In this episode, we are joined by Jeff Wolf, Director of Reimbursement Services at BESLER, to discuss how hospital providers maintain optimal reimbursement during mergers.
Highlights of this episode include:
- What providers need to look for when revaluing assets in a merger.
- Why Medicare requires hospitals to recalculate expenditures from inter-company transactions.
- After a merge, what challenges await hospitals when analyzing their general ledgers.
- How hospital mergers change reporting structures and affect reimbursement
- And more…
BESLER has long been at the forefront of national reimbursement issues, securing millions of dollars in additional reimbursement for our clients. Visit our Reimbursement Services page to learn about our area of expertise.
Mike Passanante: Hi, this is Mike Passanante. And welcome back to the award-winning Hospital Finance Podcast.
When hospital providers go through mergers, there are numerous issues they have to look out for. But of course, maintaining optimal reimbursement is paramount among them.
Joining me on the podcast today to talk about that is our Director of Reimbursement Services, Jeff Wolf. Jeff, welcome back to the show.
Jeff Wolf: Thanks very much. I think you’ll find that this issue is fairly pertinent for folks because we’re having so many mergers in the industry this year.
Mike: No doubt, Jeff. So we have some very specific areas that we’re going to cover here in this podcast. So why don’t we start out with the first question, and that is that mergers usually involve a step-up and a step-down in asset basis, basically revaluing assets across both the providers. What should hospitals look out for there?
Jeff: Well, the issue really revolves around the fact that for financial reporting purposes, an organization that is acquiring that is acquiring or merging with another organization wants to be able to report the assets and the purchase at the price that the new organization acquired it at. So, the buildings and the equipment will be revalued either up or down based on the purchase price.
The problem with that is that the Medicare regulations require cost reporting at the original purchase or construction price, not the price of what this organization purchased it at.
So, what that represents in the cost report is an adjustment that has to be made. And because some of these assets, especially buildings, can have 20- or 30-year lifespans, these adjustments are going to go for 20 or 30 years. And these organizations have to track that because it’s a difference between their financial accounting versus their Medicare regulatory accounting.
Hospitals can deal with this in a couple of ways. They can keep separate schedules in their general ledger—or sorry, not their general ledger, but a separate asset ledger that will identify the difference between what they’re booking versus what they should be reporting for Medicare. And that would be an A8 adjustment.
Or the transaction could be at cost with the additional purchase price being considered a good will. And then, the goodwill is depreciated separately from the asset.
Mike: Got it! Jeff, second area we want to cover is inter-company transactions. Of course, they become increasingly difficult to report at cost when you’re going through a merger. What should hospitals look out for there?
Jeff: Well, with multiple hospitals working together, the organization wants to be efficient in the way they provide services. So, what happens a lot of times is one of the hospitals in the organization will provide a service—whether it’s housekeeping or reference lab or something like that—to one or more of the other hospitals in the organization.
Internally, accounting will book what they call inter-company transactions. But they’ll book it on an estimated basis. It’s usually something that they figured out that, historically, the cost is X, Y and Z, and they’ll transfer that cost down to the other hospitals.
But for Medicare, as we talked about a minute ago, cost is the actual thing that they’re looking for. And so these inter-company transactions are not at cost. Sometimes, it’s a chargeback or it’s a charged amount or something like that. But it’s not an actual cost of service provided. So Medicare will require the hospitals to recalculate those expenditures from inter-company transactions at a cost basis. And this is usually achieved through the work paper A-8-1 which is for all related party transactions.
Mike: Jeff, transitioning to separate general ledgers and their structures together into one consistent general ledger is a big undertaking. What should hospitals look for there?
Jeff: One of the main reasons in hospitals once they are acquired and merged together, they end up looking for consistency. They’re looking for opportunity. They’re doing it because they think that there’s either a niche market that they want to be in, or they want to have robust services. But the bottom line is there’s going to be some need to evaluate not only individual hospitals, but across the spectrum of services that an organization provides.
When you do that, you have upper management looking at multiple hospitals, multiple service lines. They need to have the ability to analyze them consistently. And so that’s where putting them together, consistent GL’s, and having standardized transactions and things like that come into play.
Where that makes it difficult for reimbursement is you’ll have a new way of booking transactions. You’ll have a new general ledger, so you’ve got a translation table from your old general ledger to your new to try and make sure you’re recording things consistently to the government. At the same time, you have new ways of booking transactions, so you may have to go looking through the general ledger or working with your accounting department to identify where expenses are now hitting because it’s a different place from where it was historically.
Again, it has a lot of advantages for organizations because when you’re on consistently GL’s, you can make sure that you’re handling issues consistently across the organization. You can identify and have the same way of measuring the functionality or the profitability of service lines and the like. But it also presents challenges for the reimbursement folks.
Mike: Jeff, mergers usually involve significant change to reporting structures. You can imagine all the issues that can cause and how that might affect reimbursement.
Jeff: Absolutely! Just as we talked about, with trying to get some standardization around the general ledger, you’re going to have standardization around the services they provide. And a lot of this happens at an administrative level. So you’ll have consolidated billing. You’ll have consolidated accounting. You’ll have services that you’re going to bring together.
Some of the things that are going to affect the reimbursement folks are financial statements. A lot of times, they’ll be consolidated instead of having financial statements for an individual facility. That creates, again, a little bit of problem in reporting and reconciling.
You’re going to have consolidation of functions like the accounting staff or interns and residents reporting. And so, consequently, you’re going to have to work with data that is co-mingled between these organizations. You’re going to have to use a lot more of that related party transactions where you’re trying to separate out the cost.
You’re going to have creation of home office cost reports because now you have a management structure above the level of the hospital managing the organization.
You’re going to have outsourcing because, as mergers happen, certain activities are looked at as cheaper for us to outsource than to have this in-house. So you’re going to have to look at some of that. You’re going to be dealing with, whether it’s purchase services or the like, that’s going to affect how you report it on the cost report.
You can have timing issues. Hospitals will have different fiscal year-ends versus the cost report year-end. We can resolve that by requesting to have a change to our fiscal year end and things like that. But in that first year or two of the transition, you’re going to have to deal with the different fiscal year-ends which means you’re going to have partial GL’s and the like.
Mike: And Jeff, when mergers and acquisitions go across state lines, of course, the complexity goes way up. Why don’t you tell us what can go wrong there and what to watch out for?
Jeff: Well, the biggest thing is probably the Medicaid programs. Within each state, the Medicaid program is the same for each hospital. But even though the Medicaid program is fundamentally a federal program, it’s still allowed for each state to have what they call state plan amendment. And that allows them to change some of the requirements and the regulations around the reimbursement and the reporting.
And so, consequently, as organizations merge, and they start having multiple providers that span multiple states, the reimbursement people are going to have to understand the nuances and the regulations that exists in each of those states because, again, you’re going to have to be reporting those by state. Just because the corporate organization is in one state, if it has hospitals in states two and three, the reporting for the cost reports and for the state reports has to be done in those states for those particular facilities. So consequently, they’ll be subject to that state’s requirements.
Mike: Jeff, there are certainly no lack of issues to consider when you’re thinking about reimbursement during a merger. Thanks for stopping by the podcast today and helping us to understand just a few of those.
Jeff: It’s always a pleasure. Thank you, Mike.