Provider-Based Physician Adjustment

Proper Allocation on Medicare Cost Reports

Denis Houle, Healthcare Consulting Senior Manager
January 2015

As part of the Medicare cost report that helps determine a facility’s Medicare reimbursement, Worksheet A-8-2 performs the calculation of the allowable provider-based physician costs a facility incurs. Physicians often fill many roles, however, and costs related to direct hands-on patient care and costs related to administrative activities are reimbursed by different Medicare trust funds. Unfortunately, administrative costs can often be underreported. 42 CFR 415.60 instructs that the physician compensation paid must be allocated between services to individual patients (professional services), services that benefit patients generally (provider services), and non-reimbursable services such as research. Only provider services are reimbursable through the cost report. This worksheet also performs the calculation of the reasonable compensation equivalent (RCE) limits required by 42 CFR 415.70. The methodology used in this worksheet applies the RCE limit to the total physician compensation attributable to provider services reimbursable on a reasonable cost basis. RCE limits are not applicable to the compensation of a medical director, chief of medical staff, or a physician employed in a capacity not requiring the services of a physician, i.e., controller. RCE limits also do not apply to critical access hospitals (CAH); however, the professional component must still be removed on this worksheet.

Over the years, many hospitals have flipped the switch to autopilot in regards to reporting provider-based physician cost as well as the allocation splits, but this lack of attention to detail can be costly. Special attention should be paid to the following areas:

  • Medical Directors – contracts should be reviewed to ensure all medical director stipends are identified and reported as an allowable provider component.
  • Employment-Related Taxes – FICA, Workers’ Compensation and Unemployment Compensation which are paid by a hospital on behalf of a provider-based physician are considered business expenses of the employer and not fringe benefits. Hence, they should be included in their entirety as part of the administrative component, and are reimbursable to the provider on a reasonable cost basis. These statutory benefits are not allocated to the physician’s professional component.
  • Time Records – in a perfect world, physicians would maintain ongoing time reports or periodic time studies to identify provider versus professional time. In many instances, all of the physician’s time and compensation is reported as a professional component because no time studies exist. At a minimum, hospitals may be able to use alternative sources such as calendars and meeting minutes to identify administrative time spent in meetings or working on various committees. In addition, the non-worked time such as vacation, holiday and sick time should be excluded from the calculation.

These are just a few of the considerations a hospital should be aware of when using Worksheet A-8-2 to calculate reimbursable physician costs, and hopefully our readers’ increased awareness of them will help avoid underreporting administrative costs. If you have any questions, please contact Denis Houle at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.