I  I 

Department  of Health  and Human  Services 
-
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICARE  LOSSES  ON 

HOSPITAL  SALES 

JUNE GIBBS BROWN 
Inspector  General 
JUNE1997 
OEI-03-9MO170  OFFICE OF INSPECTOR GENERAL 
The  mission  of the  Office  of Inspector  General  (OIG),  as mandated  by Public  Law 95 
452, is to protect  the  integrity  of the  Department  of Health  and  Human  Services 
programs  as well  as the  health  and  welfare  of beneficiaries  served  by them.  This 
statutory  mission  is carried  out  through  a nationwide  program  of audits,  investigations, 
inspections,  sanctions,  and  fraud  alerts.  The  Inspector  General  informs  the  Secretary 
of program  and  management  problems  and  recommends  legislative,  regulatory,  and 
operational  approaches  to  correct  them. 
Office of Evaluationand Inspections 
The  Office  of Evaluation  and  Inspections  (OEI)  is one  of several  components  of the 

Office  of Inspector  General.  It conducts  short-term  management  and  program 

evaluations  (called  inspections)  that  focus  on issues  of concern  to the  Department,  the 

Congress,  and  the  public.  The  inspection  reports  provide  findings  and 

recommendations  on the  efficiency,  vulnerability,  and  effectiveness  of departmental 

programs. 

OEIs  Philadelphia  Regional  Office  prepared  this  report  under  the  direction  of 

Robert  A. Vito,  Regional  Inspector  General.  Principal  OEI  staff  included: 

REGION  HEADQUARTERS 

Linda  M. Ragone,  Project Leader 	 Stuart  R. Wright,  Program  Specialist 
Linda  Moscoe,  Technical  Support  Staff 
To obtain copies of thisreport, please call the PhiladelphiaRegional Office at (800) 531-9562  Department  of Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICARE  LOSSES  ON 

HOSPITAL  SALES 

JUNE GIBBS BROWN 
Inspector  General 
JUNE1997 
OEI-03-96-00170  EXECUTIVE  SUMMARY 
PURPOSE 
To  quantify  the  financial  impact  of hospital  sales  on the  Medicare  program. 
BACKGROUND 
At  the  inception  of the  Medicare  program,  hospitals  were  allowed  to include  the 
depreciation  of assets  as an  allowable  capital-related  cost in their  annual  Medicare 
cost  reports.  When  a hospital  undergoes  change  of ownership  for  reimbursement 
purposes,  Medicare  guidelines  specify  that  the  hospital  can  receive  an  adjustment  to 
the  facilitys  final  allowable  or reimbursable  costs based  on the  gain  or loss on 
depreciated  assets  at the  time  of sale.  This  means  that  if a hospitals  depreciable 
assets  (buildings  and  equipment)  are  purchased  at higher  than  the  net  book  value  or 
value  on paper,  Medicare  shares  in the  gain.  If the  hospitals  depreciable  assets  are 
purchased  at less than  the  net  book  value,  Medicare  shares  in the  loss.  Medicares 
share  of the  gain  or loss is known  as the  depreciation  adjustment. 
Recent  increases  in hospital  sales  have  raised  concerns  about  Medicares  liability  for 
depreciation  adjustments.  Our  study was aimed  at determining  just  how  much 
Medicare  had  paid  for  depreciation  adjustments  in recent  years. 
We  requested  information  from  two main  sources:  fiscal  intermediaries  and  the 
Health  Care  Financing  Administrations  regional  offices.  The  scope  of our  study  was 
acute  care  hospital  changes  of ownership  that  met  Medicare  requirements  for  a 
depreciation  adjustment  during  Fiscal  Years  1990 through  1996. 
FINDINGS 
Medicare lost $223 million and standk to lose another $289 million in depreciation 
adjustments forhospitals sold between 1990 and 1996. 
Fiscal  intermediaries  reported  $453 million  in losses  and  $56 million  in gains  for  a net 
loss of $397 million  on  229 hospitals  sold between  1990 and  1996.  Of the  nearly  $400 
million  net  loss reported,  $223 million  was from  hospital  sales where  the  final  payment 
determination  has  been  made.  Another  $174 million  net  loss to Medicare  has  been 
reported  by hospitals  but  has yet  to be  settled  by the  program.  We  estimate  that 
Medicare  could  pay  out  $115 million  on  an  additional  88 hospital  sales  that  have 
already  occurred  but  for which  no  financial  data  was available. 
i  Medicare  could lose an estimated $53 million in depreciation  adjustments for hospital 
sales expected in 1997. 
Although  less than  half  of the  fiscal  intermediaries  reported  being  aware  of potential 
hospital  sales  in their  respective  areas,  these  intermediaries  identified  41 expected 
hospital  sales  for  1997.  We  estimate  that  the  potential  liability  to Medicare  for  these 
41 sales  could  reach  $53 million. 
Net losses reported to the Medicare program have more than quadrupled  between  1990 
and 1996. 
Net  losses  reported  to the  program  have  increased  322 percent  from  $29 million  in 
1990 to  $122 million  in  1996.  For  every  $1 that  Medicare  shared  in gains,  it paid  out 
$8 in losses.  While  Medicare  has  shared  in the  loss for  161 hospital  sales,  in contrast, 
it has  shared  the  gain  for  only  33 hospital  sales.  Since  1990, Medicare  has  shared  in 
only  one  gain  for  every  five losses  resulting  from  depreciation  adjustments. 
Medicare  lluly be paying more than it should to hospitals sold at a loss during the 
transition period for capital prospective payments. 
The  loss to the  Federal  Government  from  hospital  sales  may be greater  than  the  half 
billion  already  identified  through  depreciation  adjustments.  Medicare  may  also  be 
paying  out  more  than  it should  for hospitals  sold  at a loss and  paid  under  the  capital 
prospective  payment  system.  While  Medicare  recognizes  a loss on  assets  for 
depreciation  purposes,  in most  cases it makes  no  adjustment  to  a hospitals  capital 
payment  methodology  to  account  for  the  new lower  value  of the  hospital. 
Losses jkom depreciation  adjustments also impact the Medicaid program. 
Some  Medicaid  programs  are  calculating  depreciation  adjustments  when  hospitals  are 
sold.  Intermediaries  could  provide  data  on  Medicaid  depreciation  adjustments  for 
only  10 of the  229 sales  transactions  with  Medicare  depreciation  adjustments.  The 
Medicaid  depreciation  adjustments  were  all losses  ranging  from  $18,000 to  $10 million. 
The  10 sales  represented  a $16 million  loss to the  respective  Medicaid  programs. 
RECOMMENDATIONS 
Substantial  amounts  of money  are  being  paid  and  will continue  to be  paid  in the 
coming  years  for  an  accounting  procedure  established  in the  early  years  of the 
program.  At the  beginning  of the  199Os, Medicare  moved  from  cost-based 
reimbursement  to  a prospective  payment  system.  We believe  the  policy  allowing 
depreciation  adjustments  on hospital  sales  is an unnecessary  holdover  from  the  old 
cost-based  reimbursement  system  that  should  be  discontinued. 
ii  We recommend  that the Health  Care Financing Administration: 
propose  legislation  to change  Section  1861(v)(l)(O)  of the  Social  Security  Act 
0 	
to  eliminate  the  requirement  that  Medicare  make  adjustments  for  gains  or 
losses when  hospitals  undergo  changes  of ownership; 
propose  a similar  elimination  of depreciation  adjustments  on hospital  sales  in 
0 	
the  Medicaid  program;  and 
examine  options  for  recalculating  capital  transition  payments  to hospitals 
0 	
undergoing  changes  of ownership  for  reimbursement  purposes. 
AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendations.  The  agency  stated  that  proposed 
legislation  entitled  Medicare  and  Medicaid  Fraud,  Abuse,  and  Waste  Preventions 
Amendments  of  1997 (Section  205) would  use the  net  book  value  as the  sales  price 
for  hospitals  undergoing  a change  of ownership.  This  proposed  change  would 
eliminate  the  need  for  a depreciation  adjustment.  The  agency  also  stated  that  if 
depreciation  adjustments  were  eliminated  in the  Medicare  program  this  change  would 
also  be  reflected  in the  Medicaid  program.  After  examining  its options,  HCFA 
believes  that  recalculating  the  capital  transition  payments  for  hospitals  undergoing 
changes  of ownership  would  be  inappropriate  and  inadvisable  at this  time.  While  we 
recognize  the  complexity  of the  policy  and  administrative  implications  identified  by 
HCFA,  we continue  to believe  that  capital  payments  to hospitals  sold  at a loss should 
be  redetermined. 
*.. 
111  TABLE  OF  CONTENTS 
PAGE 

EXECUTIVESUMMARY  ..........................................  i 

INTRODUCTION  .................................................  1 

FINDINGS  ......................................................  7 

 Medicares  loss on  depreciation  adjustments  ...........................  7 

 Loss  on  expected  sales  ...........................................  8 

0  Increase  in net  losses  over  time  ....................................  9 

0  Prospective  capital  payments  .....................................  10 

 Medicaids  loss on  depreciation  adjustments  ..........................  11 

RECOMMENDATIONS  ...........................................  12 

APPENDICES 

A:  Explanation  of Depreciation  Adjustment  Calculation  ..................  A - 1 

B:  Health  Care  Financing  Administration  Comments  ....................  B - 1 
 INTRODUCTION 
PURPOSE 
To  quantify  the  financial  impact  of hospital  sales  on the  Medicare  program. 
BACKGROUND 
The  Hospital  Insurance  program  (Part  A)  pays  for hospital,  skilled  nursing  facility, 
home  health,  and  hospice  care  for Medicare  beneficiaries.  Payments  for  inpatient 
hospital  care  comprised  70 percent  of the  $116 billion  in Part  A payments  in  1995. 
Between  1990 and  1994, the  number  of inpatient  short-stay  hospital  service  discharges 
increased  less than  10 percent;  in contrast,  expenditures  for  these  services  increased 
more  than  30 percent. 
Medicare  payments  to most  short-stay  or acute  care  hospitals  are  made  through  a 
prospective  payment  system.  For  each  Part  A patient  discharge,  the  hospital  is paid 
based  on  a reimbursement  equation  that  includes  not  only  direct  patient  care  costs but 
also  capital  costs  such  as the  updating  and  acquiring  of buildings  and  equipment. 
Prior  to  the  phase-in  of a prospective  payment  system  for  inpatient  capital  costs which 
began  in October  1991, Medicare  paid  for  capital  costs  on a reasonable  cost basis  as 
determined  by a hospitals  annual  cost report. 
Recent Increases in Hospital Mergers and Sales Activity 
In this  era  of cost-cutting  and  emphasis  on managed  care,  hospitals  are  undertaking  a 
number  of consolidation  measures  to enhance  their  operations.  The  Public  Citizen 
Health  Research  Group  reported  in its June  1996 Health  Letter  that  transactions 
involving  447 community  hospitals  had  been  announced  or completed  in  1995.  These 
hospital  transactions  included  mergers,  acquisitions,  joint  ventures,  and  leasing 
agreements. 
Medicares Handling of Hospital  Ownership Changes 
The  Health  Care  Financing  Administration  (HCFA)  contracts  with  54 fiscal 
intermediaries  to  process  Medicare  Part  A inpatient  hospital  payments.  The  HCFA 
has  provided  guidance  to these  contractors  on how to handle  changes  of hospital 
ownership,  such  as mergers  or sales,  in section  4500 of the  Intermediary  Manual. 
Guidelines  for  handling  changes  of ownership  and  disposal  of assets  are  also 
delineated  in sections  130 and  1500 of the  Provider  Reimbursement  Manual. 
The  fiscal  intermediaries  are  responsible  for performing  the  reimbursement  analysis 
for  a hospital  change  of ownership.  Not  all hospitals  that  undergo  some  type  of 
change  of ownership  will have  their  reimbursement  affected.  The  intermediary 
manual  provides  examples  of what  it considers  a bona-fide  sale  or change  of 
1  ownership  for  reimbursement  purposes.  For  the  most  part,  a bona-fide  sale would  be 
defined  as a sale between  two unrelated  parties  (frequently  called  arms-length 
transactions).  If a change  of ownership  is recognized  for reimbursement,  the  fiscal 
intermediary  will then  calculate  whether  the  transaction  results  in a gain  or loss for  the 
seller,  and  in what  portion  of the  gain  or loss the  Medicare  program  will share. 
Gain or Loss on Depreciable Assets at the Bne  of Hospital  Sale 
Hospitals  through  the  years  were  allowed  to include  the  depreciation  of assets  as an 
allowable  capital-related  cost in their  annual  cost reports.  When  a hospital  undergoes 
a bona-fide  change  of ownership  for  reimbursement  purposes,  Medicare  guidelines 
specify  that  the  hospital  can receive  an  adjustment  to the  facilitys  final  allowable  or 
reimbursable  costs based  on the  gain  or loss on  depreciated  assets  at the  time  of sale. 
This  means  that  if a hospitals  depreciable  assets  (buildings  and  equipment)  are 
purchased  at higher  than  the  net  book  value  or value  on paper,  Medicare  shares  in 
the  gain.  If the  hospitals  depreciable  assets  are  purchased  at less than  the  net  book 
value,  Medicare  shares  in the  loss. 
Calculating Medicare3  Share of the Gain or Loss 
As part  of the  audit  or settlement  of the  final  cost report,  the  fiscal  intermediaries  are 

responsible  for  reviewing  the  hospitals  gain  or loss on sale  for  Medicare  purposes. 

This  settlement  occurs  after  receiving  the  hospitals  terminating  cost  report  along  with 

other  legal  and  financial  documents  having  to do with  the  sale.  The  hospital  must 

include  in this  documentation  an  allocation  or distribution  of the  total  sale  price 

among  all assets  being  sold.  The  guidelines  allow for  an independent  appraisal  expert 

to perform  an  appraisal  to establish  the  value  of the  assets  being  sold.  As outlined  in 

section  4505.3 of the  intermediary  manual,  HCFA  considers  this  experts  membership 

in one  of several  professional  appraiser  societies  as providing  reasonable  assurance  to 

the  intermediary  that  the  appraisal  results  have  been  prepared  in accordance  with  a 

code  of ethics  and  professional  standards. 

Upon  establishment  of the  sale  or purchase  prices  for  the  depreciable  assets,  the 

intermediaries  compare  the  purchase  price  to the  current  depreciated  value  of the 

assets  (original  value  less depreciation  taken  in previous  years)  to  determine  the 

amount  of gain  or loss.  Medicares  share  of this  gain  or loss is determined  by the  ratio 

of the  hospitals  Medicare  patient  costs to  all patient  costs.  A more  detailed 

explanation  and  examples  of depreciation  adjustments  are  provided  in Appendix  A. 

HCFA  Workgroup Reviews Medicare Policies for Changes of Ownership 
The  HCFAs  Audit  & Reimbursement  Steering  Committee  convened  an  ad hoc 
Workgroup  to review  current  guidelines  for  handling  changes  of ownership.  The 
Workgroup  consisted  of both  HCFA  and  fiscal  intermediary  staff.  Its mission  was to 
recommend  to HCFA  ways to  modify, update  and  expand  program  instructions 
considered  necessary  in order  to provide  current  and  complete  guidance  to fiscal 
2  intermediaries  and  providers,  regarding  treatment  of change  of ownership  transactions 
to  determine  appropriate  Medicare  reimbursement.  The  group  has  transmitted  its 
proposals  back  to the  Steering  Committee  and  they  are  now under  review  by HCFA. 
Prior  to the  release  of this  report,  we provided  the  Office  of the  Secretary  and  HCFA 
with  the  results  of our  evaluation. 
MEiTHODOLOGY 
We  requested  information  from  two main  sources:  fiscal  intermediaries  and  HCFA 
regional  offices.  The  scope  of our  evaluation  was acute  care  hospital  changes  of 
ownership  (except  bankruptcies)  that  met  Medicare  requirements  for  a depreciation 
adjustment  during  Fiscal  Years  1990 through  1996.  For  the  remainder  of this  report, 
we will refer  to  all of these  types  of ownership  changes  as hospital  sales. 
Information Requested jkom Fiscal Intermediaries 
We  surveyed  all current  fiscal  intermediaries  to  determine  their  experiences  with 
hospital  changes  of ownership.  We requested  that  each  intermediary  complete  an 
overview  guide  regarding  hospitals  sales  that  have  transpired  under  their  jurisdiction. 
This  guide  was developed  to provide  summary  data  on the  number  of hospital  sale 
transactions  triggering  depreciation  adjustments  that  occurred  between  1990 and  1996. 
We  sent  requests  to 44 organizations  that  represent  all currently  contracted  fiscal 
intermediaries  in the  Medicare  program.  We received  some  form  of response  from  all 
44 organizations.  However,  several  intermediary  organizations  service  multiple 
geographic  areas  and  chose  to break  down  their  responses  by those  areas.  As a result, 
our  analysis  was conducted  on  54 separate  fiscal  intermediary  responses  received 
between  August  and  December  1996. 
In  addition  to  the  overview  guide,  the  intermediaries  were  asked  to  complete  a fact 
sheet  for  each  hospital  sale where  they  had  received  either  a terminating  cost report 
or other  financial  documents  from  the  hospital.  We  designed  these  fact  sheets  to 
collect  detailed  financial  and  descriptive  data  on  each  hospital  sale.  Much  of the  data 
requested  on  the  fact  sheet  could  be  compiled  from  the  hospitals  terminating  cost 
report,  sale  or purchase  agreement,  and  allocation  of sales  price  documentation. 
The  number  of fact  sheets  returned  by each  fiscal  intermediary  and  the  thoroughness 
of data  provided  on  the  fact  sheets  were  dependent  upon:  1) the  volume  of hospital 
sales within  the  intermediarys  jurisdiction,  and  2) the  comprehensiveness  and 
availability  of information  provided  by hospitals  to the  intermediaries.  Although  we 
had  follow-up  telephone  contacts  with  many  fiscal  intermediaries  staff  to  clarify  our 
information  requests,  we received  some  fact  sheets  that  could  not  be  utilized  for 
analysis  purposes.  These  fact  sheets  contained  no financial  data,  were  for  hospital 
transactions  that  did not  trigger  a depreciation  adjustment  calculation,  or were  for 
other  than  acute  care  hospitals.  The  thoroughness  of the  financial  data  provided  on 
the  remaining  fact  sheets  varied.  However,  every  fact  sheet  used  for  our  analysis  had 
3  to provide,  at a minimum,  financial  data  on Medicares  share  of the  gain  or loss on 
depreciable  assets.  We  received  229 fact  sheets  that  met  this  requirement  for  analysis. 
Information Requested jkom HCFA Regional mces 
We  surveyed  the  10 HCFA  regional  offices  to collect  data  on hospital  sales 

transactions  that  occurred  between  Fiscal  Year  1990 and  the  beginning  of Fiscal  Year 

1997.  The  purpose  of this was twofold  -- we wanted  to  1) verify  the  summary  hospital 

sales  information  received  from  the  fiscal intermediaries,  and  2) gather  regional  office 

staff  perspectives  on  the  processing  of hospital  sales  and  their  coordination  with  the 

intermediaries.  We  received  responses  from  all the  regional  offices  between 

November  1996 and  January  1997. 

Calculating the Financial Impact  of Hospital  Sales on the Medicare Program 
We  used  the  data  reported  from  the  fiscal  intermediaries  on  the  fact  sheets  to 
determine  the  impact  of hospital  sales with  depreciation  adjustments.  For  171 of the 
229 hospital  sales with  depreciation  adjustment  data,  these  adjustments  have  been 
settled  and  are  only  subject  to  change  if appealed  by the  hospital.  After  settlement  of 
the  cost  report,  hospitals  have  180 days to appeal  intermediary  determinations. 
We  identified  14 settled  transactions  with  pending  appeals  concerning  depreciation 
adjustments:  four  of these  were  for hospitals  disputing  the  amount  of gain  they  must 
share  with  Medicare,  nine  were  for hospitals  contesting  that  the  loss shared  by 
Medicare  should  be  greater,  and  one  hospital  with  a zero  adjustment  was arguing  that 
a loss should  have  been  recognized.  We  also  identified  nine  transactions  where 
intermediaries  indicated  that  the  opportunity  to appeal  had  not  yet  expired.  We 
included  the  adjustments  for  these  23 hospitals  in our  calculations  because  the  figures 
do not  represent  an  overstatement  of Medicare  impact.  Indeed,  if the  appeals  are 
decided  in favor  of the  hospitals,  the  loss to Medicare  would  be  even  greater. 
For  58 hospital  sales  transactions,  formal  settlement  of the  terminating  cost  reports 
has  not  been  completed;  therefore,  the  depreciation  adjustments  reported  are  subject 
to  redetermination  by the  fiscal intermediaries.  These  depreciation  adjustments  have 
been  aggregated  to  determine  the  impact  on the  program.  The  monetary  impact 
associated  with  these  unsettled  depreciation  adjustments  is identified  in the  findings. 
When  we refer  to the  terms  net losses or overall  impact  in this  report,  this  refers  to 
the  dollar  impact  that  results  when  aggregated  depreciation  loss adjustments  are 
compared  to  aggregated  depreciation  gain  adjustments.  Depreciation  adjustments  for 
hospitals  sold  at a loss are  presented  in negative  dollar  figures  in this  report,  since 
these  represent  Medicare  outlays.  Depreciation  adjustments  resulting  from  gains  are 
presented  as positive  dollar  figures,  since  these  represent  payments  to the  Medicare 
program.  Although  the  hospital  sales transactions  that  resulted  in zero  adjustments  do 
not  have  a financial  impact  on Medicare,  these  transactions  were  included  in the 
calculation  of all hospital  sale  statistics. 
4  Estimating  the Financial  Impact  of Hospital  Sales  Where Depreciation  Adjustments  Have 
Yet  To Be Reported 
To  determine  the  financial  impact  of  sales  that  have  already  occurred  but  for  which  no 

financial  data  is currently  available,  we  aggregated  the  total  number  of  sales 

transactions  identified  on  the  intermediary  overview  guides.  In  total,  the 

intermediaries  identified  317  hospital  sales  that  would  meet  Medicare  requirements  for 

calculating  a depreciation  adjustment.  We  subtracted  the  number  of  sales  with 

information  on  depreciation  adjustments  (229)  from  the  317  total  sales.  The 

difference  between  these  two  numbers  (88)  equals  the  number  of  sales  without 

financial  data  available  at  this  time. 

To  estimate  the  depreciation  adjustments  for  the  88 sales  that  have  already  occurred 

but  for  which  no  financial  information  is available,  we  utilized  the  depreciation 

adjustments  reported  on  the  fact  sheets.  We  purposefully  decided  to  include  in  our 

estimation  analysis  only  the  financial  data  from  hospitals  where  the  terminating  cost 

report  had  been  audited  and  settled  by  the  intermediary.  We  believed  this  would 

provide  a more  conservative  and  accurate  estimate  of  average  depreciation 

adjustments.  Financial  data  from  171 settled  hospital  cost  reports  was  used  for  this 

analysis. 

We  employed  a three-step  analysis  to  estimate  the  net  financial  impact  of  hospital 

sales  without  data.  First,  we  determined  the  proportions  of  gain,  loss,  and  zero 

adjustments  that  resulted  from  the  171 settled  transactions.  Sixty-nine  percent  of 

settled  sales  were  recognized  as losses  to  the  Medicare  program.  Seventeen  percent 

were  gains  and  another  14 percent  were  zero  adjustments.  These  three  proportions 

were  applied  to  the  88 sales  without  data  to  estimate  how  many  transactions  would  fall 

into  each  of  the  three  adjustment  categories.  Next,  we  grouped  the  171 settled 

hospital  sales  by  gain,  loss,  and  zero  adjustments  and  determined  the  average  or  mean 

depreciation  adjustment  for  each  category.  We  multiplied  the  mean  statistic  for  each 

category  by  the  number  of  sales  without  data  we  had  estimated  would  fall  into  each  of 

the  three  categories  to  quantify  overall  dollar  amounts  associated  with  gains,  losses, 

and  zero  adjustments.  Lastly,  we  compared  the  aggregate  gain  and  loss  depreciation 

adjustments  to  determine  a net  impact  to  Medicare. 

Estimating  the Financial  Impact  of Potential  Hospital  Sales 
To  determine  the  impact  on  Medicare  from  potential  sales,  we  totaled  the  number  of 
potential  sales  identified  in  the  intermediary  overview  guides.  We  had  asked  both  the 
intermediaries  and  HCFA  regional  offices  to  provide  the  number  of  potential  sales 
they  had  reason  to  believe  might  occur  in  1997;  however,  the  potential  sales  data  from 
the  fiscal  intermediaries  and  regional  offices  did  not  match.  To  prevent  overinflating 
the  data  by  combining  or  comparing  the  data,  we  chose  to  use  only  the  potential  sales 
data  from  the  intermediaries.  We  selected  the  intermediary  data  since  they  had  a 
higher  response  rate  to  the  potential  sales  question  than  the  regional  offices.  The 
fiscal  intermediaries  identified  41 potential  sales.  We  computed  the  financial  impact 
5 
 of the  41 potential  hospital  sales  identified  using  the  three-step  analysis  described  for 
hospital  sales where  depreciation  adjustments  have  yet  to be  reported. 
6 
 FINDINGS 

MEDICARE  LOST $223 MILLION AND  STANDS  TO LOSE ANOTHER  $289 
MILLION  IN DEPRECIATION  ADJUSTMENTS  FOR  HOSPITALS  SOLD 
BETWEEN  1990 AND  1996. 
Over  the  last  7 years,  a total  of 317 hospital  sales  have  occurred  that  met  Medicare 
requirements  for  calculating  a depreciation  adjustment.  These  types  of sales  have 
more  than  doubled  between  Fiscal  Years  1990 and  1995.  The  chart  below  provides 
a breakdown  of the  hospital  sales by year. 
Hospital  Sales with  Depreciation  Adjustments 
FiscalYears 1990 through 1996 
Fiscal intermediaries report $453 million in losses and $56 million in gains for a net loss 
of $397 million on 229 hospitals sold between I990  and 1996.  Medicare  has already 
paid  out $223 million of the net loss. 
The  fiscal  intermediaries  provided  financial  data  on  229 hospital  sales  transactions  that 
met  Medicare  requirements  for  a depreciation  adjustment  between  Fiscal  Years  1990 
and  1996.  Of the  nearly  $400 million  in net  losses  reported,  $223 million  was from 
171 hospital  sales where  the  final  payment  determination  has been  made.  The  fiscal 
intermediaries  have  audited  and  settled  these  hospitals  terminating  cost  reports. 
Fiscal  year  1995 was the  last  complete  year  of hospital  sales  data  collected  from 
all fiscal  intermediaries.  Medicare  has  already  paid  out  $270 million  in losses  and  received  $47 million  in gains 
for  these  hospitals. 
Another  $174 million  net  loss to Medicare  has been  reported  by hospitals  but  has yet 
to be  settled  by the  program.  This  figure  is based  on  58 hospital  sales  with  reported 
gain  adjustments  of $9 million  and  reported  loss adjustments  of $183 million.  These 
adjustments  have  been  calculated  and  reported  by hospitals  but  the  intermediaries 
have  yet  to  settle  the  terminating  cost reports. 
Medicare  could lose an estimated  $115 million on another 88 hospital sales for which no 
financial  data  was available. 
The  fiscal  intermediaries  reported  that  there  were  317 hospital  sales  that  met 
Medicares  conditions  for  calculating  a depreciation  adjustment.  However,  for  88 of 
these  transactions,  the  intermediaries  could  not  provide  us with  data  on  the 
adjustment.  Some  of the  intermediaries  had  not  yet  received  any financial  information 
on the  sale  from  the  hospitals.  Others  explained  that  they  had  received  the 
information  but  had  not  yet  reviewed  it for  accuracy. 
Using  the  financial  data  received  from  the  171 hospitals  with  depreciation  adjustments 
finalized  by the  intermediaries,  we calculated  both  the  proportion  of sales with  gains 
and  losses  and  the  average  of the  resulting  depreciation  adjustments.  Using  the 
proportions  calculated  for  the  settled  hospital  sales, we estimate  that  of the  88 sales 
without  data  there  would  be  15 gain  adjustments,  61 loss adjustments,  and  12 zero 
adjustments.  The  average  depreciation  adjustment  for  settled  hospitals  sold  at  a loss 
was $2,291,078.  For  hospitals  sold at a gain,  the  average  depreciation  adjustment  was 
$1,629,629.  By employing  the  estimated  number  of adjustments  and  the  average  gain 
and  loss statistics,  we estimate  the  88 sales  could  result  in a net  loss to Medicare  of 
$115 million.  This  figure  is an  approximation  and  is furnished  to provide  only  an 
estimate  of the  impact  on Medicare.  The  actual  financial  impact  of these  sales will 
not  be  known  until  the  fiscal  intermediaries  audit  the  transactions  and  settle  the  final 
cost reports. 
MEDICARE  COULD  LOSE AN ESTIMATED  $53 MILLION IN DEPRECIATION 
ADJUSTMENTS  FOR  HOSPITAL  SALES EXPECTED  IN 1997. 
It does  not  appear  that  the  rate  of hospital  sales will significantly  decrease  in  1997. 
Although  less than  half  of the  fiscal intermediaries  (24 of 54) reported  being  aware  of 
potential  sales  in their  respective  areas,  these  intermediaries  identified  41 expected 
hospital  sales  for  1997. 
Using  the  proportion  of gains  and  losses  and  the  average  adjustments  of previously 
settled  hospital  sales, we estimate  that  the  potential  liability  to Medicare  for  these  41 
sales  could  reach  $53 million.  This  estimate  provides  an indication  of the  possible 
impact  that  upcoming  sales  could  have  on Medicare.  If all the  expected  sales  do not 
occur,  this  could  potentially  reduce  the  estimated  loss.  Conversely,  the  impact  on  the 
8  program  could  be  even  greater  if additional  hospitals  not  identified  by the 
intermediaries  undergo  sales  in  1997. 
NET  LOSSES REPORTED  TO THE MEDICARE  PROGRAM  HAVE  MORE 
THAN  QUADRUPLED  BETWEEN  1990 AND  1996. 
When  comparing  Medicares  share  of gains  and  losses  on reported  hospital  sales  over 
the  last  7 years,  Medicare  has  never  shown  an  overall  gain  in any year.  Net  losses 
reported  to the  program  have  increased  322 percent  from  $29 million  in  1990 to $122 
million  in  1996.  For  every  $1 that  Medicare  shared  in gains,  it paid  out  $8 in losses. 
The  table  below  provides  the  number  of hospital  sales with  gain,  loss, and  zero 
adjustments  by fiscal year.  It also  provides  the  payments  associated  with  gains  and 
losses  for  each  year. 
YGII  Number  Total Gains  Number  Total  Numberof  Overall Impact 
Losses 
of Gains  of LLxses  Zeru  on Medicare 
Adjustments  Pragtam 
1990  5  $8,118,271  23  -$36,996,112  3  -$28,877,841 
1991  4  $7,401,497  21  -$49,405,907  7  -$42,004,410 
1992  8  $18,882,435  22  -$73,461,361  3  -$54,578,926 
1993  3  $2,771,716  26  -$43,978,492  7  -$41,206,776 
1994  9  $12,778,151  26  -$48,670,697  4  -$35,892,546 
199s  4  $6,054,598  24  -$78,456,929  9  -$72,402,331 
1996  0  $0  19  -$121,904,534  2  -$121,904,534 
Total  33  $56,006,668  161  -$452$X74,032  35  -$396,867,364 
FWde Medicare  has shared in the loss for 161 hospital sales, in contrast, it has shared the 
gain for on& 33 hospital sales 
Seventy  percent  of the  depreciation  adjustments  reported  for  hospital  sales  (161 of 
229) resulted  in losses  to the  Medicare  program.  Fourteen  percent  of sales  (33 of 
229) resulted  in gains  to the  program.  The  ratio  of Medicare  losses  to  gains  based  on 
the  data  from  the  229 hospital  sales  is 5 losses  for  every  1 gain.  There  were  35 
hospital  sales where  no  gain  or loss was recognized.  The  sales  price  allocated  to 
depreciable  assets  for  these  hospitals  was equal  to the  Medicare  net  book  value  of the 
assets.  Therefore,  the  depreciation  adjustment  was zero  since  no  gain  or loss on 
depreciable  assets  was established.  We  have  provided  examples  of how  the  three 
types  of adjustments  are  determined  by fiscal intermediaries  in Appendix  A. 
9 
 MEDICARE  MAY  BE PAYING  MORE  THAN  IT SHOULD  TO HOSPITALS 
SOLD  AT A LOSS DURING  THE TRANSITION  PERIOD  FOR  CAPITAL 
PROSPECLlVE  PAYMENTS. 
The  loss to  the  Federal  Government  from  hospital  sales  may  be greater  than  the  half 
billion  already  identified  through  depreciation  adjustments.  Medicare  may  also  be 
paying  out  more  than  it should  for  hospitals  sold  at a loss and  paid  under  the  capital 
prospective  payment  system.  While  Medicare  recognizes  a loss on  assets  for 
depreciation  purposes,  in most  cases it makes  no  adjustment  to  a hospitals  capital 
prospective  payment  to  account  for  the  new lower  value  of the  hospital.  Under 
Medicares  guidelines,  most  hospital  buyers  receive  the  same  capital  prospective 
payments  as the  previous  owner.  Section  2807.9 of the  Provider  Reimbursement 
Manual  states  that  if there  is a change  of ownership  subsequent  to the  base  period, 
the  new  owner  receives  capital  payments  under  the  same  payment  methodology  and 
rates  as the  previous  owner  if the  change  in ownership  results  in a single  surviving 
hospital. 
For  each  Medicare  patient  discharge,  hospitals  receive  a capital  payment  based  on  the 
methodology  selected  for  the  hospital  at the  beginning  of the  capital  prospective 
payment  transition.  Hospitals  receiving  capital  prospective  payments  during  the 
transition  period  are  paid  under  two methodologies:  fully prospective  and  hold 
harmless.  At  the  conclusion  of a lo-year  transition  period,  all hospitals  will receive 
payments  based  solely  on the  national  Federal  rate. 
Nearly  60 percent  of hospital  sales  reviewed  (134 of 229) were  reimbursed  for  capital 
costs based  on  a prospective  payment  methodology.  More  than  70 percent  of the 
hospitals  being  paid  prospectively  (95 of 134) were  sold  at a loss.  Twenty-eight 
percent  of the  hospital  sales  (63 of 229) occurred  before  Fiscal  Year  1992, and  thus 
were  sold  prior  to the  implementation  of a prospective  payment  system  for  capital 
costs. 
Of the  hospitals  which  received  capital  prospective  payments  and  were  sold  at a loss, 
44 percent  were  paid  under  the  fully prospective  methodology.  Fully  prospective 
hospitals  receive  a combination  of Federal  and  hospital-specific  rates  during  the 
transition  period.  Since  the  hospital-specific  rate  is not  recalculated  when  a hospital  is 
sold  at  a loss, these  hospitals  have  received  and  will continue  to receive  payments 
during  the  transition  period  based  on  a rate  that  was calculated  when  the  hospitals 
depreciable  assets  had  much  higher  values  and  thus  higher  associated  depreciation 
costs. 
Fifty-five  percent  of hospitals  sold  at a loss and  receiving  capital  prospective  payments 
were  reimbursed  under  the  hold  harmless  methodology.  Hold  harmless  hospitals 
receive  either  a blend  of old  and  new  capital  payments  or  100 percent  of the  Federal 
rate  depending  on which  is higher.  After  a hold  harmless  hospital  is sold,  Medicare 
does  not  redetermine  the  hospitals  payment  methodology  to  establish  if the  hold 
harmless  distinction  is still necessary.  Therefore,  the  new  owner  of a hold  harmless 
10  hospital  sold  at  a loss  may  continue  to  receive  capital  reimbursement  based  on  a 

payment  methodology  that  was  determined  by  the  previous  owners  above-average 

capital  costs.  The  Medicare  program  continues  hold  harmless  payments  even  though 

the  hospitals  current  depreciable  asset  value  is now  lower. 

We  recognize  that,  without  recalculating  hospital-specific  rates  for  each  of  the 

hospitals  sold  at  a loss,  there  is no  precise  means  to  determine  the  financial  impact  on 

the  program  of  continuing  to  make  payments  based  on  the  previous  owners 

methodology  and  rates.  We  also  realize  that  not  all hold  harmless  hospitals  would 

lose  that  distinction,  nor  would  all hospital-specific  rates  decrease  dramatically  if the 

payment  methodologies  for  hospitals  sold  at  a loss  were  recalculated  based  on  present 

capital  costs.  However,  the  decrease  in  the  value  of  depreciable  assets  and, 

consequently,  the  associated  depreciation  costs  can  be  significant.  More  than  half  the 

hospitals  sold  at  a loss  (53  percent)  had  the  value  of  their  depreciable  assets  decrease 

by  more  than  50 percent.  Thirty-five  percent  of  hospitals  sold  at  a loss  had  their 

depreciable  asset  value  drop  by  more  than  70 percent. 

LOSSES  FROM  DEPRECIATION  ADJUSTMENTS  ALSO  IMPACT  THE 
MEDICAID  PROGRAM. 
The  Federal  Government  does  not  mandate  that  State  Medicaid  programs  use  specific 

payment  methodologies  to  determine  hospital  reimbursement.  However,  some  State 

programs  are  calculating  depreciation  adjustments  based  on  the  guidelines  established 

for  Medicare  when  hospitals  providing  care  to  Medicaid  recipients  are  sold. 

Several  of  the  Medicare  fiscal  intermediaries  performed  some  type  of  payment  or 

audit  function  for  State  Medicaid  programs.  We  asked  these  intermediaries  if 

depreciation  adjustments  for  hospital  sales  were  made  by  these  programs.  Eleven 

intermediaries  indicated  that  depreciation  adjustments  were  calculated  by  State 

Medicaid  programs.  These  intermediaries  also  reported  that  the  Medicaid  programs 

used  the  same  rules  and  procedures  as the  Medicare  program  in  calculating 

depreciation  adjustments. 

Intermediaries  could  provide  data  on  Medicaid  depreciation  adjustments  for  only  10 of 

the  229  sales  transactions.  All  the  depreciation  adjustments  resulted  in  losses  to  the 

Medicaid  program.  The  individual  hospital  adjustments  ranged  from  $18,000  to 

$10  million.  These  10 sales  represented  a $16  million  loss  to  the  respective  Medicaid 

programs. 

Since  the  majority  of  fiscal  intermediaries  do  not  serve  as  contractors  to  State 

Medicaid  agencies,  it is possible  that  other  State  Medicaid  programs  not  represented 

in  our  review  also  follow  Medicare  policy  and  calculate  depreciation  adjustments  on 

hospital  sales.  The  impact  of  depreciation  adjustments  on  the  Medicaid  program 

could  conceivably  be  much  greater  than  the  $16  million  in  losses  identified  from  only  a 

small  number  of  hospital  sales. 

11 
 RECOMMENDATIONS 
The  Medicare  program  has  already  paid  out  hundreds  of  millions  of  dollars  for 
depreciation  adjustments  associated  with  hospital  sales.  If the  activity  surrounding 
hospital  sales  continues  to  increase,  the  Medicare  program  could  pay  out  even  greater 
amounts  in  the  coming  years. 
We  have  provided  evidence  in  this  report  that  substantial  amounts  of  money  are  being 
paid  and  will  continue  to  be  paid  in  the  coming  years  for  an  accounting  procedure 
established  in  the  early  years  of  the  program.  At  the  beginning  of  the  199Os, Medicare 
moved  from  cost-based  reimbursement  to  a prospective  payment  system  for  hospitals. 
Since  that  time,  Medicare  has  shared  in  only  one  gain  for  every  five  losses  resulting 
from  depreciation  adjustments  on  hospital  sales.  We  believe  the  policy  allowing 
depreciation  adjustments  on  hospital  sales  is an  unnecessary  holdover  from  the  old 
cost-based  reimbursement  system  that  should  be  discontinued. 
In  switching  from  a cost-based  reimbursement  methodology  to  the  prospective 
payment  system,  the  Medicare  program  recognized  the  need  to  constrain  rising  costs 
and  promote  cost  effective  decision-making  in  hospitals.  Medicares  sharing  in  gains 
and  losses  for  hospital  sales  does  not  advance  the  goal  the  program  set  out  to 
accomplish  when  implementing  the  prospective  payment  system. 
We  recommend  that  the  Health  Care  Financing  Administration: 
0 	 propose  legislation  to  change  Section  1861(v)(l)(O)  of  the  Social  Security  Act 
to  eliminate  the  requirement  that  Medicare  make  adjustments  for  gains  or 
losses  when  hospitals  undergo  changes  of  ownership; 
0 	 propose  a similar  elimination  of  depreciation  adjustments  on  hospital  sales  in 
the  Medicaid  program;  and 
0 	 examine  options  for  recalculating  capital  transition  payments  to  hospitals 
undergoing  changes  of  ownership  for  reimbursement  purposes. 
AGENCY  COMMENTS 
The  HCFA  concurred  with  our  recommendations.  The  agency  stated  that  proposed 

legislation  entitled  the  Medicare  and  Medicaid  Fraud,  Abuse,  and  Waste  Preventions 

Amendments  of  1997 (Section  205)  would  use  the  net  book  value  as  the  sales  price 

for  hospitals  undergoing  a change  of  ownership.  This  proposed  change  would 

eliminate  the  need  for  a depreciation  adjustment.  The  agency  also  stated  that  if 

depreciation  adjustments  were  eliminated  in the  Medicare  program  this  change  would 

also  be  reflected  in  the  Medicaid  program. 

12 
 The  HCFA  responded  that  after  examining  options  for  recalculating  capital  transition 

payments  for  hospitals  undergoing  changes  of  ownership,  it believes  that  recalculating 

payments  would  be  inappropriate  and  inadvisable  at  this  time.  The  agency  believes  it 

would  be  contrary  to  the  principle  of  administrative  finality  upon  which  the  capital 

payment  system  was  based.  In  addition,  HCFA  stated  there  would  also  be  the 

potential  for  loss  to  the  program  since  both  hospitals  sold  at  a gain  and  a loss  would 

have  their  rates  recalculated.  The  HCFA  also  advised  that  the  recalculation  would 

have  a limited  application  period  since  the  transition  for  capital  prospective  payments 

ends  in  2001.  The  full  text  of HCFAs  comments  are  provided  in Appendix  B. 

We  appreciate  HCFAs  careful  consideration  of  the  issues  concerning  capital  payments 

to  hospitals  undergoing  changes  of  ownership.  While  we  recognize  the  complexity  of 

the  policy  and  administrative  implications  identified  by  HCFA,  we  continue  to  believe 

that  capital  payments  to  hospitals  sold  at  a loss  should  be  redetermined. 

13 
 APPENDIX  A 
EXPLANATION  OF  DEPRECIATION  ADJUSTMENT  CALCULATION 
Before  the  fiscal  intermediary  can  verify  a depreciation  adjustment,  the  hospital  being 

sold  sends  a terminating  cost  report  that  documents  a possible  gain,  loss,  or  zero 

adjustment  on  depreciable  assets  for  the  sale.  The  hospital  should  also  provide  the 

hospital  sale  or  purchase  agreement,  an  allocation  of  the  sales  price,  and,  if necessary, 

an  independent  appraisal  that  determines  the  fair  market  value  of  the  hospitals 

current  assets.  The  intermediary  reviews  the  terminating  cost  report  and  the 

additional  documentation  to  ensure  that  they  are  correct  and  the  calculations  are  fully 

supported. 

There  are  several  key  pieces  of  information  that  a fiscal  intermediary  must  have  to 

ensure  a correct  calculation.  The  hospital  should  provide  to  the  intermediary  the  net 

sales  price  which  includes  cash  and  any  other  considerations  plus  any  assumed 

liabilities.  The  allocation  of  the  sales  price  provided  should  illustrate  the  types  of 

assets  being  sold  and  the  portion  of  the  sales  price  allocated  to  them.  At  the  present 

time,  this  allocation  can  include  both  depreciable  and  non-depreciable  assets  such  as 

land,  buildings,  equipment,  accounts  receivable,  medical  records,  inventory,  and  many 

other  categories  of  assets.  From  this  information,  the  fiscal  intermediary  should  be 

able  to  verify  the  sales  price  allocated  to  depreciable  assets.  This  figure  is then 

compared  to  the  net  book  value  of  all  depreciable  assets.  The  net  book  value  is the 

original  cost  or  value  of  an  asset  less  any  depreciation  taken  over  the  life  of  the  asset. 

If the  sales  price  allocated  to  depreciable  assets  is less  than  the  net  book  value,  there 

is a loss  recognized  on  the  sale  of  the  assets.  If the  sales  price  is greater  than  the  net 

book  value  of  the  depreciable  assets,  a gain  is recognized.  If the  sales  price  allocated 

and  the  net  book  value  of  the  depreciable  assets  are  equal,  then  there  is no  gain  or 

loss  and  the  sale  has  been  an  even  transaction  and  zero  adjustment  occurs. 

There  are  limits  to  the  amount  of money  that  Medicare  can  gain  or  lose  during  a 

hospitals  disposal  of  depreciable  assets.  The  amount  of  gain  is limited  to  the  amount 

of  depreciation  for  the  asset  previously  included  in  allowable  costs  to  the  Medicare 

program  through  the  years.  The  amount  of  loss  is limited  to  the  undepreciated  basis 

of  the  asset  (original  value  less  any  depreciation  taken  through  the  years)  permitted 

under  the  program. 

Once  the  overall  gain  or  loss  on  depreciable  assets  is calculated,  the  intermediary  must 

determine  Medicares  share.  This  share  is determined  by  multiplying  the  gain  or  loss 

by  the  hospitals  Medicare  utilization  during  the  years  that  the  assets  were  in  use. 

Medicares  utilization  is determined  by  comparing  Medicare  patients  use  of  the 

hospital  to  use  by  non-Medicare  patients.  This  can  be  a complicated  procedure  that 

can  require  going  back  through  previous  cost  reports  to  determine  overall  Medicare 

utilization. 

A-l  Three  examples  of  depreciation  adjustments  are  presented  in  this  appendix.  Example 
1 illustrates  a depreciation  adjustment  resulting  in  a loss.  Example  2 provides  details 
on  a gain  and  Example  3 shows  a zero  adjustment.  These  are  simplified  examples 
meant  to  illustrate  how  depreciation  adjustments  are  calculated.  The  allocation  of 
sales  price  can  include  many  types  of  assets  that  are  not  included  in  these  examples. 
We  do  not  present  the  calculation  for  determining  the  Medicare  utilization  percentage 
in  our  examples.  Instead,  we  assigned  a Medicare  utilization  rate  of  50 percent  to 
determine  Medicares  share  of  the  hospital  sale. 
Example  1 - Medicare  Loss  on  Sale 
Hospital  net  facility sales prices:  $10,000,000 
(includes  cash and  any other considerations plus  assumed  liabilities) 
Allocation  of the  net  sales price  presented  in table  below: 
(includes  both depreciable  and non-depreciable  assets such as buildings, 
equipment,  accounts  receivable,  medical  records, inventory, and other assets) 
DESCRIPTION  OF  ASSET  DEPRECIABLE  AMOUNT 
ASSET 
Land  No  $3,ooo,O~ 
Inventory  No  $2,000,000 
Buildings  Yes  $4,ooo,m 
Major  Moveable  Equipment  Yes  $l,~,~ 
TOTAL  ALLOCATED  NET  SALES  PRICE  $10,000,000 
Sales price  allocated  to Medicare  allowable  depreciable  assets: 
(determined  from  allocation above  =  4,000,OOO +  l,OOO,OOO) 
Net  book  value  of depreciable  assets at the  date  of sale: 
(determined  from  cost report:  original value less depreciation  already taken) 
Total  amount  of gain/loss  on sale of depreciable  assets: 
(sales price  less net book  value for depreciable  assets = 5,000,OOO- 7,000,OOO) 
Medicares  share  of the  total  gain/loss  on sale of allowable  depreciable  assets 
(total gain/loss on depreciable  assets multiplied by Medicare  utilization percentage 
including  inpatient/outpatient  and other components  =  -2,000,OOOx SO) 
LOSS  TO  MEDICARE  =  $ l,OOO,OOO 
A-2 
 Example  2 - Medicare  Gain  on Sale 
Hospital  net  facility sales prices:  $lO,OOO,OOO 
(includes  cash and any other considerations plus  assumed  liabilities) 
Allocation  of the  net  sales price  presented  in table  below: 
(includes  both depreciable  and non-depreciable  assets such as buildings, 
equipment,  accounts  receivable,  medical  records, inventory, and other assets) 
DESCRIPTION  OF  ASSET  DEPRECIABLE  AMOUNT 
ASSET 
Land  No  $1.000.000 
.I  I 
Inventory  No  $1,000,000 
Buildings  Yes  $5,ooO,~ 
Major  Moveable  Equipment  Yes  $3,ooo,ooo 
TOTAL  ALLOCATED  NET  SALES  PRICE  $10,000,000 
Sales price  allocated  to Medicare  allowable  depreciable  assets:  $8,~,~ 
(determined  from  allocation above  =  5,000,OOO + 3,000,OOO) 
Net  book  value  of depreciable  assets  at the  date  of sale:  $7,~,~ 
(determined  from  cost report:  original value less depreciation  already taken) 
Total  amount  of gain/loss  on sale of depreciable  assets:  $1,ooo,ooo 
(sales price  less net book value for depreciable  assets =  S,OOO,OO-O7,000,OOO) 
Medicares  share  of the  total  gain/loss  on sale of allowable  depreciable  assets  $  5owoo 
(total gain/loss on depreciable  assets multiplied by Medicare  utilization percentage 
including  inpatientloutpatient and other components  =  l,OOO,OOxO SO) 
GAIN  TO MEDICARE  =  $500,000 
A-3 
 Example  3  - Medicare  Zero  Adjustment  on  Sale 
Hospital  net  facility sales prices:  $lO,OOO,OOO 
(includes  cash and  any other considerations plus  assumed  liabilities) 
Allocation  of the  net  sales price  presented  in table  below: 
(includes  both depreciable  and non-depreciable  assets such  as buildings, 
equipment,  accounts  receivable,  medical  records,  inventory, and other assets) 
DESCRIPTION  OF ASSET  REPRECIABLE  AMUUNT 
ASSET 
Land  No  $2,000,000 
Inventory  No  $1,000,000 
Buildings  Yes  $4,oW~ 
Major  Moveable  Equipment  Yes  $3,ooo,~ 
TOTAL  ALLOCATED  NET SALES  PRICE  $10,000,000 
Sales price  allocated  to Medicare  allowable  depreciable  assets:  $7,~,~ 
(determined  from  allocation above  =  4,000,OOO + 3,000,OOO) 
Net  book  value  of depreciable  assets at the  date  of sale:  $7,ooo,~ 
(determined  from  cost report:  original value less depreciation  already taken) 
Total  amount  of gain/loss  on sale of depreciable  assets:  $  0 
(sales price  less net book  value for depreciable  assets =  7,000,OOO- 7,000,OOO) 
Medicares  share  of the  total  gain/loss  on sale of allowable  depreciable  assets  $  0 
(total gainfloss on depreciable  assets multiplied by Medicare  utilization percentage 
including  inpatient/outpatient and other components) 
NO GAIN  OR LOSS TO MEDICARE  = S 0 
A-4 
 APPENDIX  B 

HEALTH  CARE  FINANCING  ADMININSTRATION  C0MMENl-s 
B-l  DtPARTMENT  OF HEALTH  & HUMAN  SERVfClES  Hoelth Cam Financinq Admi
mm Adminktntor 
Washingtan,  DC.  20201 
DATE:  JIN -3  @g 
TO: 	 June Gibbs Brown 
Inspector  General 
FROM: 
SUBJECT 	 Oflciiceofhspect~r  General  (CM3) Ihfi  Report  Medicare  Losseson 
Hospital  Saks,  (OEI43-9600170) 
ThankYOU forthe appartnnitiyo reviewand comment  on this  report. 
B-2 
 B-3 
 Page 2 
B-4 
 Page 3 
B-5