As we are now entering cost reporting season for most Medicare-certified organizations (and for all with a 12/31/xx year-end), I wanted to share this information with those who need to know this. 

Did you know that almost all Medicare Cost Reports are required to be filed under the accrual basis of accounting?

• Do you know what the exceptions are to this requirement?
• Do you know if your organization qualifies for this exception?
• Do you know what the consequences are if you do not qualify but file as though you do qualify for this exception?

Regarding taxes, the IRS generally requires businesses with average annual gross receipts over the inflation-adjusted threshold (which was $30 million for 2024, and is projected to be higher for 2025/2026). But many smaller businesses (under this threshold) can use the cash basis, and certain types of businesses (like some personal service corps, farming) have exceptions. If a business has inventory and meets certain revenue levels (e.g., over $1 million for some resellers), the accrual basis is also typically required, but the main trigger for most is that $25M+ (adjusted) gross receipts test.  Therefore, most larger Medicare-certified entities (with annual revenues > $25 million) already maintain their financials on an accrual basis, so they are unlikely to file their Medicare Cost Report under the cash basis. 

What causes non-Compliant Medicare Cost Reports?

What causes a filed Medicare Cost Report (MCR) to be considered non-compliant?

There are numerous regulatory issues that could cause an MCR to be considered non-compliant, such as:

1. Procedural and Submission Errors, including:
   • Late Filing
   • Incomplete Submission
   • Incorrect File Formats
   • Invalid Signature
   • Etc…

2. Data and Reporting Discrepancies, including:
   • Mismatch with PS&R Data
   • Unsupported Bad Debts
   • Inconsistent Statistical Data
   • Non-Allowable Costs
   • Etc…

3. Structural and Accounting Issues, including:
   • Incorrect/Improper Cost Allocations
   • Outdated Forms
   • Unbalanced Trial Balance
   • Etc…

4. High-Risk Triggers, including:
   • Significant Year-to-Year Variances
   • Misclassification of Costs
   • Etc…

Any of these issues could cause an MCR to be considered non-compliant, at which point the Medicare Administrative Contractor (MAC) could, at its discretion, suspend payments, require an explanation, and, if not adequately addressed within a specific timeframe (generally 30 days), require a payback of all Medicare payments for the reporting period in question.  Additionally, the MAC could initiate a desk review or even a full audit of the MCR in question. 

For hospitals, SNFs, and other organizations that regularly generate annual revenues of $25-30 million or more, the above are the most common compliance sticking points.  But what about Medicare providers that generally do not generate such lofty revenue amounts?  Is there another compliance issue that could trouble those organizations?

MCRs Filed Under the Cash Basis of Accounting

Does filing a MCR under the cash-basis of accounting make that MCR non-compliant?

No, not necessarily.

However, the agency itself needs to know whether it is eligible to file its MCR under the cash basis of accounting.

• Do you know if your organization is eligible to file its MCR under the cash basis of accounting?
• Do you even know if your MCR was filed under the ‘Cash’ or the ‘Accrual’ Basis of Accounting?
• You should!

Home Health and Hospice MCRs

As someone who has worked in home health and hospice since 1992, my focus is on these entities. 

I estimate that more than 25% of all home health and hospice MCRs are filed under the cash basis of accounting each year.  Any home health or hospice that doesn’t have a reasonable $ amount of Accounts Receivable, Accounts Payable, Salaries Payable, Payroll Taxes Payable, etc…, identified in their Trial Balance is almost certainly filing their MCR under the cash basis of accounting. 

Can a home health or hospice agency legally prepare and submit its MCR under the cash basis of accounting? 

Yes.  But within certain, limited parameters. 

Or, generally, in other words: No.  Most home health and hospice organizations must file their MCR’s using the accrual basis of accounting. CMS regulations state that cost data must be based on financial and statistical records verifiable by auditors, and that the accrual basis is the most accurate for determining these costs.

What do the Regulations State?

From the Code of Federal Regulations (CFR):

42 CFR § 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.

Therefore, the ONLY home health and hospice organizations legally permitted to file an MCR under the cash basis of accounting are government-operated entities.  Meaning all other home health and hospice organizations are required to prepare and submit their MCR(s) under the accrual basis of accounting, even if they keep their financials throughout the year under the cash basis of accounting.  This means that any home health or hospice organization that keeps its operating financials on the cash basis of accounting throughout the year MUST convert these financials to the accrual basis for preparing and submitting its MCR, with no exception.

The 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. 

Non-Compliant, Cash-Based MCRs

Even though CMS (or HCFA before) has never made an issue of this, if CMS did, it could create a very unpleasant situation for any home health or hospice organization caught up in it (and CMS will also look at past years’ filings).  One, your organization will stand out in an era where one would rather not stand out.  Two, this could make the issue applicable for numerous years, all of which would need to be addressed.  And three, you will have, ostensibly, put a target on your back (see One), making your organization a prime candidate for a desk review or a full field audit, given the fraud and abuse of government funds so prevalent in today’s world. 

Why could this issue exist for your agency?

• If your agency keeps its financials under the accrual basis of accounting throughout the year, this issue would not likely exist for your agency.
• If your agency keeps its financials under the cash basis of accounting throughout the year, this issue could exist for your agency, and you should:
  • Review/understand what your cost report preparer does and communicates to you when preparing your MCR
  • Does your MCR preparer identify to you that your financials are cash-based and need to be converted to the accrual basis, or do they just prepare the MCR with the cash-based financials “as is”?
    • If it’s the former, and they convert the financials in a reasonable manner, you should not have any issues.
    • However, if it’s the later, your cost report preparer would not seem to have your back and would seem to be in it for the revenue, at which case you should change MCR preparers immediately to someone who will not only have your back, but is someone who knows what they are doing and will help keep you compliant while preparing your MCR(s).

As an fyi, based on past reviews of filed home health and hospice MCRs and clients that have come to me from other MCR preparers, I estimate that approximately 25-35% of all home health and hospice MCRs are filed with unconverted, cash-based financials every year.  This is not an exact estimate, but I know the rate of cash-based, filed MCRs significantly exceeds the approximate 2.5% of government-operated home health agencies across the program. 

Summary

You are ultimately responsible for your MCR’s compliance.  See the Certification Page of the MCR that you sign.  Having a cost report preparer to help keep your organization compliant is a strong, valuable asset to your organization. 

As the old saying goes: “An ounce of prevention is worth a pound of cure.”

If you need any assistance with preparing and submitting your Medicare Home Health and/or Hospice Cost Report(s), please feel free to contact me to discuss how I can help you and your organization.