Medicare Program; Revision to Accrual Basis of Accounting Policy

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1876-P]

RIN 0938-AH61

Medicare Program; Revision to Accrual Basis of Accounting Policy

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: Current policy provides that payroll taxes a provider becomes

obligated to remit to governmental agencies are included in allowable

costs under Medicare only in the cost reporting period in which payment

(upon which the payroll taxes are based) is actually made to an

employee. Therefore, for payroll accrued in one year but not paid until

the next year, the associated payroll taxes on the payroll are not an

allowable cost until the next year. This proposed rule would make one

exception, in the situation where payment would be made to the employee

in the current year but for the fact the regularly scheduled payment

date is after the end of the year. In that case, the rule would require

allowance in the current year of accrued taxes on payroll that is

accrued through the end of the year but not paid until the beginning of

the next year, thus allowing accrued taxes on end-of-the year payroll

in the same year that the accrual of the payroll itself is allowed. The

effect of this proposal is not on the allowability of cost but rather

only on the timing of payment; that is, the cost of payroll taxes on

end-of-the-year payroll would be allowable in the current period rather

than in the following period.

DATES: Written comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m on July 17,

1998.

ADDRESSES: Mail written comments (one original and three copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-1876-P, P.O. Box 7517,

Baltimore, MD 21207-0517.

If you prefer, you may deliver your written comments to one of the

following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW,

Washington, DC 20201, or

Room C5-11-17 Central Building, 7500 Security Boulevard, Baltimore, MD

21244-1850.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code HCFA-1876-P. Comments received timely will be available

for public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in room 309-G of

the Department's offices at 200 Independence Avenue, SW, Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(Phone: (202) 690-7890).

Copies: To order copies of the Federal Register containing this

document, send your request to: New Orders, Superintendent of

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FOR FURTHER INFORMATION CONTACT: John Eppinger, (410) 786-4518.

SUPPLEMENTARY INFORMATION:

I. Background

Generally, under the Medicare program, health care providers not

subject to prospective payment are paid for the reasonable costs of

covered services furnished to Medicare beneficiaries. This policy

pertains to all services furnished by providers other than inpatient

hospital services furnished in acute care hospitals (section 1886(d) of

the Social Security Act (the Act)) and certain inpatient routine

services furnished by skilled nursing facilities choosing to be paid on

a prospective payment basis (section 1888(d) of the Act). Additionally,

there are other limited services not paid on a reasonable cost basis,

to which this policy will not apply.

Section 1861(v)(1)(A) of the Act defines reasonable cost and

provides that reasonable cost shall be determined in accordance with

implementing regulations. Section 413.24 establishes the methods to be

used and the adequacy of data needed to determine reasonable costs for

various types or classes of institutions, agencies, and services.

Section 413.24(a) requires providers receiving payment on the basis of

reasonable cost to maintain financial records and statistical data

sufficient for the proper determination of costs payable under the

program and for verification of costs by qualified auditors. The cost

data are required to be based on an approved method of cost finding and

on the accrual basis of accounting. Section 413.24(b)(2) provides that

under the accrual basis of accounting, revenue is reported in the

period in which it is earned, regardless of when it is collected, and

expenses are reported in the period in which they are incurred,

regardless of when they are paid. Further, Sec. 413.100 (see 60 FR

33126, June 27, 1995) provides for special treatment of certain accrued

costs, including Federal Insurance Contribution Act (FICA) and other

payroll taxes claimed by providers on their cost reports. Specifically,

Sec. 413.100(c)(2)(vi) provides that a provider's share of FICA and

other payroll taxes that the provider becomes obligated to remit to

governmental agencies is included in allowable costs only during the

cost reporting period in which payment (upon which the payroll taxes

are based) is actually made to the employee.

Prior to publication of Sec. 413.100 on June 27, 1995, we published

a proposed rule on October 9, 1991 (56 FR 50834). Following publication

of that proposal, we received several comments that we should recognize

accrued payroll taxes during the same period that the employee benefits

are earned and accrued. One commenter asserted that costs related to

the accrual of payroll taxes should be allowed especially as they

relate to the accrual of year-end

[[Page 27252]]

wages. Based on our belief that payroll taxes should not be accrued and

claimed for Medicare payment until the period in which actual payment

is made to the employees, we published Sec. 413.100(c)(2)(vi) in its

present form. The policy in Sec. 413.100(c)(2)(vi) continues to be

Medicare's policy, subject to the exception proposed in section II

below. When an employee is paid by a provider as part of a provider

payroll, whether the payment is for time worked during the payroll

period or for benefits (for example, vacation benefits) earned in an

earlier period, the provider's share of FICA and other payroll taxes is

an allowable cost during the cost reporting period in which payment is

made to the employee. Our policy is based on the fact that a provider

becomes obligated to governmental agencies for payroll taxes only at

the time that the salary or benefits, upon which the payroll taxes are

based, are actually paid to the provider's employee. Further, until the

salary or benefits are actually paid, it cannot be known for certain

whether there will be a payroll tax or taxes, what the amount of the

tax(es) will be, or whether a particular employee will be liable for

the tax(es).

II. Provisions of Proposed Rule

Upon reconsideration, we agree with the comment to the October 9,

1991 proposed rule that Medicare should recognize, as allowable, the

costs related to the accrual of provider payroll taxes specifically as

they relate to the accrual of year-end payroll. Therefore, we propose

to revise Sec. 413.100(c)(2)(vi) to make one exception to the above-

stated policy. We propose to provide that if payment would be made to

an employee during a cost reporting period but for the fact that the

regularly scheduled payment date is after the end of the period, costs

of accrued payroll taxes related to the portion of payroll accrued

through the end of the period, but paid to the employee after the

beginning of the new period, are allowable costs in the year of

accrual, subject to the liquidation requirements specified in the

regulations (Sec. 413.100(c)(2)(i)). The revision made in this proposed

rule thus is intended to allow accrued taxes on end-of-the-year payroll

in the same year that the accrual of the payroll itself is allowed,

just as Medicare, in other than end-of-the-year payroll situations,

allows accrued taxes on payroll in the same year that the accrual of

the payroll is allowed. Our proposal is based on the notion that the

insignificant amount of time passing between the accrual of the end-of-

the-year payroll and the payment of the payroll in the following year

does not give rise to the same concerns described in section I. above.

We also propose to change the example in Sec. 413.100(c)(2)(vi) to

emphasize, as discussed above, that payroll taxes applicable to

benefits accrued, such as vacation benefits, are not allowable until

the period in which the employee uses the benefits, that is, takes the

vacation. Finally, we propose to change payroll tax from singular to

plural throughout the section to clarify that there can be more than

one payroll tax.

III. Impact Statement

We have examined the impact of this proposed rule as required by

Executive Order 12866. Executive Order 12866 directs agencies to assess

all costs and benefits of available regulatory alternatives and, when

regulation is necessary, to select regulatory approaches that maximize

net benefits (including potential economic, environmental, public

health and safety effects; distributive impacts; and equity). This

proposed rule, which would permit allowance of accrued taxes on end-of-

the-year payroll in the same year that the accrual of the payroll

itself is allowed, does not make any significant changes in program

payments. The proposal is limited in nature, as it affects only accrued

payroll taxes for payroll accrued at the end of one cost reporting

period which is not actually paid to employees until the beginning of

the next period. Furthermore, in this situation, the effect of the

proposal is only on the timing of payment; that is, it does not allow

an additional cost of payroll taxes but rather allows the cost in the

current period instead of in the following period. The proposal should

not involve changes in provider accounting systems and, in fact, will

free providers or intermediaries from making cost report adjustments,

under the current policy, to postpone reimbursement of the cost on the

current cost report to the subsequent cost report. We do not expect any

significant costs or savings due to this change.

We have also examined the impact of the proposed rule as required

by the Regulatory Flexibility Act (RFA) (Pub. L. 96-354), and by

section 1102(b) of the Act. The RFA requires agencies to analyze

options for regulatory relief for small businesses. For purposes of the

RFA, most hospitals, and most other providers, physicians, and health

care suppliers are small entities, either by nonprofit status or by

having revenues of $5 million or less annually. In addition, section

1102(b) of the Act requires us to prepare a regulatory impact analysis

if a rule may have a significant impact on the operations of a

substantial number of small rural hospitals. Such an analysis must

conform to the provisions of section 603 of the RFA. For purposes of

section 1102(b) of the Act, we define a small rural hospital as a

hospital that is located outside of a Metropolitan Statistical Area and

has fewer than 50 beds.

We are not preparing analyses for either the RFA or section 1102(b)

of the Act since we have determined, and we certify, that this proposed

rule would not result in a significant economic impact on a substantial

number of small entities and would not have a significant impact on the

operations of a substantial number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

proposed rule was reviewed by the Office of Management and Budget.

IV. Paperwork Reduction Act

This document does not impose information collection and

recordkeeping requirements. Consequently, it need not be reviewed by

the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1995.

V. Response to Public Comments

Because of the large number of items of correspondence we normally

receive on Federal Register documents published for comment, we are not

able to acknowledge or respond to them individually. We will consider

all comments we receive by the date and time specified in the DATES

section of this preamble, and, if we proceed with a subsequent

document, we will respond to the comments in the preamble to that

document.

List of Subjects in 42 CFR Part 413

Health facilities, Kidney disease, Medicare, Puerto Rico, Reporting

and recordkeeping requirements.

42 CFR part 413 would be amended as follows:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR

END--STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY

DETERMINED PAYMENT RATES FOR SKILLED NURSING FACILITIES

A. The authority citation for part 413 continues to read as

follows:

Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social

Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

[[Page 27253]]

Subpart F--Specific Categories of Costs

B. In Sec. 413.100, paragraph (c)(2)(vi) is revised to read as

follows:

Sec. 413.100 Special treatment of certain accrued costs.

(c) Recognition of accrued costs.

* * * * *

(2) Requirements for liquidation of liabilities.

* * * * *

(vi) FICA and other payroll taxes.--(A) General rule. The

provider's share of FICA and other payroll taxes that the provider

becomes obligated to remit to governmental agencies is included in

allowable costs only during the cost reporting period in which payment

(upon which the payroll taxes are based) is actually made to the

employee. For example, payroll taxes applicable to vacation benefits

are not to be accrued in the period in which the vacation benefits

themselves are accrued but rather are allowable only in the period in

which the employee takes the vacation.

(B) Exception. If payment would be made to an employee during a

cost reporting period but for the fact the regularly scheduled payment

date is after the end of the period, costs of accrued payroll taxes

related to the portion of payroll accrued through the end of the

period, but paid to the employee after the beginning of the new period,

are allowable costs in the year of accrual, subject to the liquidation

requirements specified in paragraph (c)(2)(i) of this section.

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance)

Dated: January 26, 1998.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing Administration.

Dated: April 8, 1998.

Donna E. Shalala,

Secretary.

[FR Doc. 98-13110 Filed 5-15-98; 8:45 am]

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