Cost Report Issues for Hospitals Employing NPs

How hospital employed NPs spend their working days has become an issue for hospital administrators who prepare and defend a hospital’s cost reports. In the Medicare program, data on wages and hours of hospital employees contained in cost reports are used to calculate the reimbursement that hospitals get for each Diagnostic Related Group (DRG).

In 2008, government auditors challenged at least one hospital’s report of nurse practitioners’ costs for wages, benefits, and hours worked. The hospital was called upon to prove that its nurse practitioners were spending the majority of their time on activities devoted to hospital services rather than physician services.

While few if any clinicians are involved in writing a cost report, nurse practitioners who are employed by a hospital may be called upon to describe how they spend their hours. They may need to categorize their activities as “Part A” (a Medicare term for hospital services) or “Part B” (a Medicare term for physician services).

Significance of a Cost Report

Hospitals are reimbursed for the services they provide inpatients on the basis of DRG payments. The hospital assigns each discharged patient a DRG, based on the patient’s diagnoses. Payers—Medicare, Medicaid, and commercial insurers and health plans—pay the hospital an amount associated with the DRG. Factors that go into determination of DRG rates include the acuity of the diagnosis and average hospital costs of labor, among other things.

A hospital’s cost report is a description and tabulation of the facility’s labor costs. The Centers for Medicare and Medicaid Services (CMS) compiles the cost reports for all hospitals into wage indexes. CMS calculates a wage index for each core based statistical area (CBSA) and each state. The wage index is based on the average hourly wage rate of hospitals in the area divided by the national average hourly wage rate.

When calculating wage indexes, CMS uses hospital wage data—wages, salaries, and related hours—collected 4 years earlier. The lag time allows CMS to collect complete cost report data from all inpatient prospective-payment-system hospitals and lets CMS’s fiscal intermediaries review these data. All hospitals within a CBSA or within a statewide rural area receive the same labor payment adjustment.

A Hospital Is Challenged

In 2008, auditors for the US Office of the Inspector General (OIG) held that a major teaching hospital was noncompliant with Medicare requirements for reporting wage data in its 2006 Medicare cost report. The auditors stated that the hospital reported inaccurate wage and hour data on its nurse practitioners. The hospital reported that it spent $2,968,724 on nurse practitioners’ salaries and benefits and that the nurse practitioners spent 99,789 hours performing hospital services. The government challenged these numbers, contending that some of the nurse practitioners’ hours were spent on Part B services (physician services reimbursed under Medicare Part B); the hospital should not claim under its Part A costs the nurse practitioners’ Part B activities.  The government pointed out that this overstatement of costs affected its wage rate calculation, which would affect the wage index for all hospitals in the area and state and would raise the DRG rates inappropriately.

The government was relying on section 1861(s)(2)(K)(ii) of the Social Security Act and 42 CFR section 410.75, which include care by nurse practitioners as covered Part B services, and section 1861(b)(4) of the Social Security Act and 42 CFR section 409.10(b)(5), which exclude nurse practitioners from Part A inpatient hospital services. The OIG maintained that “The Social Security Act and Medicare regulations provide that, as a general matter, the costs of services provided by nurse practitioners and clinical social workers are covered by Part B, not Part A.” The OIG pointed out that “The Manual, part II, section 3605, requires hospitals to exclude from their reported wage index information those nurse practitioner and other services that hospitals claim for Part B reimbursement as patient services. Under Medicare, these services are related to patient care and are billed separately under Part B.”  The manual the OIG was referring to is the Medicare Provider Reimbursement Manual.

The government contended that the hospital should have claimed only those hours and wages that the nurse practitioners spent on activities necessary to hospital operations (technical services), which are not billable as physician services under Part B.

The hospital responded that about 80% of its nurse practitioner costs were in support of hospital services, for example, procurement, nurse education, and liaison to vendors. Initially, the hospital had not provided supporting documentation, but when challenged it provided job descriptions and billing records to support its claim. The hospital pointed out that it did not submit Part B claims for the nurse practitioners’ services.

The government accepted the hospital’s argument and agreed that the technical and administrative services were allowable for wage index purposes. The government then modified its findings to allow $722,633 in salaries and benefits and 15,090 hours for services provided by nurse practitioners, which reduced the hospital’s total wage data overstatement. Because 20% of nurse practitioner costs were for clinical services, the government maintained that these costs should be removed from the wage index costs.

Lessons From This Case

This case sends several messages to hospital executives and nurse practitioners who work for hospitals. First, a nurse practitioner’s scope of work must be analyzed to determine what hours are spent on Part A activities and what hours are spent on Part B activities. Part A activities include education of other nurses and staff, administrative services, and activities in the realm of nursing rather than medicine. Part B activities include history taking, physical examination, medical decision making, performing of medical procedures, and patient counseling on diagnosis, prognosis, treatment plan, and compliance with the medical regimen.

Second, if a hospital is not already billing for nurse practitioners’ Part B activities, it should develop the infrastructure and conduct training so it can be reimbursed for the time nurse practitioners spend on Part B activities. If the Part B activities are not reimbursable—for example, because physicians already are billing (only one bill per patient per day is reimbursable)—then the hospital needs to decide whether to have nurse practitioners perform Part B activities. It’s possible that the nurse practitioners may be duplicating physician activities, performing unnecessary activities, or performing activities for which physicians are being reimbursed. If hospital-employed nurse practitioners are performing services for which a physician practice is being reimbursed, there’s a compliance problem.

Teaching hospitals often have contracts with faculty practices that call for payments from or to the hospitals for medical oversight or nurse practitioner services in clinics. These contracts may be affected by determinations on how the nurse practitioners spend their working hours.

Acting to Avoid Problems

Some hospitals are having nurse practitioners perform time studies. Other hospitals are having consultants, including myself, analyze their nurse practitioners’ activities, job descriptions, and documentation that would support the argument that nurse practitioners’ hours are spent on hospital services rather than physician services. Some hospitals are considering reconfiguring nurse practitioners’ responsibilities so that they can support a claim of nurse practitioners’ hours and salary on cost reports. Other hospitals are taking nurse practitioners’ salaries, benefits, and hours off the cost reports and are setting up the infrastructure to bill for nurse practitioners’ services under Part B.

Nurse practitioners who work for hospitals are advised to take seriously any requests for analysis of how they spend their time. They should learn to differentiate their Part A and Part B activities.