CASE STUDY

REIMBURSEMENT FOR PROVIDING SERVICES

UNDER TITLE XVIII

Background Information:

Sunset Nursing Home is a hypothetical 110-bed proprietary facility for extended care described here to illustrate reimbursement principles for services provided under Title XVIII of P.L. 89-97. This facility has met the conditions for participation.

This nursing home has a pharmacy, X-ray and diagnostic services, clinical laboratory, and a rehabilitation area where a physical therapist, an occupational therapist, and a speech therapist work part-time. There is also an examination and treatment room which is used by the social worker for consultation and interviews. The building is about 15 years old and the equipment has been in use for some years, for the most part.

The books of the home,

The owner of the home serves as the administrator. which are kept by a bookkeeper, were set up by an accountant. In addition to utilizing the accountant's services to file tax reports for the home, the owner consults with the accountant on relevant new laws and rulings.

Problem:

The owner recognizes that most patients 65 or over discharged from hospitals requiring continued nursing care will want to enter an extended care facility participating in the Medicare program. He is concerned about whether Medicare's cost reimbursement formula will allow adequate compensation for his services. He also wishes to institute whatever accounting changes are necessary so that he will insure full reimbursement for the services he renders to Medicare patients.

Questions:

1.

2.

The nursing and rehabilitation equipment has been in use for some
years and most of it has been fully depreciated for tax purposes.
What are the rules governing depreciation under Medicare in such
circumstances?

The purchase of new equipment poses a continuing problem of raising capital funds. Unless he is able to set aside funds, the owner will be unable to replace equipment that is no longer usable. How can he establish a capital fund under Medicare provisions for reimbursement?

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3.

4.

The owner is considering expanding his facility to increase the bed capacity and to provide additional therapeutic services. If he decides to do this at a cost of around $50,000, should he withdraw funds from his own capital to finance at least partially this expansion or should he borrow the entire amount? The funds he has available draw 4 percent interest. A loan would require paying interest of at least 6 percent.

He is concerned with the time lag between the providing of services to Medicare beneficiaries, the billing for these services, and reimbursement by the fiscal intermediary. Are there any provisions for interim payments?

CASE STUDY

REIMBURSEMENT FOR PROVIDING SERVICES

UNDER TITLE XVIII

Possible Solutions to Problems and Discussion:

Basis of Reimbursement

The Medicare law directs that payments to providers of services--such as hospitals and extended care facilities--be made on the basis of the reasonable cost of each provider rendering services to program beneficiaries. Reasonable cost means the actual cost of providing patient care except where such costs are determined to be excessive when compared to the costs of similar institutions. It is the intent of the Medicare law that payments to providers of service should be fair to the providers, to the contributors of the health insurance trust funds, and to other patients.

Allowable Costs

The principles of reimbursement essentially recognize all necessary and proper operating expenses including salaries of necessary personnel, administrative expenses, a reasonable allowance of compensation for the services of owners performed in a necessary function, maintenance costs, interest expense, depreciation, educational expenses, normal standby costs, etc. In addition, the principles include in the payment for costs of services a factor in the form of an allowance to cover various elements not specifically recognized or not precisely measured. For proprietary providers this factor would be 1% of allowable cost (exclusive of interest expense) and 2% of allowable cost (exclusive of interest expense) for non-profit providers. Proprietary institutions also are permitted a return on equity capital invested and used in the provision of patient care. The rate of return (currently about 8 percent) allowable is 11⁄2 times the average interest rate on public debt obligations issued to the Federal Hospital Insurance Trust Fund. For purposes of computing equity capital we mean, generally, a provider's net investment in all assets related to patient care, such as net working capital maintained for necessary patient care activities - and net investment in plant, property, equipment, i.e., net of any depreciation and related indebtedness such as a mortgage.

Cost Apportionment (See Illustration A)

The items enumerated above are includable in the provider's total allowable costs, which must then be apportioned among the users of the facility. The reimbursement regulations establish two basic methods of apportionment, either of which may be used at the option of a provider, for determining the program's share of the provider's allowable costs. The first method is the Departmental Method which involves a relationship of Medicare charges to total patient charges applied to costs. Under this method a percentage representing the beneficiaries' share of total charges, on a departmental basis, is applied to

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total allowable costs for the respective departments. This department-bydepartment method involves a determination, by cost finding methods, of the total costs for each of the institution's departments that are revenueproducing; i.e., departments providing services for which charges are made to patients. The costs of each department are then apportioned among the users of the department.

The second method is a combination method. Under this method, costs of routine services (room, board, nursing service) are apportioned on the basis of patient days for beneficiaries and for other patients; i.e., an average cost per inpatient day. The costs of ancillary services (such as radiology, laboratory, drugs, etc.) are apportioned on the basis of a percentage representing the beneficiaries' share of the provider's total charges for ancillary services. The amounts determined to be the program's share of the two parts of the provider's allowable costs are then added together to determine the total amount of reimbursement under the program. The combination method also requires that the costs of routine services be separated from the costs of ancillary services by cost finding methods.

Cost Finding Methods

The following methods of cost finding are provided to determine the actual costs of services rendered during that period.

1. Step-down Method (See Illustration B)

2.

This method recognizes that services rendered by nonrevenue-producing
departments or cost centers are utilized by other nonrevenue-producing
departments as well as by the revenue producing departments. All costs
of nonrevenue-producing departments are allocated to all departments which
they serve, regardless of whether or not these departments produce revenue.
The costs of those departments that provide the most service and receive
the least should be allocated first. After the cost of each nonrevenue-
producing center is allocated, that center will be considered "closed" and
no further costs allocated to it. This applies even though it may have
received some services from a center whose cost is apportioned later.
Other Methods

(i) Double apportionment method - The double apportionment method may be used with the approval of the intermediary. In this method a preliminary allocation of the costs of nonrevenue-producing centers is made to all other centers which use their services. These centers or departments are not "closed" after this preliminary allocation but remain "open," accumulating a portion of the costs of all other centers from which they receive services. The first or preliminary allocation is followed by a second or final allocation of expenses involving the allocation of all costs remaining in the nonrevenue-producing functions directly to revenue-producing centers.

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(ii) More sophisticated method - A more sophisticated method designed
to allocate costs more accurately may be used upon approval of the
intermediary.

(iii) Where certain conditions exist, and with the approval of the
intermediary, cost finding need not be performed to determine the
actual costs of services rendered during the period. These conditions
are as follows:

a.

C.

d.

e.

routine inpatient services are the only services provided
directly by the facility

no outpatient services are provided in the facility

no medical (Part B) services are provided in the facility

all ancillary services are purchased from the outside

no significant amounts of the facility's costs are to be
allocated to non-covered activities (unallowable costs),
e.g., gift shop.

Where the above conditions exist, the costs of routine services are the
total allowable costs of the facility for services furnished directly
by the facility. The costs of ancillary services in total or by type of
service are the costs which the facility incurred in purchasing the ser-
vices from outside sources. The total allowable costs of the facility
may then be apportioned to the program using either one of the approved
methods of apportionment.

Payment Procedures

The Medicare program has a comprehensive payment system designed to reimburse providers of service currently so that they are not disadvantaged. Basically providers are reimbursed on an interim basis throughout the year based on billings for services rendered. When total costs are determined at the end of the year a final settlement will be made. However, in addition to the basic payment procedure, a current financing payment can also be made upon the request of the provider. This payment is designed to reimburse providers currently as services are actually rendered to beneficiaries, and it will enhance a provider's working capital position.