In this episode, we’re pleased to welcome back Andrew Kinnaman, Reimbursement Manager at BESLER, to give us a glimpse into our first webinar in BESLER’s Fundamentals of Reimbursement Webinar series, Related Organizations Principles and Medicare Cost Report Best Practices on Wednesday, January 24, at 1 PM ET.Learn how to listen to The Hospital Finance Podcast® on your mobile device.
Highlights of this episode include:
- What the term related organizations means as it relates to Medicare reimbursement
- What is meant by the terms common ownership and control
- Definition of common ownership as it relates to Medicare reimbursement principles
- Definition of control as it relates to Medicare reimbursement principles
- Duggestions for an individual provider to make a determination when filing or supporting an audit for related organization allowable costs
- General information about the home office cost statement
- Highlights of changes
Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome back Andrew Kinnaman, Reimbursement Manager at BESLER. In this episode, Andrew will give us a glimpse into our first webinar in BESLER’s Fundamentals of Reimbursement Webinar series, Related Organizations Principles and Medicare Cost Report Best Practices that we’re presenting live on Wednesday, January 24th at 1:00 PM Eastern Time. Thank you for joining us today, Andrew.
Andrew Kinnaman: Well, thank you, Kelly, for the invitation back to the podcast. Looking forward to it.
Kelly: Me too. Well, let’s go ahead and jump in then. Can you describe for the audience what the term related organizations means as it relates to Medicare reimbursement?
Andrew: Yes, I can. Medicare regulations for cost to related organization really dictates that services, facilities, and supplies, furnished to a provider by a related organization, either by common ownership or control, are allowable costs to the provider receiving those services, as long as the cost is actually the cost to the related organization. So, what are we talking about? This is when individuals and organizations associate with others for various reasons, by various means. And what we’re talking about here is that some deem it may be appropriate to assure a steady flow of supplies or services to reduce competition or to gain a tax advantage or to extend fluence or other reasons to actually associate with another organization. These goals may be accomplished by means of ownership or control, by financial assistance, by management assistance, and other ways. So, Medicare considers when you’re dealing with a related organization that you are essentially dealing with yourself, and Medicare considers the cost to you equal to the cost to the related organization. It is one of Medicare’s primary concerns that these costs must not exceed the price of comparable services facilities or supplies that could have been purchased elsewhere.
There are really two principles that Medicare follows regarding related organizations. First is they want you to avoid the payment of a profit factor to the provider through the related organization. Second is to avoid payment of artificially inflated costs, which may be generated from less than arm’s length bargaining. So, when we’re talking related organizations, they come in all different sizes and forms. But the most prevalent type of related organization we discuss in Medicare reimbursement is the home office or chain organization. This type of related organization requires the submission of a home office cost statement, which is CMS Form 28722, which this is the most current version.
Kelly: Sounds great. Thanks for that explanation. Andrew, what is meant by the terms common ownership or control?
Andrew: Great question, Kelly, because that comes to the root of what is considered a related organization. Let’s first start by discussing some of the regulatory definitions as defined in the Provider Reimbursement Manual 15-1 chapter 10. Related to the provider means that the provider to a significant extent is associated or affiliated with or has control of or is controlled by an organization furnishing the services, facilities, or supplies. Now they look at it in two ways, common ownership and control. Common ownership exists when an individual or individuals possess significant ownership or equity in the provider and the institution or organization serving the provider. Control, on the other hand, exists where an individual or an organization has a power, either directly or indirectly, significantly to influence or direct the actions or policies of an organization or that institution. So, in determining if a provider organization is related to a supplying organization, the tests of common ownership and control are to be applied separately, which is very important. It’s also note that if no elements of common ownership or control are found to be in both organizations, then the costs are allowable as though they’re reasonable costs.
Kelly: Okay. I think that makes sense. Andrew, what is the definition of common ownership as it relates to Medicare reimbursement principles?
Andrew: Yeah. As we just discussed in the definitions, this is one of the ways to establish related organization. And the fact is that this determination can really only be made on the basis of facts and circumstances of the individual case. But there are three examples provided in the provider reimbursement manual that kind of illustrate the general application of the common ownership rule. So, I’ll cover each three briefly here. First is direct ownership. And that means an entity or individual owns a significant ownership in both the provider organization and the supplying organization. Pretty clean cut and simple in the directive there. Second is the dispersion of ownership. And this is where an entity or an individual owns significant ownership in the provider organization and a concentrated ownership in a supplying organization. And this is best served by probably giving you an example that was in the regulatory reference and that is, let’s say Mr. X owns 70% of a provider organization, and he also owns 40% in a supplying organization. Now, the other 60% of the supplying organization is owned by other individuals not related to Mr. X. So, unless the provider can demonstrate that Mr. X, who has a concentrated ownership in the supplying organization, is not significant, then the organizations will be considered as related organizations.
The third and final common ownership is really attribution of ownership. And this is where an individual or entity owns cumulatively significant ownership in a provider organization and also owns a significant portion of the supplying organization. Again, an example providing is that you have Mr. and Mrs. L own 50% of the provider organization. Now, Mr. L owns 20% of that, Ms. L owns 30% while Mr. L actually owns 50% of the supply organization that is providing services to that provider organization. Although Mr. L only owns 20% of the provider, it is considered as cumulatively owned by Mr. L and Mrs. L’s relationship as husband and wife.
Kelly: Thank you, Andrew, for that explanation of common ownership. But you also mentioned control. What is the definition of control as it relates to Medicare reimbursement principles?
Andrew: Well, it’s a little bit different in that control has a different terminology to it. But similar to the common ownership, this can only be determined again based on facts and circumstances of individual case. But the way Medicare looks at control, they consider it any type of control, whether it’s legally enforceable or not and however– if it is exercisable. It really comes down to the reality of the control that is decisive. And that being with these next four examples that I will provide from the provider reimbursement manual will illustrate this general application of the control rule. First, we consider administrative control. This is where an individual or entity owns a significant role in the administration or operations of the provider and has significant control of a supplier organization to that same provider. This individual has the power to influence or direct both the provider and the supplier, thus the organizations are related by control. Second is contracts. I’m going to cover this as more of an example that was provided versus a definition. And this is a provider enters into a management agreement with an unrelated company, which is key, an unrelated company. The terms include replacement of several key provider employees with company employees. It provides a substantial loan to the provider for working capital. And the company owns assets that are leased to the provider that can only be canceled by the company, and the company would assume all the assets and liabilities of the provider.
The point of this example is while each one of these individual factors would not maybe be considered significant control, all the combined elements would indicate that this company now has the power to significantly influence or direct the actions and policies of the provider. So that’s contracts. Our third example is indirect control. And giving more of an example versus the definition, let’s say an individual owns 100% of a construction company and 35% of an operating company that is a provider. That’s the key that the operating company is a provider. Now the construction company builds a facility and leases it to the operating company, which is the provider. Another individual is a key employee of the construction company, but he also has 20% interest in the operating company. Well, because the ownership of the construction company and potential influence over the key employee of that operating company, these two organizations are now related by control. Fourth and final is what we call attribution of control. And this is, again, an individual, let’s say, owns 60% of the provider. But he works with his and is supplied by the family that owns 100% interest in an organization that supplies to that provider. It will always be assumed that the individual who owns 60% of the provider has the power to influence and direct the actions of the family relating to the operation of the supplying organization, thus we would find that they would have control.
Kelly: There seems to be a considerable amount of subjectivity to determining common ownership or control. What are your suggestions for an individual provider to make a determination when filing or supporting an audit for related organization allowable costs?
Andrew: Well, other than the fact that we’ve already talked about the individual and the case circumstances, each individual provider is really responsible for maintaining the documentation to support on the cost report. Now, this is true in determining whether the cost is allowable as included on the provider’s cost report, in other words, what you put in your books, or subject to related organization cost adjustments, which could determine that the costs in your books are different than what should be based on related organization principles. So, the provider at a minimum should be able to support on how the related party was established – and this is key – or not established, because those trigger two different things, whether you’re established or not established as a related organization. And these should be focusing on the influence, control, or significant ownership. Now, some MAC or state plans may want to review such items as organization operating agreements, maybe organization charts, board minutes, etc., in their determination of related organization status. It would also be very helpful to maintain a list of specific services that were provided by the related party.
Further, maintain a list of administrative services that you, the provider, furnishes for yourself versus services from a related party or home office entity. Focus on areas of duplication of administrative services and have clear and valid explanations of why those same services are being furnished and the cost is allowable. Always maintain or keep records documenting that the reported cost is recorded at the actual cost of the related organization. The related party should have evidence that they actually incurred the costs in providing services to the provider. And there also should be the consideration of prudent buyer. That was, was the cost of the service provided reasonable based on comparison with other vendors offering same or similar services? Finally, we want to be able to document how cost was allocated to that related organization. And this is more specific as we look at a home office cost statement, which does report the amount in the cost report match both those costs reported in your provider books and the amounts from the home office. What we’re trying to determine is, was this allocation of cost based on a direct allocation, a functional allocation, or pooled assignment? Now the difference is direct allocations would be specific costs that benefit specific providers. Let’s say you had legal invoices or legal fees that were associated with just one facility. That cost should be directly associated and not borne by the other facilities.
Functional costs are allocated on a basis of a statistic that reasonably relates to the cost. Examples of that would be things like those used on B1 stats of the Medicare acute facility cost report, where you may use something like salaries, square feet, FTEs as an allocation of that cost to those facilities. Pool costs are the residual costs that will be allocated on a reasonable statistical basis. Most cases, this will be based on total operating costs of all the home office components.
Kelly: Thank you for those suggestions. Can you provide some general information about the home office cost statement?
Andrew: Definitely. This is CMS comes in, defines a home office as an entity that provides centralized management and administrative services to the individual members of a chain organization and a chain organization as an entity that consists of a group of two or more Medicare certified providers or at least one provider and any other non-provider entity. So, what you’re really saying is that there’s more than one individual facility or there’s a group of facilities that are receiving these services that need to be determined what the actual cost is. The home office may also include regional offices or divisions. The home office cost statement is submitted on the form set 287. This constitutes the documentary support required for a provider to be reimbursed for home office costs claimed in the provider’s Medicare cost report. Now, there were some clarifications in fiscal year 2019 Inpatient PPS final rule that included requirements for filing Medicare cost reports. And one of those is included in this requirement was to submit a home office cost statement. And this was due to providers sometimes reporting related party costs outside of a formal home office cost statement. And from this change, what CMS noticed or what actually happened was the number of new home offices established with the CMS increased.
Kelly: So, staying on the topic of the home office cost statement, there were changes to the home office cost statement for the cost report periods beginning on or after October 1st, 2022. Can you provide us with the highlights of those changes?
Andrew: Yes, I can. The new form set is the CMS 28722. It’s effective for cost reports beginning on or after 10/122. The first facilities that will actually need to utilize this form set will be cost reports ending with a fiscal year ending 9/30/2023. Now all subsequent reporting periods will need to use this new form set. And looking at what the changes of the forms were, while overall methodology used to determine the home office costs did not change significantly, there were major changes to the schedules themselves. Many of the changes of the form sets were to bring the cost report structure in line with other CMS reporting forms. For instance, Schedule A of the previous 28705 form was a form set for general information, certification, and listing of chain components. Well, in the news form set, this is accomplished in Schedules S-1 and S-2. The rest of the home office new forms more closely aligned with the naming convention of the acute facility report, the 2552 form set. There is a Schedule A, which is trial balances, A6, which is reclassifications, A7 capital asset balances, A8, which is really the equivalent of your revenue and expense adjustments. And then G and G1, which is your balance sheet and income statement.
There are also still schedules for the determining of direct functional and pooled allocation costs in this form set. Other changes that I think are worth noting include that no cost statement line distinction for old capital on Schedule A, which used to be or formally Schedule B. There were changes to the CMS pre-printed line and descriptions for Schedule A8. This again was formally Schedule C of the old form set. Schedule A8-1, which was formally Schedule D, has been revised to more mirror the Medicare Cost Report Worksheet A8-1. And finally, the next largest is the Schedule E, which is pooled cost.
Now this was in the old form set Schedule G, is required to complete it only when pooled costs are flowing to non-healthcare components or regional and divisional components. Schedule E is not required if pool cost is only allocated to healthcare components. So, there have also been some submission updates that you’ll want to be aware of. The home office custom statement has EC specifications including ECR export and electronic signature pages like other CMS cost report forms. And the new forms can be used for CMS MCRef or Electronic for uploading following the same steps as other CMS reports.
So, you’ll find a lot of these changes are more naming and differences in the way the forms are set up versus how they actually function from the older set. So, Kelly, I’d like to thank you for inviting me to provide some more information relevant to the Medicare cost report related organizations and as part of this fundamental of reimbursement series, I hope everyone has the opportunity to register and attend one of our upcoming webinars, including this topic, which I’ll go more in depth to later this month.
Kelly: Yes. Thank you so much, Andrew, for joining us and for giving us this sneak peek into the upcoming webinar Related Organizations Principles & Medicare Cost Report Best Practices that you’re presenting live January 24th at 1 PM Eastern Time. And as a bonus, you can earn CPE. Thank you so much, Andrew.
Andrew: Thank you, Kelly.
Kelly: And thank you all for joining us for this episode of the Hospital Finance Podcast. Until next time…
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