Cash versus Accrual – which methodology to use


The Home Health Cost Report was recently revised back in 2020 (vers. 1728-20) coincident with the change over to the PDGM version of PPS.  As someone that has been reviewing and/or preparing Medicare Cost Reports for over 30 years, I have seen how this document has and continues to affect reimbursement to the home health industry.  Unfortunately for the industry, there are too many organizations and preparers that do not really consider that when it comes to preparing and submitting their cost report and are basically just interested in putting this exercise behind them for another year.  As such, too many of the cost reports submitted tend to be rife with errors and/or omissions, yet they are continually accepted by the various MACs with little to no review.  Hence, these inaccurate cost reports become a precursor to future reimbursement rates for the industry, and these errors tend to discount industry costs and therefore have a detrimental impact on the industry’s future reimbursement. 

Without going into a full-blown essay on why the Medicare Cost Report is a lot more important than what most individuals/organizations give it credit for, I am going to focus on one of the bigger, more common errors in the cost reports submitted by home health agencies throughout the Medicare program.


Cost Reports Submitted via the Cash-Based Methodology

This has historically been one of the most common errors that has existed for the 30+ years I have been dealing with cost reports.  The reason such an egregious error has been able to exist for so long is two-fold:

  • 1st, the MACs historically have not looked for this in the cost reports when submitted, and
  • 2ndly, there are a plethora of cost report preparers that are more concerned about the revenue they’ll generate than in keeping their client agency’s compliant with Medicare regulations

The MACs have not looked for cost reports prepared under the cash-basis of accounting

Although the Medicare Cost Report (MCR) is required to prepared under the accrual-basis of accounting (see the PRM, pt II) w/few and very limited exceptions, the MACs have never really looked to verify that the submitted cost reports are compliant with this regulation.  If an agency’s cost report is rejected for any reason (including if submitted under the cash-basis), the following occurs:

  • The MAC cuts off the agency’s Medicare cash flow by the deadline at hand
  • The agency receives the “OMG” (Oh My God) letter from the MAC informing them:
    • That the Medicare cash flows have been frozen
    • That they have 30-days to correct the error or deficiency, and
    • If not corrected, they will also have to pay back all the Medicare proceeds they received for the last fiscal year within the next 30-days
    • They must submit the correction/deficiency and the MAC has 30-days to review (So you may go 30+ days w/out any Medicare cash flows)
  • What is not stipulated, but is inherently implied is that the MAC can request to review any and all supporting documentation for the changes made to correct to error

Note:  This is not a way to get on your MAC’s radar!

As extracted from §42 the Code of Federal Regulations (i.e., the law of the land) – see the following:

§ 413.24 Adequate cost data and cost finding.

(a) Principle. Providers receiving payment on the basis of reimbursable cost must provide adequate cost data. This must be based on their financial and statistical records which must be capable of verification by qualified auditors. The cost data must be based on an approved method of cost finding and on the accrual basis of accounting, except for –

(1) Governmental institutions which operate on a cash basis method of accounting. Cost data based on such basis of accounting will be acceptable, subject to appropriate treatment of capital expenditures.

(2) Costs of qualified defined benefit pension plans shall be reported on a cash basis method of accounting, as described at § 413.100(c)(2)(vii)(D) for cost reporting periods beginning on or after October 1, 2011.

(b) Definitions

(1) Cost finding. Cost finding is the process of recasting the data derived from the accounts ordinarily kept by a provider to ascertain costs of the various types of services furnished. It is the determination of these costs by the allocation of direct costs and proration of indirect costs.

(2) Accrual basis of accounting. As used in this part, the term accrual basis of accounting means that revenue is reported in the period in which it is earned, regardless of when it is collected; and an expense is reported in the period in which it is incurred, regardless of when it is paid. (See § 413.100 regarding limitations on allowable accrued costs in situations in which the related liabilities are not liquidated timely.)

Therefore, unless the agency you own/operate is a governmental institution (in which case, you cannot own it!), you are REQUIRED to prepare and complete your Medicare Cost Report under the accrual basis of accounting. 

This does not mean that you have to keep your financials under the accrual basis; but it does mean that if you keep your financials under the cash-basis (which most HHAs do), you will need to convert your financials to the accrual-basis of accounting to complete your Medicare Cost Report.  It is not difficult to do if you know and understand how to do this, but it can be utterly bewildering if you do not know how to do this while keeping your financials in balance. 

Easy, tell-tale signs that the cost report has not been prepared under the accrual-basis of accounting, include inappropriately low, or even no:

  • Accounts receivables
  • Salaries payable
  • P/R Taxes payable
  • Accounts payable

As accounts receivable represents revenues that have been earned (this does not mean billed) but payment has not yet been received, this would almost always exist for any HHA that is still actively operating and providing patient care.  Sometimes this is represented in what would otherwise be deemed cash-based financials to give the impression of accrual based, but most of the time the dollar amount would be significantly under representative of what the actual accounts receivable balance should be.

The same can be said for the payables; especially for Salaries and P/R Taxes payable.  Accounts payable is not always a given; particularly for agencies that do not use contracted services for patient care, but salaries and P/R taxes payable should always be represented on accrual based financials.  There is the chance that the reversals and accruals could net to 0, but the odds of that happening would be lottery-like! 

Questionable Cost Report Preparers

Any cost report preparer worth his or her salt should be able to identify whether the financials are cash-based or accrual-based shortly after receiving those financials.  Additionally, if they prepare the cost report for the agency based on cash-based financials that they received from the agency then not only are they non-compliant, they are only looking out for their own revenue stream, regardless of the impact to the agency (which, if identified would be very problematic, but could even become catastrophic).  Let’s face it, agency management is not likely to know regulations like this and would rely on the expertise of their cost report preparer to keep them from running afoul of the law.  If your cost report preparer (whether internal to your organization, or an outside contractor) is willing to let you run afoul of the law, is that a preparer you really want to be engaging with?

Suggestion for CMS

Under current regulations CMS can only go after the Administrator, CFO or President (as well as the agency) for non-compliance in this area, even though the cost report preparer should have been fully aware that they were preparing for submission a Medicare Cost Report that was not compliant with Medicare laws/regulations.  CMS can, and should change this, and non-compliant cost report preparers should be subject to sanctions just like anyone else that operates injudiciously in the Medicare program.

In the section of the cost report where the cost report preparer is identified (W/S S-2, pt II – see below), CMS could (should) add another certification statement in which the cost report preparer certifies that the cost report has been prepared based on the accrual-basis of accounting or that the agency qualifies for an exemption to that regulation.  This would clearly put a little more pressure on the preparer to ensure compliance.

WS S-2 MCR preparer info
WS S-2 MCR preparer info

Your MCR represents your agency. Making sure it is accurate and adequately represents your agency’s operations is your responsibility. Do your due diligence to ensure that it does.