98-13110. Medicare Program; Revision to Accrual Basis of Accounting Policy

[Federal Register Volume 63, Number 95 (Monday, May 18, 1998)]
[Proposed Rules]
[Pages 27251-27253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13110]


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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: [phone]).
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FOR FURTHER INFORMATION CONTACT: John Eppinger, [phone].

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]
BILLING CODE 4120-01-P