The Case for Cost Reports
Part One | Are Medicaid Cost Reports Still Necessary?
In this first post of our five-part series on cost reports, we ask this very question … and provide our clear and decisive answer driven by key considerations. In upcoming posts, we discuss our rationale for our position, perspective from the federal level, case studies from Myers and Stauffer’s own client engagements, and information on how we can help those of you at state agencies who are charged with decisions around these timely and important topics. Read on to learn about the influential factors at play and the evolution of the cost report itself…and see why we say Yes to cost reports.
As states transitioned away from cost-based reimbursement and into prospective payment models and fee schedules, the perceived need for cost reports diminished. While cost reports remained a fixture for years following the transition away from cost-based reimbursement, the Medicaid transition from fee-for-service (FFS) into managed care over the last decade has further impacted the perceived need for cost reports in the future. Medicaid agencies question the need for provider cost reports (costs for services rendered) and the auditing of those cost reports. This is reasonable given that many states were using the cost reports to settle providers to cost, set cost-based rates, or rebase prospective rates, and those needs are now reduced or eliminated. However, the evolution of cost reporting reveals important factors in the ongoing relevance of cost reports.
The Centers for Medicare & Medicaid Services reported that national health expenditures (NHE) in 2023 increased nearly eight percent to $5 trillion or $14,570 per person. Medicare spending rose to eight percent to just over $1,029.8 billion, representing 21 percent of total NHE. At the same time, Medicaid spending increased roughly eight percent to $871.7 billion or 18 percent of total NHE. At 32 percent, the federal government represented the largest share of health spending in 2023.
A Brief History of Cost Reports
Cost reports have been around for a long time, and since their inception many years ago, new ones have been created and added while others have been updated. These reports become the basis for reimbursement from the federal government and state Medicaid programs for long-term care facilities, hospitals, ambulances, home and community-based services, and federally qualified health centers, to name just a few.
Originally, the cost reports were primarily used to settle providers to cost reimbursement or to set reasonable cost-based rates. Eventually Medicaid and Medicare programs realized that paying costs wrongly incentivized providers (cost versus value provided) and ultimately became unmanageable, so states slowly shifted away from cost-based reimbursement in favor of prospective payment models and fee schedules. While those payment models still exist in most states today, states have also shifted from FFS to managed care in a better attempt to oversee care and manage their own budgets. Managed care entities assume most of the risk in payment to providers and negotiate their own reimbursement rates. Which begs the question: are cost reports still relevant and necessary?
The Short Answer: Yes…and Here’s Why.
With any administration change, there can be changes to entitlement programs such as Medicare and Medicaid. With the current federal administration’s review of budgets for all federally funded programs, now more than ever, we think it’s important that states know the actual costs for their providers delivering care. In fact, for several reasons, we believe states should continue to collect provider cost report data and validate that data.
New programs continue to implement cost reports including ground emergency medical transportation and certified community behavioral health clinics. Cost reports are the backbone of a fiscally responsible Medicaid program.
The first reason is most states will need cost reports at some point for SOMETHING. For example, some states are using cost reports for rebasing prospective rates – the need for this still exists.
More importantly, when providers go to the legislature to ask for rate increases, states need to be able to either defend the current rates or support the rate increase request from the provider industry, and cost is a very persuasive factor. Put another way, cost data justifies budget and funding requests. And when budget and spending cuts happen, they may be predicated first on costs. States that don’t know their provider costs and cost coverage amounts are at a disadvantage. States should know the cost to care for fragile populations rather than having to quantify those costs in response to pressure for increased or cuts to funding.
In recent years, states have seen large state directed payments (SDP) and other supplemental payments being funded more and more by provider taxes and intergovernmental transfers, and this may have helped minimize the state’s general fund share of cost and their need to understand the cost of providers. While these SDP programs may continue, 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 restricts state’s abilities to tax providers and limits the SDPs to a percent of Medicare. See the full details here. This significant change to financing mechanisms could shift more cost burden back to the states, which will again make cost data even more important to Medicaid agencies.
Knowing cost is powerful leverage in being able to negotiate with managed care organizations and health care providers. With no connection to cost, states no longer have the knowledge base from which to renegotiate rates or create a justifiable budget.
In our opinion, it would be a significant mistake for states to lose the connection to cost, especially as cuts to federal programs are being considered. How would states manage this situation over the long term? Without knowing cost, states would have little or limited ability to advocate for funding when they cannot knowingly justify costs.
Why Myers and Stauffer
Purpose driven. Exclusive focus. Government Programs.
Established in 1977, Myers and Stauffer is a nationally based consulting and certified public accounting (CPA) firm. For more than 48 years, we have worked exclusively with local, state, and federal government health and human-services agencies to help them accomplish their most critical goals for the nation’s most fragile people.
We are here to answer any questions and help with any health and human-services needs your agency may be encountering. Contact a member of our team today.
Look for our next post coming soon, entitled Why Cost Reports Still Make Sense…Especially Now. We will share our reasoning and rationale for cost reports, touching on topics such as rate setting; legislative initiatives and fiscal impact analyses; and Medicaid waiver oversight. Join us as we make the case for cost reports.
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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