Contributed July 19, 2001 by Roger Eitner reitner@tampabay.rr.com Intermediary Manual Part IV Health Care Financing Administration Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 1 HOSPITAL AUDIT PROGRAM 12-85 GENERAL -1- PROVIDER NO:__________________ REVIEWED BY:____________________ PERIOD ENDED:__________________ DATE REVIEWED:___________________ Audit Section Audit Procedure Reference Review Form HCFA-339l.0l Preliminary Discussions with Provider Personnell.02 - l.03 Preaudit Workl.04 - l.06 Review of Auditor's Workpapersl.07 - l.l5 Board of Director's Minutesl.l6 Review of Internal Controlsl.l7 - l.l8 Gifts and Grantsl.l9 Statisticsl.20 Related Organizationsl.2l Adjustments for Hospital Specific Portion l.22 Vertical Integrationl.23 Corporation Reorganizationl.24 SECTION 1: GENERAL Regulation Reference: 42 CFR 405.40l, 405.406 and 405.453 OBJECTIVE: To determine, by review of available data, the extent of audit work needed. To determine the extent of reliance which can be placed on other auditor's work in the performance of the Medicare audit. To appraise the adequacy of source documents and provider's procedures used in completing the cost report. To determine that costs are treated correctly and consistency in reporting costs is maintained as required by the Tax Equity and Fiscal Responsibility Act (TEFRA) and under the Prospective Payment System (PPS). OTHER REFERENCES: The auditor must have a working knowledge of the Medicare regulations, Provider Reimbursement Manual, HCFA Pub. 15-I, the Intermediary Manual, HCFA Pub. 13-4, and the Hospital Cost Report, HCFA Forms 2552-83 and 2552-84. StepProcedure DescriptionAuditor's Initial and DateWP Ref 1.01Review Form HCFA 339 (Provider Cost Report Reimbursement Questionnaire). This questionnaire is to be used as a survey of the provider's organization and operations. The questionnaire will give the auditor background on the changes in the hospital's operation and an understanding of the additional data needed to perform an effective audit. 1.02During the first day at the hospital meet with the administrator or other appropriate personnel to discuss the nature of the audit. 1.03During preliminary discussions explain that the following guidelines will govern the conduct of the audit. Records must be made available within a reasonable time after being requested. Provider personnel who could provide information or documentation applicable to the review must be made available. Problem areas encountered during the course of the review will be discussed with appropriate personnel for resolution. An exit conference will be provided at the conclusion of the audit. 1.04During preliminary discussions with hospital officials request that the documents listed below are made available. If documents, other than those listed below, are needed they should also be requested. All documentation requested with the Form HCFA 339 (See HCFA-Pub l5-II, §ll00) Audited financial statements; Copies of all loan agreements; Copies of insurance policies and coverages; Schedule of depreciable assets; Copy of all lease agreements; Copies of deferred compensation plans; Copies of pension plans; Copies of agreements with organization of nonpaid workers if applicable; Costs attributable to services rendered by related organizations; All management or consultant contracts; Purchased service agreements, e.g., therapy services; and All provider based physician agreements including workpapers developing the Part A/B split. All other documentation deemed necessary, to include: Board of Director's minutes; Adjusted trial balance for prior 2 years; General ledger; Voucher register and invoices; Journal entries; Payroll registers (IRS 941 forms and State and Federal Unemployment forms); Hospital floor plan and supporting schedules indicating square feet by department; Copies of capital expenditure authorizations; Workpapers which support cost as shown on the cost report; Documentation to support statistics as shown on the cost report; Midnight census sheets and monthly patient day summaries; Listing of aged, pediatric and maternity days; Charge manual; Chart of accounts; Bad debt listing and supporting ledger cards (collection policy); Copy of any physician contracts; PSRO cost - copy of budget and cost report; Admissions and discharges by class of patients; Analysis of expense accounts (if prepared); Malpractice loss experience; Copy of interns-residents approvals; Copy of technical school approvals; Medicare logs; Schedule of gifts, grants and endowments received for year under audit; Workpapers to support review on equity capital (for proprietary providers); and IRS tax returns filed. 1.05Review all of the above documents and discuss with appropriate provider personnel as deemed necessary. Where a provider denies access to records deemed necessary by the auditor, the HCFA regional office must be advised immediately. 1.06Upon completion of the review of the documents requested in 1.04 above, note specific areas which might have an impact on Medicare reimbursement and, if necessary, expand the appropriate section of the audit program to include those areas which warrant review. Any potential problem areas should also be noted by preparing a memo for the record. If the auditor deems the problem significant, then the HCFA regional office should be contacted immediately. REVIEW OF INTERNAL OR INDEPENDENT AUDITORS' WORKPAPERS 1.07If the provider has an internal audit function or has an annual financial audit, the workpapers should be made available for review. A review should be made of the workpapers with a view towards establishing reliance, thus, possibly reducing the extent of testing of certain facets of the provider's records and operations. This would be of value to the auditor since audit effort could be concentrated in potential problem areas. Review the scope of audit and assess the usefulness of the work performed by the internal or independent auditor. If the audit is considered adequate, the scope of the current audit may be modified. However, in these instances, the workpapers should be properly annotated with rationale for changing the audit scope. Data obtained from the internal or independent auditors in the following areas should be used in the performance of the audit and included in the permanent file if appropriate: Information on the provider's accounting and statistics gathering systems; Internal controls; Organizational structure; and Operations 1.08Emphasis should be placed on the annual audit of the hospital's financial statements by performing the following steps: Determine if the CPA qualified any of the prior year audit reports. If the reports were qualified, review the items noted and the reason for the qualification to determine if there are any Medicare cost reimbursement implications. Determine if the CPA issued management letters in prior years. If so, ascertain if the management letters noted deficiencies in the accounting system or made recommendations to improve the efficiency of the operations. Note if the deficiencies were corrected and if the recommendations were implemented. 1.09Review audit workpapers related to asset, liability and fund balance accounts to determine if an adequate review of the accounts was made. Copies of workpapers deemed pertinent to Medicare reimbursement should be made and included in the permanent file. Note if there is evidence of new indebtedness and its effect on interest expense. Note if there are any activities not related to patient care. 1.10Review audit workpapers related to cash disbursements and the recording of corresponding expenses to assess the adequacy of internal control. Update the permanent file where necessary. 1.11Obtain the hospital's fixed asset ledger and any workpapers used to record fixed asset values and depreciation. These records should be reviewed to determine the following: The provider's policy on capitalization of fixed assets. The method of computing depreciation expense for financial statement purposes. The provider's policy on the effective date to begin depreciation of an asset such as half year depreciation in the year of acquisition, actual time depreciation and time lag alternatives. Vouching of major asset additions. Classification of assets between the various categories such as land improvements, building, building improvements, fixed equipment and major movable equipment. The provider's policy for assigning estimated life to depreciable assets. If "certificate of need" approvals for capital expenditures were issued. 1.12Review the provider's system for relieving inventory accounts and charging the various cost centers for chargeable and nonchargeable central supply and pharmacy items to determine whether: The cost centers in which an annual inventory is taken are recorded on the books of the provider. The provider uses costed requisitions in charging cost centers for supplies used. A review was made on the standard journal entries that summarize requisitions from the various supply and services areas. The allocations of costs of items charged to the departments include a portion of salary and overhead expenses of the department. 1.13Obtain a copy of the provider's federal income tax return and perform the following audit steps: Review the return for possible income and expense items which could have an effect on Medicare reimbursement. Compare depreciation claimed on the tax return to the amount reported on the cost report. Where the hospital is a non-proprietary provider, obtain a copy of the Form 990, Federal Information Return, and a copy of the IRS Exemption Certificate issued to non-profit organizations. Review Form 990 to determine if it contains any information which would have an effect on the audit. 1.14Discuss the area of indebtedness with appropriate provider personnel to get an understanding of the magnitude of indebtedness, source of borrowing, primary purpose and whether loan indebtedness is short or long term. The auditor should request the following documents for review, if applicable: Copies of loan agreements, notes and mortgage contracts. Loan amortization schedules. Bond indenture if funds were borrowed through the issuance of bonds. Copies of loans made from funded depreciation accounts. Copies of loans made from related organizations. 1.15Discuss bad debt expense with the provider so that a determination can be made as to the significance of these costs. During these discussions the auditor should request the following information: Policies and procedures related to the determination and collection of bad debts. Method used to determine bad debt expense such as direct charge-off or reserve method. Method used to determine if a patient is either indigent or medically indigent. 1.16Review board of director's minutes noting approvals for capital expenditures, leasing arrangements, management contracts and any other issues that would be pertinent to Medicare reimbursement. 1.17Review internal controls concurrently with the review and testing of the areas to which they relate to see if the controls are functioning according to prescribed procedures. Special emphasis should be placed on the following: Controls on the authorization and recording of transactions. System for originating and recording of charges for services provided to patients. Procedures for patient billing and collection to include the determination of the portion of the total charges which will be billed to the patient for collection. Method used to identify, segregate and accumulate charges from patient care centers as applicable to Medicare and other classifications of patients. 1.18Examine internal auditor's workpapers or the CPA's workpapers to determine the method used to report and accumulate payroll. The review should also be made to determine if the following tests were performed by the independent auditors during their review of the provider's financial statements: Examined cancelled payroll checks comparing them to payroll register. Tested time cards for approval of hours worked. Tested hours recorded from time cards to payroll distribution register. Tested personnel files to payroll register. Footed and cross-footed payroll journals. Traced amounts from journals to the general ledger. Reconciled total payroll to quarterly payroll tax reports. Verified computation of the payroll. Reviewed holiday, vacation and sick pay accruals. 1.19Discuss with appropriate provider personnel the area of grants, gifts and income from endowments. Through discussion with provider personnel the auditor should determine: The extent of grants, gifts and endowments received during the year. The type of records maintained for recording receipt of these type funds. Records maintained to designate if the funds are restricted or unrestricted. Policy and procedures used to adjust the proper cost center for restricted gifts, grants and endowments. If Public Health Service grants were received. 1.20Review the provider's written instructions, procedures and flow charts for capturing statistics for cost allocation and for reporting patient statistics. If written procedures are not available, discuss the procedures used for developing and reporting statistics with proper provider personnel and prepare a written description. 1.21Through discussion with provider personnel determine if the hospital is transacting business with related organizations. If so, determine if the related organizations have been disclosed in the cost report and request the following information: Written agreements that exist between the organizations. Details relative to services or supplies furnished the provider. Method used to record costs from the related organization. 1.22Since one of the objectives in performing the audit of the base year cost report was to determine target amounts for payment to hospitals, the auditor must take into consideration the guidelines for base period audits (HCFA Pub. l3-4, Chapter 3, §4200ff). Chapter 3, 4200ff provides instructions for the treatment of cost pass-throughs in the base year audit. The auditor must have a working knowledge of Chapter 3 so that he can determine if the provider treated pass-through cost consistently between the base year and subsequent cost report years. 1.23Determine if the provider restructured for a broader range of health care services such as psychological, rehabilitation and end stage renal disease. If so, determine if the proper allocation of costs to these areas are excluded from target rate computations. To make these determinations perform the following audit steps: Obtain organization chart to determine any significant changes in the management structure of the facility Review board meeting minutes to determine if the provider intends to involve itself in additional health care services. Obtain management contracts and review for new services. Tour the facility and observe if any operational changes occurred which were not noted in prior year. If vertical integration exists, perform an analysis and/or test those areas to: Verify the accuracy of statistical data reported on schedule B-l. Determine proper handling of start up costs. Determine if charges are consistently applied to all patients. 1.24Determine if any corporate reorganization has taken place or is contemplated by performing the following audit steps: Review the provider's organization chart, chart of accounts, tax returns, internal audit questionnaires and CPA's management letters noting any changes associated with a reorganization. Review board minutes noting the form and date of the reorganization. Also identify any services (legal, consulting, management, etc.) that may be contracted for during the reorganization. Review management contracts noting changes associated with a reorganization. Review job description and functional statements of selected departments for changes attributable to a reorganization. Analyze, in depth, identified trial balance accounts for reorganization costs. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 2HOSPITAL AUDIT PROGRAM12-85 Revenue Comparison and Tests -2- PROVIDER NO:__________________ REVIEWED BY:____________________ PERIOD ENDED:__________________ DATE REVIEWED:___________________ Audit Section Audit Procedure Reference Patient Revenue2.01 Data Collection2.02 Provider's Charge Structure2.03 Billing and Recording Procedures2.04-2.05 Revenue Accumulation System2.06-2.07 Lower of Cost or Charges2.08 Conclusion2.09 SECTION 2 REVENUE COMPARISONS AND TESTS Regulation Reference: 42 CFR 405.406, 405.452 and 405.453 OBJECTIVE: To evaluate the data accumulation system and the charging practice of the provider to ascertain that it results in an equitable basis for apportioning costs. To ensure that the provider's charge structure is uniformly applied to all patients. (All patients are billed the same rate for the same services and supplies.) To ascertain that all revenues are properly recorded and classified as to revenue cost centers. To determine the matching of revenue with cost is consistent. To ensure that there are no understatements or overstatements of revenues. OTHER References: HCFA-Pub. 15-I, §2102.3, 2202, 2203, 2205, 2302.6, 2604.3 Cost Report Forms: HCFA 2552-83, Worksheet C HCFA 2552-83, Worksheet D HCFA 2552-83, Worksheet D-l Part l HCFA 2552-83, Worksheet G-2 HCFA 2552-83, Worksheet G-3 StepProcedure DescriptionGENERALWP REF GENERAL Before testing patient revenues (charges), the auditor should identify all specific categories of charges and costs that are used on the cost report, and should relate these to and become familiar with the provider's system of categorizing, recording and accumulating patient revenues (charges) PATIENT REVENUES 2.01Compare the patient revenues per financial statement with the patient revenues included in the cost report on Worksheet G-2, Part I, Column 3, Line 2l and compare charge data on Worksheet D, Columns 3 and 4 and lines as applicable with the intermediaries Provider's Statistical and Reimbursement Report (PS&RR). A.Reconcile the differences and obtain explanations where necessary. B.For those variances noted, perform audit tests and procedures as considered necessary in the circumstances. REVENUE DATA ACCUMULATION SYSTEM 2.02A.Review the provider's census-keeping statistics to ensure that the following are accurately reflected: 1.The provider's daily patient log and/or census record accurately record(s) the inpatient days accumulated for various categories of general inpatient days for all patients: a.special care days; b.aged days; and c.pediatric days. 2.Newborn days were excluded from total inpatient days. 3.Days of care furnished patients admitted and discharged on the same day (including maternity patients incurring false labor) were included in the total inpatient days reported 4.Maternity days have been recorded and used in the computation of nursing differential for each maternity patient admitted as an inpatient but occupying a bed in the labor room at the census hour. 5.No duplication has been made in recording labor room days and maternity days. B.Test and verify the accuracy of the following statistical data used in settlement: 1.patient days; 2.charges; 3.deductibles; 4.coinsurance; and 5.interim payments. C.Ascertain that the provider maintains a separate record for Medicare days and charges. PROVIDER'S CHARGE STRUCTURE 2.03A.Obtain copies of the provider's schedules of charges used in the period under audit and complete the steps below. Where these are not available, inquire who has authority to establish patient charges and how these are determined. 1.Determine that charges to Medicare and all other patients are proper, consistent and comparable. 2.Determine if the provider has any special charging arrangements (other than the regular schedule) with special groups, such as group practice prepayment plans or health maintenance organizations, which would affect the ratio of charges to charges applied to cost (RCCAC) application. If so, determine if the revenues applicable to these arrangements should have been subject to "grossing up" for the purposes of the cost statement so that the amounts are comparable to the revenues generated by the regular schedules of charges. B.Review provider's charging practices and procedures for updating charges. Determine that: 1.Same charges are made to all patients, for like services. 2.Rate increases become effective to all patients on same date. Note: Certain third party providers have to obtain approval for changes which involve 30 days or more notice, thus timing of increases may not be uniform. 3.Proper accounting was made for all in-patient/out-patient revenues. 4.Proper matching of revenues and costs was made, especially in the areas of pharmacy and medical supplies. C.Determine provider's policy with regard to charges for telephone, television, personal comfort items, private duty nurses and any luxury items. 1.If a separate charge is made, review daily revenue to determine that it has been properly excluded from patient care revenue. 2.If charges are separately recorded, trace the charges to cost or revenue offset made on HCFA-2552-83, Worksheet A-8. D.Determine the provider's policy with regard to charges for noncovered items. Test check to assure that beneficiaries are properly charged for noncovered services and supplies. BILLING AND RECORDING PROCEDURES 2.04A.Select two day's patient billing forms for review and determine that uniform charging practices are maintained, especially in those ancillary departments that reflect either exceptionally high Medicare utilization, or where departmental costs are significantly higher than the charges. B.Select 2 day's charge slips for review and trace the data on the charge slips to the appropriate source documents. The source documents may include patient registers, log books, ancillary daily reports of service, appointment books, patients' medical records, etc. 1.Trace the data from the appropriate source documents to the charge slips and patients' accounts to determine that each patient is being charged for all services rendered 2.Trace individual patients' charges for room and board, drugs, supplies and other special services to charge slips: a.To determine that the charges (revenues) have been properly classified as to type of patient, e.g., Medicare, Medicaid, Blue Cross, private pay. b.To determine that the charges have been properly identified to the revenue producing departments initiating the charges. C.Select 2 day's remittance advices to test the provider's billing and recording procedures by performing the following audit steps. 1.Verify that charges billed to all patients (as shown on remittance advice) agree with the patient ledger card and the PS&RR, or the Intermediary Paid Claims Report, whichever was used. 2.Ensure that patients have been charged the proper number of daily room charges. Count the day of admission or day of discharge, but not both. 3.Ensure that patients have been charged only for those ancillary services received as shown by medical records. 4.Ensure that all types of patients are charged the same charge for similar services. 5.Determine provider's policy for handling charges for no adjustment in-patient and out-patient claims. D.Determine how the provider is accounting for replaced blood pints. Both program revenue and total revenue should be gross or net of any blood credits. E.If the provider uses special surcharges (such as for equipment) for special care inpatient services, ensure that such surcharges are properly classified as special care rather than an ancillary cost center. F.For ancillary departments operating under a commission arrangement with the department heads, compare the departmental revenues recorded on the books with the revenues used to compute the amounts paid under the contractual arrangements. 2.05To determine that the provider is uniformly applying charges, perform the following tests: A.Obtain copy of charge schedules of services. Where these are not available, ascertain who has authority to establish patient charges and how these are determined. B.Select a sample (at least 12 each) of Medicare and non-Medicare patients and obtain the medical records and patient account records. C.Verify that the patient charges shown on the account agree with the charge schedule (the medical record may be required to determine actual test or procedure performed). Obtain explanations for any exceptions and determine if explanations are reasonable. Where possible, documentation by medical personnel should be reviewed indicating unusual circumstances. D.If provider charges do not appear uniform or there is a weighting factor for specific categories of patients, propose adjustments accordingly. REVENUE ACCUMULATION SYSTEM A.Obtain a summary of revenues (both inpatient and outpatient) by month and by department and between Medicare and non-Medicare. Compare totals between months and determine reasons for unusual variances. B.Test the accuracy and reliability of the provider's revenue accumulation procedures by selecting one day's revenue accumulation and performing the following audit procedures: 1.MEDICARE AND NON-MEDICARE REVENUE a.Test clerical accuracy of daily charge summary. b.Trace a representative sample of charge slips to the revenue summary for the day selected as to the department charged and inpatient and outpatient classifications. c.In test b above, tie total revenue to charge slips for at least two major revenue producing departments. d.Select a sample of 25 Medicare and 25 non-Medicare patients. Each group must consist of 15 inpatients and 10 outpatients. Obtain the corresponding medical records and patient accounts and compare the charges to the uniform rate schedule in effect on the date selected. Note: Describe on workpaper how these representative samples in audit steps 1b and 1d were selected and basis of evaluation. e.Verify that patient charges as shown on the accounts agree with the charge schedule. Obtain explanations for any exceptions and determine if explanations are reasonable. If available, review documentation by medical personnel indicating unusual circumstances f.Trace daily charge summary into monthly accumulation of revenue and trace accumulation by department into general ledger. g.Trace total charges from the monthly accumulation into accounts receivable control account in the general ledger. 2.MEDICARE REVENUE For the Medicare patients included in tests B-1(b) and B-1(d) above: a.Trace the charge slips to the patient ledger cards, noting the following: (1)Patient's name (2)Patient's Health Insurance Benefit number; (3)Amount and identification of charges and the department being charged; (4)Date of admission; and (5)Date of discharge. b.Compare the information in Medicare patients' accounts to the Medicare inpatients or outpatients billing forms.; (l)Refer to the Report of Eligibility HCFA-1453 and determine that the proper deductible and coinsurance amounts were charged to the patients and not to Medicare. Also, ascertain that noncovered charges were excluded from Medicare revenues. (2)Test the accumulations for the proper segregation of Medicare and non-Medicare revenues (by departments) used in the cost report. (3)Test the providers' accumulations of deductibles and coinsurance (for both inpatients and outpatients), check the clerical accuracy and reconcile to the amounts reported on the settlement forms. c.Compare total Medicare charges per cost report to accumulated plan data. (Remittance Advice or PS&R Report) 2.07Test the reasonableness of accommodation charges (revenue) in various departments. A.Routine Service (room and board) - relate percent of occupancy to maximum potential annual income and compare to recorded routine revenues. B.Special Care Units - compute special care patient days times special care per diem charge and compare to actual special care revenue. C.Nursery - compute per diem charge times nursery days and compare to actual nursery revenue. D.Delivery and Labor Rooms - compute charge data (per delivery or per hour) times related statistics (number of deliveries or hours) and compare to the delivery and labor rooms revenue and the appropriate costs of delivery and labor rooms. E.Other ancillary service tests - Where departmental charges are somewhat consistent to each test (e.g., EKG, EEG), relate actual to computed revenues. Computed revenues can be determined by taking the number of occasions of service per test times the charge per test. F.Sub-Provider Unit - compute total patient days times the average rate and compare the result to the actual revenue reported. G.Determine explanation for significant variances and propose adjustments as required (relate these tests to the tests of patient day statistics since errors in statistics can affect this area). NOTE:Watch for reduced charges in one cost center being offset by increased charges in another cost center or a newly created cost center. LOWER OF COST OR CHARGES 2.08Ascertain the application of Lower of Cost or Charges: A.Determine if this restriction is applicable with the exception of public providers with nominal charges. B.Review provider's procedures for billing and collecting from other third parties and private patients to determine "customary charges". C.Where it is determined that provider's gross charges do not represent customary charges, determine on an overall basis that (inpatient and outpatient, ancillary and routine) the percentage "customary" charges are of gross charges. Then, propose an adjustment to reduce Medicare revenue to customary charges using the percentage above for comparison with cost reimbursement. 2.09Write conclusion regarding the uniformity of provider's charges. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 3 HOSPITAL AUDIT PROGRAM (12/85) MISCELLANEOUS INCOME, EXPENSES AND ADJUSTMENTS TO COST PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Adjustments from Miscellaneous Income3.01-3.08 Investment Income3.09-3.11 Adjustments to Expenses3.12-3.13 Conclusion3.14 Section 3Miscellaneous Income and Expense and Adjustments to Cost Regulation Reference: 42 CFR 405.401, 405.406, 405.419, 405.423, 405.451 and 405.453 Objective:To ascertain that miscellaneous income and expenses have been handled correctly in the cost report (income offset and expenses excluded where necessary) To determine that nonallowable costs have been removed. To determine that all costs including indirect expense have been properly accounted for when offsets are made using costs instead of revenues. To ascertain that costs not related to patient care which were recovered from outside sources are excluded from reimbursable costs. OTHER REFERENCES: HCFA-Pub. 15-I, §§200, 600, 2100, 2300 Cost Report Forms:HCFA-2552-83, Worksheet A-8, HCFA-2552-83, Worksheet A-8-l HCFA-2552-83, Worksheet B HCFA-2552-83, Worksheet G-l HCFA-2552-83, Worksheet G-2 HCFA-2552-83, Worksheet G-3 StepProcedure DescriptionAuditor's Initial and DateWP Ref Adjustment from Miscellaneous Income 3.01Review provider's revenue (including revenue shown on Worksheet G-3) derived from all sources other than direct patient services to determine their nature and whether they have been handled appropriately. 3.02Reconcile other income and expenses as shown on the cost report Statement of Revenue and Expenses (HCFA-2552-83, Worksheet G-3) with the financial statements to determine if any exceptions were noted. 3.03Review all "other income and expense" items on the Statement of Revenue and Expenses and determine if: A.Offset of revenue is necessary; B.No offset is necessary; C.Offset or partial offset on Worksheet A-8 is necessary; and D.Development of costs through Worksheet B was done properly. 3.04Review provider's general ledger or chart of accounts to determine if miscellaneous income and expense accounts were added, deleted or changed. Accounts which were added or changed must be reviewed to determine their composition and if they were handled properly in the cost report. 3.05Ensure that income from interest and finance charges or delinquent accounts receivable is offset against allowable A&G costs. Determine that related costs incurred are not removed from costs to avoid the income offset. 3.06Ascertain that direct and indirect costs have been offset for those miscellaneous revenue items which have been determined to require offset. If the total cost of such activity cannot be determined, the total revenue must be treated as a reduction of operating costs. Ordinarily, significant amounts of general service costs are not applicable as overhead to most of the activities and should be adjusted. 3.07Ascertain that grants, gifts or endowments received and designated by the donor(s) for paying specific operating costs have been deducted from the particular operating cost or group of costs. 3.08Ascertain that restricted donations in the name of the provider but received by organizations other than the provider are offset. Investment Income 3.09Obtain or prepare a summary analysis of investment transactions. Determine and segregate which investments produce income that may affect allowable costs. 3.10Review income from investments to determine proper offset against interest expense or other appropriate operating expense. NOTE: Any investment income in excess of interest expense should not be used to offset other operating expenses. A.Ascertain that investment income derived from donor-restricted grants, gifts or endowments designated by the donor for paying specific operating costs of a certain activity is deducted from the operating costs, but not to exceed the costs for the specific activity during the period. B.Ascertain that interest income or other income earned by unrestricted funds as to use and commingled with other funds is used to reduce allowable interest expense C.Ascertain that investment income derived from gifts and grants not commingled with other funds was not used to reduce allowable interest expense. D.Ascertain that investment income from restricted and unrestricted funds which are commingled with other funds has been: 1.Applied against operating cost but not to exceed the total interest expense included in allowable costs. 2.Applied to the following cost centers in an amount based on the ratio of interest expense charged to each cost center to total interest expense. a.Administrative and General Expense; b.Depreciation - Movable Equipment; c.Depreciation - Building and Fixtures; and d.Other Appropriate Cost Centers. 3.11Ascertain that the activities listed below and any other similar type activities which are revenue producers were treated as nonreimbursable cost centers subject to step-down cost finding. Such activities may include but are not limited to: A.Research (unallowable research); B.Gifts, flowers, coffee shops, and canteen; C.Physicians' private offices; D.Fund raising expenses; and E.Others. Adjustments to Expenses 3.12Review the adjustment to expenses (HCFA-2552-83, Worksheet A-8) to determine the nature of adjustments made and the consistency in the application of the basis for cost adjustments. A.Ascertain that the costs from noncovered services to patients or other arrangements not directly related to patient care are adjusted out properly during cost apportionment. B.Where the cost (including applicable indirect cost) cannot be identified apply the total revenue received as a reduction of operating costs. 3.13Determine that payments to physicians for direct patient care are removed from allowable costs. 3.14Write a conclusion on audit procedures performed. For continuation click here. Return to Chapter Table of Contents Return to Table of Contents for Intermediary Manual Part IV Return to Program Manuals Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 4 HOSPITAL AUDIT PROGRAM 12-85 GRANTS, GIFTS AND INCOME FROM ENDOWMENTS PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of Files4.01-4.03 Review of Current Year Receipts4.04-4.06 Prior Year Carry Forwards4.07 Special Purpose Funds and Public Health Service Grants4.08-4.09 Transfer of Funds4.10 Vendor Dealings4.11-4.12 Community Fund Agencies4.13 Documenting Grants4.14 Conclusion4.15 Section 4Grants, Gifts and Income from Endowments Regulation Reference: 42 CFR 405.406, 405.423, 405.427 and 405.453 Objective:To determine that expenses are net of recoverable amounts received from outside parties in accordance with Medicare regulations. To ensure that donor-restricted gifts, grants and income from endowments for paying specific operating costs have been deducted from those costs in the proper reporting period. OTHER REFERENCES: HCFA-Pub. 15-I, §600 Cost Report Forms:HCFA-2552-83, Worksheet A-8, HCFA-2552-83, Worksheet B HCFA-2552-83, Worksheet G HCFA-2552-83, Worksheet G-l HCFA-2552-83, Worksheet G-2 HCFA-2552-83, Worksheet G-3 StepProcedure DescriptionAuditor's Initial and DateWP Ref 4.01Request details of all new and ongoing grants, gifts and income from endowments affecting the cost report under review. Extract copies of documents where appropriate. 4.02Examine correspondence on major contributions to determine whether there are any restrictions on the use of the assets contributed. Extract copies of letters and documents where appropriate. 4.03Review the provisions of the original document of restricted grants, gifts and income from endowments and determine if changes have been made from restricted to unrestricted funds. 4.04Determine if any significant grants, gifts and income from endowments were received during the current year. A.Analyze the significant grants, gifts and income from endowments for proper classification as to restricted or unrestricted. B.Ensure that adjustment to cost has been made for each restricted grant, gift and income from endowments in the proper cost reporting centers. 4.05Determine if there were restricted funds received during the current year which may be offset against operating costs. Ensure that such restricted gifts, grants, etc., are offset against expenses. 4.06Determine whether grants, gifts and endowment income received that are donor restricted are for: A.Specific operating expenses within a particular cost center. Ensure that offset has been made from that particular cost center or group of expenses in the appropriate cost reporting period. B.Operating costs of an entire cost center. Ensure this offset has been made from that particular cost center in the appropriate reporting period. C.Capital Expenditures. Vouch major expenditures from special funds to ascertain which should be considered in the determination of allowable cost. 4.07Ensure that any carry forwards from prior periods (excess of donor restricted grants, gifts or endowment income over costs) were applied as a reduction to current year's costs. 4.08With respect to special purpose funds, ensure that all direct and indirect costs are being appropriately allocated to those funds to which the activities are related. 4.09If the provider received any Public Health Service Grants, ensure that there is no duplication of recovery of the cost incurred by the provider. Obtain copies of all relevant material needed in determining the nature of the grant: A.Grant Application; B.Grant Approval; C.Public Health Service Announcements; D.Interim Expenditure Report; E.Correspondence; and F.Board Minutes. 4.10Review the transfer of funds to a provider by another component of the same entity which does not exercise fiscal control over the provider in accordance with HCFA Pub. 15-1, §§604, 606 and 607. Ensure that such transfers are not considered as grants or gifts affecting program reimbursement. 4.11Determine whether donations to providers for supplies and/or space are accounted for in accordance with HCFA Pub. 15-I, §§608 and 610. If received from a related organization, include cost under 42 CFR 405.427 through the allocation of such cost to the provider under an approved format. 4.12Determine that gifts and donations received from vendors are handled as discounts. 4.13Determine whether or not contributions from community fund monies (e.g., United Fund, Community Chest) are affected by the restrictions of HCFA Pub. 15-I, §614. 4.14Some grants may not have written understandings supporting them. These should be documented in the working papers through discussion with provider or donor(s). 4.15Write a conclusion on audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 5(12-85) HOSPITAL AUDIT PROGRAM B-1 STATISTICS -5- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of Statistical Records5.01-5.03 Reclassifications5.04-5.06 Overhead Cost Centers5.07 Nonallowable Cost Centers5.08 Special Care Statistics5.09-5.10 Premature Nursery5.11 Ancillary Services Under Arrangement5.12 Fragmented Administrative and General5.13 Teaching Facilities5.14 Conclusion5.15 Section 5B-1 Statistics Objective:To verify that the statistics used by the provider in its cost report are accurate and consistently applied. To verify the reasonableness of statistical bases used in cost finding. To verify that the permitted bases and order of allocations are used. Where alternative allocation bases or order of allocation are used, ensure that the result is more accurate and appropriate cost finding and that prior approval was obtained. To verify that any preallocations (reclassifications) of cost on provider's records at the time of cost report preparation are proper. To verify that all cost centers receive proper allocation. OTHER REFERENCES: HCFA Pub. 15-I, §§2200, 2300 HCFA Pub. 15-II, Chapter 3 Cost Report Forms:HCFA-2552-83, Worksheet B HCFA-2552-83, Worksheet B-1 StepProcedure DescriptionAuditor's Initial and DateWP Ref 5.01Review statistical records: A.To determine the propriety and reason-ableness of the statistical bases used. B.To ascertain that the statistics used are reasonably accurate and representative of the activity for the period being reviewed. C.To determine if "weighting of statistics" is necessary due to changes in the services rendered and addition of more beds. 5.02Review each of the statistics reported and used in the cost report with appropriate provider personnel. 5.03Review Worksheet B and B-1 and Schedule C to verify the statistical bases used to determine: A.If the bases used are the same as those required under the program. B.If there are any illogical overhead allocations (allocations wherein the basis of allocation does not seem to have reasonable relationship to the incurrence of the cost). C.That the allocation of costs was properly made between inpatient hospital services and other services rendered by the provider. 5.04Obtain or prepare a list of provider preallocations (reclassifications) and review as deemed necessary for propriety and allowability. 5.05Ensure that prior approvals to change allocation basis from those authorized have been obtained where applicable and that the change produced a more accurate allocation with respect to: A.More sophisticated methods. B.Changing cost finding methods. C.Changing bases for allocating costcenters or order in which cost centers are allocated. NOTE: 1. Review the correspondence with provider for the approval or rejection of the order or basis of allocation changes requested by the provider 2. Particular attention should be given to the Administration and General cost center 5.06Based on discussion with appropriate provider personnel, observations during tour of facility and the facts that come to your attention during the course of the audit, determine if changes have been made in the provider's operation and/or plant layout that would require recognition in the cost allocation statistics. 5.07Select several cost centers with high dollar impact and perform the following audit procedures: A.Test accumulation of statistics from source data. B.Discuss with departmental personnel methods employed in gathering statistical data. Evaluate and comment. C.Discuss with departmental personnel their department's general operation to determine if the statistical basis used reflects actual operations. D.To the extent possible, test by measurement, observations, etc. E.Note that statistics reflect reclassifications made on trial balance of expenses, i.e., square footage, salaries. 5.08Review the cost allocation to nonallowable cost centers to: A.Ensure that proper allocations of all applicable overhead costs were made to nonallowable cost centers. 1.Rental of hospital space; 2.Rental of quarters to others, other than employees; 3.Luxury room accommodations; 4.Gift shop, snack bar, coffee shop,etc.; 5.Sisters' maintenance/nonpaid workers; 6.Idle facilities; 7.Research cost; 8.Physician private office; 9.Meals-on-wheels; and 10.Any other nonpatient care related area. B.Compare the revenues received in the above cost centers with that of the direct and indirect costs to ensure that the monies received are comparable with the costs incurred. 5.09Ensure that labor and delivery rooms' statistics are combined and review the allocation of costs to these units. 5.10Where special care units exist in the facility: A.Review documentation relative to the special care units to insure that they include the following information for each special care unit: 1.Written policies must be specific and include criteria for admission to and discharge from the unit. 2.The unit must be equipped, or have available for immediate use, lifesaving equipment necessary to treat the critically ill patients for which it is designed. 3.Registered nursing care must be furnished on a continuous 24-hour basis. 4.A minimum nurse-patient ratio of one nurse to two patients per patient day must be maintained. B.Ensure that special care units are physically and identifiably separate from general routine patient care areas and ancillary service areas, and review the allocation of costs to these units. Premature Nursery 5.11A.Where the provider has a premature nursery, verify that the following conditions are met before the costs/charges thereof can be included as a special cost center: 1.The center must be a separate operating department within the hospital with separate nursing stations, call system hookup and their own equipment. 2.The nursing staff assigned to the center must serve exclusively in the center. 3.The center must be used exclusively for the treatment of babies requiring special care offered in the premature center. 4.Separate admission and discharge records must be maintained for the center. 5.The accounting system must be capable of properly allocating revenues and costs attributable to the center together with relevant statistical data to verify the basis of allocation. B.If all of the above conditions have been met, the premature nursery must be treated as a special cost center. C.If any of the above conditions are not met, the entire costs and revenues of the center must be included with nursery service. D.If it is established that the premature nursery charges and revenue should be included as a special cost center, ensure that premature nursery days are shown as special care days. 5.12Where the provider furnishes ancillary services under arrangements, review proper overhead allocation in accordance with regulations. A.Where the provider does not pay for the non-Medicare portion of services furnished under arrangements, determine that no indirect (overhead) costs have been allocated. The overhead allocation should be corrected by eliminating the statistics for the affected cost center from the basis of allocation 5.13Where the provider has fragmented administrative and general expenses, perform the following: A.Review the applicable bases. B.Determine that all cost centers which are established can be broken out by the provider. C.Ascertain that allocations are being made to all user departments. 5.14If the provider is a teaching facility, costs incurred in providing teaching programs are recognized under PPS. Also, reimbursement is recognized under the first year of TEFRA for providers limited by the routine cost limits. To ascertain that the computation of such payments under PPS and TEFRA are correct, determine that the calculation for interns, residents, and beds are accurate by performing the following audit steps: A.Determine if the hospital is either the legal operator of the education program or if it has been associated with the educational facility during a long standing arrangement. If the hospital does not meet this criteria, interns and residents are not to be included in the count. B.Determine that the intern and resident count was made as of the last day of the provider's fiscal year. C.Review staffing schedules, payroll records or other supporting documentation to ascertain that interns and residents included in the census were at the provider's site. D.If the provider is a multi-facility provider, determine that interns and residents are not included in the census if they were working at another facility. E.Determine that interns and residents worked at least 35 hours per week if they were considered full time. If they worked less than 35 hours, count them as one half full time equivalent. F.Verify the actual beds in use as of the last day of the provider's fiscal year. Ascertain that the bed count does not include nursery beds, excluded units and beds not currently in use. G.Determine if the bed count agrees with the number of licensed and certified beds. If it does not agree, reconcile the difference. 5.15Write conclusion on the audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 6 - HOSPITAL AUDIT PROGRAM 12-85 PATIENT DAYS -6- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Bed Count6.01-6.02 Patient Days & Census Taking6.03-6.11 Special Care, Delivery & Labor Room Days6.12-6.14 Internal Control of Census6.15 Test of Medicare Census6.16-6.19 Patient Discharges & Transfers6.20 Conclusion6.21 Section 6Patient Days Regulation Reference: 42 CFR 405.404, 405.430, 405.453 Objective:To ascertain proper accumulation of patient days. To ensure proper classification of patient days. OTHER REFERENCES: HCFA-Pub. 15-I §l300, 2200, 2300 HCFA-Pub. 15-II §300 Cost Report Forms:HCFA 2552-83, Statistical Data, page 2 HCFA 2552-83, Statistical Data, page 3 HCFA 2552-83, Worksheet D-1, Part I StepProcedure DescriptionAuditor's Initial and DateWP Ref Bed Count 6.01Ensure that the bed count at beginning and end of period for each accommodation area is properly recorded on Medicare cost report. 6.02Ensure that the bed count at beginning and end of period for each accommodation area is properly recorded on Medicare cost report. Patient Days and Census Taking 6.03Identify all categories of patient days appropriate for the provider's use in the cost report and review the provider's system for accumulating and classifying the data, including the controls in effect. 6.04Ascertain that the system(s) for patient day compilation for Medicare or non-Medicare does not include an additional day where the provider made a charge for late discharge. 6.05Determine that the provider is counting the day of admission and not the day of discharge. A.Day of admission is included in the patient day statistics. B.Day of discharge is excluded from the patient day statistics. 6.06Determine that all days were properly recorded based on location of patient at census taking hours (Routine or Special Care). 6.07Determine that newborn days have been excluded from total inpatient days in accordance with Medicare principles. 6.08Determine that leave days have been properly excluded from total and Medicare patient days. 6.09Obtain the provider's summary of inpatient days (i.e., Medicare and all other classifications) for the period. Test its clerical accuracy and trace the totals to the cost reporting forms. 6.10Prepare a schedule of monthly patient day statistics indicating the following classifications: A.Routine inpatient days; B.Inpatient special care days individually by special care area for DRCC; C.Sub-provider days; D.Aged, pediatric and maternity days; E.Nursery days; F.Premature nursery days; G.Kidney donor days (live and cadaver); H.Labor and delivery room days; and I.Disabled days. 6.11Relate the monthly totals to revenue summaries used in the test of revenues. Determine that significant fluctuations in patient days during the year produced corresponding fluctuations in revenues. (See Audit Program Section 2, Revenue Comparison and Tests.) NOTE: If any significant errors are noted in patient days accumulations, determine their effect on revenue test steps. Special Care Unit, Delivery Room, and Labor Room Days 6.12Verify that all the criteria for special care units are met for those areas designated as special care units. Use checklist as necessary. 6.13Determine correct treatment where special care unit is used occasionally for overflow routine patients. 6.14Ensure that correct treatment of delivery room and labor room days are in accordance with the instructions in HCFA Pub. 15-II, §300. Test of Patient Day Accumulation System 6.15Select a one month period to test the provider's accumulation of total patient days and perform the following: A.Select an appropriate sample period and list by day the number of admissions, discharges and resultant inpatient days accumulation. B.Trace the beginning and ending inventory of inpatients (midnight as of the last day of month preceding the month being tested and midnight of last day of the month being tested) to nurses' floor counts of patients in-house. C.Reconcile the indicated inventory of patients in-house at midnight to the nurses' floor counts for an appropriate number of sample days of the month being tested. D.Trace the balance of total patients (in-house) at the end of the day to daily census reports (or nursing station reports) submitted to the business office. E.Review the admissions and discharge records for the month being tested to ascertain that days of care furnished patients admitted and discharged during the same day have been included in total inpatient days as reported. 1.Select a representative number of patients from the daily census reports and trace the dates of services from their medical records to see that they were, in fact, "in-house" on the date indicated on the census report. 2.For these same patients, determine that they have been properly categorized Medicare and non-Medicare in the statistical records. F.Trace the provider's statistical admission and discharge data for selected patients to the records of the admitting and/or business office. G.Trace data on the admission and discharge records (used in F above) to patients' medical records. Conversely, trace data on other patients from the medical records to the admitting and/or business office records. Medicare Patients 6.16For Medicare patients, compare on a test basis (by name and date of admission and discharge) the admitting or business office records to the billing forms submitted to the intermediary. 6.17For test period, reconcile the data on remittance advices to the provider's accumulation of Medicare patient days. If the provider does not segregate Medicare days and revenue in its records but derives this information from the Medicare claim forms, test the accumulation of this data and reconcile to the totals reported. 6.18Select a number of long-stay Medicare patients and determine that days in excess of covered days are not recorded as Medicare days. 6.19Review disallowed Medicare claims, if any, and determine on a test basis that the patient days and related revenue have been reclassified as non-Medicare. 6.20Determine that patient discharges and transfers were accurately recorded by performing the following audit steps. A.Discuss with provider personnel the method and type of records maintained to record and accumulate patient discharges and transfers. B.From the sample period selected in audit step 6.l5A, test the accuracy of the Medicare discharge data by comparison to the patient medical file or other related provider records. C.From the patients' medical files or other related provider records used in Step B above, trace the discharges against those maintained by the intermediary. 6.21Write conclusion on audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 7 - HOSPITAL AUDIT PROGRAM (12-85) Expense Comparison -7- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Reconciliation of Expenses7.01 Reclassifications7.02 Adjustments to Expenses7.03 Analysis of Expenses7.04-7.12 Review of Service Contracts7.13 Conclusion7.14 Section 7Expense Comparisons Regulation Reference: 42 CFR 405.406 Objective:To ascertain that expenses have been properly classified, recorded and reasonably stated. To ascertain that non-allowable expenses have been identified and excluded. Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-l HCFA 2552-83, Worksheet A-2 HCFA 2552-83, Worksheet A-3 HCFA 2552-83, Worksheet A-4 HCFA 2552-83, Worksheet A-5 HCFA 2552-83, Worksheet A-6 HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet G-2 HCFA 2552-83, Worksheet G-3 StepProcedure DescriptionAuditor's Initial and DateWP Ref 7.01A.Trace all expenses on the trial balance of expenses (Worksheet A) for the current year to the appropriate cost report schedules. B.Insure that a Statement of Patient Revenue and Operating Expenses (Worksheet G-2) or its equivalent is completed and the total expenses are reconciled to the trial balance of expense (Worksheet A). Significant differences should be adequately explained. C.Reconcile the expenses shown on the trial balance of expenses to the provider's working trial balance and financial statements. Significant differences should be explained. 7.02Determine the correctness of the reclassification entries on the trial balance by performing the following audit steps: A.Review the reclassification entries shown on the trial balance (Column 4, Worksheet A) and the related Worksheets A-1 to A-6 for propriety and reasonableness. B.For the period under audit, list by major cost classifications the material items included in the cost report under review and test for reasonableness. C.For those cost reclassifications that are material in nature, perform audit tests and procedures (e.g., vouch, analyze) as considered necessary in the circumstances. Note the audit work done by the provider's independent auditors as presented and explained in the audited financial statements. D.Where applicable, verify reclassification entries to the audit work performed on special areas (e.g., interest, pension). Do not analyze those expense accounts that will be audited in detail in subsequent audit steps. Determine the propriety of entries transferring costs from nonallowable cost centers to allowable cost centers. E.Ensure that insurance, taxes, and interest related to building and equipment have been classified with building and equipment. NOTE: Rental expense on movable equipment must be reclassified to depreciation expense when depreciation on movable equipment is not charged on an actual depreciation basis by department. 7.03Insure that the adjustments to expense on the trial balance of expenses (Worksheet A) are correct by performing the following audit steps: A.Examine the adjustments shown on Column 6, Worksheet A and trace them to Worksheet A-8. B.Ascertain that each adjustment based on cost ("A" adjustment) is supported by documentation. C.Review the statement of Revenue and Expenses (Worksheet G-3) for items that should be applied as a reduction to allowable costs, such as: 1.Telephone services; 2.Television services; 3.Purchase and quantity discounts and allowances; 4.Rebates and refunds; 5.Drugs and supplies sold to other than patients; 6.Interest income; and 7.Others. Trace the above items to Worksheet A-8 and insure that they were handled in accordance with Section 3 of the audit program. D.Compare the detailed Statement of Income and Expense (Worksheet G-3) to the Statement of Patient Revenue and Operating Expenses (Worksheet G-2): 1.To determine whether any unallowable costs were claimed or whether any income which should be used to offset provider costs was treated properly. 2.To ensure that nonallowable costs adjustments on Worksheet A-8 which substantially reduce or eliminate the cost before cost finding were handled properly. 7.04Review and analyze in detail where appropriate, (vouching, testing, preparing necessary analysis, etc.) the following expense accounts: A.Administrative and General (specify individual cost centers within this heading which are to be investigated). Review the details of this cost center. For example: advertising and FICA; B.Laboratory supplies and expenses; C.X-ray supplies and expenses; D.Maintenance and repairs; E.Operation of plant (utilities and/or supplies); F.Professional fees (other than medical);Operation of plant (utilities and/or supplies); G.Pharmacy supplies and expenses; H.Credit card costs; I.Employee allowance; J.Dietary supplies and expenses; K.Operating room supplies and expenses; L.Medical and surgical supplies and expenses; M.Maximum drug cost; N.Miscellaneous expense; and O.List others to be tested NOTE: The extent to which detailed analysis is made of specific expense accounts should depend on: Adequacy of internal control procedures regarding account classifications. Relative materiality of the total amount charged into an account. The need to establish the nature of the individual items charged. Relative likelihood that it may contain charges for unallowable expenses. Capital-type items or other items requiring special reimbursement consideration. 7.05Examine new and unusual expense items by performing the following audit procedures: A.Review unusual items (such as expenses applicable to prior or subsequent periods or charges which result in the creation of other funds or reserves). Investigate such items and determine their propriety. B.Determine the nature of, and analyze where necessary, any new or unusual expense accounts for propriety and applicability to reimbursable expenses. 7.06Ascertain that indirect costs applied to expenses not related to patient care have been excluded in total from allowable expenses and/or have been offset by income received. (See "Miscellaneous Income and Expense" sections.) 7.07If material, analyze rent expense for the year. A.Review lease-purchase agreements or leases with options to buy (or to continue to rent at substantially reduced rentals after the expiration of the lease) to determine that leasing is not being used to accelerate depreciation. B.Review and adjust where necessary cost applicable to sale and lease-back agreements. C.Ascertain that rent expenses paid or incurred between related parties are in accordance with reimbursement principles. 7.08Generally, the treatment of advertising costs, i.e., their allowability, depends on whether they are reasonable, appropriate and necessary in developing, maintaining and furnishing covered services to Medicare beneficiaries by providers of service. To determine the allowability of advertising costs, perform the following audit steps: A.Prepare an analysis of the cost charged to the advertising account(s). B.From the analysis made in Step A, select a representative sample of expenditures for review. C.Obtain documentation and perform a review to determine if the costs are allowable in accordance with HCFA Pub. 15-l, §2136. 7.09To determine the allowability of the provider's deferred compensation plan, perform the following audit steps: A.Review the provider's balance sheet, notes to the financial statements or operating statements to verify the extent and treatment of deferred compensation. B.Review the propriety of deferred compensation plan costs by determining that the following are in accordance with HCFA Pub. 15-I §2140ff: 1.A formal plan exists which is communicated to all eligible employees. 2.There is an approved funding mechanism. 3.There are insurance contracts involving the deferred compensation. 4.Any loans made from the deferred compensation fund have been treated properly. 5.All funding payments were made within 75 days after the close of the cost reporting period. 6.Where provider funds are used to meet the compensation arrangement between the provider and provider based physician determine that: a.The arrangement meets all provisions of HCFA Pub. 15-I, §2140, that are required in order to be recognized under the program. b.Where physicians are paid on a percentage of charges, no deferred compensation is allowed. 7.There is conformity with program instructions when the deferred compensation funds are used to purchase life insurance. 8.Custodial and/or trustee fees which are paid by the corpus or earnings of the fund are not included in provider cost. 9.All transactions were made under conditions conforming to arms length transactions. C.Determine any material increases in current period costs of deferred compensation. 7.10Employee benefits are amounts paid to or on behalf of an employee in addition to direct salary or wages, and from which the employee or his beneficiary derives a personal benefit before or after the employee's retirement or death. Perform the following audit procedures to determine the reasonableness and allowability of employee benefit cost in accordance with HCFA Pub. 15-I, §§2140 - 2146. A.Prepare a schedule of all employee benefit costs. B.Review each employee benefit cost item for the following: 1.Determine whether the employee benefit cost is allowable in accordance with existing regulations. 2.If the item is not considered allowable, determine whether the intermediary granted approval for the employee benefit item. 3.If the intermediary did not grant approval, determine whether the employee benefit item is part of an employee written compensation agreement. 4.If the provider maintains that the item is part of a compensation agreement, review the following before accepting the benefit as part of employee compensation: a.A written employee contract citing the employee benefit items that are part of compensation. b.Board of Directors authorization. c.Supporting Documents such as: (1.)Employee W-2s (2.)Other statements of income such as 1099s. 7.11To determine the acceptability of pension plan costs perform the following audit procedures: A.Review/analyze the pension plan costs in accordance with HCFA Pub. 15-I, §2142ff, and determine that the following requirements were met: 1.A formal plan exists which is communicated to all eligible employees. 2.There is an approved funding mechanism. 3.All funding payments are made within l year after the close of the reporting period or within 3 years with intermediary approval (HCFA Pub. 15-I, §2142.6A). 4.Total compensation is considered reasonable. B.Review the actuarial report relating to the pension plan. Determine if any recommendations were made in the report which would affect the determination of allowable pension cost. C.Review documentation to ensure that liability to be funded has been determined and the provider is obligated to make payments into the plan. D.Review documentation to ensure that past service costs are amortized ratably over a minimum of 10 years subject to the payment requirements in HCFA Pub. 15-I, §2142.6A. 7.12Review Worksheet G-1 for any expense categories that should receive overhead allocations but were excluded from Worksheet A because of fund accounting. 7.13Determine that service contract fees are treated consistently as operating or capital related costs between the base year, TEFRA and PPS cost reporting periods by performing the following audit steps. A.Review service contracts to determine if any portion of the fee was treated as capital related costs in the TEFRA and PPS cost reporting periods, which was not appropriately identified as capital related costs during the base year. B.Review service contracts to ascertain if the provider modified existing base-year contracts in a non-bonafide manner to convert operating costs into capital related cost. 7.14Write conclusion on audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 8 - HOSPITAL AUDIT PROGRAM (12-85) Salary Review and Payroll Comparisons and Tests -8- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of CPA W/Ps8.01 Provider Payroll Procedures8.02 Review of Payroll8.03 Payroll Costs for Nonreimbursable Cost Centers8.04 Review of Fringe Benefits8.05 Detail Payroll Tests8.06-8.07 Nonpaid Workers8.08 Conclusion8.09 Section 8Salary Review and Payroll Comparisons and Tests Regulation Reference: 42 CFR 405.402(a), 405.432 and 405.451(a) Objective:To ascertain that reasonable salaries have been actually paid and charged to the proper cost centers. To ensure that a satisfactory periodic payroll test be performed since salaries and wages constitute about 70 percent of the cost incurred by a provider of health care services. OTHER REFERENCES: HCFA-Pub. 15-I, §§700, 1400, 2l00 Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-1 HCFA 2552-83, Worksheet A-8 StepProcedure DescriptionAuditor's Initial and DateWP Ref Salaries and Wages 8.01If the provider had an audit by an independent CPA, review the workpapers, to determine the extent of work performed, and the extent the work done by the CPA can be used to support other audit steps in this section. If reliance can be placed on the audit performed, note the audit steps which do not need to be completed. 8.02Review payroll procedures to ensure there have been no changes in the system since the last financial audit in order to limit the scope. 8.03Verify that salaries and wages have been charged to cost centers in accordance with the general ledger by performing the following audit steps. A.Reconcile the general ledger or reconciliation schedule totals with the amounts as recorded in the payroll journals. B.Review prior year end accruals and ascertain that they were reversed in the current year. C.Reconcile the total salaries and wages expense per the facility's financial records to the amounts reported on IRS payroll tax forms 941. D.Review the propriety of payroll reclassifications made between cost centers. 8.04Ascertain that salaries and applicable fringe benefits paid in connection with activities not related to patient care (such as fund raising, basic research, gift shop) have been excluded from allowable cost (i.e. assigned to appropriate nonreimbursable cost center). 8.05Test the accuracy and allowability of fringe benefits reported by the provider. At a minimum, assure that: A.The fringe benefits as reported in the cost report are accurate and agree with amounts recorded in the books of original entry. B.Fringe benefits are allowable under Medicare principles as explained in HCFA-Pub. 15-I, §2100 8.06Determine the reasonableness of departmental salaries and nursing salary cost by performing the following audit step. A.Perform an annual salary test by relating departmental salaries to departmental equivalent number of employees. Develop an average salary per full-time equivalent employee by department to ascertain whether salaries charged to each department are reasonable. NOTE: Nonreimbursable cost centers (e.g., delivery room, labor room, and nursery) must be examined to determine if they received the proper amount of salary cost. 8.07Verify payroll expense by performing the following audit steps. A.Select a 1 month sample of payroll journal entries for the year being reviewed to verify the accuracy of payroll computations. 1.Determine through time cards, time sheets, etc., that the employee was paid for time actually worked. a.For salaried employees, verify that the correct salary was paid and time reports indicate that the employee either worked or was on leave. b.For hourly employees, verify wages paid by multiplying the hourly rate of pay times hours worked. 2.Review personnel folders for employees selected and determine: a.That the rates of pay agree with the rates included in the payroll journals and b.That the employee was actually assigned to work at the facility. 3.Review any unusual or special payments to assure they were allowable and allocable. B.Expand sample if significant deficiencies are disclosed. C.For employees assigned to more than one cost center, verify the time distribution by tracing from employee time cards/records to the monthly time summaries by department. Determine that proper payroll distribution was made on: 1."Floating staff" (staff working for various departments rather than a specific department). 2.Changes in work assignment. 3.Payroll expense for delivery room, labor room, nursery, emergency room (outpatient), special care units and premature nursery, etc. 4.Transfer of employees between departments. Imputed Value of Voluntary Services of Nonpaid Workers (See Section 20, Nonpaid Worker Audit Program.) 8.08Where the provider included the imputed value of voluntary services of nonpaid workers in the payroll expense perform the following audit steps: A.Ascertain that only the net value of the services of the nonpaid workers was imputed, i.e., that the costs of any perquisites and maintenance (e.g., Sisters' maintenance) provided to nonpaid workers in excess of those provided to other employees in comparable positions are deducted from the gross value of their services. B.Examine time records supporting nonpaid services and test extensions. C.Trace amounts to departmental expense and general ledgers. 8.09Write conclusion on audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 9 - HOSPITAL AUDIT PROGRAM (12-85) Hospital-Based and Emergency Room Physicians -9- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of Files9.01 Schedule of Physician Payments9.02 Contracts with Physicians9.03 Professional Service Adjustment9.04-9.05 Combined Billing & 1554s9.06-9.08 Fee-for-Service & Other Complex Arrangements9.09-9.10 Under Arrangement Departments9.11-9.12 Emergency Room9.13 Conclusion9.14 Section 9Hospital-Based and Emergency Room Physicians Regulation Reference: 42 CFR 405.480 to 405.488 Objective:To ensure that the provider-based physician remuneration was correctly determined and properly distinguished between professional and provider components. To ascertain that copies of physicians agreements, billing authorization and agreements and all other pertinent data necessary to support provider-based and emergency room physicians' agreements are in file and updated. OTHER REFERENCES: HCFA-Pub. 15-I, §§2l08, 2109 Cost Report Forms:HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet A-8-1 HCFA 2552-83, Worksheet C HCFA 2552-83, Worksheet D HCFA 2552-83, Worksheet D-3 HCFA 2552-83, Worksheet A-8-1 StepProcedure DescriptionAuditor's Initial and DateWP Ref Hospital-Based Physicians 9.01Ensure that the provider-based physician documentation submitted by the provider includes the following: A.The most current approved rationale (provider-based physician allocation agreement) for each department used in determining the Worksheet A-8 adjustments. B.A departmental listing of all the physicians receiving payments, including amounts paid to each physician as well as amounts paid for purchased services. C.Current "Physician's Authorization for Hospital Billing" for the providers using the combined billing procedures. D.Calculation of the amount of the professional component of provider-based physicians' remuneration removed from allowable costs. E.Bad debts determination and calculations according to program instructions for outpatient services applicable to professional component of provider-based physicians - combined billing. F.Determination of provider overpayment or underpayment for patient care services of provider-based physicians when the charges are based on the physicians' compensation and the provider billed on Form HCFA-1500. 1.Appropriate computation of the over/under payment. 2.Notification to the Part B carrier. G.Explanations of material differences found in the adjustment(s) for provider-based physicians - Part B amounts when current costs are compared to prior costs. 9.02Review the list of all physicians receiving payments (9.01B above) and prepare schedule listing by department all amounts paid to them and also amounts for purchased services. A.Compare this list with approved rationale and ascertain reasons for any differences. B.Enter on the schedule the approved rationale for each department (9.01A). 9.03Examine contracts with physicians to determine that amounts paid were in accordance with the contract. 9.04Review the amount of the professional component provider-based physician remuneration removed from allowable cost (9.01D). A.Verify the amounts adjusted on Worksheet A-8 by department and by type of billing arrangement such as: 1.Combined billing; 2.Fee-for-service; and 3.Unusual arrangements. B.Ascertain that Worksheet A-8 adjustments include amounts reducing provider's costs for remuneration applicable to provider-based physicians providing personal patient care (professional component) services: 1.Radiologists; 2.Pathologists; 3.Cardiologists; 4.Anesthesiologists; 5.Neurologists; and 6.Other provider-based physicians. Note: a.Provider Component - Portion of HBP compensation for physician services (supervision and administration of the hospital affairs) is to be included as cost of the institution and reimbursed on reasonable cost basis under Part A. b.Professional Component - Portion of HBP compensation for professional services directly related to the medical and surgical care of the individual patient should be eliminated from the hospital costs and reimbursed on reasonable charge basis under Part B. C.Reconcile the HBP adjustments shown on Worksheet A-8 with the amounts shown in column 1 of Worksheet D-3. D.Obtain explanation or make appropriate adjustments for material differences noted in step 9.01G. 9.05Verify the calculation of reimbursement settlement for professional services rendered to Medicare beneficiaries by provider-based physicians not using combined billing. A.Obtain a copy of the provider's computation of amounts to be excluded from the hospital's costs. B.By discussion and review of the operations, ascertain whether all hospital-based physicians have been considered for inclusion in the computation. C.Determine that the computation obtained in (A) above is consistent with the method approved by the intermediary and is otherwise essentially fair and reasonable. Combine Billing 9.06Where a provider specifically uses combined billing, ascertain that: A.The hospital customarily bills for both the hospitals' and physicians' services to all patients (i.e., both Medicare and other). B.Physicians are compensated by salary, or receive a percentage of charges. Test to see that physicians' compensation is not totally or partially duplicated in Parts A and B. C.For inpatient services combined billing is only used by radiologists and pathologists. 9.07Review the following cost report worksheets and determine that: A.Worksheet A-8 adjustments agree with Worksheet D-3, column 1, lines 1 through 11. B.Worksheet D-3, column 2, lines 1 through 11 agree with Worksheet C, column 1. C.Worksheet D-3, columns 4b, 4c, and 4d agree with provider's log or PS&R report if log is not available. D.Worksheet D-3 includes Medicare inpatient Part A settlement charges less charges to patients not having Part B coverage plus inpatient Part B settlement charges as reported on Worksheet D, column 4. NOTE: If provider was on combined billing for only part of the period, the amounts reported on Worksheet D-3 must be apportioned accordingly. 9.08Compute Part B component of compensation and enter on the schedule: A.The actual basis of billing Part B component per review of HCFA 1450's, HCFA 1453's and/or HCFA 1483's. B.Using actual basis of billing (i.e., HCFA 1450's, HCFA 1453's and/or HCFA 1483's percentage(s)), compute Part B component. Where this differs, compute over/under billings made to Part B carrier. If material, propose necessary adjustment(s). NOTE: When combined billing is in effect, use Part B compensation for those specialties from the effective date of combined billing. C.Compare Part B component as calculated above to provider's calculation and reconcile the difference. The following should be noted when making this comparison: 1.Actual compensation is the total compensation less any bad debt factors. 2.Annuity or tax shelter plan should be considered as part of the physician's actual compensation. 3.Malpractice and comprehensive liability insurance premiums incurred by the provider for its hospital-based physicians must be included as part of the physician's total compensation. Fee-for-Service Compensation 9.09Review analysis of the amount of the professional remuneration removed from allowable costs. A.Examine physicians' agreement in effect and verify the agreed fee for each procedure. B.Test computation of the total compensation (agreed fee multiplied by the number of procedures performed). C.Where it appears that the provider was underpaid/overpaid on HCFA-1490, inform the carrier so that they can make the proper recovery/payment. HBP Compensation Based on Unusual or Complex Arrangements 9.10Review reconciliation of compensation (HBP Professional Component) removed from allowable costs. A.Examine physicians' contracts and obtain all necessary information to describe thoroughly and accurately the unusual or complex arrangements used in computing physician compensation. B.Verify computation and compare with the amount shown on Worksheet A-8. The adjustment made should agree with the amount shown in column 1, Worksheet D-3. 9.11Where the department was operated by an independent physician rather than the provider, ascertain that the income (if received) from the physician for space related costs or supplies and salaries paid for by the provider was offset against the allowable costs. 9.12Determine if physicians bear the cost of operating a department and bill patient directly. Review the physicians' reasonable charges and adjust downward or upward if the provider is bearing a cost which is significantly lower or higher than its own share of the proceeds of such charges. Emergency Room Services 9.13A.Determine the propriety of guaranteed standby fees and minimum compensation paid to emergency room physicians claimed by the provider. NOTE: Physicians unmet guaranteed standby fees are allowable only for emergency room services. B.Ascertain that copies of the current agreements of the physicians who contract to work in the hospital emergency rooms under guaranteed standby fees or minimum compensation are on file. C.Obtain/prepare workpapers showing: 1.Conditions outlined in HCFA Pub. 15-I, §2109.2 were met in order for the standby costs to be recognized as a hospital cost for Medicare reimbursement purposes. 2.Charges and not collections were considered in determining the incurred costs to meet the guarantee for the service of emergency room physicians. 3.An imputed charge has been established for those services rendered for which no charge is made when determining the guaranteed amount. 4.Costs were distributed between Part A and Part B in accordance with contract provisions as to duties per instructions stated in HCFA Pub. 15-I, §2109.5. 5.Emergency room costs were reduced for any cost recovery considerations paid by any agency such as city or county for maintaining emergency room services. 6.Guaranteed standby fees do not include subsidies to attract physicians to the community. D.Review Worksheet A-8 to determine if there were adjustments increasing provider costs for physicians' unmet guaranteed standby fees for hospital emergency services. 9.14Write a conclusion on the audit procedures performed. Intermediary Manual Part IV Health Care Financing Administration MedicareMedicaidSCHIPWhat's NewSite Index Medicare Intermediary Manual Part 4 - Audit Procedures Chapter 5 - Hospital Audit Program EXHIBIT 10 - HOSPITAL AUDIT PROGRAM (12-85) Lower of Cost or Charges -10- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Lower of Costs or Charges Limitation10.01-10.02 Carryover from Prior Period10.03 Analysis of Program Charges10.04 Collection Effort and Uniform Charges10.05-10.06 Sliding-Scale Charges10.07 Analysis of Cost10.08 Conclusion10.09 Section 10Lower of Cost or Charges Regulation Reference: 42 CFR 405.455, 405.460 and 405.461 Objective:To ensure that reimbursement is limited to the lower of the reasonable cost of providing services to beneficiaries or the customary charges made by the provider for the same services. OTHER REFERENCES: HCFA-Pub. 15-I, §2600 Cost Report Forms:HCFA 2552-83, Worksheet D HCFA 2552-83, Worksheet E-5 StepProcedure DescriptionAuditor's Initial and DateWP Ref Lower of Cost or Charges 10.01The provision of lower of cost or charges is effective for all cost reporting periods beginning after December 31, 1973. Ensure that the limitation on reimbursement is: A.Applied after the reasonable costs have been determined as adjusted for any "limitation on coverage of costs." B.Computed using the aggregate of customary charges and the reasonable cost of all items and services furnished Medicare beneficiaries regardless of coverage under Part A or Part B, subject to adjustments required under HCFA Pub. 15-I, §§2606 and 2608 and noncovered items and services. The most current approved rationale (provider-based physician allocation agreement) for each department used in determining the Worksheet A-8 adjustments. EXCEPTION: Public providers with a sliding scale charge structure pursuant to a legal requirement imposed by a State or local government, or as a condition of a Federal grant or loan are exempted from this regulation. These providers will compute their aggregate customary charges in accordance with HCFA Pub. 15-I, §2606.2E. 10.02A.Depending on other work performed on patient charges, consider the need to test the classifications of charges and to trace Medicare charges information to the provider's underlying records. B.If the provider's reimbursable costs were reduced due to "limitation on coverage of costs," ascertain that the reduced costs (i.e., those allowable under that limitation) are used in this lower of cost or charges limitation. 10.03If prior years' costs are carried forward, review the propriety of those amounts. A.Verify that the amount of carryover from prior years agrees with the amounts included on Worksheet E.4. B.Review the prior years to which these amounts were attributable and determine that they are properly within the allowable carry-forward period: 1.For other than new providers - two succeeding cost reporting periods. 2.For new providers - five succeeding cost reporting periods. 10.04Ascertain that the charges exclude noncovered items and services. 10.05Review the provider's billing and collection policy for non-Medicare patients to determine that: A.Charges imposed are actually collected. B.A reasonable collection effort is being made for non-Medicare patients. C.If the provider's financial statements were certified by outside accountants, a review of their workpapers was made where practicable. 10.06Tests should be made to determine that the provider's schedule of charges applied to health insurance program patients and all other patients are consistent and comparable. (Refer to Audit Step 2.03.) Adjustments made during the audit in accordance