Simione™ Healthcare Consultants

Medicare PPS Rates & The Medicare HHA Cost Report

By Thomas Boyd, MBA, CFE, Vice President of Reimbursable Services, and Mark Tsiames, CPA, CVA, Principal, Simione Healthcare Consultants


While we all know of the prospective payment system (PPS) that started for Medicare home health on October 1, 2000, many of us may have forgotten about the data that determined the initial payment rates. CMS based its decisions upon the Medicare intermediary audits of approximately 500 home health agency Medicare cost reports from 1997. More recently, on January 1, 2008, CMS did it again when they modified home health PPS rates based partly upon data collected from the unaudited 2003 Medicare cost reports (MCRs).

The PPS rates of the past have been a direct result of the data housed in cost reports submitted by home health providers. We have indeed done this to ourselves, and it is already happening again.

In March 2009, the Medicare Payment Advisory Commission (MedPAC) recommended that Congress should recommend the rebasing of rates for home health services in 2011 to reflect the average cost of providing care. The MedPAC proposal was based on the review of a limited number of 2007 MCRs. After the report was released, the New York Times published an editorial on March 22, 2009 entitled “Costly Home Health Care.” Although the article did not tell the complete story of home health care and the services that are provided, it did refer to the MedPAC report, stating that the average profit margin for a Medicare certified home health agency between 2002 and 2007 was 16.5 percent. More recently, it was estimated that the 2009 profit margin would be 14 percent.

With such information in the public domain, it is no wonder that pressure is mounting. One only has to look at the current healthcare reform bills to observe that the effort to rebase PPS rates is already underway. The current Senate healthcare reform bill contains a proposal for rebase starting in 2014 phasing in through 2017, with adjustments limited to no more than a 3.5% reduction per year. The House healthcare reform bill required a rebase in 2011 with a 5% reduction in payment rates. Finally, President Obama adopted the rebasing recommendation as part of his budget proposal for 2009 and 2010. As all of this activity churns, we can expect that rebasing is a near certainty.


If you were among those who didn’t believe in the importance of accurate and complete MCR data, then it would be useful to revisit a brief history of the cost report. The MCR evolved over the years due to the demand by the government for information on home care services provided to Medicare beneficiaries. Agencies were required to submit a cost report annually. As time passed, providers began to use MCR data to evaluate the cost of services provided to Medicare beneficiaries, negotiate reimbursement rates from third party payers, and measure profitability by payer. Now, the government is using the MCR to determine payment rates. The MCR has come full circle.

Unfortunately, many providers have become lax in their commitment to accurate and complete cost report data. In their view, the cost report is an informational tool at best, with no impact on reimbursement by Medicare. From this perspective, the goal is simply to submit an acceptable cost report, whether accurate or not, so that Medicare payments are not withheld.

On an individual basis, they might be correct – their cost report will not dictate their specific Medicare reimbursement in the future. However, this perspective fails to see the bigger picture. Below, observe five main reasons for accurate data submittal:

1. It is an annual requirement for every HHA. The failure to file correctly and completely can cause the Medicare program to suspend payments to the HHA. The Medicare program will then seek repayment of all monies paid to the HHA since the last fiscal period for which a cost report was filed.

2. The cost reimbursement era for Medicare home health ended on September 30, 2000 (implementation of the Prospective Payment System). However, the Medicare regulations did not change. Failure to comply can allow the government to file actions against the HHA.

3. In some states, the Medicare cost report is used or duplicated for the Medicaid program. The failure to follow the Medicare regulations can also be applicable to the Medicaid regulations and cause actions to be taken by Medicaid against the HHA.

4. The Medicare program reimburses costs associated with flu vaccines and covered osteoporosis drugs. A proper and complete cost report filing is needed to insure proper cost reimbursement.

5. The Medicare cost report includes data that CMS can and will use to adjust the HHA prospective payment system (PPS). Incorrect data means a flawed payment system industry wide. This last point is the subject of this article, and the reason for the call to action described below.


Because of the importance of the MCR data to the future of our industry, CMS and NAHC are concerned about the increasing number of cost reports that are not being properly prepared. More than twenty percent of submitted cost reports are so poorly prepared so as to be useless for the extraction of data for PPS and management information. CMS by Transmittal 362 of August 1, 2008 informed the Medicare contractors including NGS, PBGA and CAHABA, that, "It is the responsibility of Medicare contractors to supply information to providers regarding how CMS uses the MCR data to update future Prospective Payment System (PPS) payments. It is crucial that Medicare providers fill out these reports with complete and valid data." CMS goes on to state, "It is crucial that Medicare providers learn how CMS uses the MCR data and they understand the importance of filling out these reports with complete and valid data. The MCRs play a central role in CMS' development of the input price indexes (or market baskets) used to update PPS payments.”

In the transmittal, CMS cited the same regulations that existed in the last century, an aspect that many Medicare providers overlook. If you are a Medicare certified provider, you are still required to complete the MCR with valid data and in conformity with the regulations regarding allowable and non-allowable costs. In addition, the MCR and the CMS 339 provider cost report questionnaire both require a signature stating that the report is true, correct, complete, and in accordance with instructions, laws and regulations. "Misrepresentation or falsification of any of the information contained in this cost report may be punishable by criminal, civil, and administrative action, fine and/or imprisonment under federal law."

Perhaps you are still wondering why you should be concerned about the validity of the national data collection. If that is the case, consider the following additional questions. Do you find the LUPA payment rate sufficient? Do you find your billable medical supplies payments adequate? Are you satisfied with the lack of a wage index specific to home health care? Do you believe that the average home health care profit margin in 2009 was 14%? Do you believe the PPS rates should be reduced? All of these items and more were derived from MCR data. Thus, our individual contributions to the MCR data set affect us all and we must remain vigilant in ensuring that the data is representative of our true business operations.

Because of the importance of this issue, the Home Care and Hospice Financial Managers Association (HHFMA) formed a MCR Task Force Committee to develop and implement an action plan that:

1. Educates the provider community on the value of filing accurate cost reports, as they are used as a statistical tool for regulators to base prospective rates.

2. Educates the provider community on how to better prepare the cost report.

3. Improves the quality of filed HHA Medicare cost reports.

4. Develops a new Medicare Cost Report which satisfies the needs of third party regulators, and can be used as a management tool for providers.

On behalf of HHFMA, we are asking you to get involved.


It’s simple. On an individual level, ensure that your cost reports are prepared accurately. This not only helps the industry, but also helps your specific agency by maintaining compliance with cost report requirements (and lack of compliance can be nasty). If you would like to get more involved, you may be interested in joining HHFMA. Visit

Ultimately, it is up to us to determine our future. Providers want to receive proper and fair payment for services provided without excessive oversight from CMS and other governmental agencies. A properly prepared Medicare Cost Report will assist in that objective. We are all swimming in the same waters and everyone needs to be on their best behavior so that the activities of OIG, RAC, ZPIC, FBI, MAC, CMS, HHS, and others aren’t drawn to incorrect behavior.

We did this to ourselves in the past, let’s not do it again.

About Thomas E. Boyd

Thomas E. Boyd was appointed as Vice President of Reimbursable Services at Simione Healthcare Consultants in 2014, following 20 years as principal of Boyd and Nicholas, Inc., THE COST REPORT PEOPLE®, which he co-founded with Thomas Nicholas in 1993. Tom has more than 30 years of Medicare reimbursement experience, including almost 12 years with one of the Medicare intermediaries for home health agencies, and has been a consultant to Medicare-certified home health agencies and hospices since 1989. 

Tom has spoken on home health financial and compliance issues before NAHC, NHPCO and more than 20 state and regional home health care associations. 

He holds a B.A. in management and accounting from Sonoma State University, and a MBA from St. Mary's College in California. He is a member of the HHFMA workgroup, the Association of Certified Fraud Examiners, and the U.S. Chess Federation.

Visit or contact Tom Boyd at [email protected].

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