6 Steps Healthcare Providers Can Take to Prepare Their Annual Cost Reports

6 Steps Healthcare Providers Can Take to Prepare Their Annual Cost Reports

by Brian Sackstein
April 27, 2023

Preparing annual cost reports can be a daunting task for finance and accounting teams at healthcare and social services organizations. Navigating ever-changing federal and state regulations and dealing with reimbursement complexities is a tall order, and if not done properly, can compromise your reimbursements or even result in penalties.

The following checklist lays out six steps to prepare for filing your cost reports. These steps can serve as a starting point to help you ensure compliance with regulatory requirements, demonstrate transparency to your clients, get insights into your organization’s financial performance and gain peace of mind knowing you maintained the integrity of your cost report submission.

6 Steps to Prepare Your Cost Reports:

  • 1. Understand the regulatory requirements that apply to you.

    There are stringent federal and state regulations that your organization must adhere to throughout the year. Make sure you know which regulations apply to you and how you have met regulatory requirements throughout the applicable reporting period. These requirements may vary by state and type of organization, so you will want to refer to federal and state agency guidelines or engage an outside resource to determine the regulations that are applicable to your organization.

    For a cost report to be acceptable, you must submit detailed cost reporting forms and supporting documentation that shows you have complied. Using a cost report acceptability checklist can help ensure you’re filling out the correct forms and understanding the scope of information needed before submission.

  • 2. Gather financial data.

    Preparing cost reports requires gathering and analyzing large amounts of data from various sources. This can be a long and resource-intensive process, so it’s critical to begin compiling data as soon as possible. You’ll need to collect and review comprehensive financial data for the reporting timeframe, such as income statements, utilization data, cost center charges, balance sheets and general ledgers to calculate the costs associated with providing each program’s services.

    Confirm that the financial data you’re working with is accurate and up to date. For example, were your year-end financial statements reviewed and audited? Are your expenses properly coded? Have you reconciled all accounts to ensure that the balances match your bank statements? Validating this data before submitting your cost report will enhance the accuracy of your reporting.

  • 3. Verify costs are allocated to the correct cost centers.

    Every department or functional area should have a corresponding cost center that tracks revenues and expenses. Determine the costs associated with each department or area and allocate them to the corresponding cost center. Be sure to account for any nuances — for example, if you employ program staff who float between programs, you’ll want to make sure you are accurately dividing those expenses between the two applicable cost centers. Allocation models are helpful in recording the sharing of costs that support more than one program.

  • 4. Accurately report payroll statistics.

    Accurate payroll statistics are an integral part of the cost report. Organizations need to record the total number of hours paid, which includes all hours worked, plus all benefit hours (vacation, sick, etc.).

    Gross wages should equal 12 monthly payroll summaries. Obtain payroll hours as well as gross wages information directly from your payroll register summaries with the exact same departments as recorded throughout the year. If any employees were transferred from one department to another during the year, make the necessary adjustment for the dollars as well as the hours and document the corrected totals appropriately.

  • 5. Document fringe benefit information.

    The specific fringe benefit information that you’ll need to include in your cost report may vary depending on the type of provider you are and the specific requirements of the benefits program. Typically, you’ll include employee health insurance, retirement plans, cost allocation and supporting documentation (like employee benefit statements) to verify the information included in your cost report.

  • 6. Maintain records.

    Once you have compiled all your necessary documentation, make sure you organize and maintain records of the financial data and cost allocations used to prepare the cost report. This will be helpful for future reporting periods and audits. Keep copies of all supporting documentation for at least five years.

Contact our healthcare cost reporting experts for help preparing and reviewing your cost reports or understanding the regulations that apply to your organization, or explore more ways to stabilize your future by taking control of your operations.

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