HHS Issues Rules on DB Pension Costs for Medicare Wage Index

August 2, 2011 (PLANSPONSOR.com) – In its newly proposed rules, the U.S. Department of Health and Human Services says that while it believes pension costs must be funded in order to be reportable, it also is important for pension costs to be relatively stable from year to year so that there is less volatility in the wage index.

For this reason, under the final policy, the pension cost to be included in the Medicare wage index equals a hospital’s average cash contributions deposited to its defined benefit pension plan over a three-year period, or number of years that the hospital has sponsored a defined benefit plan if less than three years. Any reversion or other withdrawal of assets from the pension fund or trust is treated as a negative contribution for purposes of measuring the three-year average.  

The three-year average is centered on the base cost reporting period for the wage index. For example, the FY 2013 wage index will be based on Medicare cost reporting periods beginning during FFY 2009 and will reflect the average pension contributions made in hospitals’ cost reporting periods beginning during FFYs 2008, 2009, and 2010.  

In response to public comments on its proposed rules, HHS is finalizing a transition policy that permits a hospital to determine a “prefunding balance” based on pension contributions made but not reflected in the wage index during certain prior periods. The transition policy will allow providers to establish a prefunding balance equal to (A) minus (B), where (A) is the sum of cash contributions made during a period of consecutive provider cost reporting periods commencing no earlier than October 1, 2002 (the cost reporting period applicable for the FY 2007 wage index), and ending with the cost reporting period applicable for the FY 2012 wage index, and (B) is the sum of pension costs actually reflected in the wage index for the same cost reporting periods.  

The transition policy permits a hospital to include 1/10th of the prefunding balance in the wage index pension cost each year commencing with the FY 2013 wage index and ending with the FY 2022 wage index, that is, in 10 equal prefunding installments. Any prefunding installment that is not included in the wage index pension cost for the current year cannot be reassigned and added to the wage index pension cost of any subsequent year.  

The rules also include the method for determining “reasonable” pension costs.  

Text of the rule is at http://www.ofr.gov/OFRUpload/OFRData/2011-19719_PI.pdf until August 18 when it will be published in the Federal Register.