Cost Report Payments for Meaningful Use of Electronic Health Records. The American Recovery and Reinvestment Act of 2009 (ARRA) established incentive payments under the Medicare Cost Report programs for certain professionals and hospitals that “meaningfully use” certified electronic health record (EHR) technology. These provisions of ARRA, together with certain of its other provisions, are referred to as the Health Information Technology for Economic and Clinical Health (HITECH) Act. The HITECH Act’s overall public policy goal is “to promote the adoption and meaningful use of interoperable health information technology and qualified electronic health records (EHRs).” The government’s ultimate goal is to promote more effective (quality) and efficient healthcare delivery through the use of technology—reducing the total cost of Medicare Cost Report care for all Americans and using the savings to expand access to the healthcare system. ARRA set aside $19 billion for making incentive payments to hospitals and physicians that implement and meaningfully use EHR technology by 2014. Incentive payments will be paid out over four years on a transitional schedule. To qualify for incentives under the HITECH Act, hospitals and physicians must meet EHR “meaningful use” criteria. The Centers for Medicare Cost Report (CMS) chose to take a phased approach to define meaningful use (through three stages), using criteria that become more stringent over time. Generally, it appears that short-term acute care IPPS hospitals3 receiving Medicare Cost Report payments have accounted for them using either a contingency model or an IAS 20 grant accounting model. Although the Securities and Exchange Commission (SEC) had not issued any formal views on EHR income recognition at the time this paper was published, preliminary indications are that SEC registrant hospitals are applying a contingency model. Other hospitals—i.e., those that are privately-held, not-for-profit, or governmental—appear to be choosing between the two models as a matter of accounting policy. If an SEC registrant chooses to apply any model other than a gain contingency model, consultation with the SEC staff is strongly recommended.

The remainder of this Medicare Cost Report position paper discusses accounting for the incentive payments under the two accounting models. Because the SEC has not yet issued any views on the specific requirements associated with the contingency model, the primary emphasis of this paper is on the grant accounting model.

1. See July 28, 2010, Federal Register (starting on page 44314) for the final rule issued by the Department of Health and Human Services, Centers for Medicare & Medicaid Services, that implement the applicable provisions of ARRA. 2. Federal Register, p. 44316. 3. This is referring to “subsection (d) hospitals” in section 1886(d)(1)(B) of the Social Security Act that is paid under the hospital inpatient prospective payment system (IPPS) and is located in one of the 50 states or the District of Columbia.

Medicare Cost Report P&P Board Issue Analyses

The Healthcare Financial Management Association through its Principles and Practices (P&P) Board publishes issue analyses to provide short-term practical assistance on emerging issues in healthcare financial management. To expedite information to the industry, issues analyses are not sent out for public comment. Therefore, they are factual, but not authoritative. The purpose of this issue analysis is to provide some clarity to the healthcare industry on certain accounting and reporting issues resulting from incentive payments under the Medicare program for the meaningful use of electronic health record (EHR) technology. Consultation on these matters with independent auditors is highly recommended. Also, the Security and Exchange Commission registrants that are contemplating the use of a method other than the contingency model are encouraged to consider pre-clearing their views with the SEC staff.

Medicare Cost Report Payments for Meaningful Use of Electronic Health Records.

Note: Because this is an area where accounting practices are just starting to emerge, entities are strongly encouraged to discuss ac- counting for the incentive payments with their independent auditors as soon as possible. In addition, SEC registrants that are contemplating the use of a method other than the contingency model are encouraged to consider pre-clearing their views with the SEC staff. Scope. This Medicare Cost Report paper focuses on accounting for the Medicare EHR incentive payments to acute-care inpatient hospitals that are paid under the IPPS. The provisions of the incentive program are applied differently to critical access hospitals (CAHs) and eligible professionals (EPs); however, read in conjunction with the rules applicable to those types of providers, the concepts discussed in this position paper may be useful in determining the appropriate accounting in those situations as well. The concepts discussed in this position paper may also be helpful in determining the appropriate accounting for incentive payments received under state Medicaid programs, which are similar in some ways to the Medicare Cost Report program. Overview of Accounting Models Contingency Model A key consideration in applying the contingency model is appropriately identifying the contingencies that must be satisfied prior to recognize the revenue. When EHR incentive payments are viewed within the context of a contingency model, one contingency involves the fact that receipt of an incentive payment occurs only if the hospital is successful in complying with the meaningful use criteria during the entire EHR reporting period (90 consecutive days in the first payment year and 365 consecutive days during each of the second through fourth payment years). The contingency model would not permit income from incentive payments to be recognized until the hospital has actually complied with the meaningful use criteria for the full EHR reporting period in a given year. For example, if in the first payment year the hospital successfully complied with the criteria during days 1 through 89 but failed to comply on day 90, the entire incentive payment for that year would be forfeited. How- ever, if compliance was maintained for the entire 90 day period, income could be recognized on the 90th day if the discharge condition noted below is also met as of that day. It would not be appropriate under a contingency model to consider the probability of complying with the requirements when considering when to recognize income from the incentive program.

Medicare Cost Report Payments for Meaningful Use of Electronic Health Records

Another potential contingency relates to the discharges upon which the final incentive payment is based. As discussed in Appendix B of this paper, Medicare’s incentive payments are based on a formula that utilizes discharges occurring during a hospital’s cost report year4 that begins in the EHR reporting period (see Figure 1). The EHR reporting period is based on the federal fiscal year, which runs from October 1 through September 30. Therefore, unless an entity’s fiscal year coincides with the federal fiscal year, a portion of the discharges used in the payment calculation will occur after the EHR reporting period ends. Because the actual numbers of Medicare discharges and total discharges will typically not be known until the hospital’s fiscal year has ended, under a contingent gain model, these amounts would likely be considered an uncertainty that must be resolved prior to recognition of income. Similar considerations may apply to the total charges, charity care charges, and patient days used in the final incentive payment calculation. It is therefore expected that hospitals using the contingency model would typically not meet the contingency for discharge and other final payment calculation data until the last day of the cost report year. Under the contingency model, the income from the incentive payments would be recorded entirely in the period in which the last remaining contingency is resolved (see Figure 2). Thus, the cash received or receivable from an incentive payment would be recognized as income entirely in a single quarter (i.e., the last quarter of the fiscal year-end that is used in the incentive payment calculation). Submission of the cost report and its subsequent desk review or audit by CMS would not likely be viewed as contingent events that must occur prior to the recognition of income.