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Cost Report 201 – Worksheet A6 Reclassifications [PODCAST]

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The Hospital Finance Podcast

In this episode, we are joined by Andrew Kinnaman, Reimbursement Manager at BESLER to talk with us about Worksheet A6 Reclassifications on the Medicare Cost Report.

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Highlights of this episode include:

  • Purpose of the Worksheet A6 Reclassifications
  • Medicare requirements for filing the cost report
  • Common expenses reclassifications
  • Downstream Effects

Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. As we continue exploring best practices for preparation of the Medicare Cost Report, I’m joined today by Andrew Kinnaman, a Reimbursement Manager on our reimbursement services team here at BESLER. And Andrew is going to be talking with us about Worksheet A6 reclassifications on the cost report. Andrew, welcome back to the show.

Andrew Kinnaman: Thank you, Mike. And thank you for the invitation to be on this podcast today.

Mike: Always look forward to your perspectives on these topics, Andrew. So why don’t we start out what is the purpose of the Worksheet A6 reclassifications in the Medicare Cost Report?

Andrew: Well, Mike, Reclassifications can be made for various reasons, but there are a couple of specific circumstances that were usually universally applied for the cost reporting purposes. And most basic of these reclassifications coming down to moving costs identified in your financial accounting for Medicare cost allocation and matching principles. In other words, that principle of Medicare is that we’re matching our expenses to where our revenues are, and so in maintaining that, some expenses may have to be moved in order to match the revenue. And first, what we look at is that an A6 reclassification provides for the reclassification of certain costs to affect the proper cost allocation under the cost finding. That’s where I’m talking the matching principle. But secondly, and the more common reclassification, is to differentiate between financial reporting and the Medicare cost reporting requirements which are two different requirements. And so we want to make sure that we’re matching the Medicare requirements for filing the cost report.

Mike: And Andrew, what would be some common examples of reclassifications that meet the requirements you just mentioned?

Andrew: I would say a good example of a reclassification to affect the proper cost allocation under the cost finding would be reclassifications that are usually universal. And that is like medical supply expense, medical implants, drugs charged to patient expense. Many healthcare facilities report these type of expenses directly to the utilizing department. But for cost reporting purposes, Medicare wants us to always identify this patient treatment related expense in designated Medicare line numbers, such as line 71, medical supplies charged to patients, or line 73, which is drug charge to patients. Therefore, it is necessary for us to identify the expense from each department and reclassify the expense to those cost report lines. In most facilities, this action would usually require a like revenue reclassification, again, to go with the principles of making to ensure that we have proper expense and revenue matching.

Now a second example is one of differentiating between financial reporting and Medicare cost reporting, and that is the reclassification of capital costs. So in most hospitals, financial accounting will report depreciation in a designated overhead department, or in some cases, they’ll directly assign depreciation to the individual departments. So in this case, since capital expense for Medicare is treated differently than financial reporting treatment, we identify the capital costs to be reclassified and we move them to specific Medicare cost report lines. This is usually line one for capital building expense and line two for capital equipment expense. So I’m going to just elaborate a little, Mike, and put an example here. Let’s say we have Hospital A and on their general ledger, their depreciation is in the administrative department as part of total expense of this department. Well, we can identify the depreciating expense by the general ledger accounts assigned to this administrative department. That administrative department is grouped to the administrative and general cost center on Worksheet A, which is typically, let’s say, line five. In this case, we will require a worksheet reclassification to move the depreciation expense from Worksheet A, administrative general line, to either capital related – line one for buildings or line two for equipment – depending on if the expense can be determined to be either building or equipment related. So this is just one example of where how we report these financially does require change on the Medicare cost report and where an A6 reclassification would most likely be necessary.

Mike: Do you often see common reclassification of expenses that are generally applied to Medicare for most healthcare facilities?

Andrew: Yes. I think if you were to look at many of the cost reports prepared that you would see some very common reclassifications. As you see from part of my response from the last question, we addressed a few of these common reclassifications, those being the medical supply, medical implant, drug expense. Most facilities will record those in individual departments and will have that reclassification so that they can do the proper cost to charge mapping. But there are other common reclassifications which we typically see, and that can include the depreciation expense, maybe interest expense, any capital related insurance and taxes that the facility may have posted to their GO. We also see some departmental expense reclassifications. This would be such examples as reclassifying dietary and cafeteria expense or a patient related service administrative expense and the reclassification of possible nonreversible expenses for the proper capture of overhead expenses. So, yeah, in most cost reports, you’ll see a lot of commonality in that how they’re being treated is so that the Medicare cost report is usually uniform and trying to capture those costs to charge and the matching principles.

Mike: Is identifying a required A6 reclassification as easy as identifying the expense in the general ledger and moving that expense for proper Medicare cost reporting?

Andrew: Not really. I place A6 reclassifications into two categories, simple reclassifications and complex reclassifications. Now what’s the difference? Well, the way I think about reclassification, simple reclassification is identifying a natural expense within the general ledger and then by department move that expense from all departments from which it was posted and moving that expense to one or two other Medicare lines. Again, a preferred example of this would be the medical supplies charge to patients. I keep going back to that one because it’s a common one and most facilities have it and most individuals understand that process that we’re doing. So in most general ledgers, the sub account of medical supply expense can be identified by department. The Worksheet A reclassification becomes very easy to revise the expense where posted and move to line 71, medical supplies charged to patients.

Now this is completely different than what I’m going to call a complex reclassification, which is required when additional data or steps are necessary to determine the amount of expense to be reclassified. Let’s take an example of this. I would say dietary and cafeteria expense reclassification would be a great example. To complete this reclassification, I would need most cases to have determined the impacted hospital departments. For example, let’s say we have a department of Nutrition Services. Next, I would need to identify the expenses, including salary other expenses, because if I have both of these expense categories, then my A6 reclassification needs to be split between these expense types. And there are different columns on the Worksheet A6 that have to be addressed both on the increase and decrease side.

So I would need to identify the methodology or data required to make this reclassification. So in my example, I might use a percentage allocation of salary and other expense based on the ratio of equivalent guest employee meals to total meals prepared by the nutrition service department, including patient meals there. So the reason I term this as complex is because there are other factors that just the general ledger could calculate the required classification. This is also much more complex because I most certainly need to look at the cause and effect of the expense movement on other areas of the cost report. And I would like to clearly identify all those changes in any supporting work papers so that I have complete documentation of here’s where the expense was, here’s where I moved it to. These are the other areas of the cost report that got impacted because I have made this move.

Mike: And Andrew, in other Besler presentations, we’ve addressed the issue of downstream effects on cost reporting. Can you explain what is meant by the downstream effect of Worksheet A6 reclassifications?

Andrew: Mike, yeah, again, a great question. And we have discussed this in other Besler presentations, and I actually will be covering part of this issue in the newest webinar Cost Report 201. What we’re really talking about here is the concept that we have appropriately accounted for the movement of expenses in other worksheets of the cost report. In other words, have we identified the expense? Have we traced these expenses through the cost report worksheets? And have we ended up accounting for these expenses properly? For example, let’s base on an operational issue that a cost report center needs to be split for proper cost of charge matching. In other words, I may have radiology and I need to split that radiology expense between radiology and MRI because of my charges are being split. In that case, this would possibly include salaries and other expenses that are grouped to Worksheet A in radiology that now I need to split that to radiology and MRI because I had no expenses of MRI because they were really posted inside the radiology department. So for the A6 reclassification, regardless of the method I choose to allocate the department expense to the different cost report lines – whether I use a revenue code, allocation or possibly a percent to total of revenue to total revenue of that department, whatever that methodology is – the assumption is that things like medical supplies, implants, drugs, equipment rental, or any other expense reclassification that could have previously moved expense out of this have to be removed from this reclassification because ultimately what I’m doing is I’m moving the expense or the net expense– after all these other expenses have already previously been reclassed, I’m moving the expense based on a percent to total to identify the cost that goes to each of these departments.

Now when doing that, and once I’ve completed that, there are other cost report worksheets that will most likely be impacted and should be taken into account. Impacted cost report worksheets that might include this is my wage index. Why? Because if I move salaries, that means I’ve moved hours. Now, this may not materially impact the wage index for the example I gave you. But let’s say we went from administrative in general to non-reimbursable, or we went from a patient related area to an excluded area. Those would have definite impacts on my wage index. And so I’m not only looking at the salaries, but also the hours for that. My possible adjustments on worksheet A8 may have impacts that I need to look at. B1 statistics certainly would, and that could come into the effect of square feet, pounds of laundry, possibly meals, FTEs, or hours that may be used as allocation statistics because we would want to move those statistics to where we move the expense so that the proper overheads are going to those departments. So you could even go to the Worksheet C, as I gave in the earlier example, that where we did an expense reclass for medical supplies, we want to make sure that the revenue is actually captured on Line 71. So there are any number of possible effects that should be accounted for when preparing the report. And the best way to have it is having that support work paper and being able to look through and flow through the cost report. What did this change or what did this A6 reclass cause and effect so that I can have it correctly stated when I filed the cost report.

So I think that really covers most of the questions that I have today, Mike, and I appreciate is there any follow ups that you have?

Mike: No, Andrew, thank you for that very detailed discussion. And as Andrew mentioned just a minute ago, he has delivered our Cost Report 201 webinar, which walks through these issues and many, many more. If you’d like to get a look at that or look at our Cost Report 101 webinars, head up to besler.com, click on the Insights tab, look for reimbursement and you will see recordings of them there. Andrew Kinnaman, thank you so much for joining us again today on the Hospital Finance Podcast.

Andrew: Thank you, Mike. I really appreciate it.

[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER, SMART ABOUT REVENUE TENACIOUS ABOUT RESULTS.

 

If you have a topic that you’d like us to discuss on the Hospital Finance podcast or if you’d like to be a guest, drop us a line at update@besler.com.

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