The Centers for Medicare & Medicaid Services (CMS) has made some very restrictive interpretations of what costs are eligible for electronic health records (EHR) incentive payments for critical access hospitals (CAHs). These interpretations could seriously limit CAH options for obtaining, financing and paying for a viable EHR system and limit the incentive payments Medicare will pay.

The problems revolve around the language in Section 1814(l)(3)(C) of the Social Security Act. This section describes EHR costs as cost “for the purchase of certified EHR technology to which purchase depreciation (excluding interest) would apply” if payment was made under normal CAH payment rules. CMS is using a very literal definition of “purchase” and “EHR technology.”

To be allowed for the incentive payment, per CMS, a CAH must buy the asset. It cannot be leased, as noted in the FAQ on CMS’ EHR webpage. Even a capital lease will not make the asset eligible for the incentive payment. This severely limits a CAH’s options for financing the technology needed to implement an EHR system. Many CAHs will be forced to use less favorable financing options and incur additional interest expense—which would not be eligible for the incentive payment—to acquire the needed assets.

CMS also is limiting the cost of the EHR asset to the purchase price of the asset itself. Items such as installation, shipping, equipment testing, building modifications needed to accommodate the new equipment and any other cost normally capitalized under generally accepted accounting principles as part of the asset will not qualify as an EHR cost.

The CMS interpretation of what qualifies as cost for incentive payment is extremely restrictive. To become a meaningful user, a hospital must incur a large amount of cost to implement and maintain a certified EHR system. For a CAH, however, CMS will not pay an incentive on the cost the hospital must incur to make the system functional. All of these CMS interpretations mean it will be paying the incentive bonus on just a small fraction of the cost of implementing an EHR system in a CAH. This will leave many CAHs struggling to figure out how to pay for the system.

Discussions with CMS on its interpretation are ongoing with several organizations, although CMS has not changed its position.

Contact your BKD advisor for guidance on how your hospital might be affected by this CMS interpretation and to discuss possible options for limiting the impact. We also encourage you to contact your local hospital association and let that group know how this matter will affect your EHR allowable capital asset amounts.