Magazine article The CPA Journal

Controlling Nursing Home Fraud

Magazine article The CPA Journal

Controlling Nursing Home Fraud

Article excerpt

CPAs auditing nursing homes and hospices should be aware of the potential for fraud in the industry. Nursing home fraud adversely affects those paying for such care, both as caregivers and as taxpayers through support of Medicare and Medicaid, which constitute a large percentage of the country's gross domestic product. According to the Center for Medicare and Medicaid Services, healthcare spending constituted 16% of U.S. GDP in 2006 and is expected to grow to 19.6% of GDP by 2016, reaching over $4.1 trillion.

In a 2006 paper ("Whistle Blowers: False Claims Act"), Janie Gardner estimates that almost 10% percent of the U.S. annual budget is paid to companies or persons who are defrauding the government of which a large part is due to Medicare and Medicaid fraud. A 2004 Office of the Inspector General of the State of Florida audit, for example, found not just individual misdeeds but "that the State permitted improper Medicaid payments for new admissions totaling $176,853 ($99,957 Federal share) to sanctioned nursing homes." Recognized as seriously acute over a decade ago, the fraud problem has occasioned recommendations as severe as doing away with nursing home care entirely to avoid the misspending of $50 billion in government funds (Peter Uhlenberg, "Replacing the Nursing Home," Public Interest, Summer 1997).

This article surveys the current state of nursing home fraud and suggests ways that CPAs can help control this abuse.

Medicare and Medicaid

Medicare provides health insurance to people aged 65 or older, those entitled to Social Security disability payments for more than two years, and those with end-stage renal disease, regardless of income. Medicaid covers nursing home care and pays for skilled, intermediate, and long-term care for low-income individuals. States have their own Medicaid plans, receiving prospective, flat-rate, and cost-based payments, some of which involve ceilings, case-mix adjustments, and efficiency incentives. According to the U.S. Office of the Inspector General, Medicare served 43 million beneficiaries at a cost of $337 billion in fiscal year 2006, while Medicaid served 47 million people, costing the states $137 billion and die federal government $180 billion.

Nursing homes requesting Medicaid reimbursement must detail their revenues and expenses in cost reports that are subject to state audit. For example, in Michigan, they must complete Medical Services Administration Medicaid Program Form 1579, which contains around 1,000 different lines. State auditors usually focus on 100 to 150 major expense categories. Nursing homes receive the highest reimbursements for base costs (e.g., nursing supplies, nursing wages, and food), the next highest for support costs (e.g., maintenance supplies and administrative salaries), and lowest for plant costs (e.g., reimbursable leasing costs and property taxes). Some states, however, reimburse interest expenses based upon formulas that consider the nursing home's average borrowings.

Reimbursement of certain capital costs are based on the annual depreciation reported. Nursing homes should capitalize large expenses (e.g., exceeding $5,000), which usually affect major repairs, maintenance, or equipment. Moreover, unlike plant costs (which have no preset limits), base/support costs often have a built-in profit factor (up to preset limits). Incorrect reporting of capital costs could result in a nursing home being improperly reimbursed on an accelerated basis. Auditors should test capital expenditures to assure compliance.

State auditors look for correct expense classification categories and for unallowable expenses, such as late fees, penalties, and certain types of pharmacy and dentistry, and compare filings on their tax returns and accrued general ledger amounts. They usually base further investigations on amounts of expense claimed and comparisons to the prior years. They also compare vendor invoices to amounts claimed, perform their own bank reconciliations, and compute interest. …

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