Worksheet S-12 audits of hospital cost reports
Independent reviews will test Medicare Advantage negotiated rates and supporting discharge data, with adjustments incorporated into hospital cost-report settlements.
Published
10 hours ago
CMS is emphasizing hospital compliance with updated Medicare cost-reporting requirements, recently announcing an audit of first-year submissions of a brand-new worksheet.
For cost-reporting periods ending on or after Jan. 1, 2026, most hospitals paid under the Inpatient Prospective Payment System have had to complete Worksheet S-12. Those submissions will be subject to auditing by a contracted firm, according to a posting.
How CMS will conduct Worksheet S-12 reviews
CMS is setting up a separate review process beyond standard cost-report audits, hiring the auditing services firm Myers & Stauffer to conduct the worksheet evaluations. Hospitals chosen for review will receive information requests and must provide supporting documentation within the specified time frame. The firm will work with the hospitals’ Medicare administrative contractors, with any resulting adjustments incorporated in cost-report settlements.
The published guidance does not disclose how many hospitals will be reviewed or the criteria used to select them.
How Worksheet S-12 supports Medicare rate-setting
As previously reported, Worksheet S-12 requires eligible hospitals to convey the weighted median of their negotiated payment rates with Medicare Advantage (MA) organizations, segmented by Medicare Severity Diagnosis-Related Group (MS-DRG). The calculation is based on rates in the hospital’s updated price transparency machine-readable file (MRF), weighted by inpatient discharges per MA organization and per MS-DRG.
An analysis by Blue & Co. notes that completing the worksheet requires combining data from MRFs, inpatient discharge records and MA contracts. Ensuring those sources align may be a bigger challenge for hospitals than the mechanics of filling out a worksheet that includes more than 900 lines for inputting MS-DRGs.
CMS’s goal by FY29 is to incorporate the S-12 reported data to establish market-based MS-DRG rates in traditional Medicare, with further rulemaking likely needed to refine the methodology. Because the relative weights will help determine inpatient Medicare reimbursement, CMS is intent on minimizing inaccuracies in the underlying data. The agency has given no signal that the announced audits stem from indications of widespread hospital noncompliance.
The underlying goal of shifting to market-based rate-setting has been a priority of both Trump administrations. In September 2020, CMS similarly finalized a market-based MS-DRG relative-weight methodology and the corresponding requirement to express MA negotiated rates on cost reports, effective with cost-reporting periods ending on or after Jan. 1, 2021.
The plan was reversed in August 2021 by the Biden administration, which chose to retain the existing cost-based methodology for setting MS-DRG payments. At the time, CMS expressed a need to further evaluate whether MA negotiated-rate data would be useful for establishing fee-for-service payment rates. The agency also said hospitals would be spared many hours of administrative work if the requirement were repealed.
What Worksheet S-10 audits reveal about CMS scrutiny
Precedent for the S-12 audits can be seen in the dedicated review process for Worksheet S-10, which is used to capture uncompensated-care (UC) data for calculating hospital-specific UC payments.
CMS implemented auditing of selected cost reports starting in 2018. The audits examined the accuracy of reported charity care and bad debt, plus hospital compliance with requirements for financial assistance.
Although CMS does not make available a comprehensive summary of S-10 auditing, a 2022 presentation at an American Health Law Association event reported that in FY18 and FY19, hospitals filed $70.6 billion in UC costs on Worksheet S-10. Post-auditing, that amount was reduced to $67.2 billion, a 4.8% decrease.
In a 2021 report for HFMA’s First Illinois Chapter publication, analysts with Moss Adams noted that for FY18, 1,539 of 2,839 eligible hospitals had a change in their reported UC totals. The aggregate reduction was more than $1 billion, or 4.7%, although 489 hospitals saw an increase in their reported UC costs as a result of the audit.
A takeaway potentially applying to the Worksheet S-12 audits is that assessments went beyond checking figures to more thoroughly examine underlying transactions, methodologies used to compile the data, and documentation backing the reported amounts.
How hospitals can prepare for Worksheet S-12 audits
Recommendations for hospitals to ensure their S-12 worksheets are not negatively affected by the audit include verifying that their MRF data matches their inpatient discharge volumes and 835 remittance data, excluding capitated or denied accounts since those do not factor into Worksheet S-12 reporting.
There are key points to keep in mind regarding payer-specific negotiated charges with respect to the worksheet, as highlighted in a bulletin by Forvis Mazars. Specifically, 2026 price transparency regulations require encoding the median allowed amount and related fields (the 10th percentile and 90th percentile allowed amounts, along with the count of allowed amounts) in MRFs when a charge is based on a percentage or algorithm. MA payer-specific charges as documented in the MRF must be used in S-12 reporting.
