The Latest Zpic Target: Medicare Cost Reports

Mar 18, 2013   
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(For additional information concerning ZPICs, please refer to our January 11, 2013 blog entry, ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West”).

A. Cost Reports, Generally

When Medicare was created in 1966, Medicare paid participating providers (e.g. hospitals and skilled nursing facilities) based on a portion of their costs. Medicare’s portion of costs was determined by multiplying total costs by the ratio of Medicare charges to all charges. Providers were paid an estimated amount on an interim basis; however, providers filed a “cost report” at the end of each year in order to compute a final settlement. Generally, the cost report aggregated a providers’ detailed financial data. If Medicare overpaid the provider from the interim payments, a payable was generated from the provider. If Medicare underpaid the provider from the interim payments, a receivable was generated to the provider. Medicare discontinued this payment system in 1983 (for hospitals) and 1998 (for nursing homes).

Medicare now utilizes a prospective-based reimbursement system which has no relation to a providers’ actual cost report. While providers are still required to file cost reports as a condition of participation in the Medicare program, the cost report no longer impacts the settlement process. Rather, the Centers for Medicare and Medicaid Services (“CMS”) utilizes the data to compute national reimbursement rates. In other words, a providers’ Medicare cost report is used by CMS for informational purposes only.

B. ZPIC Requests for Provider Business and Financial Data

As briefly referenced in our January 11, 2013 blog entry, “ZPICs and Skilled Nursing Facilities: Medicare’s Wild Wild West,” ZPIC auditors are demanding that skilled nursing facilities produce, in addition to patient/resident medical records, confidential and proprietary business and financial records. Generally, these demands include requests for the following: (a) detailed general ledgers; (b) audited financial statements; (c) organization charts; (d) journal entry descriptions; (e) chart of accounts; (f) board meeting minutes; (g) facility check register; (h) list of facility credit card holders and bills; (i) facility grouping schedule; (j) working trial balance; (k) balance sheets; (l) profit and loss statements; (m) floor plans; (n) facility and corporate policy and procedures manuals.

These requests not only appear to exceed the scope of a ZPIC’s authority, but also appear duplicative. When the ZPIC is questioned as to its authority to request such information, the ZPIC frequently responds citing generally to the Social Security Act. When pressed for specific citations to legal authority, the ZPIC may cite to 42 CFR §§420.301-304. Interestingly, 42 CFR 420.301-304 falls under Subpart D, “Access to Books, Documents, and Records of Subcontractors” (Emphasis added). A skilled nursing facility, however, does not fall under the definition of a “subcontractor” as defined in 42 CFR §420, Subpart D. Despite advising the ZPIC of this flaw, the ZPIC is generally unwilling to engage in any further discussion relative to the scope of its authority.

Further, the requested financial information is duplicative given CMS already obtained the financial data in the normal course of business via the provider’s Medicare cost reports. Of course, if CMS, c/o its Fiscal Intermediary/Medicare Administrative Contractor (“FI/MAC”), had an issue with the information contain in the provider’s cost report, the issue would have been addressed at that time. Yet, a request for a provider’s financial data from several years prior appears to be a means of harassing a provider into noncompliance following an endless barrage of detailed and dated financial document requests.

C. Are Medicare Cost Reports “Fair Game” for ZPICs? 

When a nursing home fails (or is otherwise unable) to produce such business and financial data, the ZPIC may instruct the FI/MAC to a issue “Notice of Change of Amount of Program Reimbursement” for each corresponding fiscal year end period. The result may be as severe as a reopening of each corresponding fiscal year end period and denying some or all of the provider’s Medicare costs referenced therein.

Interestingly, the regulations clearly state that the FI/MAC is the only entity with the authority to reopen provider cost reports and make determinations relative to same. See 42 C.F.R. §405.1801, et. seq. Further, while Section 4.7.1 of the Medicare Program Integrity Manual permits a ZPIC to compile and review cost reports, the ZPIC Zone 7 Statement of Workexpressly excludes cost report action from the scope of a ZPIC’s authority (e.g. reopening and denials).

However, the FI/MAC typically accepts the ZPICs directives without question or analysis. More importantly, the FI/MAC generally has no knowledge concerning the underlying basis for the ZPIC’s cost report action. In other words, the ZPIC and FI/MAC make it clear that the ZPIC is the sole entity making all decisions and determination relative to the providers cost reports. Thus, the FI/MAC is simply issuing correspondence based on ZPIC directives.

D. A Lack of Provider Business and Financial Data Cannot be the Basis of a ZPIC’s Adverse Cost Report Determination

ZPICs have asserted, in no uncertain terms, that the failure (or inability) to produceall of the demanded financial documentation will lead to the reopening and denial of all Medicare costs contained in the corresponding fiscal year end cost reports.

However, a provider’s failure (or inability) to produce all of the demanded financial and business records has no relation to the actual ZPIC cost report determinations. In addition to aggregating a provider’s financial data (for informational purposes only), a Medicare cost report also includes RUG scores (a/k/a the rate CMS will pay the provider for a given resident). These RUG scores are multiplied by a skilled nursing facility’s census to identify Medicare days paid. Despite requesting business and financial data, ZPICs are reopening cost reports relative to Medicare days paid and making their determinations accordingly. The ZPICs’ conduct is the equivalent of stating that no skilled nursing facility resident during the same periods qualified for Medicare and any payments received by the skilled nursing facility for those Medicare residents must be returned. Yet, whether a resident qualified for Medicare and whether that information was accurately included in the provider’s cost report has no relation to, for instance, a provider’s failure or inability to produce unrelated credit card statements and/or building floor plans. Instead, a determination relative to the accuracy of a provider’s resident Medicare costs would require an analysis of the actual facility residents during the corresponding periods. Even still (and as previously noted), a provider’s Medicare cost reports are merely informational.

E. Does a Provider Have Appeal Rights?

While providers are given the opportunity to appeal cost report reopenings/denials (whether before the Provider Reimbursement Review Board or the MAC, depending upon the amount at issue), appeals may be futile given regulations which permit CMS, c/o the U.S. Department of the Treasury, to begin recouping and/or offsetting Federal and certain eligible state funds due the provider. In essence, the provider is at risk of being choked out of business with millions of dollars earmarked by the ZPIC for recoupment/offset before the provider can assert its appeal rights, even in an action arguably void at its inception. Whether a provider should exercise its appellate rights or seek some other type of relief from a cost report reopening/denial is ultimately a fact-intensive analysis which should be made in light of all of the circumstances affecting the provider’s business.

Fuerst Ittleman David & Joseph, PL will continue to monitor the ZPIC landscape. For more information concerning the foregoing, please contact our firm’s litigation department by calling 305.350.5690, or by emailing us at