[Federal Register Volume 64, Number 186 (Monday, September 27, 1999)]
[Rules and Regulations]
[Pages 51908-51910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24995]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1876-F]
RIN 0938-AH61


Medicare Program; Revision to Accrual Basis of Accounting Policy

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: Medicare policy provides that payroll taxes that a provider 
becomes obligated to remit to governmental agencies are included in 
allowable costs only in the cost reporting period in which payment 
(upon which the payroll taxes are based) is actually made to an 
employee. Therefore, for payroll accrued in 1 year but not paid until 
the next year, the associated payroll taxes are not an allowable cost 
until the next year. This final rule provides for an exception when 
payment would be made to the employee in the current year but for the 
fact the regularly scheduled payment date is after the end of the year. 
In that case, the rule requires allowance in the current year of 
accrued taxes on payroll that is accrued through the end of the year 
but not paid until the beginning of the next year, thus allowing 
accrued taxes on end-of-the year payroll in the same year that the 
accrual of the payroll itself is allowed. The effect of this rule is 
not on the allowability of cost but rather only on the timing of 
payment; that is, the cost of payroll taxes on end-of-the-year payroll 
is allowable in the current period rather than in the following period.

DATES: These regulations are effective November 26, 1999.

FOR FURTHER INFORMATION CONTACT: John Eppinger, (410) 786-4518.

SUPPLEMENTARY INFORMATION:

I. Background

    Generally, under the Medicare program, health care providers who 
are not subject to a prospective payment or other non cost based 
payment system are paid for the reasonable costs of covered services 
furnished to Medicare beneficiaries. Notable exceptions to payment on a 
reasonable cost basis are for inpatient hospital services furnished in 
acute care hospitals (section 1886(d) of the Social Security Act (the 
Act)) and for inpatient services furnished by skilled nursing 
facilities for cost reporting periods beginning on or after July 1, 
1998 (section 1888(e) of the Act). Additionally, there are other 
limited services not paid on a reasonable cost basis, to which Medicare 
policy concerning accrued costs, including the revision in this final 
rule, does not apply.
    Section 1861(v)(1)(A) of the Act defines reasonable cost and 
provides that reasonable cost shall be determined in accordance with 
implementing regulations. Section 413.24 establishes 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. Section 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.
    Section 413.100 provides for special treatment of certain accrued 
costs, including Federal Insurance Contribution Act (FICA) and other 
payroll taxes claimed by providers on their cost reports. Before this 
final rule, Sec. 413.100(c)(2)(vi) provided, without exception, that a 
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 payroll taxes are based) is actually made to the 
employee. When an employee is paid by a provider as part of a provider 
payroll, whether the payment is for time worked during the payroll 
period or for benefits (for example, vacation benefits) earned in an 
earlier period, the provider's share of FICA and other payroll taxes is 
an allowable cost during the cost reporting period in which payment is 
made to the employee. The policy is based on the fact that a provider 
becomes obligated to governmental agencies for payroll taxes only at 
the time that the salary or benefits, upon which the payroll taxes are 
based, are actually paid to the provider's employee. Further, until the 
salary or benefits are actually paid, it cannot be known for certain 
whether there will be a payroll tax or taxes, what the amount of the 
tax(es) will be, or whether a particular employee will be liable for 
the tax(es).

II. Provisions of the Proposed Rule

    On May 18, 1998, we published in the Federal Register (63 FR 27251) 
a proposed rule that would revise regulations governing the FICA and 
other payroll taxes. We proposed to revise Sec. 413.100(c)(2)(vi) to 
make one exception to the general rule. We proposed to provide that if 
payment would be made to an employee during a cost reporting period but 
for the fact that the regularly scheduled payment date is after the end 
of the period, costs of accrued payroll taxes related to the portion of 
payroll accrued through the end of the period, but paid to the employee 
after the beginning of the new period, are allowable costs in the year 
of accrual, subject to the liquidation requirements specified in the 
regulations (Sec. 413.100(c)(2)(i)). Under the proposed rule, accrued 
taxes on end-of-the-year payroll would be allowed in the same year that 
the accrual of the payroll itself is allowed, just as Medicare, in 
other than end-of-the-year

[[Page 51909]]

payroll situations, allows accrued taxes on payroll in the same year 
that the accrual of the payroll is allowed. The proposal was based on 
the notion that the insignificant amount of time passing between the 
accrual of the end-of-the-year payroll and the payment of the payroll 
in the following year does not give rise to the same concerns described 
in section I. above.
    We also proposed to change the example in Sec. 413.100(c)(2)(vi) to 
emphasize, as discussed above, that payroll taxes applicable to 
benefits accrued, such as vacation benefits, are not allowable until 
the period in which the employee uses the benefits, that is, takes the 
vacation. Finally, we proposed to change payroll tax from singular to 
plural throughout the section to clarify that there can be more than 
one payroll tax.

III. Comments on the Proposed Rule

    We received one letter of comment that favored the proposed rule. 
The commenter supported the proposal noting that the proposed policy 
matched revenues and expenses consistent with generally accepted 
accounting principles and normal business practice.

IV. Provision of the Final Rule

    Based on our position that the proposed rule published May 18, 1998 
would implement an appropriate exception to the current policy in 
Sec. 413.100(c)(2)(vi), and in the light of the fact that the comment 
received supported our proposal, we are adopting the proposed rule as 
final.

V. Regulatory Impact Analysis

    We have examined the impact of this rule as required by Executive 
Order 12866. Executive Order 12866 directs agencies to assess all costs 
and benefits of available regulatory alternatives and, when regulation 
is necessary, to select regulatory approaches that maximize net 
benefits (including potential economic, environmental, public health 
and safety effects; distributive impacts; and equity). This final rule, 
which permits allowance of accrued taxes on end-of-the-year payroll in 
the same year that the accrual of the payroll itself is allowed, does 
not make any significant changes in program payments. The final rule is 
limited in nature, as it affects only accrued payroll taxes for payroll 
accrued at the end of one cost reporting period that is not actually 
paid to employees until the beginning of the next period. Furthermore, 
in this situation, the effect of the final rule is only on the timing 
of payment; that is, it does not allow an additional cost of payroll 
taxes but rather allows the cost in the current period instead of in 
the following period. The final rule should not involve changes in 
provider accounting systems and, in fact, will free providers or 
intermediaries from making cost report adjustments, under the current 
policy, to postpone reimbursement of the cost on the current cost 
report to the subsequent cost report. We do not expect any significant 
costs or savings due to this change.
    We have also examined the impact of the final rule as required by 
the Regulatory Flexibility Act (RFA) (Public Law No. 96-354), and by 
section 1102(b) of the Act. The RFA requires agencies to analyze 
options for regulatory relief for small businesses. For purposes of the 
RFA, most hospitals, and most other providers, physicians, and health 
care suppliers are small entities, either by nonprofit status or by 
having revenues of $5 million or less annually. In addition, section 
1102(b) of the Act requires us to prepare a regulatory impact analysis 
if a rule may have a significant impact on the operations of a 
substantial number of small rural hospitals. Such an analysis must 
conform to the provisions of section 604 of the RFA. For purposes of 
section 1102(b) of the Act, we define a small rural hospital as a 
hospital that is located outside of a Metropolitan Statistical Area and 
has fewer than 50 beds.
    We are not preparing analyses for either the RFA or section 1102(b) 
of the Act since we have determined, and we certify, that this final 
rule will not result in a significant economic impact on a substantial 
number of small entities and will not have a significant impact on the 
operations of a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.
    We have reviewed this final rule under the threshold criteria of 
Executive Order 13132, Federalism, published in the Federal Register on 
August 10, 1999 (64 FR 43255). We have determined that it does not 
significantly affect the rights, roles, and responsibilities of States.

VI. Paperwork Reduction Act

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it will not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney disease, 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; OPTIONAL PROSPECTIVELY DETERMINED 
PAYMENT RATES FOR SKILLED NURSING FACILITIES

    A. The authority citation for part 413 continues 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).

Subpart F--Specific Categories of Costs

    B. In 413.100, paragraph (c)(2)(vi) is revised to read as follows:


Sec. 413.100  Special treatment of certain accrued costs.

* * * * *
    (c) Recognition of accrued costs.* * *
    (2) Requirements for liquidation of liabilities.* * *
    (vi) FICA and other payroll taxes.
    (A) General rule. 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 payroll taxes are based) is 
actually made to the employee. For example, payroll taxes applicable to 
vacation benefits are not to be accrued in the period in which the 
vacation benefits themselves are accrued but rather are allowable only 
in the period in which the employee takes the vacation.
    (B) Exception. If payment would be made to an employee during a 
cost reporting period but for the fact the regularly scheduled payment 
date is after the end of the period, costs of accrued payroll taxes 
related to the portion of payroll accrued through the end of the 
period, but paid to the employee after the beginning of the new period, 
are allowable costs in the year of accrual, subject to the liquidation 
requirements specified in paragraph (c)(2)(i) of this section.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)


[[Page 51910]]


    Dated: March 24, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: June 8, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-24995 Filed 9-24-99; 8:45 am]
BILLING CODE 4120-01-P