Health Law Daily Wrap Up, ADMINISTRATION OF MEDICARE/MEDICAID PROGRAMS—PRRB DECISIONS: MAC properly removed QAAP tax from St. Francis’s costs, (Jul 27, 2026)

By Sherri M. Schroeder, J.D.

The MAC had reduced the costs paid by the hospital by the amount of its Quality Assurance Assessment Program tax claimed for reimbursement by payments it received from the State.

St. Francis Hospital, a critical access hospital (CAH) in Escanaba, Michigan, lost its appeal to the Provider Reimbursement Review Board (PRRB). The issue before the PRRB was whether the hospital was entitled to Medicare reimbursement related to state taxes that were removed by its Medicare Administrative Contractor (MAC), WPS Government Health Administrators. The hospital paid a hospital assessment tax known as the Quality Assurance Assessment Program (QAAP) tax levied by the State of Michigan for fiscal years (FYs) 2017 through 2019. In each applicable cost report, St. Francis removed a “Payment Pool Amount” of its QAAP tax liability, leaving only the portion of the tax that the State kept for itself. When audited, the MAC reduced the hospital’s costs by the amount of QAAP tax claimed for reimbursement by payments it received from the State. On appeal, the PRRB found that the MAC had properly removed the entire QAAP tax paid by St. Francis because there was no evidence on the record of the QAAP tax paid or the QAAP payments received to calculate the “net tax expense” (St. Francis Hospital, PRRB No. 2026-D21, Case Nos. 20-0514, 21-0656, 22-0852 (July 9, 2026)).

QAAP. As a CAH, St. Francis is reimbursed at 101 percent of its reasonable costs incurred in providing inpatient hospital services to Medicare beneficiaries. For FYs 2017 – 2019, it paid its QAAP tax to Michigan. Also called a “Provider tax,” this broad-based tax on medical providers in the state helps generate revenue to reduce General Fund/General Purpose costs and enhance Medicaid reimbursements to certain provider groups. Per CMS, providers may only treat a net tax expense as the reasonable cost actually incurred for Medicaid payment purposes, with the “net tax expense” being the tax paid by the provider but reduced by payments the provider received that are associate with the assessed tax.

In its applicable cost reports, the hospital reported the QAAP taxes it paid for the years in question in the administrative and general cost center of the reports. It made adjustments to remove the “Payment Pool Amount,” calculated as the product of the total QAAP tax paid and the inverse of the State-determined retention percentage, to reflect the portion of the QAAP tax not retained by the State. At audit, the MAC adjusted to remove the state retention amounts. These eliminations of the State retention amounts are the Medicare cost report adjustments in dispute in the appeal.

Arguments. St. Francis contends that the retention amount is not associate with or related to supplemental Medicaid payments it received from the QAAP payment pool. It argued that the tax expenses it claimed on the cost reports in question are only attributable to the retention amount, which is a different assessment than the QAAP implements. Because the retention assessment did not fund the supplemental payments authorized under the QAAP, the two are not associated with one another, meaning that any supplemental payments received should not have been offset against the retention amounts, according to the hospital.

According to the PRRB’s summation of the MAC’s arguments, “St. Francis used the State of Michigan’s defined retained percentages of the funds collected from all hospitals to apply to each hospital’s QAAP tax payments to derive a retained portion of the taxes the hospital paid.” According to the MAC, this argument “ignores one of the basic principles of Medicare reimbursement” because costs must be actually incurred to qualify for Medicare reimbursement. The MAC also noted that St. Francis had acknowledged that it ultimately received more from the State than it paid in QAAP taxes. The MAC also noted, however, that St. Francis had not disclosed the actual amount of the distributions it received from the QAAP program, which meant it failed to comply with 42 C.F.R. §§ 413.20 and 413.24. The MAC therefore argued that St. Francis had not shown evidence to support the reimbursement of the costs denied by the MAC and that the hospital had not met its burden of proof.

Decision. For the PRRB, the key question was whether St. Francis “actually incurred” the QAAP tax paid. According to the Board, 42 U.S.C. § 1395x(v)(1)(A), 42 C.F.R. § 413.9, and § 2122.1 of the Provider Reimbursement Manual (PRM) require that the reasonable cost of any service must be the cost actually incurred. In determining the cost “actually incurred,” 42 C.F.R. § 413.98 and PRM 15-1 §§ 800 and 804 require that a provider’s costs be offset to account for receipt of refunds, rebates, credits, or other discounts.

The PRRB then went on to find that St. Francis did not supply sufficient documentary evidence to support the amounts of the QAAP taxes paid or revenues received to properly calculate its net tax expense as defined by the regulations. The hospital’s only evidence to support the QAAP taxes it paid was an excerpt from its trial balance for its Medicaid Fees account showing the total QAAP taxes paid each fiscal year; no invoices were given to support that trial balance accounting. The PRRB also noted that the MAC repeated asked for such support documentation, but St. Francis refused to provide it. Per the PRRB, this meant that St. Francis failed to adhere to both 42 C.F.R. § 413.24(c) and PRM 15-1 § 2304, which require current, accurate, and sufficiently detailed data to support payments made for services rendered.

Therefore, the PRRB found that the MAC properly removed the entire QAAP tax paid by St. Francis in FYs 2017 – 2019, “as there was no evidence to support the QAAP tax paid or the QAP payments received to calculate ‘net tax expense’ as defined by the regulations.”

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