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Medicare Hospital Inpatient Prospective Payment System (IPPS) Federal Fiscal Year (FFY) 2022 Final Rule

CMS-1752-F drafted on 8/2/2021; Published in the Federal Register on 8/13/2021

 
On August 2, 2021, the Centers for Medicare & Medicaid Services (CMS) issued the final rule for Federal Fiscal Year (FFY) 2022 Inpatient Prospective Payment System (IPPS). The Final Rule builds on key priorities to close health care equity gaps and support greater access to life-saving diagnostics and therapies during the public health emergency (PHE) and beyond. Its polices will assist in supporting a hospital’s readiness to respond to future public health threats and develop the health care workforce in rural and underserved communities. The Final Rule revises reporting requirements for scoring, payment, and public quality data in their effort to reduce the adverse impacts of the pandemic and any future unplanned events. The Final Rule updates Medicare payment policies and rates for hospitals under the IPPS and the Long-Term Care Hospital (LTCH) PPS effective for discharges on or after October 1, 2021 (FFY 2022).
 
CMS received greater than 6,500 public comments to the FFY 2022 Proposed Rule. These comments related to empirical disproportionate share hospital (DSH) payments, organ acquisition costs, and the provision of the Consolidated Appropriations Act (CAA) 2021, related to payments to hospitals for direct graduate medical education (GME) and indirect medical education (IME) costs, will be addressed in subsequent parts. 
 
CMS, in this Final Rule, establishes new requirements and revises existing requirements for the Hospital Value-Based Purchasing (VBP) Program, Hospital Readmissions Reduction Program, Hospital-Acquired Condition (HAC) Reduction Program, Hospital Inpatient Quality (IQR) Reporting Program, LTCH Quality Reporting Program, PPS-Exempt Cancer Hospital Reporting (PCHQR) Program, and the Medicare Promoting Interoperability Program
 
CMS uses FY 2019 data where “FY 2020 data is significantly impacted by the COVID-19 PHE” in FFY 2022 rate setting. For instance, CMS uses FY 2019 MedPAR claims data in its MS-DRG classification analysis, and FY 18/19 HCRIS cost report data in determining FY 2022 IPPS MS-DRG relative weights. Throughout the Final Rule, CMS “clearly identifies” where and how the Agency uses alternative data (as compared to more recent data from 2020 CMS would ordinarily use for rate setting).
 
Overall, the Final Rule will result in an estimated increase of $2.3bn in payments to providers. Included in that amount is a reduction of approximately $1.4bn in Medicare DSH and Uncompensated Care (UC) payments. Increases to hospital payments before the DSH and UC reduction for FFY 2022 is $3.7bn (3.1 percent). 
 

Rural Redesignation Update

 
CMS had issued an Interim Final Rule with Comment (IFC) amending current regulations at § 412.230. This amendment allows hospitals with a rural redesignation to reclassify through the Medicare Geographic Classification Review Board (MGCRB) using the rural reclassified area as its geographic location. These regulatory changes align CMS policy with the decision in Bates County Memorial Hospital v. Azar, 464 F. Supp. 3d (D.D.C. 2020). 
 

Medicare IPPS Base Rates

 
CMS is finalizing a base rate net increase of 2.7% for hospitals, after budget neutrality, for hospitals that comply with the CMS quality reporting program (QRP). There is also a 1.4% increase in the federal capital rate. As it has done in prior years, CMS will reduce payments to those hospitals which do not meet IQR or EHR requirements.
 
 
 
 
Click here for the full base rate calculation table and comparison to prior year.
 

Repeal of Market-based Data Collection, MS-DRG Relative Weight Policy

 
CMS is finalizing its proposal to repeal the requirement that a hospital include on the Medicare cost report the median payer-negotiated inpatient services charges for Medicare Advantage organizations by MS-DRG, for cost reporting periods ending on or after January 1, 2021.
 
CMS is going to repeal, the market-based MS-DRG relative weight methodology, slated to be effective for FFY2024, that would have used these data to set relative Medicare payment rates for hospital procedures. Rather, CMS, in the FFY 2022 Final Rule, states that they will continue using the existing rate-setting methodology for FFY2024 and subsequent years.
 

Changes to the New COVID-19 Treatments Add-on Payment (NCTAP)

 
CMS, in their response to the pandemic, established the New COVID-19 Treatments Add-on Payment (NCTAP) for eligible discharges during the Public Health Emergency (PHE).  CMS has approved 19 technologies that applied for new technology add-on payments for FFY 2022. This amount includes 9 technologies under the alternative pathway for new medical devices that are part of the FDA Breakthrough Devices Program and 2 that received the FDA Qualified Infectious Disease Product (QIDP) designation. In addition, CMS approved (conditionally) one technology, designated as a QIDP that met the criteria but had not received FDA approval. The remaining seven of these 19 new technologies were submitted under the traditional new technology add-on payment criteria and approved. 
 
CMS will also continue new technology add-on payments for 23 technologies which are currently receiving the add-on payment. Ten of these remain within their newness period and for the remaining 13, CMS will use its exemptions and adjustment authority, for one year, under section 1886(d)(5)(I) of the Act due to the “unique circumstances” for FFY 2022 rate-setting due to the COVID-19 PHE.
 
In total there will be 42 new technologies that will be eligible to receive add-on payments for FFY 2022. CMS estimates these payments to be $1.5bn, which is a 77% increase over FFY 2021 spending.
 
Toyon’s Take
CMS allowing the exemption on the 13 technologies and remain on the NCTAP list will provide additional relief to hospitals at a time when many still desperately need support. Hospitals will continue to have the flexibility awarded by CMS to continue to manage the care for these patients past the PHE. Providing care without these exemptions may have led to disincentives when using these new technologies. Hospitals need to ensure they are capturing these amounts in their claims.
 
Please contact Scott Besler at Scott.Besler@toyonassociates.com with NCTAP reimbursement questions.
 

Finalized Changes to Wage Index

 
Based on the CMS finalized rates for FFY 2022, the occupational mix-adjusted national average hourly wage is estimated to be $46.47, representing an increase of 2.74% from the prior year.
 
Continuation of Prior Year Wage Index Policy Changes
CMS proposed and finalized a policy in FFY2020 to reduce wage index high-to-low disparities by increasing the values for low wage index hospitals below the 25th percentile, which for FFY 2022 was finalized at a Wage Index Factor (WIF) of 0.8437. Consistent with the finalized policy in FFY 2020 and 2021, in FFY 2022 CMS will “fund” this policy by applying a uniform budget neutrality adjustment. The finalized low wage index hospital policy budget neutrality factor is 0.998035 (compared to 0.997970 in FFY 2021).
 
Also, in FFY 2020, CMS proposed and finalized a change to the rural floor calculation by removing urban-to-rural reclassifications from the statewide rural floor. CMS finalized its proposal to continue this policy in FFY 2022 (as it did in FFY 2021) so that state rural floors would be calculated without including the wage data of urban hospitals that have reclassified as rural.
 
Lastly, in FFY 2021, CMS proposed and finalized changes to specific Core-Based Statistical Areas (CBSAs) based on updated census data as released by the Office of Management and Budget (OMB) in its OMB Bulletin No. 18-04 dated September 14, 2018. In unprecedented fashion, CMS incorporated the revised OMB delineations to CBSAs impacted in FFY2021, which included new CBSAs, urban counties that became rural counties, rural counties that became urban counties, and existing CBSAs that were split apart. CMS finalized its proposal in FFY 2022 to continue to use the OMB delineations adopted beginning with FFY 2015 and updated most recently in OMB Bulletin No. 18-04.
 
As a result of the policy changes noted above, in FFY 2020 and FFY 2021 CMS finalized a “transition” policy which included a cap of 5% on the decrease of any hospital’s wage index from the prior year. For instance, in FFY 2021, a hospital could not receive a final wage index that was less than 5% of what it received in FFY2020. While this transition policy was set to expire in FFY2021 and CMS proposed to not include a transition policy in FFY 2022, CMS finalized an extension of the transition policy for FFY 2022. Specifically, for hospitals that received the transition in FFY 2021, CMS is continuing a wage index transition for FFY 2022 where it will apply a 5% cap on any decrease in a hospital’s WIF compared to its WIF for FFY 2021. In accordance with CMS, the transition policy is intended to mitigate significant negative impacts of, and provide additional time for hospitals to adapt to, CMS policy changes described above, specifically the revised OMB delineations. CMS finalized this transition policy on a budget-neutral basis consistent with FFY 2021. The finalized wage index transition budget neutrality factor for FFY 2022 is 0.99987.
 
Click here for a comparison of current and prior WIFs for each hospital as well as a comparison to the Proposed Rule. In addition, CMS Table 2 includes the bottom quartile wage index adjustment as well as where the transition policy cap of 5% applied.
 
Toyon’s Take
Please refer to our FFY 2022 Proposed Rule brief for further discussion on the continuation of the policy changes implemented by CMS as proposed and finalized to continue in FFY 2022. The FFY 2022 Final Rule update relates to the transition policy extension that was not otherwise extended in the Proposed Rule. Despite its good intentions, the extension of the wage index transition policy came with a limitation applied. By limiting the transition cap of 5% to only those hospitals that received it in FFY 2021, the number of hospitals that benefit from the transition cap is minimal (less than 30 hospitals across the country compared to well over 100 in FFY 2021). This is primarily a result of the inclusion of the imputed rural floor for “all-urban” States in FFY 2022. For instance, hospitals in the New Jersey market that were significantly impacted by the revised OMB delineations were “protected” in its wage index reduction to the inclusion of the FFY 2022 imputed rural floor for New Jersey hospitals. See further discussion below on the imputed rural floor for “all-urban” States. On the contrary, with a uniform budget neutrality factor of 0.99987 reducing standardized rates by less than 0.02%, the impact to hospitals not receiving the wage index transition cap is negligible.
 
Occupational Mix Adjustment using Calendar Year (CY) 2019 Survey Data
CMS provides for the collection of data every three years on the occupational mix of employees for each short-term, acute care hospital. In 2016, CMS collected survey data to compute an occupational mix adjustment for the FFY 2019, FFY 2020, and FFY 2021 wage indexes. For FFY 2022, a new measurement of the occupational mix was required using data from CY 2019. CMS finalized its proposal to utilize this data using the same methodology as prior years to calculate an occupational mix adjustment factor. The final unadjusted national average hourly wage is $46.52 compared to the occupational-mix adjusted national average hourly wage of $46.47.
 
Reincarnation of the Imputed Rural Floor in “All-Urban” States
In FFY 2005, CMS adopted an imputed rural floor policy as a temporary 3-year regulatory measure to address concerns from hospitals in all-urban States that argued they were disadvantaged by the absence of rural hospitals to set a wage index floor for those States. After extending the imputed rural floor policy eight times since FFY 2005, the policy expired and was not renewed in FFY2018 and has not been included in FFYs 2019 through 2021.
 
However, as required by Section 9831 of the American Rescue Plan of 2021 enacted on March 11, 2021, CMS is finalizing permanent reinstatement of the imputed rural floor wage index calculation for hospitals located in “all-urban” States, which refers to States without designated rural areas. In accordance with the American Rescue Plan of 2021, “For discharges occurring on or after October 1, 2021, the area wage index applicable under this subparagraph to any hospital in an all-urban State…may not be less than the minimum area wage index for the fiscal year for hospitals in that State.” CMS is required by the statute to reinstate the previous imputed rural floor methodology, and this rate cannot be less than the imputed rural floor CMS calculated for such States in FFY 2018. Unlike FFY 2018 and prior, the new statute specifies that the adjustment pertaining to the imputed rural floor policy shall not be applied in a budget neutral manner, which means that any increase to the wage index for these all-urban States will not be offset by a decrease to the standardized amount or applied to wage indexes.
 
While not in the Proposed Rule, CMS finalized the imputed rural floor adjustment into the rate-setting, calculation of the wage index and tables of the Final Rule in a non-budget neutral manner. CMS Table 2 (link above) includes the imputed rural floor WIFs for those hospitals that received it in Connecticut, Rhode Island, Delaware, New Jersey, and Washington D.C. (Note: Puerto Rico hospitals are also subject to an imputed rural floor, but no hospitals received the imputed rural floor in FFY 2022.)
 
Other Proposed Changes Impacting Wage Index
  • CMS proposed to make two changes to the timing of a hospital’s request to cancel a previously granted reclassification from urban to rural, which would in effect lock a hospital into its rural status for a longer period. CMS acknowledges that these changes are necessary to address the practice of applying for and canceling rural reclassification to manipulate a State’s rural wage index, which is “detrimental to the stability and accuracy of the Medicare wage index system”. The proposed two changes are described below.
    • First, CMS proposed that requests to cancel rural reclassifications be submitted to the CMS Regional Office no earlier than one calendar year after the date when the reclassification became effective, and
    • Second, CMS proposed to replace an existing rule, which requires cancellation of reclassification no later than 120 days prior to the end of Federal Fiscal Year to be effective at the beginning of the next Federal Fiscal Year, with a requirement that cancellation requests become effective in the Federal Fiscal Year that begins in the calendar year after the calendar year in which the request was submitted.
 
CMS finalized its proposed policy for the cancellation of rural reclassifications to be effective until no earlier than one calendar year after the date when the reclassification became effective, which will be reflected in the corresponding regulation – CFR §412.103(g)(4). However, CMS delayed the proposal to require cancellation requests to be effective in the Federal Fiscal Year that begins in the calendar year after the calendar year in which the request was submitted. CMS stated that it will delay this proposal to revise it further in order to assure the policy effectively targets the form of wage index manipulation it intends to deter.
 
  • For all IPPS hospitals whose wage indexes are greater than 1.000, CMS finalized its proposal in FFY 2022 to apply the wage index to the proposed labor-related share of 67.6% of the national standardized amount, compared to 68.3% in FFY 2021.
 
Please contact Ryan Sader at Ryan.Sader@toyonassociates.com with any wage index questions.
 

Finalized Changes to Uncompensated Care DSH

 
CMS proposes to decrease Medicare UC DSH payments by $1.1bn, to $7.2bn in FFY 2022.  This decrease is primarily due to estimated FFY 2022 DSH payments under the “empirical” method[1] – including data from the PHE – in the determination of “Factor 1”.  Specifically, the $103m update[2] in the Factor 1 computation includes update factors inclusive of data from the PHE (notably discharges and Medicaid enrollment) and is significantly less than prior year updates (e.g., $1.170bn in FFY 2021).
 
[1] In the Factor 1 calculation, CMS first determines Medicare DSH payments in the absence of UC DSH payments under the ACA (section 1886(r)(1) of the Act). Data from the Office of the Actuary’s January 2021 Medicare DSH estimates, based on data from the March 31, 2021 update of the Medicare Hospital Cost Report Information System (HCRIS) and the FY 2021 IPPS/LTCH PPS final rule IPPS Impact File.
[2] Updates include Market Basket (Update Factor component), ACA Payment Reductions (Update Factor component), Multifactor Productivity Adjustment (Update Factor component), Documentation and Coding (Update Factor component), Discharge Factor, Case-Mix Index Factor, and an Other Factor.  
 
Furthermore, CMS decreased Final FFY 2022 Medicare UC DSH payments by $436m as compared to the $7.6bn in the FFY 2022 Proposed Rule.  This decline is driven by a decrease in CMS’ estimated uninsured patients for FFY 2022 (“Factor 2”). CMS highlights the uninsured projection has decreased due to a “faster-than-anticipated employment growth, an improving economic outlook based on a consensus of the Blue-Chip forecasters, and substantial recent and anticipated, temporary increases in Medicaid enrollment”.
 
 
CMS finalized one significant change for FFY 2022 only using an average of two years discharge data (FY 2018 and FY 2019), rather than a three-year average that would include data from the PHE (FY 2018, FY 2019, and FY 2020). CMS also finalized new trims to exclude rare cases hospitals do not have audited FY 2018 Worksheet S-10 data and are not currently projected to be DSH eligible.  
 
Toyon’s Take
Decreasing UC DSH Payments
 
CMS’ use of discharges and Medicaid enrollment data from the PHE (“Factor 1”), combined with a projection of decreasing uninsured population (“Factor 2”), significantly lowers hospital FFY 2022 UC DSH payments.  The amount of UC costs incurred by DSH hospitals has increased each year (e.g., $1.2 billion, or 3.6%, from FFY 2021 to FFY 2022), however, the UC DSH pool is decreasing. For instance, in FFY 2021 hospitals received 25% of UC costs from FY 2017 cost reports. In FFY 2022, hospitals are receiving lower reimbursement at 21% of UC costs from FY 2018 cost reports. A hospital’s UC cost had to increase 20% from FY 2017 to FY 2018 just to break even in FFY 2022 and maintain UC DSH payments at FFY 2021 levels. 
 
New Proposed WS S-10 Reporting Instructions
 
As commenters provided CMS suggestions for recording UC costs on Worksheet S-10, CMS highlights that it will respond in a separate impending Federal Register. CMS’ comments will relate to proposed cost report instructions per the November 10, 2020, Federal Register (85 FR 71653). Please feel free to read Toyon’s article on CMS’ proposed S-10 instructions. This article was used as part of Toyon’s contribution to the American Health Lawyers 2021 Institute on Medicare and Medicaid Payment Issues. Notable proposed changes to S-10 UC reporting include:
 
  • Charity Care and Uninsured Discounts for “Medically Necessary” services only
  • Shift to Short Term Hospital Services Only
  • Split between patient coinsurance, copayment deductibles vs. other patient liabilities
  • Clarification on the reporting of Implicit Price Concessions and Inferred Contractual Relationships
  • New Reporting Tables for Charity Care and Bad Debt Information  
 
Please contact Fred Fisher at Fred.Fisher@toyonassociates.comwith any UC DSH questions.
 
There were three provisions contained in the Consolidated Appropriations Act of 2021 (“CAA”) which will affect IME and GME payments to teaching hospitals as well as new requirements for submission of resident data through the Intern and Resident Information System (IRIS).
 
CMS noted that the FY 2022 IPPS/LTCH PPS proposed rule included our proposals related to the implementation of the provisions of the Consolidated Appropriations Act (CAA) of 2021 related to payments to hospitals for direct graduate medical education (GME) and indirect medical education (IME) costs.
 
Please refer to the proposed rule (86 FR 25502 through 25524) as well as our summary released May 14, 2021, which can be found on this link, for additional background information on these proposals. Due to the number and nature of the comments that we received on the implementation of sections 126, 127 and 131 of the CAA of 2021 relating to payments to hospitals for direct GME and IME costs, we will address public comments associated with these issues in future rulemaking.
 
Please contact Tom.Hubner@toyonassociates.com with IME/GME questions.
 

Organ Acquisition Payment Policies

 
There were several changes in CMS’ FFY 2022 IPPS/LTCH PPS Proposed Rule regarding the regulation of organ acquisition reimbursement. Some of these changes codify existing Medicare organ acquisition payment policies, that are currently in the Provider Reimbursement Manual (PRM). Other proposed changes codify new organ acquisition payment policies. Please note these changes are CMS’s response to statutory directives in both the recent 21st Century Cures Act, which expanded Medicare coverage for kidney acquisition costs, as well as the Medicare Modernization Act of 2003. 
 
CMS mentions that the FFY 2022 IPPS/LTCH PPS Proposed Rule included their proposals related to the organ acquisition payment policy for transplant hospitals, donor community hospitals, and organ procurement organizations.
 
Please refer to the Proposed Rule (86 FR 25656 through 25676), as well as our summary released May 14, 2021, which can be found on this link, for additional background information on these proposals. Due to the number and nature of the comments that we received on the organ acquisition payment policy proposals we will address public comments associated with these issues in future rulemaking.
 
Toyon’s Take
CMS’s delay in applying its proposed changes will now allow the donor community to collaborate within its groups as well as with CMS and its leaders to formulate a plan which can allow for an agreement on collection of data from transplant hospitals and organ procurement organizations to calculate their share of costs.
 
Recommendation: Toyon recommends the industry continue to review and monitor the potential impact these regulations will have on their facility.
 
Please contact Scott Besler at Scott.Besler@toyonassociates.com with Organ Acquisition reimbursement questions.
 

FFY 2022 Value-Based Purchasing (VBP) Program, Hospital Readmission Reduction (HRR), and Hospital Acquired Conditions (HAC) Update

 
CMS will provide all hospitals with a neutral score for FFY 2022 VBP adjustment. This is a result of many measures impacted but the PHE. CMS also will finalize its measure suppression policy for certain measures in the Readmissions and Hospital-acquired Conditions (HAC) Reduction programs impacted by the PHE. Please note that the hospitals will be scored for their FFY 2022 Readmissions and HAC Reduction programs using the remaining measures.
 
Please contact Scott Besler at Scott.Besler@toyonassociates.com with questions.  
 

Empirical DSH – Section 1115 Waiver Days

 
The FFY 2022 Proposed Rule states Section 1115 days may be counted in the numerator of the Medicaid fraction only if the patient is eligible for inpatient hospital services under an approved State Medicaid plan that includes coverage for inpatient hospital care on that day or directly receives inpatient hospital insurance coverage on that day under a Section 1115 waiver. This excludes patient days for which hospitals receive payment from an uncompensated care pool.
 
CMS will continue to review the large number of comments on the proposed revision to the regulation relating to the treatment of section 1115 waiver days for purposes of the DSH adjustment. Due to the number and nature of the comments that CMS received in the FFY 2022 IPPS/LTCH PPS Proposed Rule, they intend to address the public comments in a separate document. 
 
Toyon’s Take
This has not been finalized and Toyon will continue to monitor any updates issued by CMS.
 
Please contact Dylan Chinea at Dylan.Chinea@toyonassociates.com with empirical DSH questions.
 

Medicare Bad Debt

 
The FFY 2022 Proposed Rule requires State Medicaid programs to accept enrollment of all Medicare-enrolled providers and suppliers (even if the provider or supplier is not recognized as eligible to enroll but meets all Federal Medicaid enrollment requirements) for purposes of processing Medicare-Medicaid dual eligible claims for cost-sharing liability. State Medicaid programs must comply for dates of service beginning January 1, 2023.
 
Toyon’s Take
The “must bill” policy is still in place. This should create additional opportunity for providers to claim Medicare bad debt on the cost report. CMS is hopeful this policy will result in a reduction in the number of future bad debt appeals.  
 
For questions regarding DSH and Medicare Bad Debt, contact Dylan.Chinea@toyonassociates.com.
 

Should you have further questions about these changes and wish to discuss them, please contact the scott.besler@toyonassociates.com.

 

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I Tried My Best, Is That Enough? Insight Into the Angst of Hospital Leadership and CARES Reporting

By:

Fred Fisher
VP Service Development
Toyon Associates, Inc.
888.514.9312

fred.fisher@toyonassociates.com


Thank you, healthcare providers, patient advocates, and dedicated hospital personnel providing access to care during the COVID-19 pandemic. The industry also greatly appreciates HHS’s expeditious appropriation of over $180 billion supporting key hospital personnel, operations, and cashflow.

There is no doubt our healthcare system is challenged with a modern-day unprecedented event. Providers are delivering essential care while contemplating the cost of COVID-19, including its impact on hospital operations and future revenues. This article focuses on the challenges and recommendations of reporting COVID-19 expenses and lost revenues to HHS under the CARES Act, especially considering complexities of healthcare finance and reimbursement systems. There are three common and substantial concerns around reporting the use of CARES Provider Relief Fund (PRF) to HHS.

  1. Vulnerability of CARES funding is a concern due to potential variation in audit determination on the use of funds.

  2. Complexities determining patient care revenue vs. other revenue like grants and settlements. When evaluating revenue losses to apply toward their PRF, providers are challenged with discerning patient care from other revenue types within sophisticated payment programs.

  3. Use and reporting of “Targeted” PRF payments between parent companies and subsidiaries (e.g., High-Impact, Safety Net, Rural). The ability for providers to retain targeted PRF is puzzling considering HHS instruction on the transfer of Targeted funds between subsidiaries and parent companies.

I.Vulnerability of PRF Under Potential Variation in Audit Determination

In addition to audit of financials, due to the public health emergency, the CARES PRF is the first time many providers are also subject to a Single Audit[1]. Furthermore, providers may also be subject to an audit from HRSA, depending on the reported use of PRF amounts[2]. Providers are preparing for these audits by reviewing resources on the HRSA Cares PRF Website; including PRF Terms & Conditions, 6.11.21 Reporting Requirements, PRF FAQs, and information available through the HRSA PRF Reporting Portal.

Of note, HHS is providing audit guidance through the Office of Management and Budget (OMB) Compliance Supplement[3]. Recently, OMB published its July 2021 Compliance Supplement[4], with a to-be-released notice including additional audit requirements on the CARES PRF. Both the OMB guidance and HHS Instructions generally state PRF amounts are to recognize expenses or lost revenues in preventing, preparing, and responding to coronavirus. Table One lists categories of COVID-19 expenses provided by both OMB and HHS, having slight differences in descriptions.

Table One

Allowable PRF COVID-19 Expenses
OMB Compliance Supplement   HHS Reporting Instruction
Checkbox Checked outline Building or construction of temp. structures   Checkbox Checked outline General & Administrative (G&A) Mortgage/Rent
Checkbox Checked outline Emergency operation centers   Checkbox Checked outline G&A Insurance
Checkbox Checked outline Retrofitting facilities   Checkbox Checked outline G&A Personnel
Checkbox Checked outline Leasing of properties   Checkbox Checked outline G&A Fringe Benefits
Checkbox Checked outline Medical supplies and equipment[5]   Checkbox Checked outline G&A Lease Payments
Checkbox Checked outline Increased workforce and trainings   Checkbox Checked outline Other G&A
Checkbox Checked outline Surge capacity   Checkbox Checked outline Healthcare Supplies
      Checkbox Checked outline Healthcare Equipment
      Checkbox Checked outline Healthcare IT
      Checkbox Checked outline Healthcare Facilities
      Checkbox Checked outline Other Healthcare

HHS provides comprehensive instruction for reporting on PRF amounts. However, other complex healthcare concepts remain unaddressed. For instance, PRF instruction allows certain costs, like supplies. Supplies are clearly distinguishable and supportable for audit. Conversely, other indirect costs are co-mingled within daily operations and are indistinguishable with audit support that would likely be subject to interpretation. There is no clear category (above, in Table One) to report indirect costs, unless they are reported as “Other Healthcare” – which HHS lists as a category, but not noted as a category on OMB’s Compliance Supplement.

Consider the indirect cost associated with excessive patient length of stay (LOS). While the PRF explicitly covers direct expenses, like associated supplies, the cost of a patient occupying the room is significant. During excessive LOS cases, patients receive sophisticated 24-hour care while incurring extensive laboratory tests, pharmaceutical treatment, and overhead costs. The occupied bed with excess LOS may occur during peak capacity, further preventing hospitals from seeing other patients in the same bed for a shorter stay of care. In addition to excessive LOS, other indirect costs like increasing employee burnout and turnover, and accelerated wear and tear on assets are adding to hospital costs.

Using precedent, Medicare recognizes indirect costs with the Indirect Graduate Medical Education (IME) program. The IME program subsidizes teaching hospitals’ additional costs associated with interns and residents (I&R) due to cost-inefficiencies (like excess lab-tests) incurred as an essential part of learning. Since there is no accounting mechanism clearly distinguishing I&R indirect costs, CMS developed its own convoluted formula identifying indirect costs for IME reimbursement. Other payers also recognize indirect costs, for instance, academic hospitals may be assigned an indirect cost factor when rate setting with state and commercial payers, and providers may apply for grants covering the indirect cost supporting novel care programs. Bottom line, indirect costs are actual and material. However, providers are concerned about the allowability of indirect expenses without a standard approach in how these costs are reported. How will HHS and auditors audit these costs under deviations in how they may be reported?

In one respect, reporting of indirect cost is important for some providers to retain current PRF and demonstrate need for future PRF allocations. In another respect, the ability to demonstrate these costs for all providers is paramount to record the true cost of COVID-19 to the entire healthcare industry. Table Two includes recommendations assisting providers evaluate and report of indirect expenses related to COVID-19.

Table Two

Recommendations for Reporting Indirect COVID-19 Costs
Checkbox Checked outline Include a written narrative discussing indirect costs, with robust supporting workpapers.
Report indirect expenses as “other” healthcare expenses, ensuring this amount removes other amounts being reported to HHS as a direct COVID-19 expenses (to avoid double counting).
Checkbox Checked outline Reduce the expense by all patient payments, such as outlier payments, that offset indirect costs (e.g., excessive LOS). It is important to account for this revenue against expenses in the event lost revenue in “Step 2” is not used for PRF. Any revenue offsetting expenses in Step 1 should not be accounted for in Step 2 revenue loss.
Checkbox Checked outline Have open and continuous dialog with auditors, associations, other providers and industry leaders on COVID-19 expenses. Also consider discussing other “stranded costs” – like the increased cost of patient care providers – as it relates to current or future PRF.
Checkbox Checked outline Refer to the HHS FAQ addressing marginal costs stating:
“The Provider Relief Fund permits reimbursement of marginal increased expenses related to coronavirus provided those expenses have not been reimbursed from other sources or that other sources are not obligated to reimburse”
Checkbox Checked outline Evaluate areas of marginal costs not captured in the COVID-19 unit, including but not limited to:
costs related to excessive LOS
increase in sick and hazard pay
increase in screening and screening costs
increase in malpractice (and other insurance) costs
increase in PPE, pharmacy and lab cost
Checkbox Checked outline Evaluate and remove marginal cost increases not related to COVID-19 (i.e., marginal costs from a new physician practice)
Checkbox Checked outline Recall HHS views every patient as a possible case of COVID-19[6], providing an argument that each patient could be assigned COVID-19 expense.
For example, the hospital may have incurred costs for all patients – not just patients in the COVID-19 unit – related to excessive LOS (inability to discharge to post-acute care), with additional screening and housekeeping costs. These costs associated with patients in a non-COVID-19 unit should be considered for PRF reporting.

II. Reporting Patient Care and Other COVID-19 Revenue

As we have contemplated reporting indirect costs as a PRF expense, it is equally important to consider associated revenue impacted by COVID-19. Provider revenue is accounted for in two areas of CARES PRF reporting:

  1. Revenue reporting against COVID-19 expenses in “Step 1”: accounting the use of PRF towards COVID-19 expenses net of “other revenue received (or obligated to receive)”
  2. Quarterly revenue evaluation comparing CY 2020 and CY 2021 vs. quarterly amounts from CY 2019 in “Step 2”: accounting revenue loss towards the use of PRF.

Revenue against COVID-19 expenses in “Step 1” of PRF Reporting

HHS notably highlights it is the provider’s burden to subtract other COVID-19 revenue reimbursed or obligated to be reimbursed from another source from PRF expenses. HHS Instruction also requires providers to report categories of other assistance in a separate area of PRF reporting (per Table Three below). It is however unspecified if HHS expects the categories of “other assistance” to be the same amounts providers use to offset against COVID-19 expenses.

Table Three

HHS Categories of Other Assistance Received
Checkbox Checked outline Department of the Treasury (Treasury) and/or Small Business Administration (SBA) Assistance
Checkbox Checked outline Federal Emergency Management Agency (FEMA) Programs
Checkbox Checked outline HHS CARES Act Testing
Checkbox Checked outline Local, State, and Tribal Government Assistance
Checkbox Checked outline Business Insurance
Checkbox Checked outline Other Assistance

Absent from Other Assistance Received above in Table Three is mention of revenues directly related to patient care. In a PRF FAQ[7] HHS asserts patient care revenue should not be reported as “other assistance received,” stating:

“Patient care revenue should not be reported as part of “Other Assistance Received” as it is a source of revenue, not a source of other assistance as defined by Provider Relief Fund reporting requirements.”

Omitting patient care revenue as “Other Assistance Received” is helpful so revenue amounts are not counted twice against PRF (offsetting expenses and again as patient care revenues). However, this instruction is perplexing and contradictory when reviewing an earlier HHS FAQ[8] denoting sources of other revenue, including:

“…any amounts received through other sources, such as direct patient billing, commercial insurance, Medicare/Medicaid/Children’s Health Insurance Program (CHIP)…”

Perhaps this is a good time to reference OMB’s Compliance Addendum highlighting FAQs are not a reliable source of PRF instruction:

Such guidance [FAQs] is issued to communicate an agency’s understanding of how the relevant statutes, regulations, or the terms and conditions of the federal awards to the extent they exist and apply to a particular circumstance, but it does not create new compliance requirements. Due to the evolving nature of the pandemic environment, it has been common for federal agencies to update, change, or delete their specific guidance over time…

Recommendations Reporting Other Assistance Received

Providing recommendations under seemingly conflicting FAQs is challenging. Nevertheless, under the guise of recognizing all non-PRF COVID-19 payments, it is recommended amounts from HHS categories of “other assistance” (per Table Three) are used to offset COVID-19 expenses.

It is also recommended patient care COVID-19 revenue (e.g., CMS’ 20% DRG add-on, outlier payments, etc.) are accounted for in the determination lost revenue (quarterly revenue in 2020, 2021 vs. revenue in 2019). However (as discussed in Section I), providers reporting indirect costs have a caveat. In the event other revenue (like outlier payments) is related any reported indirect costs (e.g., excessive LOS), providers should account for this revenue in Step 1 to net against expense, and not double count in the Step 2 revenue tally. This recommendation is to ensure revenue related to any reported indirect costs is accounted in PRF reporting, especially in the event only expenses in Step 1 (and not lost revenues in Step 2) are used to absorb PRF.

Providers should maintain workpapers and open dialog with their auditors showing how all other COVID-19 assistance is accounted against PRF. An accompanying narrative supporting this approach, or any other reporting approach, is also judicious. The narrative should reference the specific applicable HHS Instructions and/or FAQ. Providers may choose to highlight that patient care payments are typically made on a per-discharge basis (i.e., Medicare IPPS), with no linear relationship to direct itemized expenses. Therefore, there is no correlation for reporting patient care revenue as “other assistance received” (reducing COVID-19 expenses in Table One), and this revenue accounted for in the determination of quarterly revenue loss in “Step 2” of PRF reporting.

Quarterly revenue loss accounted towards PRF in “Step 2” of HHS Reporting

In “Step 2” accounting for the use of PRF, providers have the option[9] to report patient care revenue comparing quarterly amounts by payer from CY 2020 and CY 2021 against quarterly amounts from 2019. HHS PRF Reporting Instruction describes patient care revenue including amounts:

“prior to netting with expenses…health care, services and supports, as provided in a medical setting, at home/telehealth, or in the community.”

HHS PRF Instruction describes patient care revenue excluding amounts related to:

“non-patient care revenue such as insurance, retail, or real estate revenues (exception for nursing and assisted living facilities’ real estate revenues where resident fees are allowable); prescription sales revenues (exception when derived through the 340B program); grants or tuition; contractual adjustments from all third-party payers; charity care adjustments; bad debt; and any gains and/or losses on investments.”

Much of HHS’s revenue reporting requirements are straight forward. However, the instructions become murky when isolating patient care revenue impacted by COVID-19. For instance, providers may record revenue one period (i.e., Q2 of 2020), whereas the care relates to another period (i.e., Q3 of 2019). In order to provide an “apples to apples” comparison of patient care revenue, providers are evaluating whether to omit or reallocate these payments.

Importantly, HHS permits providers to remove skewed revenue per an FAQ[10] regarding fluctuations in year-over-year net patient revenues due to settlements or payments made to third parties relating to care delivered outside the reporting period (2019-2021). HHS states:

“Provider Relief Fund recipients shall exclude from the reporting of net patient revenue payments received or payments made to third parties relating to care not provided in 2019, 2020, or 2021.”


The HHS FAQ above is surely helpful, yet concerns remain on unaddressed technicalities associated with misaligned revenue. In many cases, these concerns derive from multifaceted Medicaid supplemental payment programs. For example, providers inquire if they may:

  • Realign and restate revenue within 2019 through 2021, representing the period(s) when care was provided (as compared to when revenue was recorded).
  • Omit revenue from programs subject to CMS approval (i.e., renewal of 1115 Waiver programs). Although providers may receive interim payments, actual payments are not determined until CMS approves the respective program. Providers have limited or no means of assessing and reserving for these payments during PRF reporting periods until these programs are approved and rolled out by their respective States.

Recommendations Reporting “Misaligned” Patient Care Revenue

It is recommended providers account for misaligned revenue before reporting quarterly amounts to HHS. Re-appropriation of misaligned payments may provide a more accurate depiction of COVID-19 and its impact to provider revenue. For providers looking to report year over year changes as revenue loss (HHS PRF reporting “Option i”), it is important to discuss revenue adjustments with auditors. Providers and auditors should assess whether it is appropriate to report patient care revenue – adjusted for misaligned revenue – under “Option i” (year over year changes) or under “Option iii” (other). Reporting under option iii increases likelihood of HRSA audit, but also provides the opportunity to include a narrative to HHS. Regardless, a strong narrative and workpaper set is recommended for any option.

III. Reporting Targeted Payments Between Parent Company and Subsidiaries

Since April of 2020, providers received different types of CARES PRF allocations. HHS distinguishes these payments as “General” and “Targeted” allocations. General payments were appropriated to any provider agreeing to the Terms & Conditions of the CARES PRF and relate to funding from “Phases 1 through 3.” Targeted payments, specifically related to High-Impact, Safety Net and Rural, were only appropriated to providers HHS identifies as eligible for these payments. For instance, HHS determined providers eligible for Targeted Safety Net payments using (unaudited) Medicare cost report data from 2018/2019, and qualified hospitals based on thresholds related to disproportionate share (DSH), Uncompensated Care (UC), and profitability margins. Targeted Rural payments were disbursed based on provider status, utilization and expenses reported on Medicare cost report. Targeted High-Impact funding was determined by a qualifying threshold of COVID-19 patients. In large part, Targeted payments were applied using approximate data.

More accurate than using approximate data, health systems tap into their accounting systems and teams to pinpoint subsidiary providers especially impacted by COVID-19. In some cases, to direct funds to the greatest need, providers look to transfer Targeted payments from a subsidiary to the parent company. However, HHS reporting instructions are ambiguous regarding if and how subsidiaries may transfer Targeted payments to their parent company. HHS Reporting Instruction states:

The original recipient of a Targeted Distribution payment is always the Reporting Entity. A parent entity may not report on its subsidiaries’ Targeted Distribution payments. The original recipient of a Targeted Distribution must report on the use of funds in accordance with the CRRSA Act. This is required regardless of whether the parent or subsidiary received the payment or whether that original recipient subsequently transferred the payment. A Reporting Entity that is a subsidiary must indicate the payment amount of any of the Targeted Distributions it received that were transferred to/by the parent entity, if applicable. Transferred Targeted Distribution payments face an increased likelihood of an audit by HRSA.”

Providers are confounded by the HHS instruction that “a parent entity may not report on its subsidiaries’ Targeted Distribution payments” while also stating “a Reporting Entity that is a subsidiary must indicate the payment amount of any of the Targeted Distributions it received that were transferred to/by the parent entity, if applicable.”

Furthermore, an HHS FAQ[11] indicates parent companies have more latitude transferring Targeted payments so they may “control and allocate that Targeted Distribution payment among other subsidiaries that were not themselves eligible and did not receive a Targeted Distribution.” This FAQ also states, “the parent company may allocate the Targeted Distribution up to its pro rata ownership share of the subsidiary to any of its other subsidiaries that are healthcare providers.”

Hypothetically, assume a two-hospital health system with separate TINs.

  • A is the parent entity and received $0 Targeted PRF
  • Hospital B is the subsidiary and received $50M in Targeted PRF
  • Hospital B transfers $20M in its targeted funds to Hospital A

HHS instruction is clear that $20M may not be reported by Hospital A (parent entity).

How then does Hospital B transfer these payments “to/by the parent entity, ” so that the proper entity reports on the use of $20M in funds?

Recommendations on Transfer of Targeted PRF

The primary recommendation concerning uncertainty is disclosure. It is recommended both the parent company and subsidiary include narrative and supporting workpapers on the transfer of funds. Transfer of Targeted funding should also be discussed during meetings with auditors. Hopefully, HHS will issue further guidance providing additional instruction or clarity on this reporting concern.



Ambiguity associated with $182.5bn in funding is not ideal, but – as we have learned – to be expected during the unprecedented events of COVID-19. The healthcare industry should continue to seek answers to hard questions, and at the same time provide crucial education to HHS, auditors, and anyone else in a decision-making position on PRF allotments. In the end, open communication, transparency, and solid workpapers are the best approaches for addressing the unknown.



[1] Recipients that expend a total of $750,000. Non-profit providers under 45 CFR 75.514; commercial under 45 CFR 75.216(d) or 75.501(i)
[2] HHS Reporting Instruction includes providers reporting under “Option iii” applying an “alternative” approach for reporting revenue loss and providers transferring targeted payments.
[3] PRF FAQ “Will HHS provide guidance to certified public accountants and those organizations that providers will rely on to perform audits? (Modified 6/11/2021)”
[4] 2 CFR PART 200, APPENDIX XI – ASSISTANCE LISTING 93.498 PROVIDER RELIEF FUND
[5] OMB also states including personal protective equipment and testing supplies
[6] PRF FAQ “Who is eligible to receive payments from the Provider Relief Fund? (Modified 12/4/2020)”
[7] PRF FAQ “Will patient care revenue be counted against a Reporting Entity twice if the entity reported in “Other Assistance Received” and in the “Patient Care/Lost Revenue” sections of the Reporting Portal? (Added 7/1/2021)
[8] PRF FAQ “How do I determine if expenses should be considered “expenses attributable to coronavirus not reimbursed by other sources?” (Modified 6/11/2021)”
[9] Providers may also report lost revenues comparing actual revenue in 2020 and 2021 to budgeted revenue, or under any “other” method (requiring a narrative and calculation).
[10] PRF FAQ “Providers may have significant fluctuations in year-over-year net patient revenues due to settlements or payments made to third parties relating to care delivered outside the reporting period (2019-2021). Should Provider Relief Fund recipients exclude from the reporting of net patient revenue payments received for care not provided in 2019, 2020, or 2021? (Modified 7/1/2021)”
[11] PRF FAQ Can a parent organization with a direct ownership relationship with a subsidiary that received a Provider Relief Fund Targeted Distribution payment control and allocate that Targeted Distribution payment among other subsidiaries that were not themselves eligible and did not receive a Targeted Distribution (i.e., Skilled Nursing Facility, Safety Net Hospital, Rural, Tribal, High Impact Area) payment? (Modified 1/28/2021)
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