Compliance in Healthcare
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Navigating the Complexities of Medicare Cost Report Compliance

Navigating the Complexities of Medicare Cost Report Compliance

Written by the American Institute of Healthcare Compliance Education Department 

The American Institute of Healthcare Compliance (AIHC) is a non-profit training organization offering certification to become a Certified Cost Report Specialist (CCRSSM) and is a Licensing/Certification Partner with CMS.  The information below is not all inclusive, is not legal or consulting advice and is for educational purposes only.

Introduction

Filing Medicare Cost Reports (MCRs) is a highly complex, high-stakes process involving intricate, frequently changing CMS regulations, extensive data allocation, and strict documentation requirements.  Due to the complexity, errors are frequent, according to findings reported by the Office of Inspector General (OIG).

As a cornerstone of the Medicare program, the MCR serves as the annual mechanism for providers to report descriptive, financial, and statistical data to CMS. Pursuant to 42 CFR §413.20(b), Medicare-certified providers are mandated to submit this comprehensive financial record to determine the proper settlement of costs for services rendered to beneficiaries. Beyond ensuring that interim payments accurately reflect actual costs, the MCR is critical for establishing future reimbursement rates, including wage indices, disproportionate share hospital (DSH) adjustments, and graduate medical education (GME) payments. Failure to file, or inaccurate filing, carries significant financial risks, making an understanding of these reports crucial for regulatory compliance and financial stability.

While frequently viewed as a burdensome regulatory filing, the MCR constitutes one of the most comprehensive, standardized, and publicly available sources of institutional financial data in the United States. As Medicare moves toward greater fiscal accountability, the MCR allows providers to identify operational inefficiencies, manage financial performance, and ensure compliance in a complex reimbursement landscape.

Which Organizations File MCRs?

Medicare-certified institutional providers, typically Part A providers, must file annual Medicare cost reports (MCR) to determine reimbursement, usually within 5 months (or 150 days) after the end of their fiscal year. These reports, filed to a Medicare Administrative Contractor (MAC), are required for hospitals, skilled nursing facilities, home health agencies, hospices, FQHCs, RHCs, and ESRD providers.

Institutional Providers Required to File Medicare Cost Reports:

  • Hospitals: Including general, psychiatric, rehabilitation, long-term care, and children’s hospitals
  • Skilled Nursing Facilities (SNFs)
  • Home Health Agencies (HHAs)
  • Hospice Providers:
  • Federally Qualified Health Centers (FQHCs):
  • Rural Health Clinics (RHCs)
  • End-Stage Renal Disease (ESRD) Facilities
  • Organ Procurement Organizations (OPOs)
  • Community Mental Health Centers (CMHCs)

When are Cost Reports Due to be Filed?

Providers should use the Medicare Cost Report Electronic Filing (MCReF) system for submissions.  The cost report is due on or before the last day of the fifth month following the close of the provider's fiscal year and filed to the provider’s Medicare Administrative Contractor (MAC).

  • Example: For a fiscal year ending December 31, the report is due May 31.
  • Non-Month-End Closings: If the fiscal year does not end on the last day of the month, the report is due 150 days after the last day of the cost reporting period.

Failure to submit can result in the suspension of Medicare payments, increased audit risk, and loss of reimbursement.

Key 2026 Medicare Advantage (MA) Cost Reporting Requirements

CMS requires Medicare-certified acute care hospitals reimbursed under the IPPS (inpatient prospective payment system) to report median negotiated payment rates from Medicare Advantage (MA) plans by MS-DRG on their annual cost reports for cost reporting periods ending on or after January 1, 2026.

This mandate aims to collect market-based data to set future inpatient prospective payment system (IPPS) relative weights.  Data will be used to set future MS-DRG weights likely by Fiscal Year 2029.

This requirement adds significant complexity to an already error-ridden annual Cost Report process. Providers must ensure the accurate reporting of MA negotiated rates to avoid potential audit findings, as this data will influence future payment setting.

OIG Audits CMS Contractor Cost Report Compliance

Take a look at some recent Office of the Inspector General (OIG) audit reports to see how large the financial impacts of noncompliance can be for MACs, which falls back onto the provider.

A September 2025 audit by the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) found that Novitas Solutions, Inc. (Novitas), a Medicare Administrative Contractor (MAC), failed to properly review 100% of the cost reports examined in a specific sample.

  • The errors caused by inadequate reviews led to a total of $9.4 million in corrected final settlements, consisting of $5 million in overpayments and $4.4 million in underpayments to providers.

A similar, separate OIG audit released in September 2025 also found that National Government Services, Inc. (NGS) had a 100% error rate (64 out of 64) in a sample of reopened cost reports, resulting in $5.6 million in corrected settlements.

  • The 64 cost report reopening's resulted in corrected final settlements to providers totaling $5.6 million (which consisted of $3.1 million in overpayments and $2.5 million in underpayments).

Key Findings on Cost Report Errors:

  • High Error Incidence: A 2025 OIG report revealed that 12 Medicare Administrative Contractors (MACs) failed to meet oversight requirements, with a 70% failure rate in reviewing filings.
  • Specific Errors: Common errors included misclassification of physician salaries, improper nursing/allied health program calculations, and improper bad debt reporting.
  • Financial Impact: These errors resulted in massive financial inaccuracies, including one case involving over $250,000 in improper overpayments.
  • Audit Surge Expected: Due to these findings, an increase in audits and oversight by MACs is expected.

Common Causes of Errors:

  • Inconsistent Data Sources: Failure to reconcile internal financial systems with patient data (e.g., midnight census, revenue usage files).
  • Complex Allocations: Miscalculating the allocation of costs between Medicare and non-Medicare patients.
  • Failure to Update: Carrying over errors from previous years instead of updating with current data.

Implications of Errors:

  • Overpayment Recovery: MACs can claw back funds, requiring repayment with interest.
  • Underpayments: Errors can lead to lower-than-earned reimbursements.
  • Increased Audit Risk: High error rates trigger more intensive reviews and potential civil monetary penalties.

Notable Cases of Noncompliant Medicare Cost Reporting

  • Non-Compliance with Medicare Cost Reporting Requirements

In 2018 the Office of Inspector General (OIG) reported that the National Institute of Transplantation (NIT), an independent histocompatibility lab, did not fully comply with Medicare’s cost-reporting requirements.  In the cost report in question, NIT had correctly reported only 177 of 186 cost transactions.  In total, the OIG estimated that NIT had received approximately $45,940 in overpayments from Medicare. 

OIG concluded their audit report by recommending that NIT work with the Medicare Administrative Contractor to return potential overpayments and identify any additional similar overpayments that may be related to cost reports.

  • Referring Medicare Cost Reports and Reconciling Outlier Payments

Several years ago, two organizations were cited by OIG as not always correctly referring their Medicare cost reports to CMS.  For example, Cahaba Government Benefit Administrators, LLC (Cahaba GBA) had only referred 5 out of 13 cost reports with outlier payments that were qualified for reconciliation to CMS.  The financial impact of this noncompliance was estimated to be over $9,700,000 in total, of which just over $601,000 was due to Medicare. 

Another organization, CGS Administrators, a healthcare administrator operating as a Part A, Part B, and Home Health & Hospice (HH&H) MAC for Jurisdiction 15, had referred 15 of 18 qualified cost reports to CMS for reconciliation, but of those 15 referred reports, they had neglected to reconcile the outlier payments for 14 reports.  The financial impact of these affected reports was estimated at about $39,000,000 combined, with over $16,000,000 due to Medicare.

  • Non-Compliance with Medicare Organ Statistic Requirements

In 2012, LifeCenter Northwest, a federally designated independent organ procurement organization, was reported to have not fully complied with Medicare requirements for reporting organ statistics.  In the affected cost report, LifeCenter had reported incorrect organ statistics for 15 different organs. 

If was found that Medicare’s share of organ procurement costs was overstated by about $88,000.  OIG recommended that LifeCenter submit a revised cost report to correct the overstatement and work to ensure that future reports followed Medicare requirements.

Implement Strategies Now for Compliance

  1. Internal Routine Auditing: Implement proactive monitoring to verify that data—especially payroll and equipment costs—is accurate before submission.
  2. Incorporate Prior Audit Results: Avoid repeating adjustments from previous years, as recurring errors act as "red flags" for fiscal intermediaries.
  3. Rigorous Documentation: Maintain granular support for "allowable" costs, such as marketing (informational vs. promotional) and bad debt collection efforts.

Start by addressing critical high-risk components of the report.  CMS Auditors and the Office of Inspector General (OIG) focus on several key items within the cost report.  Your organization should also focus on these same areas when conducting internal compliance audits:

  • Graduate Medical Education (GME) & Indirect Medical Education (IME):
    • Inaccurate reporting of Graduate Medical Education (GME) payments, indirect medical education (IME) costs, and Medicare bad debts.  These involve complex resident counts and are frequent targets for in-depth audits.
  • Medicare Bad Debts:
    • Facilities must prove they used "reasonable" collection efforts for non-collectible deductibles and coinsurance. Improperly documented Medicare bad debts are a frequent source of audit findings.
  • Disproportionate Share Hospital (DSH) Payments:
    • Disproportionate Share Hospital (DSH) calculations are considered high-risk audit areas on the Medicare Cost Report. Due to the complexity of the regulations and the significant financial impact on reimbursements, these calculations frequently lead to errors, underpayments, or overpayments, according to the OIG.
  • Schedule S-10 (uncompensated care UCC):
    • Worksheet S-10 is a major audit trigger as it directly affects reimbursement rates.  Auditors target improper documentation of uncompensated care on Schedule S-10, which impacts UCC/DSH payments.  As of 2026, Medicare Administrative Contractors (MACs) are scrutinizing these filings, focusing heavily on documentation that supports charity care and bad debt, according to CMS.
    • The UCC and DSH go hand-in-hand as an add-on to the DRG reimbursement, but are calculated separately. 
  • Wage Index Data:
    • This data is used to set future prospective payment rates; inaccuracies can lead to billions in misapplied funds.
  • Operational Deficiencies:
    • Late submissions, inadequate training of staff, and poor oversight of third-party contractors can lead to compliance issues.
  • Vaccinations: 
    • Vaccinations are considered a high-risk error area on Medicare cost reports for Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs). Errors often arise from failing to reconcile interim payments with actual costs, lacking proper documentation (logs, invoices, time studies), and missing or incorrect coding (e.g., Condition Code A6) on claims.

Conclusion - Include Cost Report Audits in Your Compliance Program

Because Compliance Officers often overlook the high-risk area of cost reporting, it is important to implement internal routine auditing and monitoring to ensure data submitted is accurate and timely.

Your Compliance Department should be overseeing areas which can pose a high financial or legal risk to the organization.  Cost reporting falls into both categories, requiring internal auditing and monitoring of this function to ensure accuracy and timeliness is observed.

Inaccurate filing or late submissions can result in immediate payment suspension, civil monetary penalties, or exclusion from the Medicare program.  All this can be avoided through appropriate preparation and accurate training.

This article is written by the American Institute of Healthcare Compliance Audit Education Department

References

American Institute of Healthcare Compliance (AIHC®)

CMS

Code of Federal Regulations

Noridian Healthcare Solutions

Office of Inspector General

Copyright © 2026 American Institute of Healthcare Compliance All Rights Reserved

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General Compliance

Medicare Bad Debt: Don’t Leave Money on the Table With Your Cost Report

Written by: Thomas "Trent" Jackson, BS, CCRS

Medicare bad debts present Medicare Part A providers an opportunity to recover reimbursement dollars they otherwise would have missed. Provided that a proper log is kept, total uncollected Medicare co-insurance and/or deductibles can be claimed on the cost report for 65% reimbursement.

Under 42 Code of Federal Regulation (CFR) §413.89 and the Provider Reimbursement Manual (PRM) 15-1 § 308, a bad debt is allowable when it results from deductible and coinsurance amounts for covered services that are uncollectible from Medicare beneficiaries. The Middle-Class Tax Relief and Job Creation Act of 2012 established the current reimbursement rate at 65%.

What is allowable bad debt?

An allowable Medicare bad debt must meet four criteria to be claimed by a facility:

  1. The debt must be related to covered services and derived from deductible and coinsurance amounts.
  2. The provider must be able to establish that reasonable collection efforts were made.
  3. The debt was actually uncollectible when claimed as worthless.
  4. Sound business judgment established that there was no likelihood of recovery at any time in the future.

Undertaking and documenting reasonable collection efforts will satisfy the second requirement, and the completion of those efforts will satisfy the fourth. Then, as long as the amount in question is a deductible or coinsurance amount that was appropriately written off during the period for which the cost report is filed, it is allowed to be claimed.

Reasonable collection efforts required

What constitutes a reasonable collection effort? First and foremost, collection efforts for Medicare beneficiaries must be similar to efforts to collect comparable amounts from non-Medicare patients. Beyond that, the collection policy must include the issuance of a bill on or shortly after discharge of the beneficiary as well as genuine collection efforts such as subsequent billings, collection letters, and phone calls. The regulations also allow for the use of a collection agency in addition to or in lieu of those efforts.

As with many areas of healthcare, the saying “if it was not documented, it did not happen” certainly applies. Any facility looking to claim Medicare bad debt reimbursement will need to maintain supporting documentation for each line on its Medicare bad debt log.

There are a couple of alternate methods to satisfy the second and fourth criteria:

  • If a patient is deemed indigent by provider standards, their debt can be deemed uncollectable without going through reasonable collection efforts. However, the provider must have a codified internal policy to analyze assets, liabilities, expenses, and income of the patient. It must also seek to determine that no other source than the patient would be legally responsible for their debt. Documentation supporting these factors must be contained within the patient’s file.
  • For patients who have Medicare as a primary payer and Medicaid as a secondary payer (commonly referred to as a “crossover”), billing the state Medicaid program for the unpaid amount and documenting its response will satisfy the reasonable collection effort procedures. The account can be added to the Medicare bad debt log upon receipt of the Medicaid program’s remittance advice.

Medicare bad debt is money lost for many Part A Providers, so taking time to explore the cost report reimbursement option could be a valuable decision.

_________________________________________________________

Thomas “Trent” Jackson is a senior associate within Kraft Healthcare Consulting’s Advisory Department. Kraft Healthcare Consulting is an affiliate of KraftCPAs. Trent is also a Certified Cost Reporting Specialist (CCRS) and received his BS in Accounting from Dalton State College. 

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General Compliance

Uncompensated Care and DSH (Medicare disproportionate share hospitals)

Written by: Scott Mertie, CHFP, FHFMA, CMPE, CCRS, CHCO, CIFHA (KraftCPAs) and Joanne Byron, BS, LPN, CCA, CHA, CHCO, CHBS, CHCM, CIFHA, CMDP, COCAS, CORCM, OHCC, ICDCT-CM/PCSAs (CEO of AIHC)


This article is written for education purposes and should not be considered accounting, consulting or legal advice regarding hospital charity care bad debt and disproportionate share hospitals aka DSH. For more information on filing compliance cost reports, attend the Medicare Cost Report Camp in March 2022 presented by KraftCPAs and sponsored by the American Institute of Healthcare Compliance.

Medicare Uncompensated Care Payments & DSH

Hospitals' charity care and bad debt, together known as uncompensated care, is used to calculate disproportionate-share hospital payments. The Centers for Medicare and Medicaid Services (CMS) distributes a prospectively determined amount of uncompensated care payments to “Medicare disproportionate share hospitals” or better known as “DSH.” This is calculated based on the hospital’s relative share of uncompensated care nationally.

 

As required under law, this amount is equal to an estimate of 75 percent of what otherwise would have been paid as Medicare disproportionate share hospital payments, adjusted for the change in the rate of uninsured people. In this rule, CMS will distribute roughly $8.3 billion in uncompensated care payments for FY 2021, a decrease of approximately $60 million from FY 2020. This estimate of total uncompensated care payments reflects CMS Office of the Actuary’s projections that incorporate the estimated impact of the COVID-19 pandemic.

For FY 2021, CMS will use a single year of data on uncompensated care costs from Worksheet S-10 of hospitals’ FY 2017 cost reports to distribute these funds, in part because CMS has conducted audits of this data. Mindful of the unique challenges facing Indian Health Service and Tribal hospitals and Puerto Rico hospitals, CMS will continue to use data regarding low-income insured days (Medicaid days for FY 2013 and FY 2018 SSI days) to determine the amount of uncompensated care payments for Puerto Rico hospitals and Indian Health Service and Tribal hospitals for FY 2021, similar to the FY 2020 methodology.

Background on the IPPS and LTCH PPS

CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the Inpatient Prospective Payment System (IPPS). LTCHs are paid under the Long-Term Care Hospital Prospective Payment System (LTCH PPS). Under these two payment systems, CMS sets base payment rates prospectively for inpatient stays based on the patient’s diagnosis and severity of illness. Subject to certain adjustments, a hospital receives a single payment for the case based on the payment classification assigned at discharge. The classification systems are:

  • IPPS: Medicare Severity Diagnosis-Related Groups (MS-DRGs)
  • LTCH PPS: Medicare Severity Long-Term Care Diagnosis-Related Groups (MS‑LTC‑DRGs).

The law requires CMS to update payment rates for IPPS hospitals annually, and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. This is known as the hospital “market basket.” The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area. Payment rates to LTCHs are typically updated annually according to a separate market basket based on LTCH-specific goods and services.

In 2020, CMS issued a final rule for acute care and long-term care hospitals that ensures access to potentially life-saving diagnostics and therapies by unleashing innovation in medical technology and removing barriers to competition.

On August 2, 2021, the CMS issued the final rule for fiscal year (FY) 2022 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS). The FY 2022 IPPS and LTCH PPS final rule will be issued in multiple parts. 

The final rule updates Medicare payment policies and rates for operating and capital-related costs of acute care hospitals and for certain hospitals and hospital units excluded from the IPPS for FY 2022. The policies in this IPPS and LTCH PPS final rule build on key priorities to close health care equity gaps and support greater access to life-saving diagnostics and therapies during the COVID-19 public health emergency (PHE) and beyond.

The rule’s provisions seek to:

Sustain hospital readiness to respond to future public health threats;

Enhance the health care workforce in rural and underserved communities; and

Revise scoring, payment and public quality data reporting methods to lessen the adverse impacts of the pandemic and future unplanned events. 

The final rule updates Medicare fee-for-service payment rates and policies for inpatient hospitals and long-term care hospitals for FY 2022. In this final rule, CMS approved 13 technologies that applied for new technology add-on payments for FY 2021. This includes two technologies under the alternative pathway for new medical devices that are part of the FDA Breakthrough Devices Program and five technologies approved under the alternative pathway for products that received FDA Qualified Infectious Disease Product (QIDP) designation. 

Additionally, CMS conditionally approved one technology designated as a QIDP that otherwise meets the alternative pathway criteria but has not yet received FDA approval. After consideration of public comments, CMS also approved six technologies submitted under the traditional new technology add-on payment pathway criteria.

CMS is continuing the new technology add-on payments for 10 of the 18 technologies currently receiving the add-on payment (the remaining 8 technologies will no longer be within their newness period in FY 2021, which includes the Chimeric Antigen Receptor (CAR) T-cell therapies approved for the new technology add-on payment in FY 2019).

In total, 24 technologies are eligible to receive add-on payments for FY 2021. CMS estimates that FY 2021 Medicare spending on new technology add-on payments will be approximately $874 million, nearly a 120% increase over the FY 2020 spending.

CMS is adopting some changes regarding new technology add-on payments for certain antimicrobials for FY 2021:

  • Expansion of alternative new technology add-on payment pathway for antimicrobial products designated by FDA as QIDPs to include products approved under FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD pathway).

o The LPAD pathway encourages the development of safe and effective drug products that address unmet needs of patients with serious bacterial and fungal infections. As is the case for QIDPs, under this policy an antimicrobial drug approved under FDA’s LPAD pathway will be considered new and not substantially similar to an existing technology and will not need to demonstrate that it meets the substantial clinical improvement criterion (the technology will need to meet the cost criterion).

  • CMS is adopting a policy to provide for conditional approval for antimicrobial products that otherwise meet the NTAP alternative pathway criteria but do not receive FDA approval in time for consideration in the final rule. This is to allow eligible antimicrobial products to begin receiving the new technology add-on payment sooner.

o Under this policy, those antimicrobial products that otherwise meet the applicable addon payment criteria will begin receiving the new technology add-on payment, effective for discharges the quarter after the date of FDA marketing authorization instead of waiting until the next fiscal year, provided FDA marketing authorization is received by July 1 of the year for which the applicant applied for new technology add-on payments

Conclusion

CMS estimates total Medicare spending on acute care inpatient hospital services will increase by about $3.5 billion in FY 2021, or 2.7 percent. The Office of Inspector General (OIG) has added reviews of MAC cost report oversight for 2022. This project is described in the OIG January 2022 Work Plan Item. Filing accurate and compliant cost reports should be part of your institution’s risk mitigation program. 

Additional Resources

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