The Case for Cost Reports
Part Two | Why Cost Reports Still Make Sense… Especially Now
In the inaugural post for our series, Are Medicaid Cost Reports Still Necessary?, we provided a brief history of the cost report, key factors that got us to where we are now, and why we think cost reports still make sense, especially against the backdrop of current events. In this post, we break down key considerations that serve as good reasons – with defensible results – for using the cost report.
There are many good reasons to use cost reports, as detailed in the list below. While some things are mandated, others are best practices that can help agencies be financially responsible and monitor access to care in addition to being able to answer media requests and respond quickly to new legislation.
- Cost Settlements. Some cost settlements may still exist within the fee-for-service (FFS) side. Some examples may be alternative payment methodologies for federally qualified health centers (FQHCs) or rural health clinics or ground emergency medical transportation (GEMT) programs that use cost reports.
- Rate Setting. Cost reports are still used widely by states to set Medicaid rates for FFS and minimum rate schedules for managed care.
- Certified Public Expenditure (CPE) claims. Many states make CPE claims for federal match on public providers, and these are typically required to be based on cost. In most cases, the cost reports are used to make these claims and are required to be audited by the Centers for Medicare & Medicaid Services (CMS).
- Rebase of Hospital and Nursing Facility Medicaid Rates. In states where prospective payments are made, there may be a need to rebase those rates on a periodic basis due to coding creep and other service changes. The cost report is usually used to rebase those rates in relation to cost. This may include hospital diagnosis-related groups and nursing facility acuity-based rates.
- Change in Scope. States may need to validate a provider’s claim for a change in scope for certain services including FQHCs. The cost report can be used to validate the change.
- New Reimbursement Initiatives. Medicaid reimbursement varies widely and is ever-changing. Sometimes states are faced with new federal or state funding that they must disperse to providers within mandated timelines. These initiatives usually require the use of existing data, including cost reports. Most recently, many states were faced with minimum wage increases for home and community-based services and other mandated minimum spending of rate increases (spending floors). These initiatives can usually be supported by some of the current cost report data and can be supported ongoing with minor changes to the existing cost reports as opposed to creating an entirely new reporting process. In July 2025, Congress passed, and the President signed into law, a budget reconciliation bill known as the One Big Beautiful Bill Act (OBBBA) that creates a new Rural Health Transformation Program. Under this program, one eligibility criterion includes looking at the financial situation of hospitals within the state. Cost reports would be the best source of this data as states apply for these federal dollars.
- Legislative Initiatives and Fiscal Impact Analyses. Throughout the legislative session, states are faced with preparing fiscal impacts, and they use cost report data in many of those analyses. We anticipate hospitals, nursing facilities, and other provider types to continue lobbying the legislature over reimbursement even on the managed care side. We believe it would be in the state’s best interest to be able to validate any claims made by the industry related to cost.
- Upper Payment Limit (UPL) Calculations. Cost-based (as opposed to Medicare-based) UPL calculations use cost report data.
- Medicaid Waiver Oversight. Many states have Section 1115 Medicaid waiver programs that require the use of cost reports as part of the oversight of those programs. These may include various payments, including uncompensated care pools.
- Updating/Reviewing Provider Assessments (Taxes). Many states have set up various provider taxes based on revenue or days from the cost reports. States may review those annually to ensure compliance with limits and possibly to increase such taxes. Cost report audits will help ensure these amounts remain compliant with CMS tax requirements.
- Medicaid Disproportionate Share Hospital (DSH) In many states, the Medicaid version of the hospital cost report is used for the Medicaid DSH examinations. If cost reports aren’t audited, this could result in significant Medicaid DSH cost differences.
- Medicaid Inpatient Utilization Rate (MIUR) Reporting. States are required to annually report their MIUR to CMS by June 30 of each year. Many states are using days from the cost reports for this annual reporting.
- Medicaid Graduate Medical Education (GME) Payments. Many states pay a separate GME payment using a combination of cost report data and other data.
- Medicaid Managed Care Oversight. States are constantly faced with concerns from the legislature, industry leaders, and the media related to payments being made to managed care entities and the resulting payments/services provided by the provider industry. Cost report data can be used to determine provider cost and utilization compared to the payments made to the managed care entities.
- Outlier Payments Under Inpatient Prospective Payment System. Outlier payments may be based on cost-to-charge ratios from the cost report to help determine whether costs exceed fixed-loss outlier thresholds.
- Attestation. Cost reports require a signed provider attestation and have been used to bring false claims act settlements against providers committing fraud and abuse in the Medicare or Medicaid programs.
- Required by 42 CFR §447.253 (f) and (g). These sections state that, “The Medicaid agency must provide for the filing of uniform cost reports by each participating provider,” and “The Medicaid agency must provide for periodic audits of the financial and statistical records of participating providers.”
- Required by State Law or State Auditors. In many states, state law or state auditors may require audits be performed on a percentage of Medicaid cost reports annually. States that don’t meet those requirements are faced with findings from their state auditors.
- The Cost Report Process is Already in Place. It is usually easier for states to maintain and modify an existing provider cost reporting process than to have to mandate an entirely new reporting process in the future if needs change.
Why Feds Use Cost Information
Federal-level programs use cost reports for reimbursement only on a limited basis, but they still collect them so that when new statutes require the distribution or reduction of funds, data exist to supports those reimbursement changes. The parallel is strong, and states should take note.
In our next post, we pose another question and ask if Medicare (federal) cost reports can be used instead of state-level cost reports. We assess these issues from the federal perspective and consider CMS reliance on the Medicare cost report. Check in to see what factors we evaluate.
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Related Posts in Our Series
Explore the full scope of our Case For Cost Reports comprehensive series:
Authors
| Bob Hicks, CPA
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Tami Bensky, CPA
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Tammy Martin, CPA
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