Suddenly, HCFA wants agencies to make a profit

By Elizabeth E. Hogue, Esq.
Elizabeth Hogue, Chartered
Burtonsville, MD

[Editor’s note: This is one of a continuing series about legal and ethical issues related to the implementation of the prospective payment system (PPS).]

Despite the fears spawned by the implementation of PPS, the good news is that it appears the Health Care Financing Administration (HCFA) now wants agencies to make money. Although it may seem strange to many managers who functioned for so many years under cost-based reimbursement, the current consensus is that HCFA officials correctly perceive that the home care industry must be properly capitalized through modest profits that will make the industry, as a whole, more desirable to lenders.

Medicare-certified agencies are accustomed to operating under rules that clearly indicate that only allowable costs will be reimbursed by the Medicare program. All unallowable costs will not be reimbursed. Officials at HCFA have clearly indicated that these rules will remain in effect under PPS. HCFA will continue to identify unallowable costs on cost reports that agencies will continue to submit under PPS.

What about unallowable costs?

So then, what will become of the familiar rules governing allowable vs. unallowable costs when agencies are reimbursed under PPS? What will HCFA do when unallowable costs are identified on providers’ cost reports? Fortunately, HCFA officials also have made it clear that unallowable costs will not result in overpayments. In other words, the episodic payments made to providers under PPS are considered to be payment in full.

In recognition of this key difference under PPS, as opposed to cost-based reimbursement, providers may conclude that they now have a "ticket to ride." That is, some agencies anticipate operating in an environment in which they can ignore the rules governing allowable costs.

For example, it appears that some consultants are advising agencies that they may openly market their services. Under cost-based reimbursement and the interim payment system (IPS), only so-called community awareness activities were allowable. In view of the change in reimbursement to a prospective rate, industry advisors may conclude that it is acceptable to ignore the old rules related to allowable costs.

This advice may prove to be a double-edged sword for providers. On the one hand, it may assist the industry in stabilizing and further developing in some significant directions to ignore the rules governing allowable costs. On the other hand, HCFA has indicated that it will review cost reports to determine whether costs reported are allowable. Although agencies will not be liable for overpayments as a result of unallowable costs as they have been in the past, unallowable expenses on cost reports will impact future rates under PPS.

Unallowable costs also are likely to influence whether HCFA perceives that agencies are making money and, if so, how much. If officials at HCFA perceive that agencies are making too much money, rates under PPS may be reduced.

Given that HCFA now seems to accept that home care agencies need to turn a profit to survive, the $64,000 question is: "How much profit will HCFA find acceptable?" Clearly, agencies cannot expect huge windfalls; PPS rates are likely to be adjusted to prevent them. But after eliminating unallowable costs from cost reports, it appears that HCFA will allow for a modest profit. So while it may be tempting to ignore the rules governing allowable costs under PPS, agencies should be mindful of the fact that the rules are still operative and will influence PPS rates in the future.

To the extent that unallowable costs appear on agencies’ cost reports, it may hamper HCFA’s efforts to achieve this objective. The wisest course of action may be to treat this issue as it was treated under cost-based reimbursement and IPS, at least until the PPS system, including the establishment of reasonable rates, stabilizes.

[A complete list of publications is available from Elizabeth E. Hogue’s office. Call (301) 421-0143 or send a fax request to (301) 421-1699.]