Hospital Cost Report Fraud: One Certified Filing, Several Payment Consequences

Hospital cost report fraud happens when a hospital knowingly uses false financial or statistical figures in its annual Medicare filing to obtain or keep payments it is not entitled to receive. The number may start as a cost allocation, a patient-day count or a charge. If you work in finance or reimbursement, you may know where it stopped matching the books and who wanted it changed.

The annual filing supplies figures for outlier payments, low-income patient adjustments, medical education and other reimbursement. This part of hospital billing fraud reaches the people preparing financial reports, including healthcare finance staff who never assign a diagnosis or submit a patient’s claim.

What a Hospital Cost Report Contains

CMS-2552-10 is the hospital’s certified annual cost report, containing costs and charges by cost center, utilization, financial information and Medicare settlement data. Hospitals submit it to a Medicare Administrative Contractor, as the Centers for Medicare & Medicaid Services explains in its cost-report guidance.

The Medicare cost-reporting regulation requires providers paid on a reimbursable-cost basis to supply adequate cost data drawn from financial and statistical records that qualified auditors can verify. A hospital claiming costs allocated by its chain’s home office needs a supporting Home Office Cost Statement.

The administrator or chief financial officer certifies the filing’s accuracy and that it comes from the provider’s books and records. The cost report is self-reported, rather than an audited financial statement. The important comparison is between the figure the hospital certified and the records behind it.

Cost shifting can put expenses into Medicare’s share that belong elsewhere. The 2009 paper Medicare Billing Risk Perceptions of Hospitals Operating Under Corporate Integrity Agreements, in the Journal of Forensic & Investigative Accounting, describes shifting non-Medicare costs into Medicare cost centers and moving costs to centers below their reimbursement caps. For a cost-report preparer, the allocation can matter as much as the total expense.

One Cost Report Supplies Several Payment Streams

Cost-report data affect both Medicare’s inpatient payment calculation and separate payments for teaching, uncompensated care and bad debt. Different entries reach different parts of the payment system:

The 340B Threshold Sits on the Cost Report

A disproportionate-share hospital qualifies for 340B only if its most recently filed cost report shows a DSH adjustment percentage greater than 11.75%, along with the program’s hospital category and ownership requirements, under the Health Resources and Services Administration’s eligibility guidance.

Medicaid inpatient days and Medicare inpatient days for patients eligible for Supplemental Security Income feed the low-income patient share used to determine the DSH adjustment. False reporting of Medicaid patient days can therefore affect Medicare payment and the hospital’s position against the drug program’s eligibility threshold. The cost-reporting rule requires a detailed Medicaid-day listing that matches the days claimed in the report, including a revised listing when an amended report changes those days.

Worksheet S-10 Affects Other Hospitals’ Shares

Worksheet S-10 supplies uncompensated-care data used to divide a fixed payment pool among disproportionate-share hospitals. The allocation depends on a hospital’s reported costs relative to those of other eligible hospitals. Overstating one hospital’s share directs money away from the others.

For a Worksheet S-10 charity-care discrepancy, the supporting records matter beyond the total on the worksheet. The cost-reporting rule requires a detailed listing of charity care and uninsured discounts corresponding to the amounts reported by DSH-eligible hospitals. That gives a finance employee a concrete comparison: the care the hospital counted and the amount it claimed.

Wages, Resident Counts and Bad Debt Have Supporting Records

Hospital salary data feed the wage index that adjusts the labor-related portion of Medicare inpatient payment, as the Medicare Payment Advisory Commission’s payment-system explanation describes. The index starts with hospital wage data for the local labor market relative to the national average. A false cost-report wage figure reaches beyond the payroll account in which it began.

At teaching hospitals, the indirect medical education adjustment depends on the allowed resident count relative to inpatient beds. An IME resident-count discrepancy in the certified cost report has a specific comparison point: the resident totals must match the hospital’s Intern and Resident Information System data. Direct graduate medical education counts must match too. Medicare bad-debt reimbursement has its own required support, a detailed listing corresponding to the amount claimed.

Higher Charges Can Exploit an Older Cost-to-Charge Ratio

Hospital outlier payment fraud can exploit the gap between today’s charges and the older cost report used to estimate today’s costs. Outlier payments cover unusually costly care. The calculation converts current charges into estimated costs using a lagged cost-to-charge ratio from a previously submitted report. When hospital charges increase faster than costs, the older ratio can make a price increase look like more expensive care. Later cost-report reconciliation can require repayment.

Silver Lake Hospital, a long-term care hospital in Newark, allegedly raised charges faster than costs and beyond what it could repay when Medicare reconciled its cost reports. In its January 16, 2024 announcement, the Department of Justice also described investor distributions while Medicare debt remained:

The hospital agreed to pay over $18.6 million for the alleged excessive outlier claims, with its settlement based on its limited ability to pay. The investors separately agreed to pay $12 million over the alleged transfers. The alleged transfers put investors ahead of Medicare.

Tenet Healthcare agreed in 2006 to pay more than $788 million over alleged excessive outlier payments. The Department of Justice’s announcement described charges rising far beyond increases in patient-care costs, together with billing for services and supplies patients never received.

The 2022 settlement announcement for St. Vincent Hospital carries an admission. The hospital admitted increasing inpatient charges, including for TAVR, and receiving outlier payments to which it was not entitled. The cases lacked the unforeseen complications or extended stays that would have justified those payments. The hospital raised the price, then received extra payment intended for unusually costly care.

Higher Bills, Lower Charges on the Cost Report

Underreporting charges can also sustain excessive outlier payments. United Memorial Medical Center allegedly increased inpatient charges while underreporting them on its Medicare cost reports, according to the Department of Justice’s December 2023 settlement announcement. That allegedly prevented government health care programs from adjusting the charges to reflect actual costs. The government also alleged that the hospital concealed and avoided its obligation to repay excessive outlier payments.

The alleged distortion ran in opposite directions: higher charges on the claims and lower charges in the filing meant to help reconcile them. A search confined to inflated expenses would miss that mechanism.

What a Cost Report Whistleblower Can See

A cost-report whistleblower can connect the reported figure to the supporting records, the payment it affected and the people who knew why it was wrong. For hospital employees in finance or reimbursement, that knowledge can sit outside the patient’s chart altogether. A preparer may know which allocation changed. An auditor may know what the supporting records showed when management certified the report.

The 2018 paper Healthcare Data Sources and Fraud Research Opportunities, published in the Journal of Forensic & Investigative Accounting, describes research finding discrepancies between Medicare cost reports and hospital financial statements filed with states. It also discusses comparisons with audited financial statements.

An insider may know how the conflicting figures arose, which records supported the original number and who instructed staff to change it. That connects the published discrepancy to the decisions inside the hospital.

A hospital False Claims Act case built on a cost report turns on which payments depended on the figure and what the hospital knew when it certified it. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. If you prepared those figures yourself on someone else’s instructions, that is one of the things we handle with you.

Behind the Certified Number

The cost report publishes a figure, but you may know why the hospital certified it despite records showing something else. Speak to one of our whistleblower experts about why that number was certified. We stay at your side to build your strongest cost report whistleblower case, bringing in whistleblower lawyers with experience in hospital reimbursement and false financial reporting.