On July 3, 2001, CMS issued an Intermediary Program Memorandum (Transmittal A-01-82) which "clarifies" CMS's audit and cost report settlement expectations for the intermediaries. As a result, providers can expect to see significantly tighter requirements for documentation during the course of Medicare audits. Importantly, the PM is effective for "data requests on or after September 1, 2001." Therefore, the stringent rules and timetables with respect to documentation requests should not apply to requests made prior to that time.

Some of these clarifications will be helpful to providers. In the past, providers have often been given only a couple of days to respond to document requests. Under the PM, providers must be given a list of outstanding documentation requests at the pre-exit conference (to be held the last date on site), and must be given four weeks to provide the requested information. Providers will be well-advised, however, to note that they must produce requested documentation according to the audit timetables or risk having costs disallowed with no opportunity for reopening.

Intermediary Authority
The PM reminds the intermediaries that their authority does not extend to determining whether program policies or procedures are appropriate or should be applied in given circumstances. Rather, the PM instructs the intermediary that "your responsibility is to enforce such policies and procedures."

Home Office Costs
The PM requires home office cost statements to be submitted within 150 days of the chain home office's fiscal year end. If the home office cost statement is not submitted within that time, the servicing intermediaries are instructed to issue "a demand notice requiring repayment of Home Office costs." In addition, the servicing intermediaries "are required to reduce interim payments to the providers to reflect the disallowance of any Home Office costs."

Tentative Settlements
The PM instructs the intermediaries to make initial/tentative retroactive adjustments within 60 days of the receipt of an acceptable provider cost report. While, generally, the intermediaries are to accept the costs as reported for purposes of making the initial/tentative adjustment, they also must consider past audit experiences with the providers, including whether they consistently make adjustments to the costs or whether there are errors in implementing program policy. They are also to give consideration to amounts owed to the program by the provider (unrecovered overpayments).

Field Audits
In terms of audit scheduling, the intermediaries are to give a minimum of four weeks' and a maximum of six weeks' notice of the intent to make a field visit to conduct a field audit or focused review. In the "engagement letter," the intermediary must specify a list of the required documents to be made available on the first day of the audit, the day of the entrance conference, the projected time needed to conduct the field work at the provider, a request for a contact person, and a tentative exit conference date set two to three weeks after the field work is expected to be completed.

All providers must be given an exit conference, unless the provider specifically waives the request. Finally, the NPR and final adjustment report must be issued within 75 days of the exit conference.

Documentation
Significantly, the initial engagement letter for the audit must notify the provider that "all documentation and records requested prior to and during the field work time must be given to [the intermediary] in a timely manner and that failure to produce the documentation will result in non-negotiable audit adjustments." In addition, the intermediary is required to inform the provider that it will not honor any reopening requests for "lack of documentation" adjustments, nor will the intermediary administratively resolve any appeal request for the same lack of documentation adjustments. Similarly, at the entrance conference, the intermediary must also inform the provider that costs for which the supporting documentation is not received will be disallowed, and the cost report will not be reopened after the NPR is issued.

At the pre-exit conference, scheduled for the last day the audit team is on site, the intermediary must give the provider a list of any outstanding documentation requested but not received to date, and inform the provider they have four weeks to provide the additional documentation. The intermediary must establish an exit conference date that allows sufficient time to review any additional documentation that the provider may provide. This is particularly important, because often the intermediaries issue their final adjustment within a day or two after the provider submits documentation, indicating that the intermediary has in fact not reviewed the additional documentation. According to the PM, the intermediary must review any additional documentation the provider may submit, so long as it is received during the specified timetable.

These statements on documentation are somewhat confusing. On the one hand, the PM states that intermediaries will no longer be able to administratively resolve issues when the provider belatedly produces additional documentation for any adjustments made for lack of documentation. Where adjustments are written for lack of documentation, the intermediary is to issue its NPR without considering documentation received from the provider after the established timetables unless there are pre-approved circumstances, and the intermediary is instructed to "consider the provider's culpability in failing to submit proper supporting documentation on a timely basis when [the intermediary is] rendering a decision on the allowability of a reopening and when prioritizing issues for administrative resolution if a timely appeal is filed." While the intermediary may not refuse to accept documentation, it "should refuse to consider it in the initial NPR issuance."

On the other hand, the PM states that this policy has no impact on normal provider appeal rights with the PRRB. If a reopening is later granted or a timely appeal made, the PM indicates late documentation may be considered at that time. Providers would be well-advised to do whatever is necessary to provide the requested documentation during the audit. If this memorandum is enforced as written, then providers may have to take more issues to hearing before the PRRB rather than being able to administratively resolve them. The backlog of hearings at the PRRB can only, then, increase.

Sampling
With respect to statistical sampling, the intermediary must document its sampling techniques and the confidence level of the sampling approach. The PM states that "under no circumstances should [the intermediary] make an adjustment for the amount of error in the sample without considering the effect on the universe."

Documents from Independent Auditors
The PM also notes that when documentation lies not with the provider but with an independent auditor or CPA firm, CMS insists that the provider obtain the information from the entity. CMS is taking the position that the independent auditor is a de facto agent of the provider and should comply with the request. If the provider cannot produce the documentation from the auditor, the PM states that CMS may disallow all of the provider's costs associated with the cost reports under review if the appropriate payment cannot be determined without the documentation, or may at least suspend payment until the documentation is provided.

Hierarchy of Evidence
The PM sets forth a hierarchy of evidence to be accepted by the intermediary. The intermediary should "never rely on evidence of a lower order or type if [it] can reasonably conclude that evidence of a higher order or type is available to the provider." The order of evidence, from highest to lowest, is "conclusive," "convincing," and "persuasive." The types of evidence, from highest to lowest, are physical evidence, documentary evidence, analytical evidence, and testimonial evidence. The PM instructs that testimonial evidence alone is unacceptable.

The PM contains requirements for the information that must be submitted with a cost report, as well as other instructions. All providers should be sure to read this PM carefully.