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-F]

RIN 0938-AH61

Medicare Program; Revision to Accrual Basis of Accounting Policy

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

ACTION: Final rule.

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SUMMARY: Medicare policy provides that payroll taxes that a provider

becomes obligated to remit to governmental agencies are included in

allowable costs 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 1 year but not paid until

the next year, the associated payroll taxes are not an allowable cost

until the next year. This final rule provides for an exception when

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 requires 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 rule 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

is allowable in the current period rather than in the following period.

DATES: These regulations are effective November 26, 1999.

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

SUPPLEMENTARY INFORMATION:

I. Background

Generally, under the Medicare program, health care providers who

are not subject to a prospective payment or other non cost based

payment system are paid for the reasonable costs of covered services

furnished to Medicare beneficiaries. Notable exceptions to payment on a

reasonable cost basis are for inpatient hospital services furnished in

acute care hospitals (section 1886(d) of the Social Security Act (the

Act)) and for inpatient services furnished by skilled nursing

facilities for cost reporting periods beginning on or after July 1,

1998 (section 1888(e) of the Act). Additionally, there are other

limited services not paid on a reasonable cost basis, to which Medicare

policy concerning accrued costs, including the revision in this final

rule, does 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.

Section 413.100 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. Before this

final rule, Sec. 413.100(c)(2)(vi) provided, without exception, 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. 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. The 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 the Proposed Rule

On May 18, 1998, we published in the Federal Register (63 FR 27251)

a proposed rule that would revise regulations governing the FICA and

other payroll taxes. We proposed to revise Sec. 413.100(c)(2)(vi) to

make one exception to the general rule. We proposed 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)). Under the proposed rule, accrued

taxes on end-of-the-year payroll would be allowed in the same year that

the accrual of the payroll itself is allowed, just as Medicare, in

other than end-of-the-year

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payroll situations, allows accrued taxes on payroll in the same year

that the accrual of the payroll is allowed. The proposal was 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 proposed 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 proposed to change payroll tax from singular to

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

one payroll tax.

III. Comments on the Proposed Rule

We received one letter of comment that favored the proposed rule.

The commenter supported the proposal noting that the proposed policy

matched revenues and expenses consistent with generally accepted

accounting principles and normal business practice.

IV. Provision of the Final Rule

Based on our position that the proposed rule published May 18, 1998

would implement an appropriate exception to the current policy in

Sec. 413.100(c)(2)(vi), and in the light of the fact that the comment

received supported our proposal, we are adopting the proposed rule as

final.

V. Regulatory Impact Analysis

We have examined the impact of this 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 final rule,

which permits 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 final rule is

limited in nature, as it affects only accrued payroll taxes for payroll

accrued at the end of one cost reporting period that is not actually

paid to employees until the beginning of the next period. Furthermore,

in this situation, the effect of the final rule 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 final rule 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 final rule as required by

the Regulatory Flexibility Act (RFA) (Public Law No. 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 604 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 final

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

number of small entities and will 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

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

We have reviewed this final rule under the threshold criteria of

Executive Order 13132, Federalism, published in the Federal Register on

August 10, 1999 (64 FR 43255). We have determined that it does not

significantly affect the rights, roles, and responsibilities of States.

VI. Paperwork Reduction Act

This document does not impose information collection and

recordkeeping requirements. Consequently, it will not be reviewed by

the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1995.

List of Subjects in 42 CFR Part 413

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

and recordkeeping requirements.

42 CFR part 413 is 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).

Subpart F--Specific Categories of Costs

B. In 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)

[[Page 51910]]

Dated: March 24, 1999.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing Administration.

Dated: June 8, 1999.

Donna E. Shalala,

Secretary.

[FR Doc. 99-24995 Filed 9-24-99; 8:45 am]

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