National Heritage Insurance Corporation Did Not Always Refer Medicare Cost Reports and Reconcile Outlier Payments

Of 18 Medicare-participating hospital cost reports with outlier payments that qualified for reconciliation, National Heritage Insurance Corporation (National Heritage) referred 12 cost reports to the Centers for Medicare & Medicaid Services (CMS) in accordance with Federal guidelines. However, National Heritage did not refer six cost reports that should have been referred to CMS for reconciliation. Of these, three cost reports had not been settled and should have been referred to CMS for reconciliation. We calculated that the financial impact to Medicare of the unreconciled outlier payments associated with two of these three cost reports was approximately $3 million. We also calculated that approximately $1 million was due from Medicare to a provider for the third cost report that should have been referred to CMS for reconciliation. The net financial impact of the outlier payments associated with these three unreferred cost reports was therefore approximately $2 million that was due to Medicare. The three other cost reports (of the six that National Heritage did not refer to CMS) had been settled and had exceeded the reopening limit. We calculated that the financial impact to Medicare of the unreconciled outlier payments associated with these cost reports totaled $3 million.

Medicare supplements basic prospective payments for inpatient hospital services by making outlier payments for unusually high-cost cases. Medicare contractors refer hospitals' cost reports to CMS for reconciliation of outlier payments. Effective April 2011, CMS gave Medicare contractors the responsibility to perform reconciliations upon receipt of authorization from the CMS Central Office.

Of the 12 cost reports that were referred to CMS with outlier payments that qualified for reconciliation, National Heritage had not reconciled the outlier payments associated with any of these cost reports by December 31, 2011. We calculated that the financial impact of the outlier payments associated with 11 of the 12 cost reports that were referred but not reconciled was approximately $20.8 million that was due to Medicare. We also calculated that approximately $168,000 was due from Medicare to a provider for 1 of the 12 cost reports that were referred but not reconciled. The net financial impact of the outlier payments associated with these 12 cost reports that were referred but not reconciled was therefore approximately $20.6 million that was due to Medicare.

We recommended that National Government Services, Inc. (NGS) (the Medicare contractor that assumed National Heritage's responsibilities), (1) review the 6 cost reports that qualified for referral and, if applicable, determine whether the cost reports may be reopened, reconcile the associated outlier payments, and refund the amounts due to Medicare and to the provider; (2) reconcile the outlier payments associated with the 12 cost reports that were referred, work with CMS to reconcile the associated outlier payments, finalize these cost reports, and ensure the return of funds to Medicare and to the provider; (3) ensure that control procedures are in place so that all cost reports with qualifying outlier payments are referred and reconciled; and (4) review all cost reports submitted since the end of our audit period and ensure that those whose outlier payments qualified for reconciliation are referred and reconciled in accordance with Federal guidelines. NGS concurred with our findings related to outlier status of the cost reports. However, NGS stated that they would determine the specific amounts associated with these cost reports after the outlier calculations and final settlement of the cost reports. Also, NGS described corrective actions that it had taken or planned to take in response to our recommendations.