The Medicare cost report and the limits of hospital accountability: Improving financial accounting data

Health policy makers, legislators, providers, payers, and a broad range of other players in the health care market routinely seek information on hospi tal financial performance. Yet the data at their disposal are limited, espe cially since hospitals' audited financial statements-the "gold standard" in hospital financial reporting -are not publicly available in many states. A s a result, the Medicare Cost Report (MCR), filed annually by most U.S. hos pitals in order to receive payment for treating Medicare patients, has beco me the primary public source of hospital financial information. However, fi nancial accounting elements in the MCR are unreliable, poorly defined, and lacking in critical detail. Comparative analyses of MCRs and matched, audit ed financial statements reveal long-standing problems with the MCR's data, including major differences in reported profits; variations in the reportin g of both revenues and expenses; an absence of relevant details, such as ch arity care, bad debt, operating versus nonoperating income, and affiliate t ransactions; an inconsistent classification of changes in net assets: and a failure to provide cash flow statements. Because of these problems, MCR fi nancial data give only a limited and often inaccurate picture of the financ ial position of hospitals. Audited financial statements provide a more comp lete perspective, enabling analysts to address important questions left una nswered by the MCR data. Regulatory action is needed to create a national d atabase of financial information based upon audited statements.