*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 The links are no longer being updated. 1991.08.30 : Medicare Hospital Building Costs Contact: Bob Hardy (202) 245-6145 August 30, 1991 A new policy for paying hospitals for the costs of buildings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 The links are no longer being updated. 1991.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. # # #