*This is an archive page. The links are no longer being updated. 
1991.08.30 :  Medicare Hospital Building Costs

Contact:  Bob Hardy (202) 245-6145
August 30, 1991

       A new policy for paying hospitals for the costs of buildings
and equipment under the Medicare program was announced today by HHS
Secretary Louis W. Sullivan, M.D.
       Under the new capital-payment policy, which takes effect
Oct. 1, hospitals will receive a fixed payment amount for each
Medicare patient it treats to cover capital costs directly related
to inpatient hospital care.
       The regulation, published in today's Federal Register,
replaces the "cost reimbursement" system for capital expenditures,
which had been widely criticized because it paid the same share of
costs for prudent capital investments as for unnecessary luxuries
or inefficiently used resources.  Instead, Medicare will pay
hospitals a flat rate for capital costs just as it now pays for
inpatient operating costs under the prospective payment system.
       "Including capital costs under PPS will help restrain
health-care cost inflation by encouraging hospitals to become more
prudent in their capital decisions," Dr. Sullivan said.  
       Congress mandated that capital costs be included under PPS
by Oct. 1, *This is an archive page. The links are no longer being updated. 
1991.  In February, the Health Care Financing
Administration published a proposed regulation implementing the
requirement.  
       "Today's final regulation is the result of a productive
dialogue with the hospital industry, the investment community and
members of Congress," according to HCFA Administrator Gail R.
Wilensky, Ph.D.
     "Under the old system, the more hospitals spent, the more
Medicare paid, regardless of how expensive the equipment, how
underused the plant, or how high the interest rate," Dr. Wilensky
said.  "With this change, Medicare will improve its ability to
provide incentives for planning and wise investment so as to ensure
a modern, well-equipped and efficient hospital industry.
       "Meanwhile, a transition period, a `hold harmless' provision
with an expanded definition of `old capital,' and an exceptions
policy, will all serve to ease the change," Dr. Wilensky said.
       Highlights of the final regulation include:
     o  FEDERAL RATE: A federal standard rate for capital costs
     will be established, based on estimated FY 1992 national
     average Medicare inpatient capital costs per discharge.  This
     rate will be adjusted for each hospital depending on such
     factors as its particular mix of cases, its geographic
     location, and whether it is a teaching hospital or has a
     disproportionate number of low-income patients.

     o TEN-YEAR TRANSITION:  To protect hospitals from major
     disruptions, the new capital payment policy will be phased in
     over 10 years.  During this time, a hospital will be paid
     under one of two different payment methods:  "hold harmless"
     or "fully prospective."

     o HOLD HARMLESS:  Hospitals with capital costs above the
     national average will have their existing capital commitments
     ("old capital") protected, or "held harmless" over the 10-year
     transition by receiving payments at 85 percent of the
     reasonable costs for their "old capital."  They will also
     receive a prospective payment for new capital based on a
     proportion of the newly created federal rate.

       To better help hospitals that have recently begun expansion
     or renovation, the final regulation expands the definition of
     old capital to include assets legally obligated on or before
     Dec. 31, 1990, and in use by Oct. 1, 1994.  The definition is
     also expanded to include leases, home office costs, taxes and
     insurance.  Special provisions are included for hospitals
     located in states with a certificate of need process.  
     
     o PROSPECTIVE PAYMENT: Hospitals with capital costs below the
     national average will be paid under a fully prospective rate. 
     This rate will be based in FY 1992 on a blend of 90 percent of
     the hospital's specific rate, based on its own actual costs in
     the base year, and the 10 percent of the federal rate.  Over
     the 10-year transition period, the federal portion of the
     payment will increase, and the hospital-specific rate will
     decrease, by 10 percentage points a year; after nine years,
     the hospital will be paid at 100 percent of the federal rate.

       "We estimate that over 90 percent of hospitals which now
     have low capital costs will gain under this plan.  Just over
     half will realize more than $65 per case, which can be put
     toward future capital needs," Dr. Wilensky said.

     o EXCEPTIONS PROCESS: All hospitals are guaranteed that
     capital payments will not fall below a certain level during
     the transition period.  A limited exception will also be
     provided during the transition for hospitals with
     unanticipated extraordinary circumstances that require
     unexpected major capital expenditures.

     o BUDGET NEUTRALITY:  Under the old "reasonable cost" system,
     total capital payments had been reduced 15 percent.  Aggregate
     payments under today's regulation will be discounted 10
     percent, as required by law, from FY 1992 to FY 1995,
     increasing aggregate payments by 5.9 percent.  

     Between 1984 and 1988, hospital inpatient admissions declined
2.7 percent annually, while total inpatient capital costs have
increased 9.2 percent each year.  In FY 1992, capital payments are
expected to reach about $7 billion.  

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