The Home Health Cost Report

The Home Health Medicare Cost Report is a document that must be completed and filed annually by all home health agencies (HHAs).  Failure to do so can result in the termination of all cash-flows from the Medicare program and can also trigger a recapture of all Medicare monies paid to the agency for that reporting period.  Needless to say, the Home Health Cost Report is a document that is filed by all HHAs each year.  Facility-based HHAs file their requisite information as part of the Cost Report for the facility they are attached to.  Free-standing HHAs file CMS Form 1728-94.  Form 1728-94 is the official Home Health Cost Report for non-facility based HHAs, and will be the document we will discuss for the rest of this post (although the concepts hold true for the facility-based Cost Report as well).

WS S of the Medicare Home Health Cost Report - partial

WS S of the Medicare Home Health Cost Report – partial

The Home Health Cost Report is comprised of a series of groups of worksheets (W/S).  Each of these groups generally have a common theme.


W/S Groups

The most commonly used W/S series include:

The S-series is generally comprised of demographic and operational information.  This information includes agency identification info; visits, charges, FTE info, etc…

  • New for 2016, the Provider Reimbursement Questionnaire (aka the PRQ or Form 339) has been replaced by W/S S-2-1
  • Additionally, W/S S-2-1 also requires the contact information of who prepared the Cost Report – see the following:
Cost Report Preparer Contact Information for CY 2016 and beyond

Cost Report Preparer Contact Information for CY 2016 and beyond

This is one of the most significant changes to the Home Health Cost Report since the inception of HH PPS.  CMS has established this requirement now to be able to track the quality of the Cost Reports prepared by preparer.  Remember, almost 40% of all HHA Cost Reports were excluded for the CMS rebasing calculations, and the biggest portion of those were because they were inadequately/poorly prepared.


The A-series is generally comprised of the costs/expenses incurred by the HHA for the reporting period.

The B-series are the W/Ss where the the ‘allowable’ Administrative Costs (aka: Overhead) are allocated out to the Direct Cost-Cost Centers.

The C-series is where the Cost per Visit (CPV) by discipline (i.e., SN, PT, OT, ST, MSS & HHA) are calculated and where the identification of total Medicare cost occurs.

The D-series identifies the Medicare revenues received during the reporting period, as well as any adjustments to revenues (including Sequestration) and total amounts paid to the agency.

And the F-series is the Home Health Cost Reports presentation of the requisite financial statements (i.e., the Balance Sheet, the Income Statement, and the Fund Balance).


Requirement to file a Home Health Cost Report

All entities providing services to Medicare beneficiaries seeking reimbursement for those services are required to file a Cost Report as per Section 100 of the Provider’s Reimbursement Manual (PRM 15, pt. II) – see the following excerpt from the PRM:

PRM 15, pt II - Requirement to file a Cost Report

PRM 15, pt II – Requirement to file a Cost Report


Instructions for Completing the Home Health Cost Report

The Home Health Cost Report instructions can be found in the Provider Reimbursement Manual (PRM), Part II, Chapter 32.


The Accrual Basis

The Cost Report must be prepared under the Accrual-Basis of Accounting (see Instructions).  I have heard of preparers saying that this is an old, antiquated regulation and you can file your Medicare Cost Report (MCR) under the Cash-Basis of Accounting.  Well, that is, and has been since I have been in home health (since the early ’90’s), 100% WRONG!  There are plenty of cash-based MCRs accepted by the MACs every year; but that does not mean that that is acceptable, or allowable (read the instructions noted above).  See the following excerpt from those instructions:

HH Cost Report Instructions - Accrual Basis Required

HH Cost Report Instructions – Accrual Basis Required

This is not a subjective requirement!

If the MACs identify that a MCR has been submitted under the cash-basis of accounting, that agency’s Medicare revenues will be turned off.  Additionally, the MAC could look back as far as possible to see how long this has occurred and issue a 30-day demand letter requesting the agency to pay back all Medicare monies paid to the agency for every Cost Reporting period that they identify that the MCR was prepared on the cash-basis.  The HHA will have the opportunity to amend the MCRs filed on the Cash-Basis, but they will need to get all MCRs revised/amended ASAP, and then the MAC will have to review and confirm that the MCRs are compliant; which could even entail an on-site review.  However, in the interim, your Medicare cash-flow will be turned off and you will have just put your agency(s) on the MAC’s radar; not a place any HHA wants to be in the current operating environment in home health.

Special Note:

If you want to be able to make your HHA as cost-effective/efficient as possible, you really should be operating on the Accrual-Basis of Accounting.  This is a basic business financial fundamental, that is wholly applicable to home health!  So why do so many HHAs operate on the Cash-Basis?  Mostly because the financial assistance that they obtained when initially setting up their agency was from accountants/CPAs with little to no home health experience.  Therefore, their focus was solely on taxes and financial reporting for taxes (not the MCR or business analysis).  A shortcoming; a missed financial fundamental to be sure.  Generally speaking, most HHA owners want to report their financials for IRS tax purposes on the Cash-Basis: there’s nothing wrong with that.  However, an HHA can still operate throughout the year under the accrual basis for business purposes and convert their financials to the cash-basis at year-end for tax purposes: perfectly legal!

But these instructions are mostly just for the physical entry of data into the Home Health Cost Report; and they generally do not identify what is and is not reasonable and/or allowable as per Medicare’s guidelines.  But the instructions are almost ALWAYS the focus of any webinars/training sessions about the Home Health Cost Report.  So they focus on where you put data/information, but minimally touch on what is allowable or non-allowable.  To understand was is actually allowable, you have to understand the information in the PRM part I.

The Provider Reimbursement Manual – Part 1

This is the instructions, the guidelines an agency seeking reimbursement from Medicare must follow.  This document was primarily created for Hospitals, so many chapters are not applicable to HHAs.  However, HHAs are required to comply with those chapters that are applicable to home health.  Some of the more relevant and significant Chapters include:

There are 31 chapters in all, and although not all are applicable to HHAs, the majority of chapters are applicable to home health in some manner or form.  Therefore, to be able to properly prepare a Medicare Home Health Cost Report, you have to be proficient with the:

  • Home Health Cost Report Instructions of PRM 15, part II, Chapter 32, as well as
  • All the applicable regulations & requirements as identified in PRM 15, part 1 (this is the one many preparers are not knowledgeable of).

Note:  If Medicare decides to do another round of Rebasing, they will have audits conducted on a selected sample of Home Health Cost Reports.  The HHAs selected better have a thorough understanding of the PRM 15, part 1 (or contract with someone that does) to protect the costs included in their Cost Report (assuming that they are defensible; which isn’t always the case).  The last round of Rebasing saw CMS exclude 8% of all industry costs because of the outcomes of the limited number of audits that they performed at that time!


So we’ve touched on the filing requirement and some of the instructions/regulations applicable to the Home Health Cost Report, but what about the purported flaws?  Continue reading.


Flaws of the Home Health Cost Report

Following is an overview of several (but not necessarily all) of the identified flaws of the Home Health Cost Report.



The original documents that created Medicare, back in 1965, stipulated that the program would pay all participants to the program what their costs were to participate.  Over the years, as Medicare expenditures grew in whole-dollars and as a % of the National Budget, the administrator’s of the program (i.e., HCFA, and now CMS) began to renege on that promise.  To some extent this was understandable, as Medicare spending was becoming liken to a runaway train; with Medicare expenditures increasing almost exponentially.  As a form of control, the Program started establishing various limiting thresholds to try to hold in check this explosive growth:

  • Lower of Costs or Charges
  • Increasing the denial of services
  • and for home health; prior to PPS, the Lower of Costs, Charges or the Per Beneficiary Limit
    • This was the Interim Payment System (IPS)
    • And was a transitional point from “Cost-based” reimbursement to “Prospective Reimbursement”
    • But this was a horribly designed reimbursement system that caused almost 40% of all existing HHAs at the time of implementation to close within five-years (between 1998 and 2003)
    • And financially penalized historically frugal and financially conservative HHAs while financially benefitting the most poorly and incompetently run HHAs (this is fact, not fiction!)


Payor Specific Costs


The Medicare Home Health Cost Report has always been used to identify Medicare Costs.  Pre-IPS, it did a fairly reasonable job of this as just about all activities were quite similar for any home health patient; regardless of payor (and non-Medicare costs were limited and not common).  The problem really began to manifest itself as specific payors (primarily Medicare and Medicaid) began to require additional activities and costs that were solely germane to those payors.  When this happened, additional incremental costs required by Medicare and Medicaid (from here on out I will just reference Medicare), were treated as any other costs and were attributed to ALL payors.  Well, this had the effect of understating costs attributable to Medicare (which could be significant) and overstating the costs attributable to the non-Medicare payors.

Because of this flaw, HHAs could be made to look more profitable than what they were for operating in the Medicare program; and vice-versa for their non-Medicare lines of business.  Well, this is a flaw that has been exploited by MedPac and CMS for years!  For example, see the MedPac Report to Congress for March 2017; specifically about Medicare Margins (profits) for HHAs (Chapter 9).

This flaw inflates Medicare Margins for the home health industry; making the industry look more profitable in the Medicare program than it really is.  Therefore, CMS and MedPac have used this flaw to lobby Congress to reduce home health reimbursement for over a decade now!


Where did it begin?

Ostensibly, you could say that it began about forty years ago with the implementation of the Provider Reimbursement Manual (PRM).  It was in the PRM that the concept of ‘non-allowable costs’ for Medicare came into being.  Non-Allowable costs were/are costs that, although normal, reasonable and legal to incur in the operations of your business were considered ‘not allowable‘ for the calculation of Medicare Costs.  Therefore, many routine business expenses are excluded from consideration in the calculation of Medicare costs, such as:

  • Marketing Costs (quite likely one of the most impactful non-allowable costs since the inception of PPS)
  • Accelerated Depreciation (not a capital intensive industry, but …)
  • Bad Debts/Uncollectables (for the most part)
  • Charitable Donations
  • Related-party costs in excess of what the costs are to the related party (generally; and this means no mark-ups allowed for related party transactions)
  • non-Allowable Advertising (versus allowable advertising)
  • Telehealth (even though it has been shown to help reduce costs of patient care and Medicare does benefit from this)
  • Political and Lobbying costs
  • etc…

Pre-PPS, all these costs were deemed non-allowable costs per the Home Health Cost Report.  An agency could incur these costs, but was then supposed  to self-disallow these costs (although many did not; in direct conflict with the regulations).  However, these costs were not common pre-PPS, or were not significant when they were reported; so the impact was fairly minimal.

However, that changed with the implementation of PPS.  Marketing costs skyrocketed in the home health industry.  Many, falsely believe that PPS changed the regulations around Marketing.  That perception is unequivocally wrong!  Marketing is and ALWAYS has been an allowable activity associated with non-allowable costs.  Although many do properly self-disallow Marketing Costs, most do not differentiate between what are allowable patient-care coordination costs and what are truly non-Allowable Marketing Costs; categorizing all under Marketing.  As such, much of what is identified as Marketing Costs also includes allowable patient-care coordination costs.  If/when Marketing Costs are disallowed, allowable patient-care coordination costs are also disallowed (because of the inappropriate classification), thereby causing and understatement of Medicare Costs.  This is problematic to this industry; but it is a problem that the industry itself has created.


The OASIS/Assessment Visit

The Outcome and Assessment Information Set (OASIS) has been required of all Certified agencies since 1999, but had been in development and limited use since the mid-’90s.  The OASIS Assessment visit has doubled, even trebled the time of an initial assessment visit; and therefore has increased the cost significantly of these assessment visits.  In the early years of its required usage, the OASIS was to be completed for every admission, regardless of payor, for all Medicare Certified HHAs.  This was a cost that agencies were forced to incur by the Medicare program that the Medicare program provided next to no additional reimbursement for.  This cost was 100% applicable to Medicare (regardless of the payor), yet the Cost Report treated it as a cost applicable to all payors the agency contracted with.  Therefore, Medicare-specific costs were significantly understated.

That is still the case to this very day!  Although we are no-longer required to complete the OASIS for the majority of non-Medicare payors, the additional incremental costs of these assessment visits is still attributable to Medicare.  However, these costs are still deemed general service costs and are absorbed in a pro-rata fashion by all payors (business lines).  As long as this inability to specifically allocate certain payor-required expenditures to that specific payor exists (which predominantly is Medicare), payor-specific costs will be an estimate at best and will NOT BE ACCURATE!


Other Medicare Specific Costs

These are other costs (similar to the costs of preparing the initial OASIS), that all Certified agencies are forced to incur by Medicare, but whose costs are deemed general service costs and are allocated to all lines of business.  Again, every time that this occurs, this has the effect of causing the costs of that payor (predominantly Medicare) to be understated.  Therefore, every time a portion of Medicare-specific costs are allowed to be allocated to non-Medicare lines of business, it has the effect of making the cost to provide Medicare services appear less costly than what it actually is.  This understatement of Medicare costs causes an agency’s Medicare profits (i.e., Medicare Margins – see the MedPac Report referenced earlier) appear greater than what they actually are.

Some examples of these Other Medicare-Specific Costs include:

  • Therapy Reassessment Visits
  • Reassessment and Discharge OASIS
  • F2F (including any/all legal fees to contest these disallowances through ALJ)
  • PCR  (only IL thus far and currently on hold, but …)
  • etc…

The more these, and other similar costs are incurred by the home health industry, the more inflated the ‘Medicare Margins‘ will be that CMS and MedPac report to Congress.

Update the Cost Report

Although there was a revision to the Home Health Cost Report for 2016 (the inclusion of W/S S-2-1), there was nothing done to account for the inappropriate way in which this document treats Medicare-specific costs.

There should be an additional schedule (or columns) added to the Cost Report to allow for the direct allocation of payor-specific costs to be wholly attributable to that payor.  This (or something similar) is the only way that the industry, CMS and MedPac will ever be able to identify what the true payor-specific costs are for Medicare and/or any line of business.  The industry should be demanding a document that properly identifies and allocates costs, such that the profit margins by payor from that document are fair and representative of the industry’s actual operating results.



As we just identified, there are numerous flaws in and with the Home Health Cost Report.  Some are informational, but a great many are financial and as such, help create an inaccurate presentation of the overall financial results for the industry and individual HHAs.  However, that being said, the Home Health Cost Report is still a required document that must be submitted at least annually by any HHA looking to participate in the Medicare program.