Summary

GAO reviewed: (1) the effect of the Health Care Financing Administration's (HCFA) use of unaudited cost reports to determine the standardized amount used in computing prospective payment system (PPS) rates; and (2) the effect of not removing all capital costs from the cost data even though these costs are paid separately from PPS rates.

GAO noted that HCFA used unaudited data and some capital costs to compute the average cost per Medicare discharge, which overstated the standardized amount used to determine PPS payments. GAO found that: (1) unallowable costs included in the cost reports averaged about 3 percent of the total operating costs per hospital discharge; (2) HCFA overstated the allowable cost per discharge by about $73; (3) HCFA did not exclude capital costs allocated to ancillary departments and special care units; and (4) HCFA used its 1981 cost data as the base period for PPS rates. GAO also found that: (1) HCFA needs to make adjustments to ensure that PPS rates do not reflect unallowable costs or capital costs; and (2) adjustments would reduce Medicare payments to hospitals by about $1 billion in fiscal year (FY) 1986.