Navigating the Complexities of Medicare Cost Report Compliance

Navigating the Complexities of Medicare Cost Report Compliance

Written by the American Institute of Healthcare Compliance Education Department

The American Institute of Healthcare Compliance (AIHC) is a non-profit training organization offering certification to become a Certified Cost Report Specialist (CCRS^SM) and is a Licensing/Certification Partner with CMS. The information below is not all inclusive, is not legal or consulting advice and is for educational purposes only.

Introduction

Filing Medicare Cost Reports (MCRs) is a highly complex, high-stakes process involving intricate, frequently changing CMS regulations, extensive data allocation, and strict documentation requirements. Due to the complexity, errors are frequent, according to findings reported by the Office of Inspector General (OIG).

As a cornerstone of the Medicare program, the MCR serves as the annual mechanism for providers to report descriptive, financial, and statistical data to CMS. Pursuant to 42 CFR §413.20(b), Medicare-certified providers are mandated to submit this comprehensive financial record to determine the proper settlement of costs for services rendered to beneficiaries. Beyond ensuring that interim payments accurately reflect actual costs, the MCR is critical for establishing future reimbursement rates, including wage indices, disproportionate share hospital (DSH) adjustments, and graduate medical education (GME) payments. Failure to file, or inaccurate filing, carries significant financial risks, making an understanding of these reports crucial for regulatory compliance and financial stability.

While frequently viewed as a burdensome regulatory filing, the MCR constitutes one of the most comprehensive, standardized, and publicly available sources of institutional financial data in the United States. As Medicare moves toward greater fiscal accountability, the MCR allows providers to identify operational inefficiencies, manage financial performance, and ensure compliance in a complex reimbursement landscape.

Which Organizations File MCRs?

Medicare-certified institutional providers, typically Part A providers, must file annual Medicare cost reports (MCR) to determine reimbursement, usually within 5 months (or 150 days) after the end of their fiscal year. These reports, filed to a Medicare Administrative Contractor (MAC), are required for hospitals, skilled nursing facilities, home health agencies, hospices, FQHCs, RHCs, and ESRD providers.

Institutional Providers Required to File Medicare Cost Reports:

Hospitals: Including general, psychiatric, rehabilitation, long-term care, and children’s hospitals
Skilled Nursing Facilities (SNFs)
Home Health Agencies (HHAs)
Hospice Providers:
Federally Qualified Health Centers (FQHCs):
Rural Health Clinics (RHCs)
End-Stage Renal Disease (ESRD) Facilities
Organ Procurement Organizations (OPOs)
Community Mental Health Centers (CMHCs)

When are Cost Reports Due to be Filed?

Providers should use the Medicare Cost Report Electronic Filing (MCReF) system for submissions. The cost report is due on or before the last day of the fifth month following the close of the provider's fiscal year and filed to the provider’s Medicare Administrative Contractor (MAC).

Example: For a fiscal year ending December 31, the report is due May 31.
Non-Month-End Closings: If the fiscal year does not end on the last day of the month, the report is due 150 days after the last day of the cost reporting period.

Failure to submit can result in the suspension of Medicare payments, increased audit risk, and loss of reimbursement.

Key 2026 Medicare Advantage (MA) Cost Reporting Requirements

CMS requires Medicare-certified acute care hospitals reimbursed under the IPPS (inpatient prospective payment system) to report median negotiated payment rates from Medicare Advantage (MA) plans by MS-DRG on their annual cost reports for cost reporting periods ending on or after January 1, 2026.

This mandate aims to collect market-based data to set future inpatient prospective payment system (IPPS) relative weights. Data will be used to set future MS-DRG weights likely by Fiscal Year 2029.

This requirement adds significant complexity to an already error-ridden annual Cost Report process. Providers must ensure the accurate reporting of MA negotiated rates to avoid potential audit findings, as this data will influence future payment setting.

OIG Audits CMS Contractor Cost Report Compliance

Take a look at some recent Office of the Inspector General (OIG) audit reports to see how large the financial impacts of noncompliance can be for MACs, which falls back onto the provider.

A September 2025 audit by the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) found that Novitas Solutions, Inc. (Novitas), a Medicare Administrative Contractor (MAC), failed to properly review 100% of the cost reports examined in a specific sample.

The errors caused by inadequate reviews led to a total of $9.4 million in corrected final settlements, consisting of $5 million in overpayments and $4.4 million in underpayments to providers.

A similar, separate OIG audit released in September 2025 also found that National Government Services, Inc. (NGS) had a 100% error rate (64 out of 64) in a sample of reopened cost reports, resulting in $5.6 million in corrected settlements.

The 64 cost report reopening's resulted in corrected final settlements to providers totaling $5.6 million (which consisted of $3.1 million in overpayments and $2.5 million in underpayments).

Key Findings on Cost Report Errors:

High Error Incidence: A 2025 OIG report revealed that 12 Medicare Administrative Contractors (MACs) failed to meet oversight requirements, with a 70% failure rate in reviewing filings.
Specific Errors: Common errors included misclassification of physician salaries, improper nursing/allied health program calculations, and improper bad debt reporting.
Financial Impact: These errors resulted in massive financial inaccuracies, including one case involving over $250,000 in improper overpayments.
Audit Surge Expected: Due to these findings, an increase in audits and oversight by MACs is expected.

Common Causes of Errors:

Inconsistent Data Sources: Failure to reconcile internal financial systems with patient data (e.g., midnight census, revenue usage files).
Complex Allocations: Miscalculating the allocation of costs between Medicare and non-Medicare patients.
Failure to Update: Carrying over errors from previous years instead of updating with current data.

Implications of Errors:

Overpayment Recovery: MACs can claw back funds, requiring repayment with interest.
Underpayments: Errors can lead to lower-than-earned reimbursements.
Increased Audit Risk: High error rates trigger more intensive reviews and potential civil monetary penalties.

Notable Cases of Noncompliant Medicare Cost Reporting

Non-Compliance with Medicare Cost Reporting Requirements

In 2018 the Office of Inspector General (OIG) reported that the National Institute of Transplantation (NIT), an independent histocompatibility lab, did not fully comply with Medicare’s cost-reporting requirements. In the cost report in question, NIT had correctly reported only 177 of 186 cost transactions. In total, the OIG estimated that NIT had received approximately $45,940 in overpayments from Medicare.

OIG concluded their audit report by recommending that NIT work with the Medicare Administrative Contractor to return potential overpayments and identify any additional similar overpayments that may be related to cost reports.

Referring Medicare Cost Reports and Reconciling Outlier Payments

Several years ago, two organizations were cited by OIG as not always correctly referring their Medicare cost reports to CMS. For example, Cahaba Government Benefit Administrators, LLC (Cahaba GBA) had only referred 5 out of 13 cost reports with outlier payments that were qualified for reconciliation to CMS. The financial impact of this noncompliance was estimated to be over $9,700,000 in total, of which just over $601,000 was due to Medicare.

Another organization, CGS Administrators, a healthcare administrator operating as a Part A, Part B, and Home Health & Hospice (HH&H) MAC for Jurisdiction 15, had referred 15 of 18 qualified cost reports to CMS for reconciliation, but of those 15 referred reports, they had neglected to reconcile the outlier payments for 14 reports. The financial impact of these affected reports was estimated at about $39,000,000 combined, with over $16,000,000 due to Medicare.

Non-Compliance with Medicare Organ Statistic Requirements

In 2012, LifeCenter Northwest, a federally designated independent organ procurement organization, was reported to have not fully complied with Medicare requirements for reporting organ statistics. In the affected cost report, LifeCenter had reported incorrect organ statistics for 15 different organs.

If was found that Medicare’s share of organ procurement costs was overstated by about $88,000. OIG recommended that LifeCenter submit a revised cost report to correct the overstatement and work to ensure that future reports followed Medicare requirements.

Implement Strategies Now for Compliance

Internal Routine Auditing: Implement proactive monitoring to verify that data—especially payroll and equipment costs—is accurate before submission.
Incorporate Prior Audit Results: Avoid repeating adjustments from previous years, as recurring errors act as "red flags" for fiscal intermediaries.
Rigorous Documentation: Maintain granular support for "allowable" costs, such as marketing (informational vs. promotional) and bad debt collection efforts.

Start by addressing critical high-risk components of the report. CMS Auditors and the Office of Inspector General (OIG) focus on several key items within the cost report. Your organization should also focus on these same areas when conducting internal compliance audits:

Graduate Medical Education (GME) & Indirect Medical Education (IME):
- Inaccurate reporting of Graduate Medical Education (GME) payments, indirect medical education (IME) costs, and Medicare bad debts. These involve complex resident counts and are frequent targets for in-depth audits.
Medicare Bad Debts:
- Facilities must prove they used "reasonable" collection efforts for non-collectible deductibles and coinsurance. Improperly documented Medicare bad debts are a frequent source of audit findings.
Disproportionate Share Hospital (DSH) Payments:
- Disproportionate Share Hospital (DSH) calculations are considered high-risk audit areas on the Medicare Cost Report. Due to the complexity of the regulations and the significant financial impact on reimbursements, these calculations frequently lead to errors, underpayments, or overpayments, according to the OIG.
Schedule S-10 (uncompensated care UCC):
- Worksheet S-10 is a major audit trigger as it directly affects reimbursement rates. Auditors target improper documentation of uncompensated care on Schedule S-10, which impacts UCC/DSH payments. As of 2026, Medicare Administrative Contractors (MACs) are scrutinizing these filings, focusing heavily on documentation that supports charity care and bad debt, according to CMS.
- The UCC and DSH go hand-in-hand as an add-on to the DRG reimbursement, but are calculated separately.
Wage Index Data:
- This data is used to set future prospective payment rates; inaccuracies can lead to billions in misapplied funds.
Operational Deficiencies:
- Late submissions, inadequate training of staff, and poor oversight of third-party contractors can lead to compliance issues.
Vaccinations:
- Vaccinations are considered a high-risk error area on Medicare cost reports for Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs). Errors often arise from failing to reconcile interim payments with actual costs, lacking proper documentation (logs, invoices, time studies), and missing or incorrect coding (e.g., Condition Code A6) on claims.

Conclusion - Include Cost Report Audits in Your Compliance Program

Because Compliance Officers often overlook the high-risk area of cost reporting, it is important to implement internal routine auditing and monitoring to ensure data submitted is accurate and timely.

Your Compliance Department should be overseeing areas which can pose a high financial or legal risk to the organization. Cost reporting falls into both categories, requiring internal auditing and monitoring of this function to ensure accuracy and timeliness is observed.

Inaccurate filing or late submissions can result in immediate payment suspension, civil monetary penalties, or exclusion from the Medicare program. All this can be avoided through appropriate preparation and accurate training.

This article is written by the American Institute of Healthcare Compliance Audit Education Department

References

American Institute of Healthcare Compliance (AIHC®)