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Tax Equity and Fiscal Responsibility Act (TEFRA) on Medicare cost report worksheet D-1

I’d like to speak briefly about the TEFRA calculations on D-1, Lines 54-59.

What is the Tax Equity and Fiscal Responsibility Act (TEFRA)?

The Tax Equity and Fiscal Responsibility Act was passed as a ceiling on the rate of increases in inpatient operating costs. It is calculated, in part, by dividing the hospital’s base year inpatient operating costs by the number of Medicare discharges. It is updated annually. Should a hospital be below its TEFRA ceiling, it will receive its costs in addition to a bonus payment.

How is the calculation performed?

As always, we rely on the cost report to guide us. I will use 2552-96 for the example. Medicare cost report software packages will usually do the calculation automatically for you.

D-1, Part II lines 54-59

D-1, Part II lines 54-59

1. Line 54 asks us for the program discharges. This can be obtained from S-3, Part I.
2. Line 55 asks for the target amount per discharge, which can be obtained from your intermediary.
3. Line 56 tells us to multiply lines 54 and 55 to calculate the TEFRA ceiling. Consider this your cap.
4. Line 57 asks us to calculate the difference between line 53 and line 56. Effectively, a negative number means the TEFRA ceiling has been exceeded.
5. Line 58 starts the incentive process if line 57 is positive (the TEFRA ceiling is less than inpatient operating costs), we take the lesser of (i) 15% of line 57 (the difference) or (ii) 2% of line 56 (the TEFRA cap).

–> We now compare this cost report period’s cost/discharge to lower of the target amount, trending cost, or expected costs.
6. Line 58.01 tells us to take the third full cost reporting period, calculate the lower of (i) the cost per discharge or (ii) the target discharge. This should be compounded by the market basket for each year through the current reporting year.
7. Line 58.02 tells us to use the prior year’s cost report to enter (i) the lesser of the hospital’s inpatient operating cost per discharge (line 53/line 54) or (ii) line 55, updated by the market basket.
8. Line 58.03 tells us that if this year’s cost/discharge (lines 53/54) is lower than the target amount(line 55), trending amount (58.01), or expected amount (58.02), then we calculate the lower of 50% of the difference between expected costs and actual costs or 1% of the target amount.

Source: 42 CFR. 413.40(d)(5).

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