Why Medicare Cost Reports Matter: A Guide for Missouri Hospital Leaders

For many hospital executives, the Medicare cost report can feel like a technical compliance requirement, but it is one of the most important financial and strategic documents that hospitals and health systems produce each year. These reports shape reimbursement, workforce strategies and public policy.

“When understood and used effectively, cost report data can reveal service line performance, identify reimbursement opportunities and risks, and show how much cost incurred is nonreimbursable or nonallowable,” said Andrew Wheeler, vice president of federal advocacy and finance for the Missouri Hospital Association.

At its core, the Medicare cost report is how the Centers for Medicare & Medicaid Services evaluates hospitals, according to Wheeler. Each year, hospitals are required to submit a cost report after the close of their fiscal year, typically within five months. It is filed electronically with their Medicare Administrative Contractor, which reviews and audits the submission on behalf of CMS.

What does a cost report include?

Cost reports provide a comprehensive view of an organization’s costs, operations and patient mix. The report captures a wide range of information, including the following.

• utilization statistics (including days and discharges) across Medicare, Medicaid and other payers
• patient revenue and expenses
• wage data, including salary and benefits
• departmental costs and charges
• graduate medical education information
• bad debt and uncompensated care data
• capital costs and depreciation
• overhead allocations and statistics
• physician allowable and nonallowable costs

Within the report, certain sections cover critical data.

• Worksheet S-3: Medicare utilization
• Worksheet E series: final reimbursement calculations
• Worksheet S-10: uncompensated care and charity care reporting
• Worksheet A, A-6 and A-8: cost center expenses and adjustments
• Worksheet C: cost-to-charge ratios
• Graduate Medical Education and Indirect Medical Education worksheets
• Worksheet S-3 Parts II, III and IV: wage data used to establish the hospital wage index
• Worksheet G series: hospital financial statement information

Why is a cost report important?

The Medicare cost report is a powerful tool for hospital leaders.

Cost reports help leaders benchmark against peer hospitals, track trends in uncompensated care, evaluate eligibility for various payment programs, and inform advocacy and policy discussions. These reports also offer insight into labor and wage competitiveness and support more informed capital improvement planning decisions.

Additionally, the importance of cost reports extends beyond individual hospitals, Wheeler said.

“Aggregated cost report data help demonstrate the financial realities hospitals face across Missouri, including workforce pressures, uncompensated care burdens and rural access challenges,” he said. “These reports also help support fair wage index calculations and provide data used in state and federal policy development.”

MHA and its data company, the Hospital Industry Data Institute, publish Medicare cost report comparisons annually and share supporting reports used for the Medicare wage index determinations based on CMS wage index reporting and review deadlines.

Where does the data come from?

While finance departments typically lead the process of developing these reports, it requires coordinated input from across an organization, Wheeler said. Revenue cycle and patient financial services teams provide billing and payer data. HR contributes wage and benefits information, while clinical departments supply utilization statistics.

To ensure the cost reports are accurate, hospitals typically use the following.

• accounting and general ledger reports
• patient accounting and billing systems
• payroll and HR systems
• Medicare remittance advice and claims data
• fixed asset systems
• data from electronic medical/health records and other sources

“Although the Medicare cost report is straightforward, optimizing each worksheet and dataset is extremely complex and challenging due to a number of reasons,” Wheeler said.

Hospitals must navigate frequent Medicare policy changes, and there is increasing scrutiny around worksheet S-10 and wage index data. Gathering and coordinating data from across multiple systems as well as departments can be difficult, too. Maintaining consistency between audited financial statements and reported costs also can be a challenge.

Wheeler noted there is a persistent misconception that the Medicare cost report is becoming less relevant and may no longer be used. In reality, the data that cost reports contain continue to drive payment policy, regulatory decisions and more.

Hospital leaders who invest time in understanding their cost report gain a clearer view of their organization’s financial performance and strategic position, Wheeler said.