Discrepancies of Financial Data between Medicare Cost Report and Hospital Audited Financial Statement and Its Implication for Measuring Financial Impact of Payment Policy on Rural Hospitals

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Project completed:
November 2005
This project will explore the potential of using audited hospital financial statements as an alternative data source to the Medicare Cost Report (MCR) to investigate the financial impact of payment policy on rural hospitals. Changes in Medicare payment policies have occurred without measuring the immediate effects of change. A key contributing factor for this delay in policy analysis is the lack of timely financial data for hospitals. The principal source of data, the MCR, provides financial information with as much as a three-year lag and typically a two-year lag. Additionally, financial data from the MCR, compared to those available from hospital audited financial statements, may be unreliable, often inaccurate, and lack relevant details. Required by the Centers for Medicare and Medicaid Services (CMS), hospitals report their financial data to be used as the basis for determining Medicare payments they receive. As a result, the information contained in the MCR is mainly cost accounting data, with limited financial information. On the other hand, audited hospital financial statements are published to demonstrate the public accountability of hospitals to their stakeholders such as creditors and business partners. Therefore, audited hospital financial statements contain a wide range of financial accounting information related to profitability, liquidity, cash flow, and solvency. And because of the purpose of their accountability to stakeholders, audited hospital financial statements are usually under closer and stricter scrutiny by outside professionals. To effectively examine the effect of payment policies on the financial performance of rural hospitals, validation of the financial data from the MCR using financial statement data is critical. We undertook this study to examine the agreement between MCR and hospital audited financial statement of a series of financial measures in rural hospitals. In addition, we would also assess how the findings on the discrepancies between the two data sources can be used to inform policy analysts and policy makers of the adjustment into the estimated financial effect of payment policies on rural hospitals using MCR data. The results are expected to inform state and national policy makers of the limitation inherent in using MCR data as the single source of data to examine the financial performance of rural hospitals. Our findings are also expected to provide useful insight for administrators and professionals in rural hospitals into benchmarking their hospital financial performance against their peer organizations.