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 with Audit Steps 2.03B and 2.08 and this section must be properly reflected in the lower of cost or charges computations. 10.07For those providers with a sliding-scale charge structure, verify that the Medicare aggregate charges are adjusted by applying either: A.The ratio of the actual charges to noncontractual patients based on sliding scale to the adjusted charges to noncontractual based on the charge structure used to record charges on bills submitted, or B.The ratio of billed charges (net of total charges and medical indigence allowances--differences between the provider's full published charges and the charges actually assessed the patient) to total charges for noncontractual patients before indigence allowance. 10.08Tests should be made to determine the reasonableness of cost for comparison with customary charges. A.Adjustments made to costs during the audit must be properly reflected on the lower of cost or charges computations. B.Further adjustments must be made to these costs prior to comparison with customary charges. These adjustments are as follows: 1.Payments made to a provider as reimbursement for bad debts arising from noncollection of Medicare deductible and coinsurance amounts; 2.Costs resulting from: a.Recovery of excess depreciation when a provider terminates or has a reduction in its Medicare utilization as described in HCFA Pub. 15-I, §136; b.Disposition of depreciable assets as described in HCFA Pub. 15-I, §§130 and 132. 3.Administrative costs incurred after a provider terminates participation in the Medicare program and which are included in the final cost report as provided for in HCFA Pub. 15-I, §2176. 10.09Tests should be made to determine the reasonableness of cost for comparison with customary charges. Intermediary Manual Part IV Health Care Financing Administration 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 with Audit Steps 2.03B and 2.08 and this section must be properly reflected in the lower of cost or charges computations. 10.07For those providers with a sliding-scale charge structure, verify that the Medicare aggregate charges are adjusted by applying either: A.The ratio of the actual charges to noncontractual patients based on sliding scale to the adjusted charges to noncontractual based on the charge structure used to record charges on bills submitted, or B.The ratio of billed charges (net of total charges and medical indigence allowances--differences between the provider's full published charges and the charges actually assessed the patient) to total charges for noncontractual patients before indigence allowance. 10.08Tests should be made to determine the reasonableness of cost for comparison with customary charges. A.Adjustments made to costs during the audit must be properly reflected on the lower of cost or charges computations. B.Further adjustments must be made to these costs prior to comparison with customary charges. These adjustments are as follows: 1.Payments made to a provider as reimbursement for bad debts arising from noncollection of Medicare deductible and coinsurance amounts; 2.Costs resulting from: a.Recovery of excess depreciation when a provider terminates or has a reduction in its Medicare utilization as described in HCFA Pub. 15-I, §136; b.Disposition of depreciable assets as described in HCFA Pub. 15-I, §§130 and 132. 3.Administrative costs incurred after a provider terminates participation in the Medicare program and which are included in the final cost report as provided for in HCFA Pub. 15-I, §2176. 10.09Tests should be made to determine the reasonableness of cost for comparison with customary 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 11 - HOSPITAL AUDIT PROGRAM (12-85) Interest -11- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Analysis of Loan Agreements11.01-11.02 Reasonable, Necessary and Proper11.03-11.05 Interest on Loans for Facility or Other Tangible Asset Acquisitions After July 1970 and Prior to August 197011.06 Interest Costs--If Funds are Borrowed for Construction Purposes11.07 Amortization Bond Premium/Discount11.08 Recall of Bonds Before Maturity11.09 Government Bond Issues11.10 Bond Defeasance11.11-11.13 Interest on Loans From Lenders Related to the Provider11.14 Interest Payable to Religious Orders (Motherhouse or Governing Body)11.15 Interest on Inter-fund Restricted andGovernment Bond Issues Unrestricted Funds11.16 Funded Depreciation (Same steps would apply for Qualified Pension Funds)11.17 Interest Expense of Related Organization11.18 Investment Income11.19 Interest Income Offsets11.20 Interest on Medicare Over or Underpayments11.21-11.22 Conclusion11.23 Section 11Interests Regulation Reference: 42 CFR 405.419 and 405.435 Objective:To ensure that interest expense is necessary and proper for the operation, maintenance or acquisition of the provider's facilities. To ensure that interest included in allowable costs is: a. Supported by an agreement that the funds were borrowed. b. Identifiable in the provider's accounting records. c. Related to the reporting period in which the costs are incurred. OTHER REFERENCES: HCFA-Pub. 15-I, §§200, 2300 Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet A-8-1 HCFA 2552-83, Worksheet G-3 StepProcedure DescriptionAuditor's Initial and DateWP Ref General To be allowable under the Medicare program, interest must be: (1) supported by evidence of an agreement that funds were borrowed and that payment of interest and repayment of funds are required; (2) identifiable in the provider's accounting records; (3) related to the reporting period in which the costs are incurred; and (4) necessary and proper for the operation, maintenance, or acquisition of the provider's facilities. 11.01Prepare a summary of existing indebtedness identifying pertinent items to ensure that each loan incurred is supported by acceptable evidence or documentation. A.Review copies of loan agreements, notes, mortgage contracts, etc., for pertinent data applicable to each indebtedness such as: 1.Date of debt; 2.Principal amount; 3.Due date (maturity); 4.Interest rate; 5.Method of Payment; 6.Balance at the end of the reporting period; 7.Amortization schedule, and 8.Collateral (if any). B.Determine source of borrowing and type of indebtedness such as: 1.Government bond issue; 2.Provider or community bond issue; 3.Notes - From individuals or lending institutions; 4.Interfund: a.Restricted fund; and b.Unrestricted fund. C.Determine the purpose of indebtedness 1.Working Capital; 2.Mortgage; and 3.Construction. Ascertain that the purpose of the indebtedness is related to patient care. 11.02If the provider's records do not contain sufficient documentation for the loans incurred, such as those mentioned in 11.01A above, verify each indebtedness by confirming with the respective debtors or lenders. 11.03Account for all interest claimed on loans identified in the summary (11.01) above. A.Determine that the interest incurred on each loan is reasonable, stated on an accrual basis and meets the established rules for being necessary and proper. B.On a test basis, recompute interest expense by reference to the terms of the loan instruments. C.Examine interest expense as shown on the cost report and compare the amount of interest to the indebtedness on the provider's balance sheet for a test of reasonableness. D.Obtain or prepare an analysis of interest expense for the following type of loans: 1.Working capital; 2.Long term finance (construction, expansion and acquisition loans); and 3.Interfund. NOTE: Ensure that interest expense on the above items has been properly reclassified to: a.Building and fixed equipment; b.Movable equipment; and c.Administrative and General. E.If comparative analysis of the balance sheet data indicates no reductions to the outstanding debt balances, determine the reason the debts are not being repaid. 11.04If interest expense records are maintained away from the provider's premises, (such as the County Treasurer's Office) determine that the interest is correct and that the debt is applicable to the provider. 11.05For all borrowings, abstract the terms of the loan agreement or instrument and update the permanent file to include the applicable data mentioned in 11.01A to 11.01C. 11.06Interest on loans for facility or other tangible asset acquisitions should be reviewed as follows: A.For acquisitions after July 1970, determine whether the purchase price exceeds the historical cost or the cost basis, whichever is appropriate. If so, the interest expense on that portion of the loan used to finance the excess is not considered reasonably related to patient care and is not allowable. B.For acquisitions prior to August 1970, determine whether the purchase price covers the construction or acquisition of a number of buildings or other fixed assets. If so, if any building or other asset covered by the loan is not used for purposes related to patient care, the interest applicable to such asset is not allowable as acost of patient care. C.In accordance with manual instructions, compute the proportionate part of interest applicable to assets used for patient care. 11.07If funds are borrowed for construction purposes: A.Review Worksheet A-7 and balance sheet to determine the existence and status of the construction-in-progress B.Ensure that interest cost during the construction period is capitalized. C.Determine that any bond discount and expense, or bond premium amortized during the period of construction is included in the capitalized cost of the facility constructed. 11.08Where bonds are issued at a premium or discount, ensure that the premium or discount is amortized over the life of the debt. Recall of Bonds Before Maturity 11.09A.Recompute the make-up of debt cancellation costs-- i.e., bond recall penalties, unamortized bond discounts and expenses, legal and accounting fees. 1.Determine that debt cancellation cost was reduced by any unamortized bond premium. 2.Determine that any cancellation costs attributable to years before the provider entered the program were not included in reimbursable costs. B.Determine whether the costs incident to debt cancellation plus the actual cost incurred on the bond during the provider's accounting period were LESS or MORE than the amount of interest cost and amortization expense that would have been allowable in that period had the indebtedness not been cancelled. 1.If LESS, the cost of debt cancellation, to the extent reasonable, is allowable in the year incurred. Verify the accuracy of debt cancellation costs claimed. 2.If MORE, the maximum allowable cost in that period is the total amount of interest cost and amortization expense that would have been allowable in that period had the indebtedness not been cancelled. Determine the accuracy of the calculation of maximum allowable costs. 3.The full amount will be allowable in the period incurred when the debt cancellation costs are less than 50 percent of the amount of interest cost and amortization expense that would have been allowable in that period had the indebtedness not been cancelled. If the full amount of debt cancellation cost is claimed, determine that the 50 percent requirement has been met and verify the accuracy of the total amount claimed Government Bond Issues 11.10Where the facilities are constructed or acquired with funds raised by the governmental entity by levying taxes and by borrowing through the device of issued government bonds: A.Determine that the interest costs are allowable. B.When governmental bond issues are designated to meet construction cost for more than one facility, allow the portion of the interest costs on these bonds applicable to the provider where the facility is owned by and the provider is controlled by the governmental entity issuing the bonds. C.Disallow interest costs when funds used to construct or acquire the governmental facilities are obtained from the general pupose funds of the government owner, even though a portion of the general pupose fund is raised through bond issue(s). 11.11HCFA Pub. 15-I, §233 provides for advance refunding of debt and applies to refundings initiated on or after July 1, 1983. The auditor must determine if there was an advance refunding in the provider's base year. If so, a review of the base year workpaper file should be made to determine how the following advance refunding costs were treated: A.Debt issue cost on refunding debt; B.Debt cancellation cost on refunded debt; C.Redemption expense; D.Annual authority and trustee fees on refunded debt; and E.Interest expense on refunded and refunding 11.12Determine if advance refunding costs were treated consistently between the base year and subsequent years cost reports. If not, determine why the provider deviated from its method of treating advance refunding costs. 11.13If an advance refunding did not occur in the base year, determine if there was an advance refunding in the cost report year under review by performing the following audit steps: A.Review the balance sheet to determine if the provider has any outstanding bond indebtedness. If so, prepare a worksheet listing the following data: 1.Total amount of indebtedness; 2.Amount of outstanding bond premium or discount; 3.Bond maturity dates; 4.Interest rate and annual interest expense; and 5.A summary of the bond indenture. Specifically, details must be provided relative to debt defeasance provisions. B.Review Board of Directors minutes to determine if any action was taken applicable to advance refunding of debt. If board minutes indicate there will be an advance refunding, the auditor must ascertain if the refinancing will be done to replace existing debt prior to its scheduled maturity with new debt. If so, determine if the purpose is to: 1.Obtain a lower interest rate; 2.Improve cash flow; 3.Remove restrictive covenants; or 4.Increase borrowing capacity. C.From the data obtained in Step11.13A determine if advance refunding costs were treated as required by HCFA PUB-15-1, §233. Interest on Loans from Lenders Related to the Provider 11.14Review loans from lenders related to the provider through control, ownership or personal relationship to ensure that the interest paid on such loans was treated in accordance with existing regulations: A.Determine that any interest payments made to partners, stockholders, or related organizations are not included in allowable cost. If so, disallow the interest unless the interest was paid on loans made before July 1, 1966. EXCEPTION: Interest paid on loans made before July 1,1966, is allowable provided that the terms and conditions of payment of such loans have been maintained in effect without modification after June 30, 1966. B.For proprietary providers, determine if the interest is a distribution of profit such as: 1.Interest on partner's capital accounts. 2.Dividends to stockholders. Determine that such interest has been excluded from interest expense or other operating expense. C.Determine whether any interest payments were made to banks or other financial institutions which have owner(s) of the provider serving as members of their board of directors and which lend money to the provider. If loans are made to the provider by such organization, a determination as to whether a personal relationship or control exists between the provider and lending institution should be made. This determination will be based on the facts and circumstances of each case, and the interest paid should be allowed or disallowed based on this determination. 11.15Determine that interest payable to religious orders (Motherhouse or governing body) from the prior period has been paid within the next (current) reporting period, and that a contractual agreement exists which calls for the payment of interest and for the eventual repayment of the loan. Inter-Fund Restricted and Unrestricted Funds 11.16Determine that inter-fund interest has been charged only on loans from donor restricted funds, loans from qualified pension funds or loans from funded depreciation. A.If funds are borrowed from the provider's restricted funds, determine that the interest rate meets program requirements. Ascertain that unrestricted funds were not available for provider use at the time of borrowing. B.If the provider's general fund borrowed from its own unrestricted funds, ensure that the interest claimed by the provider is not included in allowable cost. Funded Depreciation (Same steps would apply for Qualified Pension Funds--See HCFA Pub. 15-I, §228.) 11.17Review provider's funded depreciation account to determine that the account is maintained in accordance with Medicare instructions. A.Determine the accuracy of the amounts deposited to the fund. B.Examine the deposits made to the fund to determine any deposits in excess of accumulated depreciation. 1.If excess deposits were made, determine that income earned by such excess funds was applied as a reduction of interest expense. 2.to be considered as valid funding transactions, ascertain that deposits representing depreciation are in the funded depreciation account for 6 months or more. C.Examine the pupose of withdrawals from the funded depreciation account. 1.Ensure that the withdrawal was used for the purchase of equipment, improvements of plant, etc. 2.Determine if withdrawals were made for puposes other than those listed in Audit Step C1. If so, interest income attributable to funded depreciation should be offset against interest expense. 3.Determine that money was not borrowed to make deposits of funded depreciation. If so, interest paid by the provider on the money borrowed must be excluded from the allowable cost. D.Review other board restricted funds, which may be viewed as a funded depreciation account, for possible overfunding of depreciation expense. Investment income earned on excess funded depreciation must be used to offest interest expense. Interest Expense of Related Organizations 11.18Since costs of ownership of the leased facility are allowable costs of the provider, the mortgage interest paid by the related organization is allowable as an interest cost to the provider. If such an arrangement exists, and mortgage interest is paid by the provider, determine that the interest paid is reasonable, necessary, and proper (see 11.03 of this program) Investment Income 11.19Examine the source of the investment income to determine if the income should be offset against interest expense or other appropriate operating costs. A.Analyze investment income by reviewing board minutes, bank correspondence, and provider records. to: 1.Determine if the funds are identified as restricted or unrestricted 2.Determine if separate bank accounts are maintained for restricted funds. 3.Describe each source of fund as to purpose using the following categories: a.Restricted (board, donor and lender); b.Nonrestricted c.Commingled restricted; d.Separately maintained; e.Type of fund (operations, special purpose, endowment, plant, etc.); f.Related party; g.Non-related party; h.Funded depreciation; i.Sinking fund; j.Pension fund; and k.Accounts receivable, insurance reserves, contingency reserves, others. B.Review the provider's cost report, Statment of Recenue and Expenses, and financial statements to determine income from investments. C.Review the cost report for offsets of cost. If the income in the current period was not applied as an offset to interest expense, obtain an explanation. D.If a Bond Redemption or Refunding Reserve Account was maintained, ensure that the interest income was offset. 11.20Determine from the desk review workpapers if any recommendations were made for further review of interest income offsets. If further review is required, the scope of audit of interest income and expense should be expanded to adequately cover the treatment of interest income offsets between the TEFRA and PPS cost report years. From the summary made of existing indebtedness in Step ll.0l, determine that the proper offset of interest income was made to long term debt (capital pass-through portion) and working capital (A&G) expense. 11.21Determine if the provider received Medicare overpayments and if the intermediary assessed the provider for interest on the overpayments. If the provider was assessed interes, determine if funds were borrowed to pay the interest asssessment. If interest was paid on the overpayments from the provider;s own funds or borrowed funds, ascertain that the interest expense is not included on the cost report. 11.22If Medicare underpayments were made to the provider and the intermediary made interst payments for the underpayment, ascertain if offset to interest expense was made by reviewing the desk review workpapers. 11.23Write 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 12 - HOSPITAL AUDIT PROGRAM (12-85) Depreciation -12- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review Capitalization Policy12.01 Testing Asset Classification and Lives, Current Year Expense12.02-12.04 Review of Minor Equipment12.05 Analysis of Book Value Changes12.06 Depreciation Expense Direct Costed12.07 Physical Inspection of Equipment12.08 Change in Method of Depreciation12.09 Accelerated Depreciation12.10 Estimated Useful Lives of Assets12.11 Additions/Acquisitions12.12-12.16 Transfers Between Government Entities12.17 Construction-in-Progress12.18 Retirements, Gains or Losses and Casualty Losses12.19-12.21 Lease Arrangements12.22 Limitation on Federal Participation for Capital Expenditures12.23 Purchase of Facility as an Ongoing Operation12.24 Donated Assets12.25 Betterments and Improvements12.26 Proprietary Providers12.27 Funded Depreciation12.28 Conclusion12.29 Section 12Depreciation Regulation Reference: 42 CFR 405.415 through 405.418 Objective:To determine that depreciation is stated in accordance with current Medicare regulations: a. Based on the historical cost and/or fair market value at the time of donation or inheritance. b. Prorated over the estimated useful life of the assets. c. Related to the reporting period in which the costs are incurred. To determine that periodically updated summary schedules which reflect the values of fixed assets and the related depreciation claimed under the program are maintained. To ascertain that additions and/or acquisitions are properly capitalized and recorded at cost. To determine that gains or losses on disposal of assets are accounted for in accordance with Medicare regulations. To determine that accelerated depreciation if taken under the program was properly claimed or recaptured where applicable. To determine that the methods adopted for computing depreciation are adhered to. To determine that regulations applicable to transactions entered into after March 20, 1979, for trade-ins, scrapping, gains or losses on disposals and asset lives are properly applied. OTHER REFERENCES: HCFA-Pub. 15-I, §l00 Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-7 HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet A-8-2 HCFA 2552-83, Worksheet B-1 StepProcedure DescriptionAuditor's Initial and DateWP Ref 12.01Review the provider's capitalization policy to ascertain that it is in conformity with Medicare regulations and to obtain an understanding of policies and procedures used for: A.Determine the basis for depreciation B.Determining method used to compute depreciation. C.Determining policy with regard to capitalizing major repairs, improvements, betterments and additions. D.Determining if the provider consistently applied its capitalization policy between the TEFRA and PPS year by performing the folowing audit procedures. 1.Review the preaudit and desk review workpapers to ascertain if any exceptions in the application of the capitalization policy were noted 2.If any exceptions were noted, discuss the esceptions with the provider. Verify the providers explanations by testing source documents such as purchase order and invoices for new asset acquisitions. NOTE: If the facility's outside auditors performed an audit of depreciation which includes audit effort as outlined in this section and reliance can be placed on the audit performed, then audit steps in this section which were adequately reviewed may be eliminated. 12.02Review and test the computation of the current year's depreciation provisions and accumulated depreciation. 12.03Determine on a test basis the propriety of depreciation claimed on Worksheet A of the HCFA cost report under review. To accomplish this, obtain the provider;s workpapers used to compute the depreciation as shown in the cost report. Grom these workpapers, select a sample of items for review. For items selected, examine detailed property records, contractor's and/or vendor's invoices, reports of independent auditors, historical cost appraisals or other supporting data to determine the following: A.That the asset was classified properly such as building, furniture and fixtures, equipment, etc. B.That assets are recorded at cost or, in the case of donated assets, fair market value at the time of donation. C.That the life or rate is in accordance with the American Hospital Association (AHA) or Internal Revenue Service (IRS) guidelines. If a different life is used other than that established by the AHA or IRS guides such as depreciation on componentized buildings, obtain convincing reasons for the deviation and determine that adequate documentation is available to support the useful life. Refer to audit step 12.11D for depreciation on componentized buildings. NOTE: The use of the accelerated cost recovery system (ACRS) and bonus depreciation under IRS guidelines is not permitted for Medicare reimbursement purposes. D.That the accumulated depreciation does not exceed historical cost less salvage value on any individual asset. E.That based on the life or rate determined in step (C), the depreciation is computed accurately. F.That the method of depreciation used for each asset classification was proper. NOTE: For assets acquired after July 1970, the straight-line method of depreciation must be used unless it results in insufficient cash flow as defined in HCFA Pub. 15-I, §l00. If cash flow is insufficient, the provider may use (only with specific permission of the intermediary for each asset involved) a declining balance method not to exceed 150 percent of the straight-line rate. 12.04Analyze the historical costs of assets used by the provider for depreciation and equity capital purposes to determine if they are allowable, i.e., the net book values (asset value less accumulated depreciation) properly reflect the value of the assets. Minor Equipment 12.05To review costs claimed for minor equipment perform the following audit steps: A.Determine policy with regard to recording of minor equipment and ensure that this has been consistently applied to: 1.Original investment not amortized or depreciated. Ensure that: a.Costs of replacement to the stock are charged to operating cost. b.The investment in the base inventory is adjusted when there is significant change in the inventory size. 2.Net book value of assets upon entering the program written-off ratably over 3-year period. Ensure that: a.Full one-third write-off has been made in the year of acquisition. b.Any assets over 3 years old that are already completely written- off but still in use are not included. c.Any new purchases are written-off ratably over 3-year period. 3.Equipment still in use over their actual useful lives. a.Determine that the cost is written-off ratably over the actual useful lives of the assets. B.If a change in method for writing off minor equipment is adopted, determine that approval was obtained from the intermediary and that the request for the change was made by the last day of the first month of the asset year in which the new method was used. 12.06Prepare an analysis of book value changes during the year for depreciable asset costs and related reserves for depreciation. Reconcile additions and retirements with audited financial statements (and Worksheet A-7, HCFA Form 2552-83) using prior year's closing balances. Depreciation Expense Direct Costed 12.07Review provider's procedure of direct costing depreciation expense to individual cost centers.Examine documentation supporting the basis for the direct assignment. A.Where depreciation is directly assigned to cost centers (direct costed) i.e., depreciation is not shown on Worksheet A,determine if it was charged to departments (cost center). B.Determine that the basis used for the direct assignment is correct and properly documented in the audit workpapers. C.Determine that depreciation included in the departmental expenses (12.07A above) agrees with the total depreciation expense claimed for the period. D.Select several departments where depreciation charges are significant and verify the mathematical accuracy of depreciation claimed. 12.08Make a physical inspection on a limited basis of equipment on which depreciation was claimed by performing the following audit steps: A.Obtain an asset listing by department of equipment charged to the department, description of equipment and identification number. B.From the asset listing, select a sample of equipment items to be inspected and perform the physical inspection. C.Determine if the assets are still in use for patient care and if they are located in the respective departments for which depreciation was claimed. D.For any item of major equipment that is no longer in use, determine through discussion with provider personnel the status (obsolete, standby, etc.) of such equipment and whether they are properly reflected in the asset account. Change in Method of Depreciation 12.09A.Compare depreciation methods used between years. If a change has occurred, ascertain that proper advance approval was obtained from the intermediary. (Only one change per asset is permissible.) After July 1970, changes in depreciation methods may only be made to the straight-line method. No intermediary approval is required for such change. Once the straight-line method has been selected for an asset, an accelerated method may not be subsequently used. B.If the provider changes from estimated to actual depreciation based on an appraisal, ensure that the correct adjustments have been made in respect to all years. Refer to section 13 of the audit program for audit stepson appraisals. Accelerated Depreciation 12.10A provider may request to use accelerated depreciation if it can demonstrate that a cash flow need exists. If accelerated depreciation is being used, perform the following steps: A.Where accelerated depreciation is used for assets acquired on or after August 1, 1970, determine that intermediary approval has been obtained. B.Obtain documentation to support the claim that cash flow is insufficient to provide funds required to meet the principal amortization schedules on the capital debts related to the provider's total depreciable assets used to provide patient care. C.From documentation obtained in 12.10B, determine the following: 1.That the proper basis for depreciation is used. 2.The mathematical accuracy of the supporting schedules so that a determination can be made as to whether or not a cash flow need exists. D.For cost reporting periods starting on or after August 1, 1970, where a provider using an accelerated method of depreciation either terminates the program or where the health insurance portion of allowable cost decreases so that cumulatively more depreciation was paid than would have been paid using the straight-line method of depreciation, the excess reimbursement should be recovered. The recovery of amounts paid in excess of straight-line depreciation is applicable to voluntary and involuntary terminations. To ascertain if accelerated depreciation should be recovered, perform the following steps: 1.For providers who terminate the program after July 1970 and disposed of assets during its final cost reporting period or within 1 year after termination, verify that the correct amount of excess depreciation was recovered by completing steps a through c. a.Verify that the recomputed depreciation (straight-line method) applicable to reporting periods under the program is distributed proportionately to those periods. b.Compare the recomputed depreciation for each reporting period to actual depreciation taken in each period. The difference is the excess depreciation to be recovered. c.Determine that any gain or loss is allocated proportionately to each reporting period under the program and is combined with the excess depreciation for that period to determine the net depreciation adjustment. 2.Ascertain if there has been a decrease in the health insurance proportion of allowable costs by performing the steps shown in HCFA Pub. 15-I, §136.4. Verify that the correct amount of excess depreciation was recovered by performing audit steps 12.10D.1.a, b and c. E.If termination is due to a change of ownership resulting from a transaction between related parties, accelerated depreciation must be recovered if all of the following four criteria are not met. 1.The termination of the provider agreement is due to a change in ownership of the provider resulting from a transaction between related organizations. 2.The successor provider continues to participate in the health insurance program. 3.Control and extent of the financial interest of the owners of the provider before and after the termination remain the same; i.e., the successor owners acquire the same percentage of control or financial investment as the transferors had. 4.All assets and liabilities of the terminated provider are transferred to the related successor participating provider. Ascertain if the criteria as outlined above are met by performing the following steps: a.Obtain documentation such as agreement of sale and minutes of meetings to ascertain if the change of ownership resulted from a transaction between related parties. b.Review the provider agreement of the successor provider to determine if it intends to participate in the health insurance program. c.Obtain and review the agreement of sale, minutes of meetings and financial records to determine if the control and extent of the financial interest of the owners of the provider before and after the termination remain the same. d.Determine that all the assets and liabilities of the terminated provider are transferred to the related successor participating provider by reviewing the agreement of sale, minutes of meetings and financial records. e.After performing the above audit steps, if all of the criteria as outlined in E-1 to E-4 are not met, determine that the accelerated depreciation was properly recovered. Estimated Useful Lives of Assets 12.11Review the estimated lives of assets to determine that they are acceptable for program purposes. A.Ensure that asset lives of new acquisitions are reasonable and consistent with the provider's stated policy, AHA and IRS guidelines or convincing reasons for deviating from such guidelines. B.Ensure that assets were not written off prematurely. C.The auditor must determine that the provider did not improperly maximize cost reimbursement under TEFRA and PPS by improperly reducing or relifing the estimated useful lives of existing depreciable assets below AHA or HCFA guidelines. The auditor must also determine that the provider did not avoid or reduce the reimbursement impact of future prospective payments for capital related costs (i.e. in FY l986 or after) by inappropriately accelerating the write-off of depreciable assets. Where the provider has either increased or decreased an asset's estimated useful life, perform the following: 1.Review provider's procedures and computations for changing the useful life to determine if it is in conformity with Medicare regulations. 2.Ensure that the accumulated depreciation balances prior to July 1, 1966, and after have been properly adjusted for the change. 3.Verify that intermediary approval has been obtained. 4.For assets acquired prior to entry into the Medicare program determine that the depreciation was recomputed retroactively from the dates of acquisition and that the resultant adjustment to the prior years' accumulated depreciation was offset against the current year's provision. B.Componentized Buildings - Under current Medicare regulations, a different useful life may be used other than that established by AHA or IRS guides. However, if the useful life differs significantly from that established by the guides, the deviation must be based on convincing reasons supported by adequate documentation. There could be instances where a provider used componentized depreciation for buildings. Under this method, the components within the building such as heating and air conditioning systems, machine room, wiring, elevators, etc., are set up with a shorter life and the building shell over a longer life. This method enables a provider to write-off a significant amount of depreciation over a shorter time period. If it is determined that the provider used componentized depreciation for buildings, perform the following steps. 1.Ascertain if the provider furnished convincing reasons to the intermediary to substantiate the use of this method. 2.If so, review the documentation provided to the intermediary. 3.If documentation reviewed appears inadequate, determine if the provider obtained an appraisal to establish the useful life of the building components and building shell. 4.If no appraisal was obtained and the documentation reviewed is inadequate, determine the useful life by using AHA and IRS guidelines and compute depreciation using the straight-line method. Disallow the difference between the amount claimed and the amount computed using straight- line depreciation. 5.Obtain the depreciation schedules prepared for componentized assets and compare the rates of depreciation for the current year to rates used in the prior year. If the depreciation rates changed, obtain an explanation from the provider. 6.Determine if repair and replacement costs on componentized assets were properly treated as to capital or expense by performing the following audit procedure. a.Obtain the provider's disbursements journal and select charges in excess of $1,500 for review. Request documentation to support charges selected for review and ascertain if the amount charged to expense should be capitalized. Additions/Acquisitions 12.12Obtain and review the listing of fixed asset additions and acquisitions and perform the following: A.Review asset acquisition schedules and identify current period acquisitions for proper classification as follows: 1.Land; 2.Land Improvements; 3.Building and Fixtures; 4.Buildings and Improvements; 5.Fixed Equipment; and 6.Movable Equipment. B.Determine whether they are patient related or nonpatient related (chart of hospital accounts) and are assigned to the appropriate cost centers. C.Ensure that the related depreciation is properly recorded and the estimated useful lives and basis of depreciation are proper. D.Compare fixed asset values on the current and prior period balance sheet to determine changes. E.Test check major acquisitions during the year by reviewing the vouchers and tracing such additions to vendor's invoice or other related supporting data to determine that the cost incurred was properly capitalized and recorded at cost (or fair market value in case of donated assets). F.Determine the method used by the provider for recording depreciation in the year of acquisition. G.On a test basis, determine if the method used for computing first year depreciation is consistently followed. H.Determine if the estimated useful lives are in accordance with the provider's policy, AHA or IRS guidelines or if there are convincing reasons for deviating from such guidelines. 12.13For donated assets used under the program by a previous owner, ensure that the provisions of regulations §405.415(j) have been complied with by verifying that: A.The basis of depreciation for the asset is the lesser of the fair market value or the net book value of the asset in the possession of the owner last participating in the program. B.Where fair market value is not attainable or was not established by the provider, an appraisal of such fair market value will be acceptable for determining the basis of depreciation. C.The basis for depreciation is determined as of the date of donation or the date of death of donor, whichever is applicable. For other appropriate audit procedures, see audit step 12.25. 12.14Investigate additions which appear to be replacement items and determine that appropriate corresponding retirements have been recorded. 12.15Related Organizations - Ensure that assets acquired from related organizations are recorded at net book value of the assets transferred from the related organization. 12.16Chain Organizations - Ensure that assets acquired from the home office or other components within the chain are recorded at net book value of the assets transferred from the organization. Transfers Between Government Entities 12.17If the provider is a government entity, ascertain whether any assets have been transferred thereto from another government entity. If so, ensure that the provisions of regulations §405.415(i) have been complied with by performing the following audit steps. A.Determine if the transfer was: 1.The result of a sale between government entities. 2.A donation of facilities. 3.A transfer done solely to facilitate administration or to reallocate jurisdictional responsibility. 4.A transfer which constituted a taking over in whole or in part the function of one government entity by another government entity. B.If the transfer was a result of a sale between government entities, determine that the basis for depreciation to the purchasing provider is the historical cost incurred in initially acquiring the assets. Also, determine that the historical cost does not exceed the lower of current reproduction cost adjusted for straight-line depreciation over the life of the asset to the time of purchase or fair market value at time of purchase. C.If the transfer is the result of a donation of assets from another government entity, determine that the acquiring provider did not assume any functions for which the transferor used the assets and that the acquiring provider did not make any payment for the assets in theform of cash, property or services. D.If the transfer results from steps A3 and A4 above, determine if the transferor claimed depreciation under the Medicare program prior to the transfer. 1.If depreciation was claimed, ascertain that the basis for depreciation used by the acquiring provider is the same as the basis used by the transferor prior to the transfer. The acquiring provider may use the same method of depreciation or it may change the method. If the acquiring provider changed its method of depreciation, determine that the change was made as outlined in audit steps 12.09A and B. 2.If the transferor has not claimed depreciation under the program, determine that the basis used by the acquiring provider is the cost incurred by the transferor in acquiring the asset less depreciation calculated on a straight-line basis over the life of the asset to the time of transfer. Construction-in-Progress 12.18Review construction-in-progress expense accounts to: A.Ascertain the proper treatment of: 1.Interest During Construction; 2.Demolition Costs; 3.Repairs and Maintenance; and 4.Planning Costs (Architect Fees, etc.). B.Analyze increases in the capital account with regard to the capitalization of expenditures previously carried on the financial statement in the prior period as construction-in-progress to determine: 1.That all costs, including planning costs and demolition costs are included in asset preparation (capitalized). 2.If construction is performed by a related organization: a.The asset values are adjusted (reduced) for the profit realized by the related organization. b.Any allocated costs are included in the new construction. c.The allocated costs are supported by adequate documentation. d.The allocated costs are verified to ascertain that the costs are proper. C.If the provider has undertaken or completed a major expansion of its facilities: 1.Determine that start-up costs have been capitalized and are being amortized. 2.Determine that planning costs (architect fees, legal, etc.) have been capitalized as part of the cost of the assets. D.Providers might attempt to expense planning and start-up costs in the TEFRA year rather than capitalize them as a part of the asset. Also, in PPS years the provider might attempt to treat the operating cost portion (salaries, utility cost, etc.) of properly deferred start-up cost as a capital pass-through. The auditor should determine that planning and start-up costs were properly treated in the TEFRA and PPS years by performing the following audit steps. 1.Review the pre-audit and desk review files to determine if exceptions were noted on planning and start-up costs. If noted, discuss the exceptions with provider personnel to obtain an explanation for the manner in which these costs were treated. 2.Determine the effect on Medicare reimbursement in the TEFRA and PPS years. Retirements, Gains or Losses and Casualty Losses 12.19Retirements - Obtain a schedule of asset retirements or disposals that occurred for the year under review and perform the following: A.Determine if the proper method of depreciation was used for the asset retired. B.Determine if depreciation was computed properly between years prior to and subsequent to entry into the program. C.Determine if the retired asset is being held for standby or emergency use. If so, depreciation may continue to be taken. D.Determine if the retirement of assets constitutes a termination. If so, perform the following steps: 1.Ascertain if accelerated depreciation was taken on the assets. 2.If accelerated depreciation was taken, obtain the provider's worksheets and verify that recapture of depreciation was properly made (12.10D). 12.20Gains or losses - Review the appropriate worksheet of the cost report and audit workpapers to ascertain proper handling of gains or losses on disposal of assets. A.When asset disposals are indicated, review audit workpapers to ascertain the type and quantity of assets involved. B.Examine gains or losses computation and trace the necessary adjustment to the appropriate worksheet of the cost report. Gains or losses may be presented as an adjustment to depreciation expense. C.Determine that gain or loss on the disposition of depreciable assets has been included in accordance with regulations §405.415(f) either in computing allowable cost or in computing the adjustment to Medicare reimbursable cost. D.Determine the amount of gains or losses due to scrapping. Gains and losses are recognized only on scrapping that occurs while the provider is participating in the program. E.Determine if any assets were sold for a lump sum sales price. If so, determine that the gain or loss on the sale of each depreciable asset was computed by allocating the lump sum sales price among all the assets sold on the basis of the fair market value of each asset at the time of sale. 1.Review documentation to support the current fair market value of each asset shown in audit step 12.20E above. 2.If sufficient documentation does not exist, determine if an appraisal was performed by an independent appraisal expert. If so, review the appraisal report. (Refer to Section 13 for Appraisal Audit Guidelines.) F.Determine if there were any exchanges, trade- ins or donations of depreciable assets. If so, determine that gains or losses are not included in the determination of allowable costs. G.Determine if any assets were demolished or abandoned during the reporting period. If so, perform the following steps: 1.Prepare a schedule of these assets. 2.Determine if the aggregate loss (net depreciation adjustment) from all demolition and abandonments during the period is $5,000 or less. Based upon the results of this analysis, ascertain the following: a.If the loss should be included as an adjustment to allowable cost during the reporting period. b.If the loss should be allocated to other cost reporting periods. c.If the loss should be capitalized as a deferred charge and amortized. Casualty Losses 12.21Review any changes that occurred in the fixed asset accounts resulting from casualty losses. A.Ascertain that allowable casualty losses: 1.In excess of $5,000 are deferred and amortized over the useful life of the replacement 2.That are $5,000 or less, the entire amounts are included in allowable cost in the year of the casualty. 3.Which are not considered as casualty, such as effect on the value of property resulting from a nearby disaster, change of neighborhood, increased risk area rating, etc., are not included in allowable cost. B.For completely destroyed assets, check with the provider to ascertain the providers intention with respect to replacement. If the asset will not be replaced, no loss is allowable for losses $5,000 or less. C.Ascertain that the insurance coverage reflects a prudent management policy. D.Ensure that losses resulting from the provider's failure to obtain proper insurance coverage, and/or not compensated by insurance proceeds where the lack of insurance coverage reflects imprudent management are not included in allowable costs. E.Where an asset is restored, determine the proper basis to be used for depreciation and determine that the expected useful life is established in accordance with the provider's capitalization policy and AHA guidelines. F.If the destroyed asset is disposed of by scrapping, determine that income received from salvage is treated as a reduction in the amount of the loss. G.Determine if any gain resulted from insurance proceeds exceeding the amount of the casualty. Where the asset is retained, determine that the gain is used first to reduce the amount of restoration cost and that any remaining gain is used to reduce the cost basis of the restored asset. Lease Arrangements 12.22Where a provider enters into lease arrangements, obtain documentation for the permanent file to include the following: Copy of the lease arrangement; Analysis of the details of the lease arrangement; and Basis for allocating the rental expenses to the various departments. After reviewing the above documentation, perform the following audit steps: A.Sale and Leaseback Arrangements - Determine if any sale and leaseback agreements for plant facilities or equipment were entered into with a nonrelated party. If the rental specified in the agreement is included in allowable cost, determine: 1.That rental charges are reasonable based on consideration of rental charges of comparable facilities. 2.Adequate alternate facilities or equipment were not available at lower cost. 3.Leasing was based on economic and technical considerations. 4.That rental charges do not exceed the amount which the provider would have included in reimbursable costs had it retained legal title to the facilities or equipment. A.Lease Purchase Agreements - Some lease agreements are the same as installment purchases of facilities or equipment. Perform the following steps to determine if the lease is a purchase agreement. 1.Determine if the rental charge exceeds rental charges of comparable facilities or equipment in the area. 2.Determine if the term of the lease is less than the useful life of the facilities or equipment. 3.Ascertain if the provider has the option to renew the lease at a significantly reduced rental or the right to purchase the assets at a price significantly less than the fair market value at the time of acquisition. 4.If a determination is made that the lease is a purchase, ascertain that the rental charge is includable in allowable cost only to the extent that it does not exceed the cost of ownership. 5.If the lease is considered a purchase, make an adjustment for the difference between the amount of the rent paid and the amount allowed as rental expense. The difference is considered a deferred charge and must be capitalized as part of the historical cost when the asset is purchased. 6.If the asset is returned to the owner instead of being purchased, ascertain that the deferred charge was expensed in the year the asset was returned. 7.Ensure that accelerated depreciation on assets under lease purchase is not included in allowable costs under any circumstances. C.Determine if any facilities are leased for a nominal amount. This is done in some instances where a provider leases facilities from a municipality at $1.00 per year. If facilities are leased for a nominal amount, perform the following audit steps: 1.Determine that the cost of any improvements to the leased property are properly amortized. 2.If the provider has included in its costs an amount to cover depreciation on the leased facilities, review the lease and determine that the conditions below are met. a.The lease must contemplate that the lessee will make necessary improvements to the leased facilities. b.The intent of lessor and lessee is to continue the lease arrangements for the useful life of the asset. c.The lease has no restrictions on the free use of the facility by the lessee. d.The lease does not provide any indirect benefits to the lessor. 3.Determine if the provider contributed any funds to retire the lessor's bonds or notes issued for the facility or made any other type contribution to the lessor. 4.If it is determined in step 3 above that contributions were made and treated as rental expense, ensure that depreciation is not included in allowable costs. 5.Determine the basis and method used for depreciation. Limitation on Federal Participation for Capital Expenditures 12.23Scan listing of assets such as additions, acquisitions, construction-in-progress, expansion, lease-purchase, which may fall in one of the three categories below. A.Exceed $600,000. B.Changed the bed capacity of the facility. C.Substantially changed the services provided by the facility. D.Based upon the asset schedules obtained in completing audit step 12.12A for asset additions (including leases), asset purchases or donations which fall in the three categories above, perform the following audit steps: 1.Ensure that newly acquired assets under categories A, B and C above are supported by approval from the designated planning agency. 2.Where the State planning agency has ruled the expenditure was inconsistent with local planning requirements, remove from allowable cost all direct costs relating to the expenditure (e.g., depreciation, interest, finance charges, legal and broker's fees, permits). The expenditure should also be excluded from equity capital computations. 3.Where no ruling has been received, obtain a copy of the provider's application submitted to the planning agency for approval. Also, obtain a copy of the planning agency's letter in response to the application. Correspondence should be maintained in the permanent file. The expenditure would be subject to the criteria of reasonable cost related to patient care. 4.If the provider has not applied for approval, investigate and comment as to why no application was made. Disputed expenditures must be referred to the planning agency via the HCFA regional office for resolution. 5.Reasonable cost incurred by a provider for studies, surveys, etc., which are made to enable a provider to properly determine whether proposed expenditures would be in compliance with the planning agency criteria are allowable in the period in which the project was disapproved. 6.Obtain and review copies of any rulings/approvals from other local or regional planning agencies. Purchase of Facility as an Ongoing Operation 12.24Determine if the facility was purchased as an on-going operation. If it was, determine the historical costs of assets by performing the following audit steps. A.If the facility was purchased after July 1, 1966, and prior to August 1970, determine that the sale price attributable to the asset does not exceed the fair market value (FMV) of the asset at the time of sale. B.If the facility was acquired after July 1970, determine that the cost basis of the depreciable assets does not exceed the lower of the current reproduction cost adjusted for straight-line depreciation over the life of the assets to the time of the sale or FMV of the tangible assets purchased. C.Determine if the facility was being operated under the program at the time of sale. If it was, perform the following steps: 1.Ascertain that the sales price used by the seller in computing gain or loss for the final cost report agrees with the historical cost used by the new provider. 2.Determine that the purchase of the on-going operation was a bona fide sale. If it is not a bona fide sale, the seller's net book value must be used by the purchaser as the basis for depreciation. In such instances, determine that the purchaser recorded the historical cost and accumulated depreciation of the seller which was recognized under the program. Donated Assets 12.25Determine if depreciation was claimed on donated assets. (See audit procedure 12.13.) If so, perform the following audit steps: A.Determine the basis used for computing depreciation. B.If cash was paid for the asset, determine that the amount paid is used as the historical cost of the asset. C.If no cash was paid, the basis would be the fair market value as of the date of donation. If fair market value is used, determine if an appraisal was made and review the appraisal report. Betterments and Improvements 12.26Determine if any betterments or improvements were made during the year under review. If so, determine that they were properly capitalized and written off ratably over the remaining useful life of the asset as modified by the betterment or improvement. (See audit step 12.01C.) Proprietary Providers 12.27In addition to the above steps, the following need special attention for proprietary providers: A.Obtain historical costs of assets used for income tax purposes and compare with the historical costs of the assets used for depreciation and return on equity capital purposes under Medicare. B.If an appraisal to establish the basis for depreciation was made, examine the provider's Federal tax return to ensure that the cost base adopted in the appraisal is not in excess of the cost reported in the tax return. C.Where the income tax basis exceeds the Medicare basis, ensure that the excess basis is properly substantiated. 1.Determine if an appraisal was necessary as a result of inadequate property records or Federal tax records. If an appraisal was necessary, determine that the appraised cost does not exceed the cost basis used for Federal tax purposes. (Refer to section 13 for audit steps on appraisals.) 2.Ascertain if any assets which were originally charged off as an expense under the provider's capitalization policy or fully depreciated for Federal income tax purposes are still in use. Determine that their useful lives were revised and verify that depreciation was properly recorded. 3.Determine if there is a difference in inventory cost of minor equipment between the Federal income tax basis and Medicare basis. If differences exist and adjustments were made to the inventory cost for Medicare purposes, determine the correctness of the adjustment and verify the accuracy of depreciation claimed. 4.Where depreciable assets are involved such as buildings, building equipment, major movable equipment, land improvements and leasehold improvements, determine that the historical cost basis for Medicare does not exceed historical cost used for Federal income tax purposes. D.Where records are maintained off premises (by governmental agencies, home offices or branches), on-site reviews of such records should be made. E.The audit of the provider's records could result in the need for audit adjustments that would affect the calculation of equity capital. Therefore, audit adjustments should be carried forward to the appropriate worksheets of the cost report. For steps to perform for the audit of equity capital, refer to section 14. Funded Depreciation 12.28Funding of depreciation is the practice of setting aside cash or other liquid assets in a fund separate from the general funds of the provider to be used for the replacement of the assets depreciated or for other capital purposes. The manner in which funded depreciation is handled could affect the allowability of cost in various areas such as interest income and expense and equity capital. Therefore, the auditor should determine if the provider is funding depreciation and, if so, perform the steps in section 11 for the audit of interest expense. 12.29Write the 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 13 - HOSPITAL AUDIT PROGRAM (12-85) Appraisals -13- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Preliminary Review of Intermediary's Approval and Review of Permanent File13.01 Determining Reason for Appraisal13.02 Review of Appraisal Agreement, Program, and Report13.03-13.04 Assets Excluded from Appraisal13.05 Disposal of Assets13.06 Review of Provider's Floor Plan13.07 Reconciliation of Appraised Assets to Provider's Records13.08 Consistent Use of Appraised Values13.09 Appraisal of Donated Assets13.10 Appraisal of Partial Casualty Losses13.11 Proprietary Providers13.12 Appraisal Expense13.13 Conclusion13.14 Section 13Appraisals Regulation Reference: 42 CFR 405.415 through 405.418 General: There are instances where historical cost records of depreciable fixed assets are not available or are incomplete. In such instances, the principles of reimbursement for provider costs provide that an appraisal of the historical cost of the asset made by a recognized expert will be acceptable for depreciation and owner's equity capital purposes. Before an appraisal is made, the provider must inform its intermediary of its intent and the reason for the appraisal. The provider must also make the proposed appraisal agreement available to its intermediary. The intermediary will determine if the appraisal firm qualifies as an expert and whether the proposed appraisal meets program requirements. If accepted, the appraisal must be performed within the time limits specified in the agreement. The appraisal of the historical cost of assets should produce a value approximating the cost of reproducing substantially identical assets of like type, quality and quantity at a price level in a bona fide market as of the date of acquisition. Also, the appraisal should assist in the construction, reconstruction or revision of accounting records to enable the provider to make proper distribution of depreciation expense in Medicare cost reports. If the appraisal is accepted by the intermediary, the basis for depreciation would be the appraised value of the assets. Objective:To ascertain that an appraisal was made to determine the proper basis for depreciation where the historical cost records of depreciable fixed assets are not available or are incomplete. To determine that the provider properly advised its intermediary of its intent and the reason for the appraisal. To determine that all applicable assets are included as part of the appraised values. To ascertain that assets were appraised in conformity with Medicare regulations and requirements. To determine that appraisal cost in excess of the cost basis used for Federal income tax purposes is not allowed under Medicare. OTHER REFERENCES: HCFA-Pub. 15-I, §§124, 134 Cost Report Forms:HCFA 2552-83 Worksheet A HCFA 2552-83 Worksheet B StepProcedure DescriptionAuditor's Initial and DateWP Ref 13.01Review the provider's asset values established at the time it entered the program. If historical costs of the assets were established with the use of an appraisal (reconstructed historical cost), ensure that: A.Intermediary's approval has been obtained. B.Request the provider to furnish adequate information supporting the appraisal values such as: 1.Identity of the appraiser. 2.Letter of acceptance of the appraisal by the intermediary. 3.Documentation that asset inventory, historical (appraised) values of assets and net book values as of the date of appraisal have been ascertained to be proper. 4.Copy of the appraisal program and appraisal report. 13.02Ascertain if the need of and reason for the appraisal were due to: A.No historical cost records of depreciable fixed assets were maintained. B.Incomplete records. 13.03Review the documents involved in the appraisal such as the appraisal agreement, appraisal program and appraisal report to determine the adequacy of the appraisal and the acceptability of the appraised asset values. In reviewing these documents, perform the following steps: A.Obtain a copy of the appraisal agreement and determine the following: 1.The appraisal date and estimated date of completion; 2.That the appraisal was performed within the time limits specified within the agreement; and 3.That the scope of the appraisal as outlined in the proposal was adequate. B.Appraisal Program - Since the condition of provider asset records varies significantly, an appraisal program could be comprehensive or partial. For instance, a provider may engage an appraisal firm to appraise a part of its facility for which no historical records have been maintained or a provider may need to have an appraisal made on a particular class of assets in a specific identified location. Review the appraisal program and determine that it includes the following: 1.A physical inventory and listing of pertinent data for all applicable assets in use, or in standby status, at the appraisal date or report date. 2.The acquisition cost of each item or unit of property, including architects fees, installation costs, freight, etc. 3.A classification of each item or unit of property in accordance with the most recent American Hospital Association Chart of Accounts. 4.Establishing an estimated useful life for each asset. 5.Determining a salvage value for each asset. 6.Selecting a depreciation method for each asset. 7.Calculation of the depreciation provisions for the current reporting period. 8.Calculation of accumulated depreciation using an approved basis from the date of acquisition to the start of the first reporting period in which actual depreciation is first claimed under Medicare. 9.Calculation of square footage for each cost center which identifies all rooms on a floor or within a building if this was not previously done by the provider. 10.A reconciliation of appraisal results with provider records. C.Appraisal Report - Review the appraisal report and ascertain that it includes a letter of certification and transmittal and a listing of assets appraised. 1.Determine that the letter of certification and transmittal includes the following: a.Name of provider. b.Location of facilities included in appraisal. c.Appraised date, date up to which accumulated depreciation was calculated (if other than appraisal date) and period for which current depreciation is calculated. d.Contents of data supplied to the provider such as summaries, schedules and plans. e.A description of the appraisal program. The description should contain information which is not readily apparent in the detailed results such as extent of the appraisal, depreciation methods, etc. f.Policy for determining capitalizable assets. g.Depreciation policy in the year of acquisition and disposal. h.Identification of material items included in the appraisal where the values of such items were obtained from outside sources without independent verification by the appraisal firm. 2.Determine that the listings of the appraised assets include the following data: a.Building location; b.Cost center or department; c.Asset description such as manufacturer's name, model number, serial number; d.Asset classification; e.Historical cost; f.Acquisition date; g.Estimated useful life to the provider; h.Salvage value; i.Depreciation provision for current reporting period; j.Accumulated depreciation provision at appraisal or other pertinent date; k.Pricing method where necessary for adequate disclosure, where more than one method is used on various assets; l.Reconciliations and comparisons with providers records; and m.Square footage and other allocation basis information for buildings and cost centers within buildings. 13.04If the audit is the initial audit where depreciation was computed based on an appraisal, a review should be made of the appraisal agreement, appraisal program and report. A limited amount of testing should be done to determine the acceptability of the appraisal values. From the information obtained by performing audit step 13.03, select a sample of assets from the inventory schedules and perform the following steps: A.Determine the asset acquisition cost by reviewing documents such as vendor invoices, cancelled checks and contractor construction completion statements. If these documents are not available, ascertain if the acquisition cost was determined by the use of other records such as revenue stamps, board minutes, contracts of purchase and properly recorded deeds. B.Determine if the classification of the item or property was made in accordance with the most recent American Hospital Association chart of accounts. C.Ascertain the useful life and salvage value established for the asset. D.Determine the method selected for depreciation. E.Verify the calculation of the accumulated depreciation from the date of acquisition to the start of the first reporting period under Medicare in which actual depreciation is first claimed. F.Verify that acceptable remaining useful lives were established for depreciation of the assets. G.Determine that the method of depreciation used in prior years is the same as used in the appraisal. 13.05Determine that the following type assets are not included in the appraisal: A.Fixed assets of a related organization not used by the provider in rendering patient care. B.Assets acquired in anticipation of expansion. C.Assets held for investment and not used in the plant operation. D.Leased Assets - If such assets are included, obtain supporting documentation to determine the reason for including the assets in the appraisal and the acceptability of the appraised values. 13.06There could be instances where depreciable assets were disposed of which would result in a gain or loss or recapture of depreciation. If any depreciable assets were disposed of, determine that they were treated correctly in the appraisal. 13.07Obtain a copy of the floor plan and verify that the buildings and square footage as listed in the appraisal ties into the floor plan. 13.08Where a comprehensive appraisal program was required, the appraisal firm should provide a reconciliation of the appraised assets to the provider's records. Review the reconciliations to determine if there were significant differences. If significant differences exist which are not explained in the appraisal report, determine the reason for the difference through discussion with provider personnel. 13.09For audits performed after the initial audit, ascertain that the appraised values approved by the intermediary were used in the computation of depreciation. Donated Assets 13.10Where assets were acquired through donation and the fair market value was not established as of the date of donation, an appraisal of such fair market value on the date of donation is considered acceptable for depreciation and equity capital purposes. To determine the acceptability of the appraised values, perform the following steps: A.Where assets other than constructed assets were donated, review the pricing source used to determine the fair market value. From documentation reviewed, determine the acceptability of the appraised value. B.Where material, labor and services are donated in the construction of an asset, the asset value is the sum of the appraised cost of the material, labor or services actually donated and the incurred cost of the part which was not donated. Review the pricing source used to determine the fair market value. From documentation reviewed, determine the acceptability of the appraised value. Partial Casualty Losses 13.11Where a depreciable asset is partially destroyed or damaged as a result of fire or other casualty, a reduction of the cost basis (book value) is assumed to have taken place. Therefore, the cost basis of the asset must be reduced to reflect the amount of the casualty loss regardless of whether; the loss is covered by insurance. In instances where an appraisal was made to determine the fair market value of a partially destroyed asset, perform the following steps: A.Review documentation to verify the fair market value before and after the casualty. B.Verify the calculations made in determining the amount of the casualty loss. C.Ascertain if any insurance proceeds were received. If so, determine if the proceeds were deducted from the amount of the casualty loss to determine the gain or loss. D.Ascertain that the allowable portion of the casualty loss was recorded as a deferred charge and amortized over the estimated useful life of the restored asset. Proprietary Providers 13.12Normally, a proprietary provider will not need an appraisal of depreciable assets since its Federal tax return and supporting records will show the historical cost basis of its assets. However, where an appraisal is necessary because the Federal tax records do not adequately reflect the cost of the facility for Medicare purposes, the intermediary will recognize the appraised cost for Medicare reimbursement. To determine the acceptability of adjustments made to the asset basis as shown on the Federal tax return perform the following steps: A.Obtain a copy of the tax return and compare the basis of depreciation to the appraisal report. If the basis for depreciation based on the appraisal exceeds the basis as shown on the tax return, determine the reason for the difference. B.Where there is a difference, determine if any assets are still in use that were originally charged off as expense or if there are assets fully depreciated for Federal income tax purposes that are still in use. Under these circumstances, Medicare will recognize for depreciation purposes an appropriate adjustment to the income tax valuation. C.If an adjustment is made to the income tax valuation, verify the accuracy of the adjustment. D.Costs in excess of the cost basis used for Federal income tax purposes will not be recognized under Medicare (except as discussed above). Therefore, a redetermination of historical cost must be made under the following conditions: 1.Where the intermediary approved an appraisal which resulted in establishment of asset costs in excess of the cost basis used for Federal income tax purposes. 2.Where a proprietary provider increased the historical cost basis used for Federal income tax purposes by reference to supporting documentation. a.Where a redetermination of historical cost was made, review the supporting documentation to determine its acceptability. Appraisal Expense 13.13Appraisal expense could be allowable or nonallowable depending upon the purpose for which it was incurred. To determine the allowability of appraisal expense, perform the following steps: A.Determine if the appraisal expense was incurred to establish plant records for Medicare purposes or if the appraisal was for research and other nonpatient departments. This expense could be included in allowable cost if the appraisal was approved by the intermediary. B.Determine if appraisal expense was incurred for other business purposes such as insurance coverage, tax values and financing. If so, ascertain that they are included as allowable cost in the administrative and general cost center. C.Determine if appraisal expense was incurred to establish values for the sale or anticipated sale of a provider organization. If so, ascertain that these expenses are not included in allowable cost. D.Ascertain if the appraisal expense incurred was to establish the historical cost of assets which were already adequately reflected in its books, records or tax returns. If so, disallow these costs. 13.14Write the 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 14 - HOSPITAL AUDIT PROGRAM (12-85) Return on Equity Capital -14- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review Balance Sheet14.01-14.02 Items Included and Excluded in Equity Capital Computation14.03 Temporary Investments14.04 Liabilities14.05 Interim Payments14.06-14.07 Reconcile Assets, Accumulated Depreciation & Liabilities with Tax Return14.08-14.09 Chain Organization/Home Office14.10 Monthly Entries on Average Equity14.11 Apportionment of ROE to HI Programs14.12 Conclusion14.13 Section 14Return on Equity Capital Regulation Reference: 42 CFR 405.429 Objective:To ascertain that a reasonable return on equity capital invested and used for patient care has been accurately computed for proprietary providers. To ensure that providers' equity capital reflects only those assets and liabilities that are necessary and proper for the operation of patient care activities. OTHER REFERENCES: HCFA-Pub. 15-I, §2100, §2152 HCFA-Pub. 15-II, §300 Cost Report Forms:HCFA 2552-83 Supplemental Worksheet E-4 HCFA 2552-83 Supplemental Worksheet F Parts I, II, III StepProcedure DescriptionAuditor's Initial and DateWP Ref General An allowance of a reasonable return on equity capital invested and used in the provision of patient care is includable as an element of the reasonable cost of covered services furnished to beneficiaries by proprietary providers. The amount allowable is determined by applying to the provider's equity capital a percentage equal to one and one-half times the average of the rates of interest on special issues of public debt obligations issued to the Federal Hospital Insurance Trust Fund for each of the months during the provider's reporting period. 14.01Review Balance Sheet for Computation of Equity Capital to ensure the validity of the balance sheet data used to determine equity capital. A.Perform an analysis of the balance sheet data to note and document significant differences between cost-reporting periods. 1.Compare the current period balance sheet with the prior period for consistency of the items presented and to identify any significant variances that should be explained by the provider such as: a.Assets or liabilities reported in one period, but not in another. b.Differences resulting from the comparison. (10 percent or more and the amount of difference is $25,000 or greater.) B.Trace provider's Balance Sheet For Computation of Equity Capital to the balance sheet used for tax purposes. (Form 1120, 1120S, for Corporations; Form 1065 for Partnerships; Form 990 for Non-Profit Corporation.) 14.02Review the Balance Sheet to determine which assets and liabilities are related to patient care facility operations and services and perform the following audit procedures: A.Identify unallowable assets and liabilities. 1.Ascertain that assets and related liabilities associated with patient care activities are properly included in the cost report. 2.Ascertain that assets and related liabilities not associated with patient care activities are excluded from the cost report. B.Verify that the provider is not including as many assets as possible and excluding liabilities in order to increase the Medicare average equity capital during the period. 14.03Review the computation of equity capital invested and used for patient care to ascertain the propriety of the items included or excluded from the computation. The following list of inclusions and exclusions may be used as a guide to ensure that the proper assets and liabilities have been included or excluded in the computation of equity capital. A.INCLUDABLE ITEMS IN COMPUTING EQUITY CAPITAL 1.All tax liabilities should be included in the computation of Medicare net equity. 2.Unamortized start-up or organizational costs. 3.Providers' leased assets from a related organization (limited to cost of ownership). 4.Any current or accelerated financing outstanding should be included in Medicare liabilities. 5.Any estimated receivable or liability included in the financial statement based on the outcome of a final settlement from a third party reimbursement agency (Medicare and Medicaid). 6.Funds deposited by provider who leases plant, property, or equipment used for patient care provided that the deposits are required by the terms of the lease. 7.Goodwill purchased in an acquisition prior to August 1970 of an existing organization. However, goodwill which has not been purchased, but has been internally generated, e.g., from a reorganization of the provider, is not includable in the provider's equity capital. B.EXCLUDABLE ITEMS IN COMPUTING EQUITY CAPITAL 1.Invested funds--all long-term investments and temporary investments lasting over 6 month duration. 2.Receivables created by loans between related organizations, receivables not related to patient care such as amounts due from owners, officers and employees, directors and other miscellaneous sources. 3.Cost of inventory items not related to patient care. 4.Any prepaid life insurance premium or the cash surrender value of life insurance on officers and key employees where the provider is the designated beneficiary. 5.Assets held in anticipation of expansion--costs of any fixed assets and related depreciation which are not related to patient care must be excluded (e.g., land for future expansion, clinic or professional building). 6.Construction in progress and liabilities connected with such construction. 7.Limitation on Federal participation for capital expenditures--costs of assets determined not to be consistent with requirements of §1122 of the Act, and related liabilities. 8.Donor restricted funds created from gifts and grants such as endowment funds. 9.Funded depreciation account--the balance in funded depreciation accounts which may encompass board restricted funds treated as funded depreciation accounts. 10.Goodwill purchased after July 1970, or internally generated goodwill e.g., from a reorganization of the provider. NOTE: Effective November 19, 1976, goodwill will no longer be included in the computation of the return on equity capital once the sum of the rates of allowable return on equity capital for months after July 1970 equals 100 percent. 11.Inter-company loans or receivables resulting from related entities such as a chain related organization. 12.Loans from owners should be excluded from liabilities if they meet any of the following three requirements: a.Loans from owners or related organizations made after June 30, 1966. b.Loans from owners or related organizations made before July 1, 1966, where the terms and conditions of payment have been modified after June 30, 1966. c.regardless of when the loan was made. 13.When the provider is on the PIP reimbursement method, the Medicare current receivable must only include the PIP retention amount and the outpatient receivable. 14.If the provider owns and operates a gift shop or any non-allowable cost center, all assets, such as inventories, fixed assets, etc., and liabilities, such as trade payables, accrued salaries, etc., must be eliminated. 15.Deposits on leases for assets in the following categories should be scrutinized for possible exclusion: a.Related organization; b.Not related to patient care; and c.Assets not meeting the requirements of §1122 of the Social Security Act (P.L. 92-603, §221). 16.Self-insurance reserve funds. 17.Assets and corresponding liabilities that are not related to patient care. 18.Where depreciation and/or interest attributable, to the excess amount of the purchase price over the historical cost of facilities and tangible assets acquired after July 1970 is excluded, the excess price over the historical cost paid for the facilities and tangible assets and/or related liability must also be excluded. 14.04Determine if there was a buildup of cash, temporary investments or other assets, which resulted in inflating equity capital. 14.05Ensure that the long-term debts are correctly reported on the balance sheet by performing the following audit steps: A.Compare the long-term liabilities (mortgage and/or bonds payable) to the related encumbered assets to determine if there is a significant imbalance between the two. B.Where the value of encumbered assets significantly exceeds the amount of long-term liabilities: 1.Inquire how the assets were financed, or 2.Determine whether the long-term liabilities or portion thereof were omitted from the balance sheet and in the computation of the average equity capital during the period. 14.06Ensure that the difference between the interim payments and the provider's net cost of covered services are handled correctly for Titles XVIII and XIX. A.Review/prepare workpapers showing that the proper adjustment is reflected in the equity capital shown on the balance sheet. B.Ascertain if the interim payments: 1.Exceed the cost of covered services. This amount constitutes a reduction of equity capital. 2.Are less than the cost, if so, add the difference to equity capital. 14.07Ensure that the proper Supplemental Worksheet includes the amount: A.In excess of cost over charges. B.Representing recovery of prior period cost. 14.08Review the provider's files or workpapers for documentation to support the asset values and liabilities that were reconciled to the provider's balance sheet used for tax purposes. Ensure that the income tax liability was properly adjusted to reflect changes in program cost. 14.09If the provider is utilizing a different method of depreciation for Medicare than for non-Medicare purposes, the accumulated depreciation per the Medicare plant fund analysis should be used. Chain Organization/Home Office 14.10Determine if the provider is a member of a chain organization. If so, A.Review the workpapers and/or report from home office to ascertain the procedure undertaken with regard to home office equity is in accordance with program instructions. B.Determine the type of control of the chain home office of the provider: Wholly owned; Leased; Partnership with chain; and Other. C.Obtain and review a copy of the home office equity capital schedule to verify the amount of home office equity included in the cost report. D.Ensure that proper consideration has been given to the beginning balance and ending balance of the home office equity. E.Ascertain that the cost report includes a separate equity capital computation schedule for home office if the provider included a share of home office equity capital. 1.Ensure that supporting schedule is included with the cost report showing the distribution of the home office equity balances to the providers in the chain. 2.If the home office equity schedule shows negative amounts, this should be included in the providers computation of equity capital included in the cost report. 14.11Review the appropriate worksheet of HCFA-2552 to ensure the accuracy of the computation of the average equity capital and the amount of return includable in allowable costs. A.Ensure that the beginning equity capital balance of the current period agrees with the prior year's finalized ending equity capital balance. Document differences noted, if any. B.Trace the annual rate of return used to the rate shown on the published interest tables. Determine that the correct rate was used to determine the amount of return on equity for the period under review. C.Review the provider's files for documentation or workpapers that support the actions taken on transactions affecting equity balance. Any large fluctuations in the equity balance should be given specific attention in the calculation of equity capital. A review should be made of the following type of transactions. 1.Monthly changes in the invested equity account such as additions and acquisitions. Review the appropriate worksheet of HCFA-2552 for evidence of asset acquisitions. 2.Gain or loss on the sale of fixed assets as determined in the audit of depreciation. Such gains or losses would be recognized in the month of occurrence. a.Review the applicable Worksheet A for the adjustments for gains and losses. 3.Monthly drawings of owner's salaries or personal expenses, dividend distributions, etc. 4.Other increases and decreases such as: a.Monthly changes in the loans from owner's account where they have been treated in accordance with HCFA Pub. 15-I, §1210. b.Material unrestricted donations or grants which increase the general fund balance. D.Where the ending monthly balance results in a negative amount, the equity capital computation is to be computed only on positive equity balances. No amounts are to be entered when the monthly balance results in a negative balance. This should be noted when reviewing the cost report. Apportionment 14.12Review the appropriate Supplemental Worksheet to verify the apportionment of the allowable return on equity capital. 14.13Write 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 15 - HOSPITAL AUDIT PROGRAM (12-85) Bad Debts -15- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Methods of Determining Bad Debt Expense15.01 Analysis of Deductible and Coinsurance Amounts Claimed15.02-15.03 Utilization of Collection Agency15.04 Review of Prior Year Bad Debts15.05 Review of Indigent Patient Claims15.06 Recovery of Prior Year Bad Debts15.07 Title XIX State Plans15.08 Conclusion15.09 Section 15Bad Debts Regulation Reference: §405.420 General: Bad debts are amounts considered to be uncollectible from accounts and notes receivable which were created or acquired in providing services. The Medicare Program recognizes that there are instances where a provider should not be held accountable for bad debts attributable to beneficiaries who received services covered by the program. Therefore, under the Medicare program, bad debts resulting from deductible and coinsurance amounts for provider services which are uncollectible from beneficiaries are considered in the program's calculation of reimbursement to the provider. However, the uncollectible amounts are not includable as such in the provider's allowable cost. Objective:To determine that allowable bad debts resulted from uncollectible deductibles and coinsurance amounts for provider services. To determine that unrecovered costs attributable to Medicare bad debts are properly computed in the program's calculation of reimbursement to the provider. To determine that a proper credit was made for the recovery of bad debts. To determine the allowability of Title XIX (Medicaid) bad debts if included in the calculation of allowable bad debts. To assure that bad debts for deductibles and coinsurance amounts applicable to the professional services of provider based physicians are not included in Medicare bad debts. OTHER REFERENCES: HCFA-Pub. 15-I, §300 Cost Report Forms:HCFA 2552-83, Worksheet E StepProcedure DescriptionAuditor's Initial and DateWP Ref 15.01The auditor should review the provider's policies and procedures to obtain an understanding of the method used to determine bad debts, bad debt collection effort and the method used to record the recovery of bad debts previously written off. After reviewing bad debt policies and procedures, the auditor should determine that only uncollectible deductible and coinsurance amounts are included in the calculation of reimbursable bad debts. 15.02Obtain documentation to support the amount claimed for bad debts applicable to Medicare beneficiaries. Verify the mathematical accuracy of the amount claimed for the year under review. 15.03From the documentation obtained in step 15.02, select a sample of patient accounts receivable ledger cards. Prepare a worksheet listing the patient's name, health insurance number, date of billing, dates of services, date of write-off and amounts of deductible and coinsurance claimed for bad debts. Based upon this analysis, perform the following audit steps: A.Determine that the bad debt relates only to deductibles and coinsurance for provider services and that bad debts related to deductibles and coinsurance for the professional patient care services of provider based physicians are not included. B.Ascertain that the provider made reasonable collection efforts to collect the bad debt by reviewing documentation such as bills issued to the patient or, if deceased, to the person responsible for the patient's financial obligations, and records of telephone or personal contacts with the beneficiary. C.Determine that the period of time from the first billing to the write-off date is at least 120 days unless the patient is considered indigent or medically indigent. D.Determine if any title XIX (Medicaid) bad debts are included in the amount claimed for bad debts. If Medicaid bad debts are included, perform audit step 15.08. E.Determine if the bad debt was for services which are not covered by Medicare or for services to non-Medicare patients. If so, disallow the amount claimed and consider expanding the sample. 15.04Where a provider utilizes the services of a collection agency, the provider need not refer all uncollected patient charges to the agency, but it may refer only uncollected charges above a specified minimum amount. If reasonable collection effort was applied, fees the collection agency charges the provider are recognized as an allowable administrative cost of the provider. To determine the acceptability of collection agency services, perform the following audit steps. A.Review provider contracts with the collection agency to determine that both Medicare and non-Medicare uncollectible amounts are handled in a similar manner. B.Determine that the patient's file is properly documented to substantiate the collection effort by reviewing the patient's file for copies of the agency's billing, follow-up letters and reports of telephone and personal contacts. C.Determine that bad debt amounts recovered by the collection agency are properly recorded by verifying that the full amount collected is credited to the patient's account and the collection fee is charged to administrative expense. 15.05Obtain a list of prior year bad debts claimed and ascertain that the same bad debts have not been claimed in the current year. 15.06There could be instances where the provider may have established that the beneficiary is either indigent or medically indigent. Determine if the provider has a listing of patients determined to be indigent. If so, select a sample of these patients' accounts receivable ledger cards and perform the following audit steps: A.Ascertain that the patient's indigence was determined by the provider. B.Determine if the provider took into account the patient's total resources which would include an analysis of assets (but only those which are convertible to cash and unnecessary for the patient's daily living), liabilities and income and expenses. C.Ascertain that no other source such as title XIX, local welfare agency or guardian would be legally responsible for the patient's medical bill. D.Ascertain that the patient's file contains documentation of the method by which indigence was determined in addition to all back-up information to substantiate the determination. E.If there is not sufficient documentation to conclude that the patient is indigent, disallow the amount claimed for the bad debt. 15.07Amounts included in allowable bad debts in a prior period could be recovered in a later reporting period. The auditor should verify that recoveries of such bad debts are properly offset. To determine if bad debt recoveries were properly handled, perform the following steps: A.Obtain a listing from the provider of bad debts recovered during the period under review. B.From the listing obtained, select a sample of patients' accounts receivable ledger cards. C.From the account receivable ledger card or other source documentation, determine the amount of bad debt that was originally reimbursed by the program. Ascertain if there was any recovery of the bad debt. Where a recovery was made, determine if reimbursable bad debts for the year of recovery were reduced by the amounts recovered. However, such reductions in reimbursable bad debts for the year of recovery should not exceed the bad debts reimbursed for the applicable prior period. D.Where the provider was not reimbursed by the program for bad debts for the reporting period in which the amount recovered was includable in allowable bad debts, ascertain that reimbursable bad debts in the period of recovery were not reduced. E.Determine if the provider records recoveries of previously written off accounts in a separate revenue account. Where this is done, analyze the revenue account to determine if any amounts relate to Medicare deductibles and coinsurance. If the provider cannot provide support for deposits made into the account, then make an adjustment based upon the following formula: TOTAL MEDICARE BAD DEBTS FOR CURRENT AND PRIOR YEAR Total Bad Debts for Current and Prior Year x Total Recoveries = Adjustment 15.08Prior to 1968, title XIX State plans under the Federal medical assistance programs were required to pay the Part A deductible and coinsurance amounts for inpatient hospital services. Effective January 1, 1968, State title XIX plans are no longer required to pay these amounts, but instead have the option to do so. Therefore, to the extent that State plans do not provide for payment of the Medicare deductible and coinsurance amounts for patients eligible for title XIX benefits, such unpaid amounts are allowable as bad debts provided that the requirements relative to indigent or medically indigent patients are met. To determine if title XIX deductible and coinsurance amounts for individuals entitled to benefits under title XIX are allowable bad debts, perform the following steps: A.Where the Medicare deductible and coinsurance amounts for patients eligible for title XIX benefits were paid by the State or Welfare agency, insure that those amounts are not included in the claimed bad debts. B.Review the provider's policies and procedures for billing the State for the deductible and coinsurance amounts. If the provider does not have an ongoing billing system or if there is a system but it has not operated properly, disallow related bad debts for deductible and coinsurance amounts claimed under Medicare. C.If the State is being billed correctly and has accepted liability, ascertain that title XIX deductible and coinsurance amounts are not included in the claimed bad debts. D.If the State has been billed, but did not pay the amount due, determine if there is a written notice of rejection in the patient's file. Review the rejection notice and if it is found to be acceptable allow the bad debt for Medicare purposes. 15.09Write 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 16 - HOSPITAL AUDIT PROGRAM (12-85) Cost to Related Organizations -16- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Known Relationships & Possible Exceptions16.01-16.02 Examination of Cost of Related Organizations16.03 Review of Supply Contracts16.04 Governmental Providers16.05 Leased Assets16.06 Basis of Allocation16.07 Management Contracts16.08 Teaching Hospitals16.09 Review of Home Office Cost Statement16.10 Leased Facility Cost16.11 Shared Service Cost16.12 Conclusion16.13 Section 16Cost to Related Organization Regulation Reference: 42 CFR 405.427 Objective:To determine that a profit is not paid to a provider for services, facilities or supplies through the related organization. To determine that the costs applicable to services, facilities and supplies furnished to the provider by the related organization are included in the allowable cost of the provider at the cost of the related organization. To determine that costs of the related organization are not artificially inflated due to less than arm's length bargaining. OTHER REFERENCES: HCFA-Pub. 15-I, §§1000, 2150, 2151, 2152, 2153 HCFA-Pub. 15-II, §300 Cost Report Forms:HCFA 2552-83, Worksheet A-8-1 HCFA 2552-83, Worksheet B-1 HCFA 2552-83, Worksheet F StepProcedure DescriptionAuditor's Initial and DateWP Ref 16.01Where dealings with related organizations are known: A.Obtain details of relationships, amount and classifications of expenses with a related organization. Verify the data to HCFA-2552, Worksheet A-8-1, Part B, Column 4. B.Determine the extent of business conducted with other oganizations related by common ownership or control. Where applicable, request the following relative to dealing with related organizations. 1.Lease agreements; 2.Management contracts; and 3.Consultant contracts. C.Where material, perform audit procedures considered necessary in the circumstances to determine that amounts included are in compliance with the principles of related organizations. D.Obtain representation letter signed by appropriate officer of the provider as to the full disclosure of data pertaining to related organizations. 16.02Review the nature of relationship to determine whether exceptions to related organization principles are applicable. A.Review worksheet A-8-1 and determine the provider's existing interrelationship. B.Ensure that the provider has submitted the proper evidence to support the application of the exception rule in accordance with §1010 of the Provider Reimbursement Manual (HCFA- Pub. 15-1). C.Verify the accuracy of the information submitted. 16.03Examine the amounts claimed as cost to related organizations. A.Determine that the amounts are related to patient care. B.Ascertain that the cost of services, facilities and supplies furnished by a related organization to the provider are included in the provider's allowable cost at the cost to the related organization. C.Review the cost from county, state or city governments to determine if they are related to patient care. D.Ensure that the amounts (audit steps 16.03 and C above) represent actual costs (not charges) of the related organization. E.Evaluate the cost incurred by the related organization (including home office, county, state, city, university or religious organization) as to accuracy and reasonableness. 1.Review documentation supporting the cost claimed to ascertain it includes, in sufficient detail, the nature of the cost by expense account. 2.Review Worksheet A-8-1 to properly ascertain that the amounts indicated in column 5 correctly represent the actual cost of the services rendered by the related organizations in accordance with HCFA-Pub. 15-I, §1000. 3.Ascertain that the costs claimed are not budgeted amounts, estimated costs or the fair market value of the services, facilities and supplies furnished. 4.Where provider included in allowable costs the fees or charges of the related organization, delete those amounts from the cost report and request the provider to obtain the costs and the basis for computation from the related organization. 5.Where rent paid to a related organization was included, delete the amount and ask the provider to supply the detailed costs of ownership. 16.04Review supply contracts to determine if the provider had executed a contract which created a related organization situation which was not previously disclosed by the provider. 16.05If the provider is operated by a state or local government and has included costs allocated to it from other components of the government entity, evaluate the costs by determining the: A.Nature and appropriateness of the types of services represented by the costs. B.Bases used to allocate the costs to the provider and other governmental activities. 16.06For proprietary providers, review the balance sheet for the computation of equity capital to determine that assets leased from related organizations are not included in the provider's equity. 16.07Ascertain the propriety and reasonableness of the bases used in allocating costs from the related organization, such as county, state, city, religious organizations, chain corporations or related providers. NOTE: An example of an unacceptable basis would be the allocation of utilities based on the ratio of total hospital expenditures to total university expenditures, data processing cost allocated on square feet, and business office expense allocated on an arbitrary ratio. 16.08Where cost of management contract fees are included in the allowable costs: A.Review the management contract as to the: 1.Extent of management duties. 2.Basis for management fees. 3.Reasonableness of the management fee. B.Determine the relationship between the provider and the management firm either through control or ownership (application of exception rule and arms-length transaction). C.Ascertain compliance/adherence of management firm to the provisions of the management contract. Teaching Hospitals 16.09Review provider's work papers supporting university costs claimed for Medicare reimbursement. A.Where costs are allocated to or from related universities, extended care facilities, joint service operations whose costs are shared, etc., review the amounts, composition and bases of the cost allocations for propriety and reasonableness. 1.Compare current and prior period costs. Significant cost variance between the two periods should be explained. 2.Examine university costs to determine if they are related to patient care. 3.Review the basis for allocating university costs to the provider for accuracy and reasonableness. Mother House and Chain Organization 16.10Review Worksheet A-8-1 to determine the following: A.If home office costs were claimed by the provider and/or management fees or charges were assessed to the provider for services rendered, ensure that these home office costs were supported by a cost statement showing the calculation of home office costs allocated to the organizations in the chain, including the provider in accordance with HCFA-Pub. 15-I, §§2150 through 2153. B.Ascertain that the proper transfer of home office costs is made between expense and capital for TEFRA and PPS cost report years by performing the following audit steps. 1.Determine from the desk review workpapers if any areas of the home office cost report were noted for further audit review. 2.Ascertain the most recent year for which home office audits are complete and determine if any exceptions were noted in the base year or TEFRA year in the treatment of cost as an expense or pass-through. 3.Determine that the provider's cost report reflects its proper allocable share of home office costs as identified by pooled functional and direct cost allocations and the breakdown of pass-throughs in a consistent manner. 16.11If a provider leases a facility from a related organization, determine that the rent paid is not included in the provider's cost. Determine that the provider only included the costs of ownership of the facility (depreciation, interest, real estate taxes, etc.) in its cost. 16.12Determine if the provider is part of a shared-service organization. If so, review the documents of the shared-service organization to ascertain if a related party relationship exists. If a related party relationship exists, the cost of services or supplies from the shared-service organization should be reviewed based upon the related organization principle. 16.13Write 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 17 - HOSPITAL AUDIT PROGRAM (12-85) Physical Therapy and Other Therapy Services -17- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review Extent of Therapy Services17.01 Determine Hourly Salary Equivalency and Travel Allowance Rates17.02 Review Therapist Contracts17.03-17.05 Review Internal Audit WPs17.06 Review CPA's WPs17.07 Nonallowable Travel Allowance17.08 Rural Providers17.09 Other Therapy Allowances17.10-17.12 Conclusion17.13 Section 17Physical Therapy and Other Therapy Services Regulation Reference: 42 CFR 405.432 General: Under the regular Medicare payment system, a provider is reimbursed for the reasonable costs of services provided by physical, occupational, speech and other therapists for services performed. The cost is limited to: (1) amounts equivalent to the salary and other costs that would have been incurred by the provider if the services had been performed in an employment relationship plus (2) an allowance to compensate for other costs incurred in furnishing services under arrangements. In the audit steps which make up this section, a step may not address a specific type therapy but it should be noted that it applies to all type therapy. Objective:To determine that the provider is not reimbursed costs for therapy services in excess of the cost that would be incurred in an employment relationship. To determine that costs for outside therapy services do not exceed the limits established by HCFA. OTHER REFERENCES: HCFA-Pub. 15-I, §714 HCFA-Pub. 13-2, §2138 Cost Report Forms:HCFA-2552-83, Worksheet A StepProcedure DescriptionAuditor's Initial and DateWP Ref 17.01Meet with appropriate provider personnel to determine the extent of therapy services provided by outside suppliers. The following data should be obtained through discussion with the provider. A.Type of therapy services furnished by outside suppliers. B.The extent of full time or regular part time services. C.The extent of limited part time or intermittent services. D.The existence of contracts between the provider and outside supplier. E.Type of accounting records maintained for recording costs incurred for services furnished by outside suppliers. F.A master listing of outside therapists. 17.02Determine the adjusted hourly salary equivalency amount and the standard travel allowance in effect for the hospital under audit. 17.03If contracts exist between the provider and outside supplier, obtain the contract file and perform the following audit procedures: A.Prepare a worksheet listing: Therapist name; Type therapy provided; Classification as to full or part time; Hourly salary equivalency amount; Amount of travel allowance; and Amount of other expense claimed. B.Based upon the therapist's classification as to full time or part time, select 2 months charges for review and determine the following: Number of hours the outside supplier worked at the hospital. Number of days the outside supplier was on site. Costs associated with equipment and supplies owned or provided by the therapist. Cost and hours worked by physical therapy assistants or aides furnished by the outside supplier. Hours worked in excess of the normal work week. Hourly salary equivalency rate paid. Travel allowance rate paid. 17.04If a contract does not exist between the provider and therapist, determine if the provider has a master listing of outside therapy providers. If a master file is not maintained, meet with appropriate provider personnel in the hospital's therapy departments and obtain the names of outside suppliers. 17.05From the listing of outside suppliers obtained in audit step 17.04, select 2 therapists from each therapy category. For the therapists selected for review, perform the following audit steps. A.Obtain the cash disbursements journal and select 2 months disbursements for review. B.Review the disbursements journal to determine the amounts paid to the therapists selected for review. Trace back to the invoice presented for payment. C.Prepare a worksheet and, from the invoice presented for payment, list the information as outlined in audit step 17.03 B, 1 through 7. 17.06Through discussion with provider personnel, determine if an internal audit was recently performed on the cost of outside therapy services. If so, request the workpaper file and review the workpapers noting any areas covered which would be of value in performing the audit. 17.07Through discussion with personnel from the provider's CPA firm, determine if any recent review was made of costs of outside therapy services. If so, request that the workpapers be made available for review. Review the workpapers and abstract any data which would be of value in the review. 17.08When reviewing costs paid for outside therapy services, ascertain that no travel allowance was paid for therapy services performed at the site of the contracting supplier. Also, determine that no travel allowance was paid for a therapist who performs only administrative duties in the capacity of an Administrator of a contracting organization. 17.09If the provider is a rural provider, it may require the services of a therapist on a limited part-time or intermittent basis because of the size of the facility. In these instances, costs for therapy services may be evaluated on a reasonable rate per unit of service. If the hospital is in this category, perform these audit steps. A.Determine that the contract between the facility and the outside supplier provides for a method of payment based on a rate per unit of service. B.If the contract does not include this provision, determine that reimbursement did not exceed the guidelines established by HCFA for the hourly amounts plus other allowable costs. 17.10Determine if the outside therapist, in addition to the hourly salary equivalency amount and travel allowance, claimed any other allowances listed below.If the provider is a rural provider, it may require the services of a therapist on a limited part-time or intermittent basis because of the size of the facility. In these instances, costs for therapy services may be evaluated on a reasonable rate per unit of service. If the hospital is in this category, perform these audit steps. A.Equipment - an additional allowance may be given for depreciable equipment remaining at the provider site and for equipment not remaining at the site. B.Leased equipment - an allowance may be made for depreciable equipment that is leased or rented by the outside supplier. C.Repair and maintenance costs. D.Supplies - actual reasonable direct and indirect costs of any supplies furnished for direct patient care are allowable. 17.11If the outside therapist claims reimbursement for any of the items listed in audit step 17.10 A through D, he must maintain proper records and provide adequate documentation to support the cost claimed. If the review disclosed therapists who claimed such costs, request documentation to support the amount claimed. 17.12Determine if the outside therapists claimed costs for physical therapy assistants and aides, and respiratory therapy aides and trainees. If so, determine that the hourly rate paid to aides and trainees is comparable to the rate paid the provider's employees of comparable classification and qualification. Also, determine that the hourly rate paid assistants is the going rate paid by providers in the area to salaried physical therapy assistants. 17.13Write a conclusion on audit work 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 18 - HOSPITAL AUDIT PROGRAM (12-85) Limitations on Coverage of Costs -18- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Determine Hospital Classification18.01 Determine Hospital Cost Limits18.02 Review Statistics on Routine Days18.03 Computation of Cost Limits18.04-18.05 Conclusion18.06 Section 18Limitations on Coverage of Costs Regulation Reference: 42 CFR 404.460, 405.461, 405.452(d)(2), 405.452(d)(7), 405.455(d)(1) and (2) General: Under the regular Medicare payment system, in the determination of allowability of provider costs, the costs determined to be in excess of those necessary in the efficient delivery of needed health services are excluded. Therefore, cost limits could be imposed on direct or indirect overall costs, costs of specific items or services or groups of items or services. Cost limits on inpatient general routine service cost do not apply to the cost of special care units, ancillary services, outpatient services or to the cost of research. Objective:To ensure that reimbursement for the cost of inpatient routine services does not exceed the inpatient routine service cost limits. To ascertain that costs in excess of the general routine service cost limits are excluded from the provider's allowable costs. OTHER REFERENCES: HCFA-Pub. 15-I, §2500 Cost Report Forms:HCFA 2552-83, Statistical Data Pages 3 and 4 HCFA 2552-83, Worksheet D-1, Part I StepProcedure DescriptionAuditor's Initial and DateWP Ref 18.01Determine the hospital classification as to bed size and whether it is in an urban or nonurban location. This is necessary in order to determine the cost limits to be applied. 18.02Determine the cost limits applicable to the hospital under review. 18.03Review the statistical data page of the cost report to be certain that the number of days used to calculate the limitation of routine costs are based on Medicare general routine service days only. 18.04Review the computation of the cost limits as shown on Worksheet D-1, Part I, HCFA Form 2552. Ascertain that the per diem rate used in the calculation is the same as that listed in the published "Schedule of Limits on Hospital Inpatient General Routine Service Costs" (HCFA Pub. 15-I, §2520.1). 18.05If the provider's inpatient general routine service costs exceed the limitation, ascertain that the provider was not reimbursed the excess costs. 18.06Write a conclusion on audit work 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 19 - HOSPITAL AUDIT PROGRAM (12-85) Cost of Educational Activities -19- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Validation of an Approved Program19.01 Testing of Costs19.02-19.03 Joint Educational Programs19.04-19.06 Nonapproved Programs19.07 Revenue and Subsidies19.08-19.09 Training and Direct Medical Education Costs19.10-19.12 Conclusion19.13 Section 19Cost of Educational Activities Regulation Reference: 42 CFR 405.421 and 405.422 to 405.525 Objective:To verify that only the net cost of approved educational activities are included as allowable expenses. To determine that all related income has been offset against the cost of operating the educational activity. To determine that the cost of interns and residents that are not in an approved program are reimbursed under Part B and any teaching costs associated with the nonapproved program are excluded from allowable costs. To determine that allowable costs do not include cash contributions by the provider to support nursing or paramedical training programs operated by other organizations. OTHER REFERENCES: HCFA-Pub. 15-I, §§400, 500, 2100, 2200, and 2500 Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet B HCFA 2552-83, Worksheet D-2, Part II HCFA 2552-83, Worksheet F, Part I HCFA 2552-83, Worksheet G HCFA 2552-83, Worksheet G-1 HCFA 2552-83, Worksheet G-3 StepProcedure DescriptionAuditor's Initial and DateWP Ref 19.01Verify the adequacy of documentation for educational program cost claimed by the provider by performing the following audit procedures: A.Determine whether the program is recognized and is an approved professional or other training program by reviewing: 1.Correspondence from educational institutions concerning the type of programs being conducted. 2.Certification from approving bodies. 3.Documentation verifying that the provider is the legal operator of the educational program being conducted. B.Where the provider is the legal operator (or joint operator with other providers) of the educational program, the following steps should be performed: 1.Review a copy of the written agreement executed between the provider and the educational institution specifying the services being rendered. 2.In cases where no agreement exists, review other documentary evidence, such as bills for services from the educational institution, to determine the reasonableness of allowable costs recorded in the provider's accounts. 19.02Examine claimed educational costs to assure that they are under an approved program. A.Review the operating cost of the provider's educational activities for composition, reasonableness, and general applicability. 1.Review the trial balance of expenses for costs of approved educational programs, such as interns and residents, nursing schools, and/or paramedical education programs. 2.Identify educational program costs on the trial balance. 3.Perform an analysis of educational program costs to ensure that the costs are proper and reasonable. NOTE: Educational program costs should not include cash contributions by the provider to support nursing or paramedical training programs operated by other organizations. B.Ensure that nursing school costs and interns and residents costs are properly allocated to correct cost centers such as operating rooms, delivery rooms, nursing services, special care units, as applicable. C.Determine the number of cost centers receiving interns and residents cost allocations to assure they agree with type and numbers of approved teaching programs. EXAMPLES: 1.Where the provider has been approved to offer teaching programs for interns and residents in three areas of medical services such as surgery, maternity and coronary and their service time is restricted to those work areas, then the cost allocations should be in the operating room, delivery room and coronary care unit. 2.If the interns and residents are also required to furnish services to patients transferred to inpatient areas, then the time spent by the interns and residents in performing the services must be reflected in routine service cost centers through the cost allocation process. 19.03Determine the allowability of part time educational cost. Examine employee's written agreement to complete the training course while continuing in provider's employ for at least 6 months thereafter. 19.04Where a provider participates and lends financial support to educational programs conducted by other organizations (e.g., local community colleges, universities), HCFA-Pub. 15-I, §404.2 should be reviewed in determining the allowability of education costs incurred by the provider. A.Review the provider's files to determine if costs or charges for services are reasonable in relation to the services furnished. B.Ensure that any payments to educational institutions were related to the provider's training programs. 19.05Where there is a medical school, university-based hospital or other educational institution related to the provider, the following should be performed: A.Ensure that the costs or charges for services are reasonable in relation to the services furnished. B.Ensure that the costs are properly documented, necessary and do not reflect any portion of profit. C.Ascertain that the cost and not the charges are allowable. 19.06In cases where the provider furnished space, services or materials to an educational institution, ensure that costs other than recognized educational costs are excluded from the provider's allowable costs. NONAPPROVED PROGRAMS 19.07If the cost report reflects interns and residents costs not in an approved program, the following procedures should be performed: A.Ensure that administrative and other costs applicable to nonapproved teaching activities were excluded from reimbursement. B.Verify that educational costs for nonapproved programs have been charged to an unallowable cost center and cancelled through the stepdown process. C.Where a provider employs interns and residents not under an approved teaching program, determine that Part B reimburse- ment has been properly treated on Worksheet D-2 and that any unallowable costs have been removed. NOTE: The cost of services provided to program beneficiaries by interns and residents either employed by a hospital without a teaching program or in conjunction with a teaching program which is not approved, are reimbursable under Part B. D.Verify the inpatient and outpatient allocation for nonapproved intern and resident program costs. 1.Review Worksheet D-2 to ensure that the percentages shown in column 1 are based on the time spent by interns and residents in each area. 2.Ascertain that all costs for interns and residents in a nonapproved program are subject to 20 percent coinsurance. NOTE: There is no allowable cost for supervision or administrative function for interns and residents in nonapproved programs. REVENUE AND SUBSIDIES RECEIVED 19.08Ensure that revenues and subsidies received have been properly offset against the cost of operating the educational activity before stepdown. A.Review Worksheets G, G-1, G-3, Supplemental Worksheet F, Part I and other provider financial statements to determine that revenues/subsidies directly related to specific educational programs are offset against operating cost of the educational activity. Those items include: 1.Tuition, scholarships, textbooks, room and board revenues. 2.Governmental subsidies restricted for use on specific educational programs. 3.Revenues received by a provider with an approved intern and resident program from affiliated hospitals for the services of interns, residents and supervisory physicians. 4.Recovery of student nurses salaries. B.Review Worksheet A-8 for offsets to allowable cost. 19.09If provider is County, State or Federally owned and operated, review any subsidies received from those governmental bodies as to any restriction to their use for approved training programs. Ensure that Worksheet A-8 adjustments have been made for the applicable amounts. 19.10Determine the type of training cost which was eliminated from the cost report for rate setting purposes in the TEFRA base year. 19.11Under TEFRA, only nursing education and intern and resident costs can be treated as pass-throughs. Determine how these costs were treated in the TEFRA and PPS cost report years. 19.12For PPS cost report years, determine that direct medical education cost is handled consistent with the base year, i.e. operating expense or pass-through. 19.13Write a conclusion on the audit steps 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 20 - HOSPITAL AUDIT PROGRAM (12-85) Value of Services of Non Paid Workers -20- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of Files20.01-20.02 Non-Paid Payroll Records20.03 Accuracy of Computation20.04-20.06 Maintenance Costs20.07-20.08 Payment of Wages & Fringes20.09 Director of Volunteers20.10 Overhead Allocation Statistics20.11 Home Office/Mother House20.12 Conclusion20.13 Section 20Value of Services of Nonpaid Workers Regulation Reference: 42 CFR 405.424 General:The value of services performed by nonpaid workers, who work more than 20 hours per week in various full-time positions usually occupied by paid personnel of providers not operated by or related to religious orders, is allowable in reimbursable costs as an operating expense. However, such amounts must be identifiable in the books and records as a legal obligation of the institutions. Objective:To determine that amounts allowed as value of services of nonpaid workers are: A. For work related to patient care activities. B. Reasonable and equivalent to amounts that would be paid to regular salaried workers. To ensure that the costs imputed for nonpaid workers were properly documented, determined and supported by a legal obligation. To ensure that any imputed costs for the value of services performed by nonpaid workers at the home office of a chain organization or the mother house are related to patient care. To ascertain that maintenance costs (if any) have been properly determined and removed from allowable amounts. To ascertain that nonallowable costs of nonpaid workers were determined through cost finding procedures or through the analysis method. OTHER REFERENCES: HCFA-Pub. 15-I, §§700, 2150, 2160 Cost Report Forms:HCFA 2552-83, Worksheet A HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet A-8-1 HCFA 2552-83, Worksheet B HCFA 2552-83, Worksheet B-1 StepProcedure DescriptionAuditor's Initial and DateWP Ref 20.01Through discussion with the provider, determine if costs were claimed for nonpaid workers. If so, request documentation to support the amount claimed. 20.02Obtain and review provider contracts with nonpaid workers organizations and perform the following audit procedures: A.Determine that actual written contracts exist between the organization of nonpaid workers and the provider and that there is a legal obligation to remunerate the organization of nonpaid workers for rendered services. B.Determine that all nonpaid workers are members of the organization involved in the legal arrangement with the provider. C.Ascertain that membership substantiation is maintained in the files of the organization of the nonpaid workers. D.Obtain a copy of the agreement entered into by the provider and the organization of nonpaid workers. Review the agreement to determine if it includes any provisions which would have an impact on Medicare reimbursement. E.Determine that a bonafide payment was made to the organization of nonpaid workers. NOTE: If the contract contains a clause specifying that the organization of non-paid workers has the legal obligation to pay the provider all or part of the salary liability, a legally enforceable agreement would not exist. 20.03Review the provider's books and records to ensure that the provider has done the following: A.Discharged its legal liability to the organization of nonpaid workers. B.Adhered to the terms of payment, the positions provided for and the period of work in accordance with program requirements. C.Maintained adequate documentation to support the value of the imputed services performed by nonpaid workers. Determine if the provider maintains the following documentation. 1.Job classification. 2.Surveys of full-time positions normally held by paid personnel of comparable providers that are not operated by or related to religious orders. 3.Work schedule. 4.Time cards. 20.04Establish if the provider maintains payroll records of reimbursable services performed by nonpaid workers and whether the records are equivalent to records maintained for paid employees. If so, review the work schedules, time cards, job classifications, etc. of nonpaid workers. 20.05Review the compensation claimed by position and determine reasonableness as to: A.Positions involved are essential in providing patient care. B.Compensation has been traditionally reimbursed by third parties. C.Qualifications of nonpaid workers are comparable to the qualifications of paid employees performing identical services. D.Salaries attributable to nonpaid workers are similar to the salaries of paid employees performing identical services. 20.06Verify that the computation of imputed cost for the services of nonpaid workers in the departmental cost centers are accurate by performing the following audit steps. A.Review documentary evidence that supports the value of services performed by nonpaid workers. B.Verify that overtime was not included as a part of imputed salary cost of the nonpaid workers. C.Ascertain that adjustments to expenses were made for those workers whose imputed cost could be recovered from a fund, grant or special program fund. D.Determine that the net value of services of nonpaid workers was imputed as follows: 1.The costs of any prerequisites and maintenance (e.g., Sisters' maintenance) furnished to nonpaid workers in excess of those provided other employees in comparable positions are deducted from the gross value of their services. 2.The reimbursable costs of services of individual nonpaid workers do not exceed: a.The amount paid to an individual employee performing similar services. b.The amount provided under the terms of the contract. c.The amount paid for such services by other providers in the area of similar size, scope of services, and utilization where the services of nonpaid workers were performed in positions unlike any other full time position in the provider's organization. 20.07Determine whether the direct costs related to maintenance costs have been properly allocated by performing the following audit steps: A.Review Worksheet A to determine that maintenance costs for nonpaid workers has been allocated to a nonallowable cost center. B.Examine Worksheet B to assure that the cost of maintenance for nonpaid workers has been carried through the cost finding process. C.If the analysis method was used to determine the amount of maintenace cost, perquisites, and fringe benefits incurred for nonpaid workers, check the methodology for accuracy and reasonableness by performing the following steps: 1.Determine that the computations are supportable by auditable documentation. 2.Ensure that arbitrary estimates were not used to compute costs. 3.Determine that the adjustment made to the department is not for direct cost only, but includes applicable overhead for the department. 4.If the labor and overhead (fringe benefits, perquisites, maintenance, etc.) exceed allowable costs incurred for comparable paid workers, the excess cost should be charged to the nonallowable non- paid workers' cost center. 5.Review the provider's books and records to assure that any payments made to the provider by the organization of nonpaid workers are offset against the total costs incurred by the provider. 20.08Determine that bona fide payment has been made to the proper organization within 1 year after the end of the accounting period to which the liability was determined. 20.09If the provider was not required to make payments to regulatory agencies on behalf of the nonpaid workers, for social security taxes, workmen's compensation etc., stemming from legislative requirements, ensure that no imputed values for such taxes were included in the determination of value of services to nonpaid workers. 20.10Where compensation of Director of nonpaid workers (Mother House, volunteer, etc.) was included in allowable cost, determine that the amount paid is reasonable and related to patient care. 20.11Examine the allocation made to nonpaid workers cost to assure that any allocation in general service costs were properly made. Also, determine that any allocation of Sisters' maintenance costs to various cost centers are proper and reasonable. HOME OFFICE OR MOTHER HOUSE 20.12Any imputed value of services by the home office personnel of a chain organization or mother house must be reviewed to verify that it is for services related to patient care. Examine the work schedule and list the nonpaid workers that may be members of a mother house or home office. 20.13Write a conclusion on the audit steps 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 21 - HOSPITAL AUDIT PROGRAM (12-85) Balance Sheet -21- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review21.01-21.02 Cash & Investments21.03-21.04 Receivables21.05 Inventories21.06 Prepaid Expenses21.07 Notes & Accounts Payable21.08 Accrued Liabilities21.09 Fund Balance21.10 Conclusion21.11 Section 21Balance Sheet Regulation Reference: 42 CFR 405.406, 405.420 and 405.429 Objective:To review the assets, liabilities and fund balances of the provider for consistency of the items presented and conformity with Medicare instructions and generally accepted accounting principles. OTHER REFERENCES: HCFA-Pub. 15-I, §§1200, 2152 Cost Report Forms:HCFA 2552-83, Worksheet A-7 HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet G HCFA 2552-83, Worksheet G-1 HCFA 2552-83, Supplemental Wkst. F, Part I to Part III StepProcedure DescriptionAuditor's Initial and DateWP Ref 21.01NOTE: If the facility's outside auditors performed an audit of the provider's balance sheet, which includes audit effort as outlined in this section, and reliance can be placed on the audit performed, then audit steps in this section which were adequately reviewed may be eliminated. In auditing provider costs, the proper scope of the review of the balance sheet accounts (other than fixed assets) is a matter of professional judgment. A material error or inconsistency in the balance sheet accounts can have a significant impact on the amount shown on the provider's costs in a given period. Accordingly, the scope of the audit of the balance sheet accounts for Medicare purposes is dependent upon the: A.Effectiveness of the internal controls.D B.Results of tests performed in other areas. C.Past experience. D.Relative materiality of the account balances. E.Potential for significant misstatements of costs to the Medicare program. 21.02Obtain provider's balance sheets for the current and prior year. Review summary of the assets, liabilities and capital for all funds, i.e., general, specific, endowment, plant. A.Review the auditor's notes to the audit/desk review of the balance sheets for: 1.Inconsistencies identified and the exceptions indicated in the desk review. 2.Unallowable assets and liabilities flagged for investigation and/or adjustment. B.Review the balance sheet (HCFA-2552, Worksheet G) for the current period and compare it with the balance sheet of the prior period for consistency of the items presented and for conformity with generally accepted accounting principles. Verify the following specific areas for appropriateness: 1.Cash (21.03); 2.Investments (21.04); 3.Receivables (21.05); 4.Inventories (21.06); 5.Prepaid Expenses (21.07); 6.Accounts Payable (21.08); 7.Accrued Liabilities (21.09); and 8.Fund Balances (21.10); C.Perform an analysis of the balance sheet (HCFA-2552, Worksheet G) to note and document significant differences between cost reporting periods such as: 1.Appearance of items that are not related to patient care. 2.Assets and liabilities reported in the current period but not in prior periods, or vice versa. 3.Significant differences resulting from the comparison (Procedure 21.02B). D.Trace the assets and liabilities recorded on Worksheet G to the provider's financial statements where financial statements are available. E.Ensure that the value of plant property listed on the balance sheet, Worksheet G agrees with amounts shown on Worksheet A-7. Investigate the differences and obtain provider's explanation. F.Review changes in fund balance on Worksheet G-1 for items causing changes in fund balances which are not included on the profit and loss statement. (See Procedure 21.10H.) G.Ensure that the long-term debts are correctly reported on the balance sheet. 1.Compare the long-term liabilities such as mortgage and bonds payable to the related assets to determine if there is a significant imbalance between the two. (Normally, liabilities are significantly lower than the assets.) 2.Check and document the explanation for any significant difference noted. Where value of related assets is significantly above the amount of liabilities: a.Inquire how the related assets were financed, or b.Determine whether the long-term liabilities or portion thereof were omitted from the balance sheet. H.Examine the provider's income tax liability. Review the provider's files for documentation or workpapers to verify that the asset values and liabilities were reconciled to the provider's balance sheet used for tax purposes. I.Review self-insurance reserves to verify any liability losses claimed in the current period. J.If provider is using a different method of depreciation for Medicare, verify that the method used is in accordance with existing regulations. Cash 21.03Review the bank reconciliations prepared by the provider's personnel. A.Obtain confirmation of the provider's bank accounts. B.Tie the cash balance per books to the appropriate general ledger accounts. C.Trace the balance per bank to the appropriate bank statements. D.Review the bank reconciliations and investigate large checks that remain outstanding at the cut-off date. E.Select a block of checks issued during the final month of the accounting period under review, and: 1.Check numerical control (account for the numerical sequence and verify voided checks for the month under audit). 2.Trace the checks issued to cash disbursement records, comparing the number, date, payee and amount. 3.Verify authorized check signers. 4.Compare endorsement to indicated payee. 5.Examine cancellation dates and length of time outstanding. If cancellation date is after the end of accounting period, trace check to outstanding checks list. F.Trace deposits in transit at end of accounting period to the subsequent bank statement and investigate any unusual time lag. G.Trace and tie out interbank and interfund cash transfers for three to five business days before and after the audit date. H.Evaluate provider's procedures for periodic replenishment and audit of petty cash funds and imprest cash funds. 21.04Obtain/prepare summary schedule of investment transactions (e.g., securities, real estate). A.Prepare an analysis of investment transactions in funds for which income will affect allowable cost for the year. 1.Trace the beginning balances to prior year's ending balances or audit working papers. 2.Test check the changes in the fund principal during the year to the statement of transactions furnished by the custodian. If an outside custodian is not used or if a statement of transactions is not prepared, trace transactions to the cash receipts and disbursements records and to brokers' advices or other supporting data. 3.Verify changes in the investment accounts during the year per authorization in the minutes of the board of directors. 4.If considered necessary, review amortization of bond premium and discount for propriety and consistency with prior years. 5.Compare balances at year end to the confirmation received from the outside custodian or from the records of the provider. B.Ascertain that all investment property (i.e., not used in the general operations) are segregated and that the related income and expenses have been excluded from operations (e.g., rental property held for the production of income). C.Determine which investments produce income that may affect allowable costs. 1.As to the investments held during the year, test check: a.computation of interest income received and accrued. b.dividend income by reference to published dividend records. 2.If an investment pool is maintained, review the distribution of income for propriety. 3.Ensure that applicable investment income has been properly offset against interest expense or other appropriate operating costs. NOTE: Investment income must be used to reduce operating costs to the extent that interest expense is otherwise properly included therein, except income derived from: a.Funded depreciation. b.Provider's qualified pension fund. c.Gifts and/or grants, restricted or unrestricted, which are held separate and not commingled with other funds. d.Donor-restricted grants, gifts or endowments designated by the donor for paying specific operating costs but not in excess of the costs incurred in the period. D.Trace investment income and gain or loss on investment transactions (sale of investments held) to the general fund income account, the applicable fund balance account/analysis, or appropriate revenue account on the working trial balance. E.If the provider is funding depreciation, ascertain that the funds are being used for equipment purchases, plant improvements, etc. If funds are used for other purposes, income attributable to funded depreciation should be ratably offset against interest expense in operations. Receivables 21.05Review the trial balances of patients' accounts receivable as of year end and tie the totals to general ledger control accounts. Determine whether the trial balances were independently footed and whether aged trial balances of patient accounts are available. A.Perform the following audit procedures generally applicable to "Bad Debts" in a Medicare cost audit: 1.Review the provider's "bad debt" policy and determine whether its application to both Medicare and other patients is consistent. 2.Obtain a listing of bad debts claimed on the Medicare cost report. 3.Ascertain whether reasonable collection efforts were made. 4.Examine claim forms or other pertinent documentation (on a test basis) to establish that the patients were in fact Medicare beneficiaries. 5.Determine that the Medicare bad debts were restricted to the deductibles and coinsurance amounts not collected. Bad debts representing charges for noncovered services to Medicare beneficiaries are not reimbursable under the Medicare program. B.For receivables due from other than patients, audit as deemed necessary at time of field work. Review possibility of supplier refunds due to quantity adjustments on annual purchase agreements, etc. C.For the reserve for doubtful accounts, perform the following audit steps: 1.Analyze the reserve account for the year. Review the accounting treatment of recoveries of previously written off accounts to ensure proper offset to claimed reimbursement and also trace the provision (charge to expense) for doubtful accounts for proper exclusion from allowable Medicare costs. 2.Obtain a listing of the Medicare and non-Medicare accounts written off during the year as not collectible from the beneficiaries or other sources and tie into the reserve analysis. D.Compare the summary of aging analysis with the previous year. Compare bad debt write-offs, recoveries and the average age of receivables for a 3-year period to show trends in collection patterns. E.Review briefly the status of past-due Medicare receivables (not yet written off) and obtain comments of management as to the prospect of collectibility. Inventories 21.06A.Audit of recovery of supplies accounts is normally subject to limited audit testing. The specific items to be tested should be selected on the basis of: 1.Materiality 2.Nature of the items involved; and 3.Reasonableness of the account balance for the current year compared with the prior year. B.Ascertain that adequate and effective control procedures are in effect for the major inventory items such as: 1.Medical and surgical supplies; 2.Drugs and biologicals; 3.Food (dietary supplies); 4.Office supplies; 5.Laundry and linens; 6.Uniforms and garments; 7.Repairs and maintenance supplies; 8.Housekeeping supplies; and 9.Stationery and forms. C.Determine date of latest physical inventory. Review general ledger for recording of physical inventory and cutoff procedures with management to determine the adequacy of these procedures. D.Compare total inventory valuation with the previous year and examine any significant variance. E.Visit the stockrooms and pharmacy and verify reasonableness of inventory valuation and condition of stock. Inquire as to any excess, obsolete or defective items which may be accounted for in the inventory. F.Discuss the pricing procedures used with accounting or appropriate management personnel. G.Test as to the consistency between years of the provider's procedures relating to: 1.Inventory pricing; 2.Determining quantities or volume; 3.Reviewing obsolescence; and 4.Accumulation of inventory balances. H.Review the requisition journal for one month and, on a test basis, trace totals to entries in the departmental expense ledgers and general ledger inventory accounts. I.Select a sample block of requisitions for detailed review. 1.Trace quantity issued to the indicated reduction of stock on hand shown in the perpetual inventory records. 2.Review pricing of individual items to verify that such prices are comparable to original invoice costs and/or suppliers' catalog prices. 3.Test clerical accuracy of extensions and footings. 4.Review requisitions for indication of department head approvals and indication of issuance from central stores area. J.If the provider maintains perpetual inventory records and these records are used in lieu of a physical inventory, perform the following tests: 1.Compare total inventory value per perpetual inventory records with the inventory value per book in the general ledger. 2.Select five to ten items from the perpetual inventory records and compare indicated quantities to actual quantities on hand and another five to ten from the quantities on hand to the perpetual inventory records. Prepaid Expenses 21.07Ascertain the reasonableness and propriety of prepaid expenses, deferred charges and prepayments. A.Review the provider's schedules of unexpired insurance premiums. 1.Test reasonableness and accuracy of computations on individual policies. 2.Examine any significant dollar variance between current and prior year's balances. 3.Trace write-off of prepaid insurance to applicable expense accounts. If insurance is charged departmentally, review the reasonableness of the allocations. 4.Review insurance policies in force and the provider's procedures for periodically appraising coverages in determining and locating possible over insured or need for additional coverage. B.If a schedule of unexpired insurance is not available from the provider or the outside auditor, prepare the unexpired insurance schedule using the insurance policies, premium notices and/or other supporting documentation of insurance coverage in force. C.Review reasonableness and explain the nature of: 1.Other prepayments and insurance premiums. 2.Any deferred charge. Notes Payable and Accounts Payable 21.08Review the Accounts Payable and Notes Payable accounts to ascertain the adequacy and effectiveness of internal control established to include: 1.Separation of the approving and paying functions. 2.Safeguards over purchasing and receiving (including returned purchases and rebates). 3.Maintenance of complete record of open purchase orders and commitments. B.Analyze the notes payable accounts for the year. Vouch payments and tie-in the interest charges to expense. C.Obtain a trial balance of accounts payable at the audit date and tie into the general ledger. Review the individual balances for unusual items and determine that the provider has not included the same items in both accounts payable and accrued liabilities. D.Trace large and unusual items in accounts payable to supporting documentation and/or subsequent cash payment to ensure that there is no potential significant misstatement of the cost to the Medicare program. E.Vouch all disbursements in excess of $1,000 for the first two months after year end. Indicate on the accounts payable trial balance the vouchers examined which are properly recorded as a liability at the audit date. List any unrecorded liabilities noted. Consider decreasing scope of items to be reviewed during the second month, as appropriate. F.Examine vendors' invoices and other supporting documents for all accounts payable in excess of $1,000 which were not vouched as part of 21.08E above so as to determine the validity of items included in accounts payable at year end. Accrued Liabilities 21.09The scope of audit work on accrued liabilities should be based on the relative materiality of the balances and the possibilities for significant misstatements of expenses for any given period. Keeping this in mind, the following detailed audit procedures should be completed: A.Review the balances of accrued liabilities for reasonableness (e.g., payroll, taxes, medical-professional fees, pensions.) by reference to the provider's accrual worksheets or other supporting data. 1.Make an overall test of accrued payroll by determining the portion of the first payroll subsequent to year end which applies to the days included in the period under review, and on the number of working days prior to the end of the period. 2.Trace the subsequent payment of payroll taxes to the applicable payroll tax returns and review the various returns for appropriateness. 3.If the employees are covered by commercial hospitalization insurance, review the most recent utilization report to determine whether any significant liability exists. 4.Review contract commitments with doctors, specialists, technicians, related parties and others who perform services by arrangement with the provider. Make an overall test of any material amounts accrued for professional service contracts. B.Review the activity during the year in malpractice or other reserve accounts established by the provider under a self-insurance program. 1.Examine claims against the provider for negligence and malpractice for possible disclosure of contingent liabilities. Evidence of claims may usually be obtained from claims agents, insurance companies and attorneys. 2.Ascertain whether contributions to such reserve funds were excluded from claimed costs, and whether allowable losses were properly included. C.Check for possible liability under retroactive ceiling reimbursement arrangements with third party welfare agencies, Blue Cross Plans, etc. D.Consider the effect on financial statements caused by timing differences between the period in which items enter into the determination of reimbursement under third-party reimbursement arrangements and the period in which such items enter into the financial statements. E.Ascertain that pension liabilities and income tax are accounted for: 1.Pension liabilities: a.The amount to be included in the balance sheet as an accrued liability or a prepaid expense is usually the difference between the cost provisions and the amounts paid. Unamortized prior service cost should appear in the balance sheet only if it is a legal liability. b.Where pension-plan arrangements impose a specific legal obligation that exceeds the total of the amounts paid or accrued, a simultaneous asset and liability position should appear in the balance sheet. The unfunded unaccrued portion of the obligation is shown as a liability on the balance sheet to the extent not appropriately included in the cost provisions. The cost of such benefit should appear as a deferred charge to operations of future periods. 1.Income Tax: Income tax accounts must be presented in the balance sheet so as to provide separate classification of the following elements: a.Taxes estimated to be currently payable. b.Net amount of current deferred charges and current deferred credits relating to time differences. c.Net amount of noncurrent deferred charges and noncurrent deferred credits relating to timing differences. d.Refundable taxes arising from carrybacks of operating losses, investment credits and similar items. e.Future tax benefits of carry-forwards of operating losses and similar items (in those unusual cases where they have been recognized because realization is assured beyond any reasonable doubt). f.Deferred investment credits (applicable when the deferral method of accounting for investment credits is employed). F.Review the reasonableness of other miscellaneous accruals by comparing current year balances with previous year balances. Discuss with provider personnel any significant variance. G.Where possible, additional provisions to accruals should be tied to the applicable accounts. Fund Balances 21.10Review the description and composition of fund balances for prior periods to determine the nature of the resources accounted for and the restrictions on the funds, if any. Verify that restricted and unrestricted fund balances are adequately described and differentiated in the financial statements. Specific consideration should be given to the composition of specific purpose funds. A.Determine the validity of inter-fund receivables (line 10, HCFA-2552, W/S G) and payables (line 40, HCFA-2552, W/S G). Investigate the means by which such interfund balances arose. B.Examine authorizations and approval (if required) for major transfer. C.Determine that the inter-fund receivables and payables are in balance. D.Examine documentation on major contributions for restrictions on their use. Abstract and update permanent file. E.Ascertain that grants, gifts and/or endowment income, which are donor-restricted for paying specific operating costs, have been deducted from those costs in the determination of allowable costs. F.Analyze opening balances to determine any donations made in prior years and still being held in the current year. G.Examine major expenditures from special funds and other significant transactions (especially in the operating fund) to see if they were handled properly in determining allowable cost. H.Review Statement of Changes in Fund Balance (HCFA-2552 W/S-G-1). Prepare/review analysis of changes in all fund balances for the year. Verify and test that: 1.Transfers from endowment or other restricted funds are in accordance with donors' instructions. 2.Transfers have been made from restricted to unrestricted funds for additions to property, plant and equipment financed by restricted resources. 3.Receipt and acknowledgement procedures for all gifts exist and that restrictive provisions are being complied with. Income and expenditures included in restricted funds should be reviewed to determine that such items are accounted for in accordance with the governing instrument. 4.Earnings/losses on investments of each restricted fund are properly accounted for. If investments are pooled, ascertain that earnings/losses are accounted for in appropriate funds. 5.Changes in restricted fund balance involving research grants are in accordance with grant agreements. a.Review the adequacy of reserves for disallowances of cost items and other adjustments. b.Review the budget, expenditures, term, billing procedures, allowable cost provisions and any renegotiation requirements. I.For proprietary institutions, analyze the activity in all "equity" accounts for transactions having a possible impact on cost. See Audit Program for Return on Equity Capital, Section 14. 21.11Write 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 22 - HOSPITAL AUDIT PROGRAM (12-85) Research Costs -22- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Review of Files22.01 Research with Patients22.02 Research Cost22.03 Grants22.04 Conclusion22.05 Section 22Research Costs Regulation Reference: 42 CFR 405.422 Objective:To determine that costs incurred for research purposes, over and above usual patient care, were excluded from allowable costs. To ensure that a separate cost center is established for research and carried through the cost finding process. OTHER REFERENCES: HCFA-Pub. 15-I, §500 Cost Report Forms:HCFA 2552-83, Worksheet A-7 HCFA 2552-83, Worksheet A-8 HCFA 2552-83, Worksheet B HCFA 2552-83, Worksheet G HCFA 2552-83, Worksheet G-2 HCFA 2552-83, Worksheet G-3 HCFA 2552-83, Worksheet F, Part I StepProcedure DescriptionAuditor's Initial and DateWP Ref 22.01Review the provider's research activities and their relationship to patient care for allowability. Determine the nature and extent of research by discussion with provider personnel, observation of provider operations, reference to accounting classifications, review of sources of other income and research activity included in the cost report. A.Obtain a list of research activities noting total expense for the current period and amount included as being related to patient care. 1.Ascertain that adequate documentation or suitable workpapers to support research activities for the current reporting period are maintained for each research program to include the following information: a.Identity of the grantor or donor. b.The type of research program. c.Whether research is conducted with or without patients. d.Explicit provision as to the reimbursement for research costs. e.Explicit provision as to the reimbursement for usual patient care costs. f.If the contract is not explicit as to the reimbursement for usual patient care costs, ensure that the provisions of HCFA Pub. 15-I, §505.1(b) are followed. 2.Review and scrutinize the following cost report schedules or worksheets: a.Statement of Revenue and Expenses (W/S G-2 and W/S G-3) - To determine the receipts (amounts) of funds from research grants. b.Balance Sheet (W/S G) and/or Balance Sheet for Computation of Equity Capital (Supplemental W/S F, Part I) - To ascer-tain the specific amounts due from the grantor(s) and that a separate fund has been established for each research grant. c.Trial Balance of Expenses (W/S A) - To determine that the research cost center includes direct cost (e.g., salaries, others and total) and is properly identified as a non-allowable cost center. d.Cost Allocation (W/S B) General Service Costs - To ascertain that the research cost center has been carried through the normal cost finding process and that the total allocated overhead research cost has been eliminated from allowable costs. (1.)Determine that the provider has been consistent in the application of statistical bases to the research cost center. (2.)Ascertain that the general service cost center was allocated to research on the same basis as to the other cost centers. (3.)Review Worksheet B to ensure that no part of the research cost is allocated into any other allowable cost center. (4.)Ensure that indirect overhead costs such as A&G or other general service expenses are not included in direct research costs on W/S A. (5.)Trace research costs from Worksheet B through the settlement sheet to ensure that research is excluded. (6.)Evaluate all reclassifications and adjustments that affect the research cost center. Examine without exception, all reclassifications from research to other allowable cost centers. 22.02Where research is conducted in conjunction with patients, ensure that: A.Statistics for research patients' ancillary charges and inpatient days are maintained separately. B.Research funds applicable to usual patient care have been handled in accordance with HCFA PUB. 15-1, §505.1. C.The provider is not charging clinical research cost to the allowable cost areas. (Researchers evaluating conditions of patients.) D.The provider is properly handling usual patient care costs, and maintains separate statistics for research patients' ancillary charges and inpatient days. E.Extraordinary patient care costs incurred in conjunction with research were handled in accordance with HCFA Pub. 15-I, §504.3. F.That a separate cost center for nonallowable research cost was established in the cost report and properly carried through the step- down process. 1.If a nonallowable cost center was established, ascertain that any costs reclassified both to and from the research cost center is documented as to: a.Reclassification of costs from the research center to other allowable cost centers. b.Reclassifications of costs from other cost centers into the research center. 2.If a nonallowable research cost center was not established, determine the reason why. 3.Review trial balance W/S A to determine if research costs were properly recorded as a nonallowable cost center. Direct costs such as salaries should be entered on W/S A and charged to the research cost center. 4.Review W/S B for general service cost allocations to research. Indirect costs such as A&G or other general service expenses should not be included in direct research costs on W/S A. 22.03Where provider has research activities, ensure that proper allocation has been made on: A.Payroll 1.Obtain a list of all staff involved in research (both part time/full time). 2.Ensure that salaries have been posted correctly to proper ledger accounts. 3.For staff engaged in patient care and research activities, ascertain the following: a.The percentage of time attributable to research is documented correctly for payroll purposes. b.Salaries of such staff are reasonable and correctly apportioned between research and other involved departments. B.Supplies: 1.Ascertain that a separate general ledger account for research supplies is maintained. 2.Test check the posting of the correct cost of supplies to the proper general ledger account for research. 3.If provider does not maintain a separate general ledger account for research supplies, determine allocation made to research department as to reasonableness. 22.04Determine whether research activities are reimbursed by research grants or other funds. A.Obtain details of all research grants received by provider detailing all applicable research areas. B.Ascertain if grants received for each program or project exceed both direct and indirect costs. 1.Review Worksheet A-8 to ascertain if grant income is properly offset against usual patient care research costs after stepdown. 2.Determine if the proper calculations of the usual patient care costs of each cost center connected with the research projects were made in order to ascertain the proper offset of research funds. 3.Ensure that the excess grants be offset against ancillary department cost centers involved in research projects. 22.05Write a conclusion of 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 23 - Conclusion of Audit Conclusion of Audit -23- PROVIDER NO: __________________REVIEWED BY: ___________________ PERIOD ENDED: _________________DATE REVIEWED: ________________ AUDIT SECTIONAUDIT PROCEDURE REFERENCE Conclusion of Audit23.01 Audit Report23.02 Management Letter23.03 Exit Conference23.04-23.05 Written Audit Reports23.06 Section 23Conclusion of Audit Objective:To conclude the audit and ascertain that: A. The audit findings are discussed with the provider before summarizing the results of audit. B. Any questions related to reimbursement policy or regulations as they relate to the audit are discussed with the provider. C. Concurrence on audit findings is obtained from the provider where possible. To summarize the results of audit and prepare the audit report. OTHER REFERENCES: HCFA-Pub. 13-2 and Part V of the Standards for Audit of Governmental Organization, Programs Activities and Functions HCFA-Pub. 13-2, §§2001, 2040, 2632 StepProcedure DescriptionAuditor's Initial and DateWP Ref 23.01A.After completing the field audit work, review all workpapers to ascertain that the findings as presented in the workpaper file are properly documented and referenced to supporting schedules. B.Return all documents, files, books and records utilized during the audit to the provider. C.Prepare a summary worksheet to highlight areas where significant deficiencies were noted for which a follow-up review should be made in the subsequent year audit. D.After review of the audit workpapers, determine that the audit procedures as outlined in the audit program were completed or properly annotated if not applicable. 23.02Prepare an audit report which includes a listing of adjustments made to cost report HCFA Form 2552 as submitted to the intermediary. The auditor must cite appropriate references to regulations, law and instructions in his report. 23.03Prepare a management letter which must include the following: A.An explanation of any deficiencies in the system used to accumulate and report revenues and expenses. B.Weaknesses in internal controls. C.Recommendations for improving the system used to accumulate and report revenues and expenses and recommendations for improving the accounting system and internal controls. Exit Conference 23.04A.Hold an exit conference with appropriate provider personnel and other individuals whom the provider or intermediary believes should be included at the conference. B.The exit conference should cover the following areas: 1.A review of all the proposed audit adjustments. 2.Recommendations for improvements in internal controls, compiling statistics and in the accounting system. C.Minutes of the meeting should be maintained and include: 1.Date, place and time of meeting. 2.Persons attending. 3.Items discussed. 4.Providers reaction to findings. D.Request a responsible representative of the provider to sign a document which indicates that a meeting was held and the adjustments were discussed. E.Advise the provider that the audit report is subject to revision based upon the conclusions reached at the exit conference. 23.05If total agreement on the proposed adjustments is reached, the provider's representative should indicate so by signing the adjustment report. The adjustment report should be included as part of the permanent file. 23.06At the conclusion of the audit, a written audit report must be prepared covering all the adjustments made to the cost report as a result of the audit. The report should be concise, clear and complete and present the following: A.Scope and objective of the audit. B.Audit findings and conclusions. C.Audit adjustments. D.Support (evidence and citations) for position taken. E.Revised cost report. F.Audit recommendations for management improvement.