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i • • r Indian River Memorial Hospital , Inc. and Subsidiaries 4 Notes to Consolidated Financial Statements For the Years Ended September 30 , 2002 and 2W 2. Net Patient Service Revenue The Hospital has agreements with third parry payors that provide for payment to the Hospital at amounts different from its established rates. A summary of the basis of payment with major third-parry payors follows : Medicare - Inpatient acute care services, skilled nursing services and hospital outpatient services rendered to Medicare program beneficiaries are paid at prospectively determined rates. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Rehabilitative services, Psychiatric services, certain ` outpatient services rendered to Medicare beneficiaries, and direct graduate medical education costs are•paid based upon a cost reimbursement methodology. The Hospital is reimbursed for cost reimbursable items at a tentative interim rate with final settlement determined after submission of annual cost reports by the Hospital- and audits by the Medicare fiscal intermediary. The Hospital's Medicare cost reports have been audited and final settlements determined by the Medicare intermediary for all years through September 30, 1999 . Retroactive adjustments for cost report settlements are accrued on an estimated basis in the period when the related services are rendered and adjusted in future periods when final settlements are determined. Medicaid - Inpatient and outpatient services (except for- laboratory and pathology services) rendered to Medicaid program beneficiaries are reimbursed under a cost reimbursement methodology. Reimbursable cost is determined in accordance with the principle - f reimbursement established by the Florida Title XIS Hospital Reimbursement Plan, supplemented by the Medic.4re Principles of Reimbursement. The interim rates are tentatively established on an individual-per diem basis for each hospital, subject to- cost ceilings with exceptions . The Hospital is reimbursed at a tentative interim rate with final settlement determined when the prospectively determined rate is adjusted after the intermediary audit of the combined Medicare and Medicaid cost report that was used to determine the prospective rate. Retroactive adjustments for interim rate changes anticipated after the intermediary audit of the cost report are accrued on an estimated basis in the period when final settlements are determined. The Hospital ' s Medicaid interim rates are based on the Medicare/Medicaid cost report which has been audited by the fiscal intermediary through September 30 , 19990 The Hospital classification of patients;and the appropriateness of their admission are subject to review by the fiscal intermediaries administering the Medicare and Medicaid programs. - 13 -