Medicare Clarifies Allocation of Pension Cost for Wage Index Purposes

Janet Hodgdon, Healthcare Consulting Director
August 2015

Medicare has clarified its policy related to allowable pension cost for wage index purposes. This is important for providers with defined benefit plans as the timeline for requesting changes to reported wage data has changed this year and all requests are due in early September. This clarification may change the way some hospitals and health systems identify allocated pension cost.

Medicare had allowed, for wage index purposes, a hospital’s average actual cash contribution deposited to its defined benefit pension plan over a 3-year period. However, Medicare recently became aware of some confusion as to how to calculate this if a hospital participates in a plan that also covers other entities.

As a result of this confusion, Medicare has clarified in its inpatient proposed rule for FFY 2016, published in the Federal register on April 30, 2015, the following:

    “…if a hospital participates in a pension plan or retirement system that also covers other entities the hospital must report its respective 3-year average pension cost (or prefunding balance) reflecting only the hospital’s allocated share of total plan contributions, and not including any share of pension costs of other entities. For each hospital, this is accomplished by first determining the hospital’s allocated pension contributions…”

It goes on to say that providers should have adequate cost data available based on their financial and statistical records to calculate this allocation. They further state that a provider can’t claim costs of services associated with another entity, and provide the following scenario:

    “…It is not appropriate to compute the 3-year average (or prefunding balance) based on the total contributions made to the plan by all participating entities and then determine a hospital’s allocated portion of the 3-year average cost (or prefunding balance) because there are instances in which the 3-year average could be skewed because a hospital may be including pension cost from another entity in its 3-year average. Specifically, if the allocated percentage of total plan contributions for one or more of the participating entities changes during the 3-year average, the average will be skewed. The allocated percentage to each entity can change due to mergers, changes in plan coverage, or other factors…”

Hospitals should take care to ensure that the allocation of pension plan contributions between entities for each wage index reporting period is based on a consistent methodology and in accordance with this newly clarified position. As Medicare Audit Contractor (MAC) wage index desk reviews are conducted this fall, hospitals may well find the MACs are providing extra scrutiny in this area.

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