[Federal Register Volume 60, Number 123 (Tuesday, June 27, 1995)]
[Rules and Regulations]
[Pages 33126-33137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15341]
-----------------------------------------------------------------------
DEPARTMENT OF HEALTH AND HUMAN SERVICES
42 CFR Part 413
[BPD-366-F]
RIN 0938-AD01
Medicare Program; Clarification of Medicare's Accrual Basis of
Accounting Policy
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule revises the Medicare regulations to clarify
the concept of ``accrual basis of accounting'' to indicate that
expenses must be incurred by a provider of health care services before
Medicare will pay its share of those expenses. This rule does not
signify a change in policy but, rather, incorporates into the
regulations Medicare's longstanding policy regarding the circumstances
under which we recognize, for the purposes of program payment, a
provider's claim for costs for which it has not actually expended funds
during the current cost reporting period.
EFFECTIVE DATE: This final rule is effective July 27, 1995.
FOR FURTHER INFORMATION CONTACT: John Eppinger, (410) 966-4518.
SUPPLEMENTARY INFORMATION:
I. Background
Generally, under the Medicare program, health care providers not
subject to prospective payment are paid for the reasonable costs of the
covered items and services they furnish to Medicare beneficiaries. This
policy pertains to all services furnished by providers other than
inpatient hospital services (section 1886(d) of the Social Security Act
(the Act)) and certain inpatient routine services furnished by skilled
nursing facilities choosing to be paid on a prospective payment basis
(section 1888(d) of the Act.) Additionally, there are other limited
services not paid on a reasonable cost basis, to which this policy
would not apply. Section 1861(v)(1)(A) of the Act defines reasonable
cost as the cost actually incurred, excluding any cost unnecessary in
the efficient delivery of needed health services. That section of the
Act also provides that reasonable costs must be determined in
accordance with regulations that establish the methods to be used and
the items to be included for purposes of determining which costs are
allowable for various types or classes of institutions, agencies, and
services. In addition, section 1861(v)(1)(A) of the Act specifies that
regulations implementing the principles of reasonable cost payment may
provide for the use of different methods in different circumstances.
Implementing regulations at 42 CFR 413.24 establish the methods to be
used and the adequacy of data needed to determine reasonable costs for
various types or classes of institutions, agencies, and services.
Section 413.24(a) requires providers receiving payment on the basis
of reasonable cost to maintain financial records and statistical data
sufficient for the proper determination of costs payable under the
program and for verification of costs by qualified auditors. The cost
data are required to be based on an approved method of cost finding and
on the accrual basis of accounting. Currently, Sec. 413.24(b)(2)
provides that under the accrual basis of accounting, revenue is
reported in the period in which it is earned, regardless of when it is
collected, and expenses are reported in the period in which they are
incurred, regardless of when they are paid.
As explained in the October 9, 1991 proposed rule (56 FR 50834),
under the current definition of the accrual basis of accounting, some
providers have claimed costs without evidence of having incurred actual
expenditures or the assurance that liabilities associated with accrued
costs will ever be fully liquidated through an actual expenditure of
funds. For example, under the terms of some provider employment
contracts, nonprobationary employees are entitled to accumulate a
certain number of sick leave days annually and carry forward a maximum
accumulated amount of unused sick leave time. These sick leave days are
typically vested (although not funded) but nevertheless are subject to
forfeiture. That is, unused accumulated sick leave days are subject to
redemption for cash if the employee retires, resigns, or is discharged
in good standing, but may be forfeited if the employee is discharged
for cause. In the latter case, under the current rule, some providers
have sought Medicare payment for sick leave days for which the provider
never became liable.
As a result of the lack of clarification in the regulations
regarding Medicare payment for certain accrued costs, the Medicare
program has settled approximately $4.0 million worth of accrued costs
in sick leave, FICA taxes, deferred compensation, and unpaid mortgage
interest expense cases. We believe that a clarification to the
regulations to incorporate longstanding Medicare policy regarding
timely liquidation of liabilities associated with these accrued costs
will minimize the unwarranted payment of Federal funds. That is, the
regulations will clarify that in cases in which a provider does not
timely liquidate the liabilities, Medicare recovers its payment for the
accrued costs claimed by the provider.
As discussed in the proposed rule, an alternative would be to
forego incorporating in regulations our policy regarding the
circumstances under which Medicare accepts a provider's claim for costs
for which it has not actually expended funds during the current
reporting period.
However, without a change to the regulations, some providers would
believe that, for Medicare purposes, they could continue to rely solely
upon the generic definition of the accrual basis of accounting, whereby
revenue is reported in the period it is earned, regardless of when it
is collected, and expenses are reported in the period in which they are
incurred, regardless of when they are paid. HCFA would have to continue
to defend the policy without specific support in the regulations. To
the extent that challenges to this policy were successful, we would be
forced to pay currently for accrued liabilities that either may not be
liquidated timely or may never be liquidated. Although we believe that,
in light of the recent decision of the United States Supreme Court in
Shalala v. Guernsey Memorial Hosp., 115 S. Ct. 1232 (1995), the
likelihood of successful challenges has decreased, we believe it is
appropriate to publish these regulations to avoid any confusion
regarding the policy.
In summary, despite the clear statements of Medicare payment
principles found in Medicare manuals (for example, section 2305 of the
Provider Reimbursement Manual), the lack of clarification to the
regulations continues to impair HCFA's ability to defend against
challenges to the regulations for accrued costs of sick pay, vacation
pay, FICA and other payroll taxes, owners' compensation, deferred
compensation, pension plans, nonpaid workers' services, and unpaid
mortgage interest, as well as other accrued costs. The end result, to
the extent that HCFA cannot defend challenges to the policy, is that
the Medicare program makes payments for costs not incurred by
providers, in violation of section 1861(v)(1)(A) of the Act.
[[Page 33127]]
II. Summary of Proposed Rule
On October 9, 1991, we published a proposed rule (56 FR 50834) to
revise Sec. 413.24 by adding a new paragraph to describe the conditions
under which certain accrued costs would be recognized for purposes of
Medicare payment. Our intention in specifying these conditions was not
to change policy. Rather, it was to incorporate into the regulations
our longstanding policy on the timely liquidation of liabilities, as
contained in sections 704.3, 704.5, 906.4, 2140, 2144.8, 2144.9, 2146,
2162.9, and 2305 of the Provider Reimbursement Manual. Under this
longstanding policy, accrued costs are included in Medicare allowable
costs in the year of accrual, provided the related liabilities are
liquidated timely, in accordance with the liquidation requirements for
the particular type of accrued cost. If the liabilities are not
liquidated timely, an adjustment is required to disallow the costs.
Generally, the adjustment is made in the year of accrual except for
vacation and all-inclusive paid days off, in which case the adjustment
generally is made in the year in which the payment for the accrued
vacation or all-inclusive paid days off should have been made. (The
Provider Reimbursement Manual provides additional instructions, not
incorporated in the regulations, regarding later recognition, if any,
with respect to costs associated with liabilities not liquidated in
accordance with the liquidation of liabilities requirements.)
As we indicated in the proposed rule, we believe this clarification
will significantly contribute to the uniform application of our
policies concerning recognizing accrued costs for Medicare payment and
will preclude misinterpretation of the policies in the future. A change
to the regulations is necessary to ensure that providers are paid for
their actual costs as intended under section 1861(v)(1)(A) of the Act,
and 42 CFR 413.9(c)(3), which state that the reasonable cost basis of
payment contemplates that providers of services are to be paid the
actual costs of providing quality care.
Accordingly, in order for accrued costs to be recognized for
Medicare payment, we proposed that the following requirements be met
with respect to the liquidation of liabilities:
In a new Sec. 413.24(c)(3)(i), we proposed that a short-
term liability generally must be liquidated within 1 year after the end
of the cost reporting period in which the liability is incurred, with
an exception in cases in which the intermediary is furnished, within
the 1-year time limit, sufficient written justification, based upon
documented evidence, for nonpayment. An extension not to exceed 3 years
beyond the end of the cost reporting year in which the liability was
incurred could be granted for good cause.
In a new Sec. 413.24(c)(3)(ii), we proposed that if the
provider's vacation policy is consistent for all employees, we would
require that payment be made within the period provided for by that
policy. If the provider's vacation policy is not consistent for all
employees, we would require that payment be made within 2 years after
the close of the cost reporting period in which the liability is
accrued. Under this paragraph, we also proposed that the policy
applicable to vacation pay also would apply to all-inclusive paid days
off (for example, total time off in a given period for unspecified
occasions, including illness, vacations, and family bereavement).
In a new Sec. 413.24(c)(3)(iii), we proposed that if sick
pay is vested and funded in a deferred compensation plan, liabilities
related to the contributions to the fund would be liquidated in
accordance with the policy stated above for a short-term liability.
However, if the sick leave plan grants employees the right to demand
cash payment for unused sick leave at the end of each year, we proposed
that the sick pay be includable in allowable costs, without funding, in
the cost reporting period when it is earned.
In a new Sec. 413.24(c)(3)(iv), with regard to
compensation of owners other than sole proprietors and partners (that
is, employees, officers and directors owning stock in closely-held
corporations or with a substantial ownership or equity in publicly-
traded corporations, and certain employees of trusts), we proposed that
any related accrued liability be liquidated within 75 days after the
close of the cost reporting period in which the liability occurs.
In a new Sec. 413.24(c)(3)(v), we proposed that
obligations incurred under a legally-enforceable agreement to
remunerate an organization of nonpaid workers be discharged no later
than the end of the provider's cost reporting period following the
period in which the services were furnished.
In a new Sec. 413.24(c)(3)(vi), we proposed that the
employer's share of FICA and other payroll taxes that the provider
becomes obligated to remit to governmental agencies may be included in
allowable costs only during the cost reporting period in which payment,
upon which the tax is based, is actually made to the employee. For
example, no legal obligation exists for the provider-employer to pay
FICA taxes until such time as the employee is paid and the specific
amount of payroll liability is known.
In a new Sec. 413.24(c)(3)(vii), we proposed that accrued
liabilities related to contributions to a funded deferred compensation
plan must be liquidated in accordance with the policy stated above in
Sec. 413.24(c)(3)(i) for a short-term liability. However, if the plan
is not funded, reasonable provider payments made to employees under
deferred compensation plans would be considered an allowable cost only
during the cost reporting period in which actual payment is made to the
participating employee.
In a new Sec. 413.24(c)(3)(viii), we proposed that accrued
liability related to contributions under a self-insurance program that
are systematically made to a funding agency, and that cover malpractice
and comprehensive general liability, unemployment compensation,
workers' compensation insurance losses, or employee health benefits,
must be liquidated within 75 days after the close of the cost reporting
period.
III. Discussion of Public Comments
In response to the October 9, 1991 proposed rule, we received 17
timely items of correspondence. The comments were submitted by eight
providers or provider associations, two trade associations, five
consultants or accounting firms, one State, and one law firm. Our
responses are presented below:
A. General
Comment: Several commenters raised questions regarding the
relationship between Medicare payment policy and generally accepted
accounting principles (GAAP). Some commenters believe that the proposed
rule conflicts with GAAP and that HCFA is bound to use GAAP.
Response: The regulations at Sec. 413.24(a) establish the general
principle that cost data be based on the accrual basis of accounting, a
concept also integral to GAAP. However, regarding application of the
accrual basis of accounting, Medicare payment policy does not always
follow GAAP exactly because Medicare payment policy and GAAP have
different objectives. Medicare's objective for cost payment purposes is
to pay providers appropriately for the reasonable and proper cost of
furnishing services to Medicare beneficiaries in a specific fiscal
period. On the other hand, the primary goal of GAAP is the full and
proper presentation of accounting data through statements and reports.
[[Page 33128]]
Medicare's longstanding position on the relationship between
Medicare payment policy and GAAP is that GAAP will be followed only in
cost situations not covered by the Medicare statute, regulations,
rulings, manual provisions, or program policy (American Medical Int'l
v. Secretary of Health, Educ., and Welfare, 466 F. Supp. 605, 624 n.21
(D.D.C. 1979), aff'd 677 F.2d 118 (D.C. Cir. 1981)). This position has
long been stated in the Foreword to the Provider Reimbursement Manual
and elsewhere (41 Fed. Reg. 46, 291-2 (Oct. 20, 1976)) and is
consistent with the Medicare statute.
Section 1861(v)(1)(A) requires the Secretary, in defining
reasonable cost, to ``consider, among other things, the principles
generally applied by national organizations or established prepayment
organizations (which have developed such principles).* * *'' At most,
the statute requires the Secretary to consider certain principles.
Moreover, the principles that must be considered are not generally
accepted accounting principles, but are payment principles developed by
national insurance or prepayment organizations in the health services
sector. Therefore, we disagree with the commenter's belief that HCFA is
bound to use GAAP in determining what costs are allowable. Instead,
GAAP, which includes accrual accounting, is used by providers in
maintaining their records and reporting their costs. When reporting
their costs, providers register their trial balance in accordance with
their records and subsequently make reclassification and adjustments to
the trial balance in certain situations (for example, when Medicare
payment policies depart from GAAP). (See section 2407 of the Provider
Reimbursement Manual, Part II.)
The Supreme Court recently upheld Medicare's longstanding position
on the relationship between Medicare Payment Policy and GAAP in Shalala
v. Guernsey Memorial Hosp., 115 S. Ct. 1232 (1995). The Court agreed
that neither the Medicare statute nor the regulations (42 C.F.R.
Secs. 413.20 and 413.24) mandate Medicare payment according to GAAP.
The Court also accepted the Secretary's position that the regulations
require only that providers use GAAP for recordkeeping.
Because of the apparent confusion regarding the relationship
between Medicare payment policy and GAAP, we have decided to move the
provisions beginning with Sec. 413.24(b)(3) of the proposed rule into a
new Sec. 413.100, Special Treatment of Certain Accrued Costs, in 42 CFR
Subpart F, Specific Categories of Costs. We believe that leaving these
payment provisions in Sec. 413.24 of Subpart B, Accounting Records and
Reports, which does not address allowable Medicare costs, would
continue to create confusion about the role of GAAP in determining
whether a cost is allowable under the Medicare program. Leaving the
provisions in Sec. 413.24 would fail to recognize the distinction
between the role of GAAP in recordkeeping and reporting, where
providers adhere to GAAP (including accrual accounting), and the role
of GAAP in determining allowable costs, where GAAP applies only if
there is no Medicare policy covering the cost situation. (See section
IV of this preamble for a crosswalk between the regulation text
citations for provisions of the proposed rule and the corresponding
provisions of the final rule.)
Comment: Some commenters objected to the establishment of time
limits for the liquidation of an accrued liability since such time
limits are not required under GAAP. One commenter asserted that it was
inefficient to require hospitals to follow Medicare's unique accrual
policies when all other users of hospital financial statements accept
GAAP.
Response: The fact that Medicare payment policies may at times
differ from GAAP is neither unusual nor unintentional. This rule is a
case in point. We recognize that the accrual basis of accounting, as
defined in Sec. 413.24(b)(2), is essential for the proper reporting of
costs. However, as the commenters pointed out, GAAP does not impose
time limits for liquidating accrued liabilities. Time limits for
liquidating accrued liabilities are essential to ensure that Medicare
recognizes only costs associated with a liability that is liquidated
timely through an actual expenditure of funds. Medicare policy does not
prevent a provider from maintaining its books and records in accordance
with GAAP. Rather, for Medicare purposes, payment for a claimed accrual
must be recovered if the accrual is not timely liquidated.
Comment: Some commenters stated that they opposed the proposal
because it adds to the burden and cost to providers without any
demonstrated need to do so, while providing relatively small benefit to
HCFA.
Response: This rule should not add to the burden and costs to
providers. It merely conforms regulations to present policies and
longstanding practices regarding the circumstances under which Medicare
recognizes, for purposes of program payment, a provider's claim for
costs for which the provider has not actually expended funds during the
current cost reporting period. It does not require changes in reporting
or recordkeeping.
We do not agree that this rule provides a relatively small benefit
to HCFA. Incorporation in the regulations of our longstanding policies
will clarify that Medicare does not make payment for provider expenses
for which the associated liabilities are not liquidated timely.
Comment: Several commenters stated that the proposed rule
constituted a policy change, rather than just a codification of
existing policy. They believe that the proposed changes to the
regulations improperly deny payment for substantial costs incurred in
furnishing services to Medicare beneficiaries. They opposed any changes
to the existing definition of the accrual basis of accounting in
regulations at Sec. 413.24(b)(2). In addition, some commenters stated
that we do not have authority to implement changes in Medicare
regulations retroactively. They believe that this new provision may not
be applied to services provided before the effective date of this final
rule.
Response: This final rule does not implement a change in Medicare
policy. Rather, it incorporates into the regulations our longstanding
policy on the timely liquidation of liabilities, as contained in
sections 704.3, 704.5, 906.4, 2140, 2144.8, 2144.9, 2146, 2162.9, and
2305 of the Provider Reimbursement Manual. Accordingly, this final rule
does not represent a retroactive change in Medicare payment policy.
Program manuals contain HCFA's guidelines for implementing the statute
and regulations, that is, on how we interpret the statute and
regulations. Our policy guidelines on the timely liquidation of
liabilities have been included in the Provider Reimbursement Manual for
many years. These guidelines are now being incorporated into the Code
of Federal Regulations, as of the prospective effective date of this
final rule.
Comment: One commenter believes the proposed rule places
intermediaries in the role of ``policemen'' to determine whether a
provider is a ``going concern''.
Response: Under this rule, providers simply would be required to
liquidate liabilities timely in accordance with our longstanding
policies, in order for them to be allowable costs for Medicare payment
purposes. The rule adds no new requirements regarding whether a
provider is a going concern. As always, intermediaries will monitor a
provider's furnishing of patient care services. If a provider goes out
of business, it is still necessary for the provider to timely
[[Page 33129]] liquidate liability for expenses paid by the Medicare
program.
Comment: According to one commenter, when HCFA implemented the
prospective payment system for hospitals in 1983, we stated that after
capital and outpatient cost reimbursement were folded into the
prospective payment system, the hospital cost reports would become
obsolete and could be phased out. In light of this statement, the
commenter believes that the cost reporting burden on providers should
not be expanded, and objects to HCFA's proposal to expand the burden of
cost reporting by no longer allowing GAAP.
Response: Section 1886(f) of the Act requires the Secretary to
maintain a system of cost reporting for hospitals receiving payments
under the prospective payment system. Thus, the submission of cost
reports continues to be a statutory requirement. Moreover, even if cost
reporting were not necessary for prospective payment purposes, cost
reporting continues to be required to determine Medicare payment for
outpatient services in prospective payment hospitals and for services
in other types of providers.
We are not expanding the burden of cost reporting. Providers have
always been required to maintain sufficient financial records and
statistical data of costs payable under the program (Sec. 413.20(a)).
This rule simply codifies in the regulations Medicare's longstanding
policy regarding the timing of payment for accrued costs by requiring
timely liquidation of liabilities in order to receive Medicare payment.
This policy is intended to prevent the outlay of Federal trust funds
before they are needed to pay the costs of providers' actual
expenditures. It does not require changes in reporting or recordkeeping
and, therefore, does not expand the burden of cost reporting.
Comment: One commenter stated that the proposed rule conflicts with
the requirements of the Medicare law and regulations, and noted that
HCFA has recognized that the Medicare law requires it to determine
payment in accordance with standardized accounting practices widely
accepted in the hospital and related fields. Furthermore, the commenter
pointed out that, in National Medical Enterprises v. Bowen, 851 F. 2d
291, 294 (9th Cir. 1988), the United States Court of Appeals for the
Ninth Circuit concluded that the accounting standards used by hospitals
to calculate and record costs are integral parts of Medicare
regulations regarding what is a reasonable cost under Medicare.
Response: The rule implements already existing policy. We believe
it does not conflict with the authority in the law or the regulations
that implement the law. On the contrary, section 1861(v)(1)(A) of the
Act defines reasonable cost as cost actually incurred, and states that
reasonable costs shall be determined in accordance with regulations.
Thus, the Secretary has broad discretion to define reasonable cost by
regulation.
We are aware of the court's decision in National Medical
Enterprises regarding the applicability of accepted accounting
standards (such as GAAP) in determining reasonable cost under Medicare.
However, National Medical Enterprises does not hold that generally
accepted accounting principles supersede explicit Medicare instructions
stated in the regulations. GAAP is important to a provider in
maintaining its books and records and is relevant to the determination
of Medicare payment when there is no Medicare policy on point. However,
as discussed in our response to an earlier comment, GAAP and Medicare
payment policy have different purposes. Unlike GAAP, which is intended
to be used to present the financial position of an organization,
Medicare policy specifically deals with paying providers for costs
incurred in furnishing care to Medicare beneficiaries. For payment
purposes, the Medicare Trust Funds should not be required to pay a
provider for costs associated with liabilities that are not liquidated
timely. Thus, we do not believe that Medicare policy must fully
incorporate GAAP. To the extent that the National Medical Enterprises
case differs with our policy on GAAP, we believe that case is
inconsistent with the decision of the Supreme Court in Shalala v.
Guernsey Memorial Hosp., 115 S. Ct. 1232 (1995). (We note that we are
developing a notice of proposed rulemaking to clarify the general
applicability of GAAP to Medicare payment policy.)
Comment: One commenter asserted that HCFA's purpose in proposing
the rule change is solely financial. The commenter stated further that
courts have held that HCFA may not create an interpretation of the
Medicare statute or regulations simply as a means of saving money
(Villa View Community Hospital, Inc. v. Heckler, 720 F. 2d 1086, 1094
(9th Cir. 1983)).
Response: The primary purpose of the rule is to codify in
regulations longstanding policy precluding Medicare payment for
otherwise allowable costs in cases in which a provider has not
liquidated timely the liability associated with the expense. For HCFA
not to recover its payment for a cost accrued by a provider when the
provider fails to make an expenditure to liquidate timely its liability
on an obligation is not appropriate. In effect, the provider would be
paid by Medicare for an expense for which it has had no outlay of
funds, which is not consistent with the law. Thus, this rule does not
constitute an interpretation of Medicare statute or regulations simply
designed to save money, and, therefore, it is not in conflict with the
reasoning of Villa View Community Hospital.
Comment: Several commenters stated that the proposal violates
principles of accrual accounting and would force an already over-
regulated industry to maintain two sets of books. They also alleged
that provider costs would escalate dramatically as a result of
providers being forced to spend untold hours converting to cash basis
accounting.
Response: This change does not violate the principles of accrual
accounting; rather, it provides time limitations by which liabilities
must be liquidated in order to receive Medicare payment for the year of
accrual. Providers initially record their costs in their books and
records in accordance with GAAP and, subsequently, make necessary
reclassifications and adjustments in their Medicare cost reports to
conform with Medicare policy. The incorporation into regulations of
already-functioning time limitations related to accrued costs would not
change providers' established accounting systems or their preparation
of Medicare cost reports. Therefore, a provider would not have to
maintain two sets of books to comply with this regulation, nor would
the regulations require conversion to cash basis accounting.
Comment: One commenter stated that the proposed change will prove
to be detrimental to providers due to the wide variety of possible
interpretations by fiscal intermediaries.
Response: We believe that the commenter's contention that this rule
raises the possibility of a wide variety of interpretations by fiscal
intermediaries is unfounded. The purpose of the rule is to avoid this
possibility by explicitly setting forth in regulations longstanding
policy that mandates specific time frames for liquidation of
liabilities.
Comment: One commenter suggested that we include in the final rule
examples of workers' compensation plans structured to lend themselves
to unwarranted payment of Federal funds, for example, (1) situations in
which a provider's workers' compensation [[Page 33130]] insurance
premium payments are funneled back to a reinsurer related to the
provider, or (2) situations in which a provider may have the option of
paying less than the insurance premium billed to it (that is, claim an
accrual for the billed premium but eventually pay the insurer a smaller
amount). The commenter felt the regulations should be clear that a
provider's costs are payable only to the extent that the provider has
actually paid a premium.
Response: We have chosen not to incorporate the commenter's
examples in the regulations. However, we agree that Medicare cannot
properly pay a provider unless the provider has actually incurred a
cost. In the first example, the provider's intermediary must examine
the situation of an insurer reinsuring with a party related to the
provider. To the extent the intermediary determines the provider's
premiums are unnecessarily or improperly funneled back to a party
related to the provider, the premiums would be unallowable. In the
second example, to the extent that a provider does not fully liquidate
its accrual, that portion of the accrual would be unallowable.
Comment: One commenter took exception to the proposal's claim that
no additional information collection requirements would be imposed as a
result of the proposed changes to the regulations. The commenter stated
that the requirement that unfunded deferred compensation (for example)
be an allowable cost only during the period in which actual payment was
made to the employee would necessitate additional recordkeeping by
providers who must convert their financial reporting systems.
Response: Medicare policy for unfunded deferred compensation plans
remains unchanged. If deferred compensation is unfunded, Section 2140.2
of the Provider Reimbursement Manual has long indicated that the
provider does not claim an expense until actual payment is made to the
employee (or accrued and liquidated timely). Any necessary
recordkeeping should already be in place to comply with existing
policy. No new or additional recordkeeping would be required under this
rule.
Comment: One commenter believes the proposal addressed a concern
with over-accrual of costs but failed to provide for under-accrual of
costs. The commenter indicated that if payment subsequent to filing the
cost report exceeds the accrual, there is no ready mechanism to correct
the under-accrued costs and to obtain proper payment. Similarly, the
rule should be clarified to allow the provider to increase its interest
expense in a situation in which accrued investment income is offset
against interest costs but payment is not subsequently received.
Response: If the amount actually expended is greater than the
accrual, the excess amount may be treated as paid on a cash basis.
Similarly, if the amount of investment income actually realized is less
than the amount of the accrual, the amount received serves as the basis
for making an appropriate adjustment (that is, to allow additional
interest expense).
Comment: One commenter stated that if this rule were adopted,
providers would incur costs in treating Medicare patients that would
not be paid by Medicare, thus forcing providers to shift incurred costs
to other patients. The commenter noted that such cost shifting is
prohibited by section 1861(v)(1)(A) of the Act.
Response: In accordance with our policy involving the accrual basis
of accounting, Medicare has always paid a provider for incurred costs
for which the related liability has been properly accrued, even though
the provider has not transferred actual assets to satisfy its
obligation. That is, Medicare, through interim payments and eventually
through the cost report settlement process, has paid its share of the
cost even though the provider in some cases has not yet expended any
funds. To the extent that Medicare pays before the provider expends
funds, Medicare has made an advance payment for the cost. The purpose
of this rule is to recover Medicare's payment after permitting the
provider a reasonable period of time in which to liquidate its
obligation, if liquidation has not occurred within the required time
period. To recover Medicare payments for costs for which the provider
has not timely liquidated its obligation does not shift incurred costs
to non-Medicare patients.
Comment: One commenter stated that the rule should be clarified to
reflect that providers are entitled to be paid for the current period's
amortized portion of costs that are not liquidated within 1 year, such
as bond discount or bond issue costs.
Response: We do not agree that clarification is necessary. The
regulation addresses costs for which liabilities are incurred and must
be liquidated timely in order to receive Medicare payment for the year
of accrual. It is not intended to apply to the current year's amortized
portion of costs, which do not require current liquidation.
Comment: One commenter believed that the savings to the program
cited in the proposed rule are suspect because in the vast majority of
cases for the items in question, payment to the provider merely will be
deferred to a later period. Therefore, a savings to the government
would not be permanent.
Response: We did not identify any ``savings'' in the proposed rule.
Rather, we stated that the lack of clarification in the regulations
involving the accrual basis of accounting forced the Medicare program
to settle cases involving accrued sick leave, FICA taxes, deferred
compensation, and unpaid mortgage interest. We indicated our belief
that without a change to the regulations, the Medicare program could be
forced to pay additional amounts of accrued liabilities even though
providers may not liquidate the liabilities on a current (that is,
timely) basis.
This rule will result in a clearer statement in the regulations of
our policy precluding Medicare payment for expenses in a cost reporting
period for which the associated liability is not liquidated timely. If
the liability is not liquidated timely, Medicare will recover payment
it made for the year of accrual. (Generally, recovery is applicable to
the actual year of accrual, although it could apply to a later period
in some cases, such as for vacation pay.) Should the liability
thereafter be liquidated and our policy provides for Medicare payment
in that subsequent period, there will be a Medicare outlay for that
period. In cases in which the liability is never liquidated, Medicare
does not share in the cost, in the current period or a later period.
B. Self-Insurance
Comment: Some commenters noted that under the proposal, self-
insurance program costs would have to be paid within 75 days after the
close of the cost reporting period. They suggested that we modify the
proposed change to allow program payment in the cost reporting period
in which the provider incurs the cost, provided that payment by the
provider is made within the timeframes specified in the provider's
self-insurance funding plan.
Response: The commenter suggests that the program should recognize
a provider's own established time frames in liquidating liabilities for
contributions to a self-insurance fund. This would defeat the purpose
of the rule, which requires a consistent time frame to be used by all
providers, in accordance with longstanding program policy.
Comment: One commenter stated that the proposed rule was not clear
as to Medicare's policy in cases in which a self-insurer provides
advance funding under State law, and the account is
[[Page 33131]] maintained and administered by the provider.
Response: By definition, self-insurance is a means whereby a
provider undertakes the risk of protecting itself against anticipated
liabilities by providing equivalent funds to liquidate those
liabilities. In order for the contributions to a self-insurance fund to
be recognized under Medicare, the self-insurance fund must be
established with an independent fiduciary such as a bank, a trust
company, or a private benefit administrator. In the case of a State or
local governmental provider or pool, the State in which the provider or
pool is located may act as a fiduciary. In either case, section 2162.7
of the Provider Reimbursement Manual sets forth stringent criteria that
must be met in order to gain program recognition as a self-insurance
fund. These criteria are designed to ensure the soundness and
independent integrity of the fund. The situation alluded to, in which
the account is maintained and administered by the provider, would not
qualify.
C. All-Inclusive Paid Days Off
Comment: One commenter suggested that we modify the proposal to
allow for differences in benefit plans across entities within a
company. In some of the provider's facilities, according to the
commenter, the benefit plan permits employees to accrue leave or
payment in lieu of leave for any combination of types of leave, with
some employees accruing leave over an extended period of time. The
commenter believes that the proposal creates discrimination among
employees even when the different plans do not, and that the proposed
change may cause companies to remove the flexibility and control that
employees currently have over their benefit plans.
Response: Our intent is not to remove the flexibility a provider's
employees may have over their benefit plans. If a provider's vacation
policy or its all-inclusive paid days off policy is consistent among
all employees, liquidation of the liability is not limited by the
proposal. The accrued costs of benefits in the period earned remain
costs of that period provided that liquidation of the benefits is made
within the period provided for by the provider's policy. Consistent
application under a policy may provide for increased benefits based on
years of service, provided it applies in the same manner to all
employees.
We believe that consistent application of the provider's policy
ensures that an employee actually takes the vacation or all-inclusive
paid days off benefits for the costs that are claimed.
D. Short-Term Liability
Comment: One commenter believes that if consistency and assurance
of payment for actual costs are the goals, it is inappropriate to allow
a 3-year extension for ``good cause'' for payment of short-term
liabilities. The commenter views such a determination as being highly
subjective and largely dependent upon the good will of the fiscal
intermediary. Instead, the commenter suggested that we allow
liquidation of liabilities consistent with GAAP and in conformity with
existing provider agreements and policies regardless of whether those
policies cover accrued benefits, self-insurance, or deferred
compensation payments.
Response: We do not agree with the commenter's suggestion to allow
liquidation of liabilities in accordance with GAAP and in conformity
with existing provider agreements and policies. The purpose of the
regulation is to assure that Medicare recognizes only costs associated
with a liability that is timely liquidated through an actual
expenditure of funds. GAAP does not offer this assurance for Medicare.
Although the end of the year following the year of accrual permits
adequate time for timely liquidation of liabilities in the vast
majority of cases, we believe that an extension of up to 2 additional
years is appropriate if a provider can support its need for additional
time in accordance with instructions in the Provider Reimbursement
Manual. We do not believe the granting of an extension is subjective or
dependent on the goodwill of the intermediary.
Comment: One commenter suggested that we clarify that if short-term
liabilities are the subject of dispute or litigation, they need not be
discharged within 1 or even 3 years.
Response: Even in disputed cases or cases that are in litigation,
our policy on the timely liquidation of liabilities still applies. The
policy does not disadvantage a provider even if the liability is not
discharged within 1 year, or up to 3 years in the case of an extension
granted by the intermediary for cause. While the cost cannot be paid by
Medicare in the year of accrual in the absence of timely liquidation of
the liability, the cost can be claimed in the cost reporting period
when the liquidation of the liability occurs, that is, when an actual
expenditure takes place, as currently described in section 2305 of the
Provider Reimbursement Manual.
Comment: One commenter suggested that we permit providers
terminated from Medicare to obtain payment for all properly accrued
costs incurred during their final cost reporting period (together with
costs incurred after termination authorized under section 2176 of the
Provider Reimbursement Manual).
Response: All properly accrued allowable costs are recognized for a
provider that is terminating from the Medicare program. However, the
rules for liquidation of liabilities contained in the proposed
regulation continue to apply. That is, although a provider is
terminating, the intermediary must still assure that the liability is
timely liquidated.
Comment: One commenter suggested that the final rule should
explicitly provide that the regulations are intended to address only
short-term liabilities, that is, amounts normally paid within 1 year of
the date the cost report is filed, and not the discharge of long-term
liabilities.
Response: In this final rule, we have revised Sec. 413.24(c)(3)(i)
of the proposed rule (now Sec. 413.100(c)(2)(i)) to provide that short-
term liabilities include the current portion of long-term liabilities,
such as the mortgage interest due to be paid in the current year. That
is, the portion of a long-term liability due in the current year is a
short-term liability for the year. Section 413.100(c)(2)(i) of this
rule does not apply to portions of long-term liabilities due in future
periods.
E. Compensation of Owners
Comment: One commenter stated that the proposed rule appears to
indicate that the liability must be liquidated in the form of cash
within 75 days after the close of the cost reporting period. The
commenter noted that section 906.4 of the Provider Reimbursement Manual
recognizes a promissory note as liquidation and recommended that the
language in the regulations should be consistent with that in the
Provider Reimbursement Manual. Another commenter stated that if we
intend to propose more restrictive requirements on compensation of
owners, we should also specifically provide in regulations that the
issuance of an enforceable note to the owner for the amount of
compensation should constitute liquidation of the accrued liability.
Response: The proposed rule stated simply that liquidation of an
owner's compensation accrual must occur within 75 days after the close
of the cost reporting period in which the liability occurs. We do not
plan to specify in the regulations the manner of liquidation,
[[Page 33132]] but rather have chosen to continue to address those
specifics in the Provider Reimbursement Manual. Therefore, the proposed
regulation did not provide a more restrictive liquidation policy than
existing policy in the Provider Reimbursement Manual.
However, we intend to revise section 906.4 of the Provider
Reimbursement Manual to deny recognition of the liquidation of
liabilities by use of a promissory note without the actual transfer of
assets within 75 days of the close of the cost reporting period.
Revised section 906.4 then will be consistent with instructions in
section 2305 of the Provider Reimbursement Manual concerning
requirements for liquidating liabilities. Those instructions (albeit
with different time limitations) require that a liability actually be
liquidated by the end of the appropriate time period, rather than being
extended by way of another liability, for example, a promissory note.
F. FICA and Other Payroll Taxes
Comment: One commenter asserted that accrual of employer-related
FICA liabilities is clearly appropriate under GAAP as well as under
Sec. 413.24(b)(2), and that HCFA should continue to allow recognition
of these costs especially as they relate to the accrual of year-end
wages.
Response: We believe that employer-related FICA taxes should be
accrued and claimed for Medicare payment only in the period in which
actual payment to the employee is made. It is not until that point that
the liability for the employer-related FICA tax is incurred.
Comments: One commenter pointed out that the preamble language in
the proposed rule stated that FICA and other payroll taxes related to
vacation pay and nonpaid workers would be paid only in the period in
which payment is actually made to the employee. Yet, the language of
proposed Sec. 413.24(c)(3)(vi) indicated that all FICA and payroll
taxes would be handled in the same way. The commenter suggested that we
clarify the discrepancy in the final rule.
Response: Even though the preamble language for the proposed rule
specifically addressed only payroll taxes related to vacation pay and
nonpaid workers, our intent was to prohibit the accrual and claim for
Medicare payment of such taxes for all types of payments until the
period in which payment (on which the tax is based) is actually made to
the employee. Thus, as the commenter suggests, and as the regulations
text has always specified, this policy applies to all FICA and payroll
taxes.
Comment: Some commenters stated that the applicable FICA and other
payroll taxes should be accrued during the same period that the
employee benefits are earned and accrued. One commenter stated that
FICA and other payroll accruals apply equally to accrued vacation,
holiday, and sick pay benefits. Another commenter suggested that if
such payments are not made to employees in subsequent years, Medicare
may recover the excess cost in subsequent years.
Response: We continue to believe that such taxes should not be
accrued and claimed for Medicare payment until the period in which
actual payment to the employees is made. It is at that point that the
liability for the related payroll taxes is incurred.
G. Sick Pay
Comment: Regarding the sick leave example in the proposed rule (56
FR 50835), one commenter believes that providers would not typically
accrue for forfeitable sick leave. Even if providers do so, the
commenter believes that Medicare could avoid payment by requiring
forfeitures to be offset against subsequent sick pay costs.
Response: We agree with the commenter that providers should not
accrue forfeitable sick leave. However, we disagree that where
forfeitable sick leave is accrued and claimed for Medicare payment,
Medicare would avoid payment by requiring forfeitures to be offset
against sick pay costs incurred during the period in which the
forfeitures occur. Handling forfeitable sick leave in this manner would
result in Medicare recognizing and paying for excessive sick leave
costs up until the point of forfeiture.
As a result of this comment, we have made two revisions to this
final rule. First, we have clarified under Sec. 413.100(c)(2)(iii)(A)
that if sick leave is funded in a deferred compensation plan, the
contributions to the fund must take into account forfeitures. Second,
if an employee has the right to demand cash payment at the end of the
year, we believe that forfeitures are not an issue because the employee
has earned a nonforfeitable right. Accordingly, we also have specified
under Sec. 413.100(c)(2)(iii)(B) that if a provider's sick leave plan
grants employees the nonforfeitable right to demand cash payment for
unused sick leave at the end of each year, sick pay is includable in
allowable costs, without funding, in the cost reporting period in which
it is earned.
Comment: One commenter asserted that providers should not be
financially disadvantaged by disallowance of accrued benefits that are
vested but subject to forfeiture clauses. The commenter stated that
such clauses are financially prudent and result in lower Medicare
program costs.
Response: We believe the commenter is concerned that if forfeitures
are possible, Medicare would not recognize any accrual of sick leave.
On the contrary, as discussed in the response to the preceding comment,
if sick leave is funded in a deferred compensation plan, the
contributions to the fund must take into account forfeitures. That is,
the accrual of the contributions to the deferred compensation fund
reflects anticipated forfeitures. However, the issue of forfeitable
sick leave occurs only in the context of contributions to a deferred
compensation fund. In a situation in which an employee has the right to
demand cash at the end of the year for unused sick leave, the employee
has earned a nonforfeitable right. In all other situations, sick pay
can be claimed for Medicare payment only on a cash basis for the year
in which the benefits are paid; therefore, the issue of accrual of
forfeitable sick leave does not arise.
In proposing to incorporate Medicare's policy on sick leave costs
(contained in section 2144.8 of the Provider Reimbursement Manual) into
the regulations, we believe it was understood that sick pay costs can
be claimed for payment only in the cost reporting period in which paid,
unless the sick leave is funded in a deferred compensation plan or
unless an employee has the nonforfeitable right to demand cash at the
end of the year for unused sick leave. This policy has been included in
section 2144.8 for many years. Nevertheless, we have revised the
regulations by specifying under Sec. 413.100(c)(2)(iii)(C) that sick
pay costs can be claimed only on a cash basis if paid on any bases
other than those in Sec. 413.100(c)(2)(iii) (A) or (B) (that is,
through a funded deferred compensation plan, or in situations in which
the sick leave plan grants employees the nonforfeitable right to demand
cash payment for unused sick leave at the end of each year).
Comment: One commenter stated that although timing differences will
occur in any accrual method of accounting, in total, the program is not
overpaying since any overestimate of expenses in one year is offset by
reduction in accrued expenses in a subsequent period when the sick
leave, vacation, and other types of leave are determined to be
overaccrued.
Response: The purpose of the longstanding policy on liquidation of
liabilities, which we proposed to incorporate in the regulations, is to
[[Page 33133]] assure that a provider properly claims costs during each
cost reporting period. Costs claimed during a period for which the
related liability may never be liquidated result in overpayment of the
costs in the year the costs are claimed. Reduction in accrued expenses
in a subsequent period when sick leave is determined to be overaccrued
results in Medicare's recognizing and paying for excessive costs up
until the point when accrued expenses are reduced in the subsequent
period.
However, in the case of vacation benefits, we are incorporating
into the regulations the policy that is currently included in the
Provider Reimbursement Manual regarding liquidation of the vacation
accrual. In proposing to incorporate the requirements of section 2146,
Medicare's policy on vacation costs, into the regulations, we believe
it was understood that if payment is not made within the required time
period or if benefits are forfeited by the employee, the adjustment to
disallow the cost is made in the current period (that is, the latest
year in which payment should have been made or the year in which the
benefits are forfeited) rather than in the period in which the cost was
accrued and claimed for Medicare payment. (However, an intermediary may
choose to require adjustment in the period in which the cost was
accrued and claimed for Medicare payment if the cost report for that
period is open or can be reopened, and if the intermediary believes the
adjustment is more appropriate in that period.) This policy has been
included in section 2146.2 for many years. The new
Sec. 413.100(c)(2)(ii)(C) codifies this longstanding policy.
Comment: One commenter asserted that administrative costs
associated with a funded deferred compensation plan (required when sick
pay is not payable at year end) would prohibit the implementation of
such plans in numerous facilities--effectively eliminating this form of
``short-term disability insurance.''
Response: If a provider is unable to afford the administrative
costs associated with establishing a deferred compensation plan, the
provider could simply claim its sick pay costs at the time when payment
is made to the employee, in accordance with Sec. 413.100(c)(2)(iii)(C).
Of course, under this arrangement, the provider would not be permitted
to claim accrued sick pay costs. However, under
Sec. 413.100(c)(2)(iii)(B), if a provider's sick leave plan grants
employees the nonforfeitable right to demand cash payment for unused
sick leave at the end of each year, sick pay is includable in allowable
costs, without funding, in the cost reporting period in which it is
earned.
H. Vacation Pay
Comment: One commenter stated that the consistency requirement for
vacations is unclear and has no relationship to the probability or
timing of payment, and requested that the term ``consistent'' be
limited to the time frame for liquidation of the vacation liability and
not be extended to the rate of accrual. The commenter believes that as
vacation pay benefits are vested, the accrual should be recognized--
consistency between classes of employees is irrelevant.
Response: This rule codifies long-standing Medicare policy (section
2146 of the Provider Reimbursement Manual) regarding payment for
vacation benefits. This policy recognizes the accrual of vacation
benefits, and permits payment for the accrual in the cost reporting
period in which the benefit is earned, if the provider's vacation
policy regarding when the vacation must be taken--or when payment is
made in lieu of the vacation--is consistent for all employees. If the
policy regarding when vacation must be taken is not consistent among
all employees, vacation must be taken or payment in lieu of vacation
must be made within 2 years after the close of the cost reporting
period in which the vacation was accrued in order for the accrual to be
allowed in the year in which the vacation is earned.
We agree with the commenter that, for purposes of this Medicare
vacation policy, a provider's vacation policy that is ``consistent
among all employees'' addresses the provider's policy regarding the
time frame in which vacation benefits must be used. The provider's
policy may provide for different amounts of vacation accrual depending
upon such factors as an employee's length of service, or whether the
employee is managerial or nonmanagerial. We now believe our statement
in the proposed rule that a provider's consistent policy is one in
which no provision of the policy provides for different amounts of
vacation benefits for certain positions and types of employees was an
overextension of the language ``consistent among all employees''.
Medicare's vacation policy is intended to assure that a provider
actually liquidates its accrued costs for vacation benefits. We believe
the policy is clear and permits a high degree of flexibility for a
provider. In situations in which a provider's vacation policy is not
consistent for all employees regarding when vacation must be taken,
Medicare's policy permits a reasonable time frame--2 years after the
close of the cost reporting period in which the vacation was accrued--
for liquidating vacation accruals in order for the accruals to be
allowed in the year when the vacation is earned.
I. Deferred Compensation
Comment: One commenter expressed concern that the proposal would
require hospitals to devote staff to track the payment of deferred
compensation for 10, 20, or possibly more years in order to obtain
payment.
Response: The proposed regulation did not change our current policy
on deferred compensation, which has been in section 2140 of the
Provider Reimbursement Manual for many years. If a provider's deferred
compensation plan is funded in accordance with that policy, program
payment has long been based on the current period contributions to the
fund, provided liabilities related to the contributions are timely
liquidated (usually within 1 year after the close of the current cost
reporting period). Benefit payments from the deferred compensation
fund, which can occur many years later, are part of the operation of
the fund and do not affect program payments in the later periods when
payments are actually made from the fund.
If a provider's deferred compensation is not funded in accordance
with requirements in section 2140 of the Provider Reimbursement Manual,
the manual instructions have long permitted program payment only during
the period in which actual payment is made.
Therefore, these regulations require no more staff time to track
deferred compensation payments than is used by providers under our
current, longstanding policy.
Comment: One commenter asked that we add the word ``Plans'' to the
title of Sec. 413.24(c)(3)(vii) of the proposed rule, to read
``Deferred Compensation Plans'' and that we add a new paragraph
(vii)(C), to read ``Deferred compensation plans under this section do
not include accrued salaries and/or accrued bonuses that are allowable
in the year earned, provided they are liquidated no later than the end
of the provider's cost reporting period following the period in which
the salary and bonuses were earned.''
Response: We believe it is clear that the salaries and bonuses
referred to in the comment, which are earned currently and which are
liquidated timely under this rule with no attempt to defer payment, are
not treated as [[Page 33134]] deferred compensation. Therefore, we have
not adopted the commenter's suggestion to address salaries and bonuses
in the text of the regulation.
IV. Provisions of the Final Rule
This final rule generally confirms the provisions of the proposed
rule, with the clarifying changes discussed above in the responses to
comments. In addition, upon further consideration of the regulations
text set forth in the proposed rule, we believe that one additional
policy clarification is necessary.
Section 413.24(c)(2) of the proposed rule consisted of an example
that indicated that the accrual of postretirement health benefits under
Medicare cannot be recognized unless the liability for the benefits is
liquidated timely. That example referred to Statement of Financial
Accounting Standards (SFAS) No. 106 (December 1990), Employers'
Accounting for Postretirement Benefits Other Than Pensions, without
explicitly citing SFAS No. 106. SFAS No. 106, generally effective for
fiscal years beginning after December 15, 1992, requires an employer to
accrue the expected cost of providing postretirement benefits to
employees (and the employees' beneficiaries and covered dependents)
during the years the employees provide the necessary services. However,
it does not provide for timely liquidation of the accruals in
accordance with Medicare policy. Accordingly, the example clarified,
consistent with Medicare policy, that the accrual of postretirement
benefits (addressed in SFAS No. 106) cannot be recognized in allowable
costs in the year of the accrual without timely liquidation of the
related liability.
We now believe that the original example is unnecessary in the
final rule. Because payment for postretirement benefits is deferred,
the benefits are deferred compensation. Therefore, Medicare policy on
deferred compensation, funded and unfunded, applies to postretirement
benefit deferred compensation plans as well as to other types of
deferred compensation plans. The deferred compensation policy is found
in section 2140 of the Provider Reimbursement Manual and also, with
regard to liquidation of liabilities related to accrued deferred
compensation costs, in Sec. 413.100(c)(2)(vii) of this final rule. The
deferred compensation policy sets forth the requirements to be met,
including timely liquidation of liabilities, in order to receive
Medicare payment for deferred compensation.
Under SFAS No. 106, a provider may have postretirement benefit
obligations applicable to more than one year, for example, prior
service costs, or a transition obligation (which, under SFAS No. 106,
the provider may elect to accrue immediately or on a delayed basis).
For purposes of Medicare payment, the deferred compensation policy
provides, in Provider Reimbursement Manual section 2140.3.B.1 (by
reference to section 2142.5, Pension Costs for Past and Current
Service), that past service costs applicable to more than one cost
reporting year must be amortized over a minimum of 10 years, even if
the related liability for the accrual has been liquidated timely.
Therefore, in lieu of the example in proposed Sec. 413.24(c)(2), we
have clarified in Sec. 413.100(c)(2)(vii)(C) of this final rule that
postretirement benefit plans addressed in SFAS No. 106 are deferred
compensation arrangements to which all the provisions of Medicare's
deferred compensation policy apply.
We believe it should have been clear to readers of the proposed
rule that Medicare's deferred compensation policy applies to all
deferred compensation arrangements, including postretirement benefit
plans. However, although the proposed rule addressed postretirement
health benefits, clarifying that the accrual of such benefits cannot be
recognized for Medicare payment in the year of the accrual without
timely liquidation of the liability for the benefits, it did not
emphasize the applicability of the deferred compensation policy in all
respects to postretirement benefit plans.
Therefore, there could be situations in which a provider that has
elected to accrue postretirement benefit past service costs over more
than 10 years for accounting and reporting purposes (that is, for non-
Medicare purposes) in conformity with SFAS No. 106, mistakenly believed
it needed to use the same period for amortizing the costs for Medicare
purposes. If, for Medicare purposes, the provider now wants to amortize
the costs over fewer years, but not fewer than 10 years, it may request
its intermediary, subject to the requirements in the regulations at
Sec. 405.1885, to make the change to applicable cost reporting periods
in accordance with the longstanding policy in section 2140.3.B.1 of the
Provider Reimbursement Manual. In all cases, Medicare payment is
subject to the policy in this final rule and in Provider Reimbursement
Manual section 2140.4 regarding timely liquidation of the associated
accruals for the deferred compensation.
Correspondingly, if a provider has amortized the costs over fewer
than 10 years for Medicare purposes without the express permission of
its intermediary, the intermediary is required, subject to
Sec. 405.1885, to make necessary adjustments to conform the
amortization to the policy in section 2140.3.B.1. of the Provider
Reimbursement Manual. (We note that if a provider has been permitted by
its intermediary to amortize such costs for Medicare purposes over
fewer than 10 years, assuming timely liquidation of the associated
accruals, the intermediary will not now make adjustments to reflect
amortization over at least 10 years, nor is the provider required to
make such a change.)
The other clarifying changes to the proposed rule that are set
forth in this final rule, as discussed in our responses to public
comments in Section IV of this final rule, are as follows:
In Sec. 413.100(c)(2)(i) of this rule, we have clarified
that short-term liabilities also include the current portion of long-
term liabilities, such as the mortgage interest due to be paid in the
current year.
We have added new Sec. 413.100(c)(2)(ii)(C) to address
necessary adjustment to a provider's cost report if accruals for
vacation pay and all-inclusive paid days off are not properly
liquidated. The new material incorporates policy currently in section
2146.2 of the Provider Reimbursement Manual, which provides that the
adjustment to disallow accrued cost generally is made in the current
period if payment for the vacation or all-inclusive paid days off is
not made in the required time period or if benefits are forfeited by
the employee.
In Sec. 413.100(c)(2)(iii)(A) concerning sick pay, we have
clarified that contributions to the deferred compensation plan must be
reduced to reflect estimated forfeitures.
In Sec. 413.100(c)(2)(iii)(B), we have clarified that only
if an employee has a nonforfeitable right to demand cash for unused
sick leave at the end of each year can the sick pay be includable in
allowable costs, without funding, in the cost reporting period in which
it is earned. We believe that, typically, an employee's right to demand
cash for unused sick leave is nonforfeitable. However, in a situation
in which an employee has a right to demand cash but, later, for any
reason may not be entitled to receive the cash (that is, the amount is
forfeitable under certain conditions), a provider cannot accrue the
sick leave benefit and make a current year claim for Medicare payment
under Sec. 413.100(c)(2)(iii)(B) [[Page 33135]] because that section
applies only to situations in which an employee's right to demand cash
is nonforfeitable. Rather, the provider can claim the cost only in the
year when paid to the employee, unless it meets the provisions of
Sec. 413.100(c)(2)(iii)(A).
We have added new Sec. 413.100(c)(2)(iii)(C) to clarify in
the regulations Medicare's policy in section 2144.8 of the Provider
Reimbursement Manual, that sick pay paid can be claimed for Medicare
payment only on a cash basis if paid on any basis other than those in
Sec. 413.100(c)(2)(iii) (A) or (B) (that is, through a funded deferred
compensation plan, or in situations in which the sick leave plan grants
employees the nonforfeitable right to demand cash payment for unused
sick leave at the end of each year).
In Sec. 413.100(c)(2)(viii), we have removed the language
included in the proposed rule that addressed the allowability in
subsequent periods of self-insurance accruals liquidated after the time
limit provided in that section. We did not address that issue for any
of the other types of accrued costs addressed in the proposed rule and
thus we do not believe it would be consistent to address that issue
here. This issue is already addressed in implementing manual
instructions.
We have revised the wording of Secs. 413.100(c)(2)(i),
(c)(2)(iii), and (c)(2)(vii)) of this rule to clarify that a request
for extension to the 1-year time limit for liquidating a liability must
be made within the 1-year time period. We believe it was clear that a
provider could not reasonably request an extension after having failed
to liquidate within the 1-year period. The regulation now specifically
addresses this point.
In the same sections of the rule, we have removed the language
included in the proposed rule describing ``good cause'' for an
extension. Such description is already covered in section 2305 of the
Provider Reimbursement Manual.
Finally, as explained in section III of this final rule, we are
moving the proposed provisions of Sec. 413.24(b)(3) and (4), and
Sec. 413.24(c) into a new Sec. 413.100, Special Treatment of Certain
Accrued Costs. For the convenience of the reader, presented below is a
crosswalk that shows the regulatory citations for the provisions of the
proposed rule and for the corresponding provisions of this final rule.
------------------------------------------------------------------------
Proposed Final
------------------------------------------------------------------------
Sec. 413.24(b)(2)............ Sec. 413.24(b)(2)
Sec. 413.100(a)
Sec. 413.24(b)(3)............ Sec. 413.100(b)(1)
Sec. 413.24(b)(4)............ Sec. 413.100(b)(2)
Sec. 413.24(c)............... Sec. 413.100(c)
Sec. 413.24(c)(1)............ Sec. 413.100(c)(1)
Sec. 413.24(c)(2)............ delete
Sec. 413.24(c)(3)............ Sec. 413.100(c)(2)
Sec. 413.24(c)(3)(i)(A)(B)... Sec. 413.100(c)(2)(i)(A)(B)
Sec. 413.24(c)(3)(ii)(A)(B)(C Sec. 413.100(c)(2)(ii)(A)(B)(C)
).
Sec. 413.24(c)(3)(iii)(A)(B)( Sec. 413.100(c)(2)(iii)(A)(B)(C)
C).
Sec. 413.24(c)(3)(iv)........ Sec. 413.100(c)(2)(iv)
Sec. 413.24(c)(3)(v)......... Sec. 413.100(c)(2)(v)
Sec. 413.24(c)(3)(vi)........ Sec. 413.100(c)(2)(vi)
Sec. 413.24(c)(3)(vii)(A)(B). Sec. 413.100(c)(2)(vii)(A)(B)(C)
Sec. 413.24(c)(3)(viii)...... Sec. 413.100(c)(2)(viii)
------------------------------------------------------------------------
V. Impact Statement
Unless we certify that a final rule will not have a significant
economic impact on a substantial number of small entities, we generally
prepare a regulatory flexibility analysis that is consistent with the
Regulatory Flexibility Act (RFA) (5 U.S.C. 601 through 612). For
purposes of the RFA, we consider all hospitals, long-term care
facilities, and other providers to be small entities.
Also, section 1102(b) of the Act requires us to prepare a
regulatory impact statement if a final rule may have a significant
economic impact on the operations of a substantial number of small
rural hospitals. Such an analysis must conform to the provisions of
section 603 of the RFA. With the exception of hospitals located in
certain rural counties adjacent to urban areas, for purposes of section
1102(b) of the Act, we define a small rural hospital as a hospital with
fewer than 50 beds.
Our intention in this rule is not to signify a change in policy
but, rather, to incorporate in regulations our longstanding policy
regarding the circumstances under which Medicare accepts a provider's
claim for costs for which it has not actually expended funds during the
current cost reporting period. Because this rule merely conforms
regulations to present policies and practices, we have determined, and
certified, that this rule will not have a significant effect on the
operations of a substantial number of small entities or small rural
hospitals. Therefore, we have not prepared a regulatory flexibility
analysis or an analysis of the impact of this rule on small rural
hospitals.
In accordance with the provisions of Executive Order 12866, this
regulation was not reviewed by the Office of Management and Budget.
VI. Collection of Information Requirements
This document does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.).
List of Subjects in 42 CFR Part 413
Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.
42 CFR part 413 is amended as follows:
PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES
1. The authority citation for part 413 is revised to read as
follows:
Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social
Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).
2. In Sec. 413.1, the following changes are made:
a. The heading of paragraph (a) is revised to read as set forth
below. [[Page 33136]]
b. Paragraph (a)(2) is redesignated as paragraph (a)(3).
c. Paragraph (a)(1) is redesignated as paragraph (a)(2), and the
heading ``General summary.'' is removed and the heading ``Scope.'' is
added in its place.
d. A new paragraph (a)(1) is added to read as follows:
Sec. 413.1 Introduction.
(a) Basis, scope, and applicability--(1) Statutory basis. (i) Basic
provisions. Section 1815 of the Act requires that the Secretary make
interim payments to providers and periodically determine the amount
that should be paid under Part A of the Medicare program to each
provider of services for services it furnished. Section 1814(b) of the
Act (for Part A) and section 1833(a) of the Act (for Part B) provide
for payment on the basis of the lesser of a provider's reasonable costs
or customary charges. Section 1861(v) of the Act defines ``reasonable
cost.''
(ii) Additional provisions. Section 1814(j) of the Act provides for
exceptions to the ``lower of cost or charges'' provisions. Section 1833
(a)(4) and (i)(3) of the Act provide for payment of a blended amount
for certain surgical services furnished in a hospital's outpatient
department. Section 1833(n) of the Act provides for payment of a
blended amount for outpatient hospital diagnostic procedures such as
radiology. Section 1834(c)(1)(C) of the Act establishes the method for
determining Medicare payment for screening mammograms performed by
hospitals. Section 1881 of the Act authorizes payment for services
furnished to ESRD patients. Section 1883 of the Act provides for
payment for post-hospital SNF care furnished by rural hospitals having
swing-bed approval. Section 1886(h) of the Act provides for payment to
a hospital for the services of interns and residents in approved
teaching programs on the basis of a ``per resident amount.''
* * * * *
Subpart B--Accounting Records and Reports
3. Section 413.24 is amended by revising paragraph (b)(2) to read
as follows:
Sec. 413.24 Adequate cost data and cost finding.
* * * * *
(b) Definitions--
* * * * *
(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 Sec. 413.100 regarding limitations
on allowable accrued costs in situations in which the related
liabilities are not liquidated timely.)
* * * * *
Subpart F--Specific Categories of Costs
4. Section 413.100 is added to read as follows:
Sec. 413.100 Special treatment of certain accrued costs.
(a) Principle. As described in Sec. 413.24(b)(2), under the accrual
basis of accounting, revenue is reported in the period in which it is
earned and expenses are reported in the period in which they are
incurred. In the case of accrued costs described in this section, for
Medicare payment purposes the costs are allowable in the year in which
the costs are accrued and claimed for Medicare payment only under the
conditions set forth in paragraph (c) of this section.
(b) Definitions. (1) All-inclusive paid days off benefit. An all-
inclusive paid days off benefit replaces other vacation and sick pay
plans. It is a formal plan under which, based on actual hours worked,
all employees accrue vested leave or payment in lieu of vested leave
for any combination of types of leave, such as illness, medical
appointments, holidays, and vacations.
(2) Self-insurance. Self-insurance is a means by which a provider
independently or as part of a group undertakes the risk of protecting
itself against anticipated liabilities by providing funds in an amount
equal to anticipated liabilities, rather than by purchasing insurance
coverage.
(c) Recognition of accrued costs.--(1) General. Although Medicare
recognizes, in the year of accrual, the accrual of costs for which a
provider has not actually expended funds during the current cost
reporting period, for purposes of payment Medicare does not recognize
the accrual of costs unless the related liabilities are liquidated
timely.
(2) Requirements for liquidation of liabilities. For accrued costs
to be recognized for Medicare payment in the year of the accrual, the
requirements set forth below must be met with respect to the
liquidation of related liabilities. If liquidation does not meet these
requirements, the cost is disallowed, generally in the year of accrual,
except as specified in paragraph (c)(2)(ii) of this section.
(i) A short-term liability.
(A) Except as provided in paragraph (c)(2)(i)(B) of this section, a
short-term liability, including the current portion of a long-term
liability (for example, mortgage interest payments due to be paid in
the current year), must be liquidated within 1 year after the end of
the cost reporting period in which the liability is incurred.
(B) If, within the 1-year time limit, the provider furnishes to the
intermediary sufficient written justification (based upon documented
evidence) for nonpayment of the liability , the intermediary may grant
an extension for good cause. The extension may not exceed 3 years
beyond the end of the cost reporting year in which the liability was
incurred.
(ii) Vacation pay and all-inclusive paid days off.
(A) If the provider's vacation policy, or its policy for all-
inclusive paid days off, is consistent for all employees, liquidation
of the liability must be made within the period provided for by that
policy.
(B) If the provider's vacation policy, or its policy for all-
inclusive paid days off, is not consistent for all employees,
liquidation of the liability must be made within 2 years after the
close of the cost reporting period in which the liability is accrued.
(C) If payment is not made within the required time period or if
benefits are forfeited by the employee, an adjustment to disallow the
accrued cost is made in the current period (that is, the latest year in
which payment should have been made or the year in which the benefits
are forfeited) rather than in the period in which the cost was accrued
and claimed for Medicare payment. However, an intermediary may choose
to require the adjustment in the period in which the cost was accrued
and claimed for Medicare payment if the cost report for that period is
open or can be reopened as provided in Sec. 405.1885 of this chapter,
and if the intermediary believes the adjustment is more appropriate in
that period.
(iii) Sick pay.
(A) If sick leave is vested and funded in a deferred compensation
plan, liabilities related to the contributions to the fund must be
liquidated, generally within 1 year after the end of the cost reporting
period in which the liability is incurred. If, within the 1-year time
limit, the provider furnishes to the intermediary sufficient written
justification (based upon documented evidence) for nonpayment of the
liability, the intermediary may grant an extension for good cause. The
extension may not exceed 3 years beyond the end [[Page 33137]] of the
cost reporting year in which the liability was incurred. Contributions
to the deferred compensation plan must be reduced to reflect estimated
forfeitures. Actual forfeitures above or below estimated forfeitures
must be used to adjust annual contributions to the fund.
(B) If the sick leave plan grants employees the nonforfeitable
right to demand cash payment for unused sick leave at the end of each
year, sick pay is includable in allowable costs, without funding, in
the cost reporting period in which it is earned.
(C) Sick pay paid on any basis other than that specified in
paragraphs (c)(2)(iii) (A) or (B) of this section can be claimed for
Medicare payment only on a cash basis for the year in which the
benefits are paid.
(iv) Compensation of owners. Accrued liability related to
compensation of owners other than sole proprietors and partners must be
liquidated within 75 days after the close of the cost reporting period
in which the liability occurs.
(v) Nonpaid workers. Obligations incurred under a legally-
enforceable agreement to remunerate an organization of nonpaid workers
must be discharged no later than the end of the provider's cost
reporting period following the period in which the services were
furnished.
(vi) FICA and other payroll taxes. The provider's share of FICA and
other payroll taxes that the provider becomes obligated to remit to
governmental agencies is included in allowable costs only during the
cost reporting period in which payment (upon which the tax is based) is
actually made to the employee. For example, no legal obligation exists
for a provider-employer to pay FICA taxes until the employee is paid
and the specific amount of liability known.
(vii) Deferred compensation.
(A) Reasonable provider payments made under unfunded deferred
compensation plans are included in allowable costs only during the cost
reporting period in which actual payment is made to the participating
employee.
(B) Accrued liability related to contributions to a funded deferred
compensation plan must be liquidated within 1 year after the end of the
cost reporting period in which the liability is incurred. An extension,
not to exceed 3 years beyond the end of the cost reporting year in
which the liability was incurred, may be granted by the intermediary
for good cause if the provider, within the 1-year time limit, furnishes
to the intermediary sufficient written justification for non-payment of
the liability.
(C) Postretirement benefit plans (including those addressed in
Statement of Financial Accounting Standards No. 106 (December 1990))
are deferred compensation arrangements and thus are subject to the
provisions of this section regarding deferred compensation and to
applicable program instructions for determining Medicare payment for
deferred compensation.
(viii) Self-insurance. Accrued liability related to contributions
to a self-insurance program that are systematically made to a funding
agency and that cover malpractice and comprehensive general liability,
unemployment compensation, workers' compensation insurance losses, or
employee health benefits, must be liquidated within 75 days after the
close of the cost reporting period.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance)
Dated: April 20, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
[FR Doc. 95-15341 Filed 6-26-95; 8:45 am]
BILLING CODE 4120-01-P