West Virginia Code of State Rules
Agency 65 - Health Care Authority
Title 65 - LEGISLATIVE RULE HEALTH CARE AUTHORITY
Series 65-05 - Hospital Cost-Based Rate Review System
Section 65-5-5 - Full Financial Requirements (FFR)

Universal Citation: 65 WV Code of State Rules 65-5-5

Current through Register Vol. XLI, No. 13, March 29, 2024

The first step in the calculation of a hospital specific rate is the identification of the full financial requirements (FFR) of each hospital in its base years. FFR can be defined as the total revenue needed from all services by a hospital to maintain financial viability. The components of FFR include, but are not limited to, total operating expenses, capital related costs (i.e., depreciation, interest expense, insurance, property taxes, leased equipment costs, etc), charity, bad debts, interest on short term loans for working capital, and a fair return on invested capital. The Authority assumes that hospitals budget for their needs, including the need for working capital.

5.1. Operating Expenses

5.1.1. Operating Expenses shall include, but not be limited to the following:
5.1.1.a. Non-supervisory salaries, wages and benefits; [Will remain subject to pass through pursuant to W. Va. Code '16-29B-20(d)];

5.1.1.b. Supervisory salaries and wages;

5.1.1.c. Employee benefits;

5.1.1.d. Consumable supplies such as, office supplies; food and dietary supplies; medical supplies, both consumable and saleable; pharmacy supplies, both consumable and saleable; laundry supplies; etc;

5.1.1.e. Other expenses such as, employee recruitment expense, travel expense, education expense other than medical education expense, etc;

5.1.1.f. Utilities, including energy, water, telephone and waste disposal.

5.1.2. Operating expenses should not include expenses associated with loans to employees, officers, physicians or other related organizations. Such expense would be interest on loans or defaulted loan principal repayment that may be made by the hospital.

5.1.3. The base operating expenses per discharge of the hospital requesting a rate increase will be compared to the same base operating expenses per discharge of hospitals in its peer group. In determining the base operating expense per discharge, the total operating expenses should not include the cost of items enumerated below. A portion, or possibly all, of the cost of items a) through f) below must be added back to the base operating expense in order to establish the hospital's acute care charge for services that it provides.
5.1.3.a. Capital related costs

5.1.3.b. Professional compensation and fees

5.1.3.c. Medical liability (malpractice) insurance

5.1.3.d. Medical education (direct and accumulated indirect)

5.1.3.e. Excluded units and services

5.1.3.f. Other items unique to a specific hospital and as determined by the Authority.

5.1.4. Other Factors Affecting Operating Expense

Hospitals may have operating units and/or special care units that cause operating expenses to be above the peer group average (e.g. obstetric unit, nursery, neonatal intensive care unit, burn unit, mobile units, medical staff office buildings, especially in hospitals in rural areas).

Based on a particular hospital's level of service and case mix the Authority may give consideration to any additional costs up to a percentage to be determined by the Authority. In no case will costs for these types of services exceed a maximum established by the Authority.

5.1.5. Nonsupervisory salaries, wages, and benefits

Although this expense shall remain subject to the pass through pursuant to W. Va. Code '16-29B-20(d), the Authority shall monitor the amount expended by the hospital for these items and compare the actual expenditure to the amount budgeted by the hospital. If the hospital expends less than the budgeted amount for nonsupervisory salaries, wages, and benefits, the Authority may make an adjustment in the hospital's revenue limits during the next rate review application process; provided that the rate application is not filed pursuant to section 7 of this rule.

5.2. Additional costs and/or expenses that make up the hospital's full financial requirements are further discussed in this rule. These expenses are initially separated from hospital operating expenses in order to place hospitals on a more comparable level. Each of the following expenses will be compared to the peer group with the overall goal of moving these costs toward the peer group average.

5.3. Capital Costs/Depreciation And Interest

5.3.1. Depreciation

The Methodology Task Force approved the use of a straight line depreciation method using estimated lives based on the American Hospital Association's latest guidelines entitled, "Estimated Useful Lives of Depreciable Hospital Assets," which was published in 1988.

5.3.2. Other Capital Costs consist of the following components:
5.3.2.a. Leases and rentals for depreciable assets used for patient care.

5.3.2.b. Interest expense incurred in acquiring property, plant or equipment used in patient care, including the interest expense on debt associated with such purchases.

5.3.2.c. Insurance on property, plant and equipment used for patient care or insurance that provides for the continuing payment of capital related costs during interruptions in patient care.

5.3.2.d. Real and personal property taxes on land or other property, plant or equipment used in patient care.

5.3.3. Donated Property, Plant and Equipment

The donation of assets or funds to acquire property, plant and equipment is a unique situation not found in investor owned entities. Many health care entities are charitable, or tax exempt organizations. As with other charitable organizations, donors and grantors often place terms and conditions on how their support may be used by the hospital or other health care entity. This places a fiduciary responsibility on the health care entity to comply with the specific restrictions. The American Institute of Certified Public Accountants (AICPA) recognized this unique aspect of hospital accounting in the "Hospital Audit Guide" published in 1972 and reaffirmed in the 1990 edition of "Audits of Providers of Health Care Services." The AICPA formalized the accounting principle that donated assets are to be reported on the hospital's books and records at the fair market value as of the date of the gift. The fair market value of the gift of these donated assets would be depreciated in the same manner as other property plant and equipment.

5.3.4. Capital Cost/Non-patient Related
5.3.4.a. The amount of capital cost, as defined above, for non-patient related property and equipment such as parking garages, and other non-patient service areas such as cafeterias, snack bars, gift shops, etc. will be determined by the hospital. The hospital will have the option to use either the lower of costs or the revenue derived from these sources as a reduction of capital costs. In the event the hospital cannot determine the capital cost related to non-patient property, plant and equipment, the revenues derived from the operation of these areas will be used as direct offsets to the capital related costs.

5.3.4.b. Hospitals that own and/or operate parking garages and/or cafeterias that are solely for employees' use, and for which no charge is made may be allowed to include the full cost of these areas in the total allowable cost. The hospital will be required to furnish additional information to the Authority. The additional information must be based on auditable records maintained by the hospital.

5.3.4.c. Hospitals that own and/or maintain office buildings, especially those occupied by physicians, will be required to furnish additional information to the Authority. It is the Authority's intent that medical staff office buildings will be self-sufficient.

5.3.5. Other.

All capital related costs should be separated from the base operating expenses for peer group comparison. These costs shall be added back after comparison to the peer group in order to determine the hospital's total costs. The Authority will review the capital related costs on a continuing basis and make changes to this methodology as necessary.

5.4. Professional Compensation And Fees

Professional compensation and fees are made up of several different components. These can include payments to physicians for their direct services to patients in the hospital or for supervisory services performed by the physicians. Fees or compensation paid to non-physician professionals, such as physical therapists and CRNAs may be in the form of salaries, or in the form of contractual arrangements. Professional fees for physicians are generally adjusted out of the hospital's reimbursable cost for Medicare because the physicians are paid from the Medicare Part B trust fund. Medicare recognizes amounts paid for supervisory services as part of hospital costs, but not all hospitals have costs related to physician supervisory services. Likewise all hospitals do not have CRNAs and physical therapists. Therefore, compensation paid to the above-referenced health care professionals whether for patient care or supervisory service should be separated from the base operating expenses for peer group comparison. Costs for compensation of these health care professionals may be added back after the peer group comparisons if the services provided by these health care professionals were not separately billed by the hospital.

5.5. Medical Liability (Malpractice) Insurance

Medical liability insurance premiums or self insured contributions are somewhat dependent upon the services offered by a hospital and somewhat dependent on the experience of the hospital. Since it is possible that hospitals in a peer group may not all provide identical services, nor have identical medical liability claims experience, the cost of medical liability insurance or contributions to self insured plans should be separated from the base operating expenses for peer group comparison. These costs would have to be added back after comparison to the peer group in order to determine the hospital's total costs.

5.6. Medical Education

Approved medical education programs are not engaged in by all hospitals. Generally, approved education activities mean formally organized or planned programs of study usually engaged in by providers in order to enhance the quality of care in an institution. These programs may include the costs of interns and residents, students, nursing schools and medical education of paraprofessionals (e.g., radiologic technicians). These programs do not include on-the-job training or activities such as patient education or general health awareness programs offered to the community at large.

The net cost of an approved educational program will be considered as an allowable operating expense if the program meets the following Medicare educational requirements:

(1) The activity is intended to improve the quality of health care in the institution; and

(2) the program is licensed by the State of West Virginia and /or accredited and approved by the Board of Trustees for the West Virginia University System or the Board of Trustees for the State College System and/or the program has been accredited by the recognized national professional organization related to the program and approved by the Authority.

Since all hospitals do not have approved medical education programs, the accumulated direct and indirect cost of such programs should be separated from the base operating expenses for peer group comparison. These costs would have to be added back after comparison to the peer group in order to determine the hospital's total costs.

5.7. Excluded Units And Services

A number of providers have distinct part units which require CON approval and provide services which are different from the services in the acute care hospital. These distinct part units include skilled nursing facilities (SNF), psychiatric care units, substance abuse units, and rehabilitation units. The costs associated with providing care in these distinct part units may be significantly different from the costs of providing acute care inpatient hospital services to patients.

The operating expenses attributable to each of the distinct part units shall be determined through the allocation method used in the Medicare Cost Report and the Authority Uniform Reporting System. The operating expenses for each distinct part unit including the ancillary revenue department expenses shall be separated from the operating expenses for peer group comparison. The hospital and each of the distinct part units shall be allocated an appropriate part of the uncompensated care and return on equity. The revenue limits for each distinct part unit shall be based on the accumulation of costs divided by total patient days.

The Authority will accumulate the above information in a database during the initial years of the new methodology. In the meantime it is anticipated that charges for excluded units will be adequate to cover, at a minimum, the direct expenses for the distinct part units.

5.8. Taxes

5.8.1. Disproportionate Share Act

The Governor signed on April 4, 1991, H.B. 2251 ['9-4A-1 et. seq.], known as the Medicaid Uncompensated Care Fund, (hereinafter the "Fund"). This Fund was established for the purpose of receiving money from the following sources, (1) all public funds transferred by any agency to the department of health and human resources medicaid program for deposit in the fund; (2) all private funds contributed, donated or bequeathed to the fund; (3) interest which accrued on amounts in the fund; and (4) federal financial participation matching the amounts referred to in (1), (2) and (3). These funds will be used to reimburse eligible disproportionate share hospitals for services rendered to medicaid beneficiaries.

The net Medicaid Uncompensated Care Funds received, (i.e., the gross amount minus any contributions by the hospital) should be recorded on the books of the hospital in an account that results in a reduction of the Medicaid contractual allowances. This reduction of allowances should result in an increase in the hospital's total excess of revenues over expenses, which should also reduce the hospital's rate increase request for non-governmental payors. All appropriate accruals should be made to account for disproportionate share funds (net of donations) for the hospital's fiscal year.

5.8.2. Provider Medicaid Enhancement Act

The Governor signed on November 4, 1991, H.B. 210, ['9-4B-1 et. seq.; '9-4C-1, et. seq.; '11-26-1 et. seq.] known as the Medicaid Enhancement Act (hereinafter the "Act"). This Act established a provider medicaid enhancement tax which is levied against medicaid reimbursements of health care providers. The money received from all sources are to be used to match federal medicaid funds.

All of the funds received are to be used to increase provider medicaid reimbursement through approved increased fees; increased utilization due to program growth and to cover administrative costs.

5.8.3. Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 ( P.L. 102-234 )

The President signed into law the above-referenced Act on December 12, 1991. This Act provides that the use of donations and taxes, as described in A and B above, as a source of a state's share of Medicaid funding is currently scheduled to end no later than June 30, 1993.

5.8.4. Federal and State Income Tax

Investor owned hospitals are subject to both federal and state income taxes that are not applicable to hospitals exempt under Section 501(c)(3) of the Internal Revenue Code. The Authority recognizes this situation and in order to allow the investor owned hospital an equivalent rate of return, it will allow a return on equity, as described in Section IX, equal to a percentage that will permit a net return that approximates the return for tax exempt hospitals.

5.9. Uncompensated Care

Uncompensated Care results from a variety of situations. Below are just three broad examples of ways that uncompensated care arises:

5.9.1. Individuals who are unemployed or Medicaid recipients who have exhausted their Medicaid benefits and are thereby unable to pay for any medical services provided to them. These situations may be considered to be charity care; or

5.9.2. Individuals who are employed, but whose incomes are at or near the poverty income guideline level or individuals who are employed, have significant medical problems and have no insurance. These individuals also may fall in the category of charity care, or;

5.9.3. Those individuals who are employed, or who have substantial means, or who are able to purchase or otherwise acquire health care coverage and who refuse or evade the payment for co-payments, deductibles or such other part of a bill which is a personal liability to the hospital. These individuals may be considered to be bad debts after all reasonable efforts have been made to collect the full amount due the hospital.

Uncompensated care (i.e., charity and bad debts) resulting from either Medicare or Medicaid are generally handled as follows:

5.9.4. The Medicare Program makes provision for bad debts related to deductibles and co-payments arising from hospital medical services provided to Medicare beneficiaries. The Medicare Program will pay for such unpaid deductibles and co-payments if the provider can demonstrate that it made bonafide efforts to collect such amounts from the recipient, therefore, the effect is that there are no bad debts or charity associated with the Medicare program.

5.9.5. The Medicaid Program is a payor of last resort and normally there is no deductible or co-payment to be paid by the covered recipient. Therefore, upon exhaustion of benefits any amount associated with a Medicaid beneficiary that is not covered by the program should be classified as a self pay nongovernmental patient and in effect becomes a nongovernmental charity account.

5.9.6. The Authority believes that accounts receivable from all payors who are not properly classified as charity accounts should be vigorously pursued through all commercially reasonable efforts. If the hospital can demonstrate that it made bona fide efforts to collect such accounts these amounts will be considered as part of the reimbursable bad debts.

5.9.7. However, there are significant costs associated with bad debts and charity care for nongovernmental payors. The cost of treating nongovernmental patients properly classified as charity care or as bad debts is already included in the hospital's operating expenses. It is recognized that patients so classified may not pay for all of the services received by them. Therefore, it may be necessary to adjust a hospital's revenue limits to include the unpaid expenses arising from nongovernmental payors, in an amount to be paid by nongovernmental payors. The factor to be used to make such adjustment will be based on each hospital's percentage of charity care and bad debts in relation to the charges in the base years.

5.9.8. After the first year a cost to charge relationship will be determined for each hospital and new ratios for charity and bad debts will be developed.

5.9.9. The following are to be used as guidelines to define the elements of uncompensated care:
5.9.9.a. Charity Care/Bad Debts
5.9.9.a.1. Persons deemed to be bankrupt either by the filing of a bankruptcy notice or proof of bankruptcy claim.

5.9.9.a.2. Persons who meet West Virginia Department of Health and Human Services Income and Resource Guidelines, but who are not eligible for Medicaid coverage.
5.9.9.a.2.a. Persons who fall within the "U.S. Department of Health and Human Services Annual Update of the (HHS) Poverty Income Guidelines" published annually in the Federal Register and who are further impoverished as a result of an extended uninsured illness.

5.9.9.a.2.b. Persons who fall within 101% and 200% of the HHS Poverty Income Guidelines may also be considered as patients eligible for charity care. These patients should be considered on a graduated scale ranging from 99% to 0%.

5.9.9.a.3. Medicaid recipients who have exhausted the covered days allowed by the Medicaid Program.

5.9.9.a.4. The contractual allowance associated with Medicare and Medicaid covered services must not be considered as charity care or bad debt.

5.10. Contractual Allowances And Discounts

5.10.1. Contractual Allowances

Hospitals generally record revenues and the related accounts receivable in the accounting records on an accrual basis at the hospital's full established rates. But, a significant portion of the revenues are received in whole or in part from third-parties which pay according to allowable costs or a predetermined (prospective) contractual rate rather than the hospital's established rates for service.

The provision for contractual adjustments (i.e., the difference between established rates and third-party payor payments) and discounts (i.e., the difference between established rates and the amount collectible) are recognized on an accrual basis and deducted from gross patient revenue to determine net patient revenue.

The Authority recognizes that the cause of cost shifting is the failure of all payors to pay the full financial requirements of hospitals. The result of this cost shifting is contractual allowances for both governmental and nongovernmental payors. The cost shifting therefore increases the cost of acute care hospital services to nongovernmental purchasers and other third parties who are unable to contract with the hospital.

The Authority recognizes that cost shifting resulting from governmental contractual allowances is a significant problem that this agency may not be able to resolve totally. The Authority will continue to review this problem and will work to reduce the amount of cost shifting from governmental programs.

5.10.2. Discount Contracts

In accordance with W. Va. Code '16-29B-20 no contract for payment of patient care services between a purchaser and third party payor and a hospital can take effect until it is approved by the Board. The Board shall approve or deny the proposed contract within the annual rate review period. The Authority, in its review of nongovernmental discount contracts shall eliminate cost shifting as a result of these contracts during the first year of the cost based methodology.

5.11. Return On Equity.

The Authority recognizes that the FFR includes a fair return on invested capital, and will develop a factor in order to determine what rate of return on invested capital is appropriate in order to provide sufficient funds for working capital and for the acquisition and/or replacement of property, plant and equipment. This factor shall be referred to as the "return on equity (ROE)". The ROE is to be added to total operating expenses in order to determine the hospital's FFR. During the first year of the cost based review system, the Authority will use a ROE factor based upon the DRI McGraw-Hill "Hospital Basket Moving Average Inflation Factor," as adjusted for efficient hospitals or inefficient hospitals, as the case may be, and certain other adjustments described hereinafter. The ROE factor, as adjusted, shall then be applied to the fund balance for tax exempt hospitals or to the stockholders' equity for investor owned hospitals in order to arrive at the hospital's FFR.

The Authority shall determine if a hospital is operating efficiently or inefficiently, and may adjust the ROE factor accordingly to promote efficiency. The Authority shall compare the total operating costs of the hospital to the median for the hospital's peer group in order to determine if a hospital is operating efficiently. The Authority shall allow efficient hospitals, which shall be defined as hospitals operating at costs less than or equal to the peer group median, the full amount of the ROE factor, and may, at the discretion of the Authority allow an additional increase not to exceed two percent (2%) for efficient hospitals as an incentive to promote efficiency. The Authority may, in its discretion, decrease the ROE factor for inefficient hospitals by an amount to be determined by the Authority, which shall be defined as hospitals operating at a total cost in excess of the peer group median.

In addition to adjustments to the ROE factor for efficiency and inefficiency, the Authority may, in its discretion, increase the DRI McGraw-Hill "Hospital Market Basket Moving Average Inflation Factor" during the first year of the cost based rate review system for a hospital by a certain percentage to be determined by the Authority in order to arrive at an appropriate level of FFR.

The Authority, in its discretion, may increase or decrease a hospital's fund balance or stockholder's equity, as the case may be, in order to compensate for changes required by generally accepted accounting principles or for other unique and extraordinary circumstances which could not reasonably have been foreseen by the hospital.

After the first year under the cost based rate review system, the Authority may, in its discretion, amend the DRI McGraw-Hill "Hospital Market Basket Moving Average Inflation Factor" standard or provide a substitute standard upon thirty (30) days advance notice, which notice shall be published in the State Register and the Saturday Charleston newspapers and which notice shall provide for a thirty (30) day period after publication for public comment. Hospitals receiving a final decision on rate applications during the thirty (30) day comment period may seek reconsideration of the rate decision if the amended or substituted standard would result in a substantial change to the rate previously allowed in said decision.

5.12. Outpatient Services.

The cost for outpatient services will be determined through the allocation method used in the Medicare Cost Report and the Authority Uniform Reporting System. Total outpatient costs will be accumulated for patients on the appropriate rate setting form. These total costs will be used to determine the outpatient cost per visit. The Authority will continue to review outpatient charge methodologies used in other states, as well as the methodology being developed by the Medicare program to determine the applicability of these systems to West Virginia hospitals.

5.13. Peer Group.

Hospitals will be placed into two major groups based on bed size. The first group consists of hospitals with one hundred (100) beds or less, and the second group consists of hospitals with more than one hundred (100) beds.

The hospitals in each category are ranked through the use of a Peer Group Index, which is computed by weighing the following factors and determining an index for each item in order to establish the rank of each factor as well as the overall rank. The adjusted days rank plus the Medicare rank plus the case mix rank are then used to calculate an overall ranking for each of the two major groups. (See Computation of Rank below).

The actual peer group used when evaluating a hospital will consist of four (4) hospitals above and four (4) below the review hospital. The hospital under review is not included with the hospitals in its "peer group" when the peer group median is determined. The peer group is a "floating" group of hospitals in that a given hospital can be involved with several different "peer groups" when the median is determined. Review hospitals with less than four (4) other hospitals below or above them in the overall ranking shall be compared to a lesser number which is between four (4) and eight (8) peer hospitals. For example a hospital located third from the top of a category will be compared to six (6) other hospitals, two (2) above and four (4) below.

The method used to compute a rank (or index) for each rating factor is defined below:

5.13.1. For a given category, e.g., Adjusted Days, the average is computed by summing the values and dividing by the number of items.

5.13.2. For each item, the difference between the average and the value for that item is computed. The total of the differences is divided by the number of items to arrive at a value. The square root of that value is then computed to arrive at the standard deviation which is a measure of "distance" from the average.

5.13.3. The rank for each item is computed by dividing the standard deviation into the difference between the value for that item and the average. In this manner, each value is expressed as a positive or negative value in terms of "standard deviations" from the average.

The above calculation results in an overall ranking that is used to order the hospitals within the peer group.

5.14. Other Policy Issues

5.14.1. Projected Patient Utilization for Inpatient and Outpatient Services.

There are several recognized methods of forecasting available to hospital management and the Authority will encourage the use of these forecasting methods particularly the regression analysis method. Other suitable forecasting methods may also be accepted by the Authority.

In some circumstances, the hospital may experience greater utilization than was anticipated, which may also result in the actual revenue exceeding the projected gross patient revenue limits. If, and when, such circumstances occur and the hospital has projected volume and revenue using a suitable projection methodology applied to the hospital's historical data the Authority shall consider this fact in its review of overages.

5.14.2. New Services Which Require A Certificate of Need

The effect of the proposed project on the hospital's operating costs must be evaluated in the CON financial feasibility study. At the time the feasibility study is prepared the cost of the project will have been developed based on the best information available at that time. However, during the time of implementation of the project circumstances may cause the actual cost to exceed the projected costs. When such cost overruns occur and the Authority's approval has been received during the implementation of the project, the Authority shall consider the cause and include the additional expenditure as part of the hospital's total operating costs. However, when the hospital has not filed progress reports or otherwise kept the Authority informed and has not received approval from the Authority for the cost overruns, the Authority may not allow the additional expenditure as part of the hospital's total operating costs.

5.14.3. New Services Which Do Not Require a Certificate of Need
5.14.3.a. Rate adjustments will be considered upon application to the Authority and as provided in '16-29B-21.

5.14.3.b. Rate adjustments will be evaluated by examining the hospital's estimated financial projections of costs, utilization and charge per unit.

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