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Date: Thursday, August 28, 1997
FOR IMMEDIATE RELEASE
Contact: HCFA Press Office (202) 690-6145

HHS Secretary Donna E. Shalala -- in the first action implementing the new Balanced Budget Act -- today announced a regulation that freezes rates and makes other changes in hospital payment policy in fiscal year 1998.

"President Clinton signed the Balanced Budget Act just 23 days ago. Today, we're taking the first of many official steps putting that law into effect," Secretary Shalala said. "We are following through on the wishes of the president and Congress that hospitals deliver services in a more efficient manner, and share in the effort toward reducing the federal deficit."

The new rule will be published in tomorrow's Federal Register, and takes effect Oct. 1. It also makes important changes in Medicare payments for hospital capital costs, physician education, and assistance to hospitals that serve large numbers of low-income patients.

These policy changes represent about half of the Medicare savings included in the Balanced Budget Act signed by President Clinton August 5.

In May, following the bipartisan agreement to balance the federal budget, Secretary Shalala recommended the freeze, which was subsequently included in the new legislation. Under the old law, Medicare's hospital payment rates would have increased 2.7 percent in FY 1998.

The independent Prospective Payment Assessment Commission, which also recommended a Medicare hospital payment freeze, projects that hospitals would have reaped profit margins of nearly 17 percent on Medicare patients in FY 1998 if scheduled rate increases had not been repealed.

The freeze will affect 5,200 acute care hospitals and 3,400 non-acute care psychiatric, rehabilitation, long-term, cancer and children's hospitals participating in Medicare. Some 360 hospitals may qualify for exceptions to the freeze because they have lost money on Medicare patients in recent years and they do not receive extra payments for treating poor patients or for indirect medical education costs, or are not small rural Medicare-dependent hospitals. These hospitals will receive a 0.5 percent increase.

Medicare payments to acute care hospitals increased from $81.9 billion in FY 1996 to $85.8 billion in FY 1997. "That increase came despite limits on payment growth because we have more people in Medicare and sicker patients being admitted to hospitals," said Vladeck. With the new freeze, and taking those factors into account, total Medicare payments to hospital are expected to decline to $85.7 billion in FY 1998.

Payment rates are expected to increase in FY 1999. The new law stipulates that rates will rise by 1.9 percent less than the inflation rate on prices for goods and services purchased by hospitals. The inflation rate for this "hospital market basket" in FY 1998 is estimated to be 2.7 percent.

The new rule also reduces Medicare payments for capital-related costs, such as depreciation, interest, taxes, insurance and similar expenses for plant and equipment. These payments are being cut by 17.8 percent for hospitals which are paid based on patient diagnoses under Medicare's prospective payment system, and by 15 percent for hospitals which are paid based on their actual costs.

The new rule caps the number of medical interns and residents that Medicare will fund through direct medical education payments to teaching hospitals at 1996 levels. Indirect medical education payments also will be reduced in order to bring them closer into line with the actual cost of treating patients in teaching hospitals.

And the new rule reduces special payments to hospitals that treat large numbers of low-income patients. These "disproportionate share hospitals" payments will decline by 1 percent each year through FY 2002.