On August 1, 2011, the Centers for Medicare & Medicaid Services (CMS) published the final rule for changes to the hospital acute care prospective payment system (PPS) for federal fiscal year (FY) 2012. As was discussed in a prior BKD article on this topic, CMS included several changes affecting the hospital wage index computation for FY 2013.
One of the more significant wage index changes is the changing of methodology in computing allowable pension cost. Currently, the Provider Reimbursement Manual (PRM) defines maximum allowable pension costs as those requiring pension costs that must be funded to be allowable; that excess funding can be carried forward for recognition in a subsequent period. PRM currently requires allowable pension cost to be determined according to the Employee Retirement Income Security Act of 1974 (ERISA), even if the hospital is not subject to ERISA. However, recent regulatory changes to ERISA resulted in a lack of standard actuarial basis used by ERISA and non-ERISA plans.
Under the new methodology, allowable pension cost will not rely on the plan’s actuarial computation, but compute cost based on historical cash contributions. CMS decided not to follow general accepted accounting principles (GAAP) for determining allowable pension expense, citing different versions of GAAP as well as GAAP’s uncertain future.
With the new rules, allowable pension costs will equal the three-year average of contributions made to the pension plan. CMS believes this three-year average will add stability to allowable wage-related costs. For example, the FY 2013 wage index will be based on cost reporting periods that began in FY 2009. The new methodology requires not only pension plan contribution data for the existing base cost reporting year (FY 2009), but also contributions data for FY 2008 and FY 2010 cost reporting periods to determine the three-year average that will be used to determine allowable pension cost for the FY 2013 wage index. It is important to note this is only a change for wage index purposes; allowable costs for the annual Medicare cost report will be computed using separate rules. It is also important to note, although it is solely hospital data used to calculate this wage index, most other Medicare payment systems, including outpatient PPS, inpatient rehab and psychiatric, skilled nursing facilities and home health, use the same wage index.
As a result of the public comment period, CMS is developing a transition policy permitting a hospital to determine a “prefunding balance” based on pension contributions made but not reflected in the wage index. The transition policy will allow hospitals to establish a prefunding balance equal to (A) minus (B), where (A) equals the sum of cash contributions made during a period of consecutive cost reporting periods no earlier than October 1, 2002 (the cost reporting period applicable for the FY 2007 wage index), and ending with the cost reporting period applicable for the FY 2012 wage index, and (B) is the sum of pension costs actually reflected in the wage index for the same cost reporting periods. The transition policy will allow 10 percent of the prefunding balance to be included in allowable cost, starting with the FY 2013 wage index and ending with the FY 2022 wage index.
CMS has established a FY 2012 final rule home page, where the final rule and related data files are available for download.
If you have additional questions or would like more information on these matters, contact your BKD advisor.
