The final rule for changes to the hospital inpatient acute care prospective payment system (PPS) for federal fiscal year 2012 was released by the Centers for Medicare & Medicaid Services (CMS) in early August. This release included two changes related to the amount of defined benefit pension costs a hospital is allowed to claim on its Medicare cost report. One of the changes relates to calculating allowable pension costs claimed on a PPS hospital’s wage index. BKD released an Insights article in September that examined this aspect in depth.
The second change relates to the calculation of allowable pension costs for cost-finding purposes. Two different methodologies are necessary to appropriately address the goal of each. The wage index is used to measure a hospital’s labor costs across areas, while cost-finding procedures determine the actual costs incurred at individual hospitals. The current maximum amount of defined benefit pension costs claimed for cost-finding purposes, as detailed in Section 2142.5 of the Provider Reimbursement Manual (PRM), is based on actuarial accrued liability, normal costs and unfunded actuarial liability. To be allowable, costs must be computed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The current period liability for pension cost also must be funded. Finally, funding in excess of a current period liability can be carried forward and recognized in a future period.
Under the Pension Protection Act of 2006 amendments made to ERISA, there is no longer a standard actuarial cost basis used by all types of plans. Therefore, changes have been made in calculating allowable defined benefit pension costs. These changes will be effective for cost-reporting periods beginning on and after
October 1, 2011.
The final rules state a provider’s pension cost for cost-finding purposes will be the sum of cash basis contribution deposits (which must be made within the current cost-reporting period and not reflected as a pension cost for a prior cost-reporting period) and any carryforward contributions. This total cost is subject to a limitation. To determine the limitation amount, providers need to calculate their average pension contributions for the three highest consecutive cost-reporting periods out of the five most recent cost-reporting periods. This average, multiplied by 150 percent, becomes a provider’s pension cost limitation for the current cost-reporting period.
If a provider has a newly adopted plan, the three-year and five-year periods described above will be limited to the number of cost-reporting periods the defined benefit pension plan has been in place. There is a provision within the final policy allowing providers exceeding the 150 percent limit to submit documentation showing that all or a portion of the excess amount is reasonable and necessary and should be reported in the current period as allowable pension costs.
Any pension contributions in excess of the amount reported in the current period can be carried forward to be reported in a subsequent cost-reporting period, again subject to the 150 percent limitation. CMS encourages providers to establish a carryforward balance to account for contributions (on a cash basis) made prior to the effective date of this change that were not reported as pension costs in a prior period. This balance should be updated annually to reflect changes and to lessen the chances for duplication of recognized contributions. Finally, CMS states it is the providers’ responsibility to document and maintain, for audit purposes, the data used to establish the carryforward balance and any changes to that balance.
As a result of this new policy, Section 2305 of the PRM-I, liquidation of liabilities provision, will be changed to exclude qualified defined benefit pension plan costs. This provision will continue to apply only to contributions made to liquidate pension costs for cost-reporting periods prior to the change in policy.
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, please contact your BKD advisor.
