*This is an archive page. The links are no longer being updated. 
1991.02.22 :  Medicare Capital Costs

Contact:  Bob Hardy (202) 245-6145
February 22, 1991

       To provide hospitals with an incentive to control their costs
for construction and equipment, HHS Secretary Louis W. 
Sullivan, M.D., today announced a proposal under which Medicare would
pay hospitals for capital costs in the same way it now pays for
inpatient operating costs.
       Under the prospective payment system, established in 1983,
Medicare pays operating costs by a set fee for each hospital stay
depending on the patient's diagnosis and the type of hospital.  This
fee is designed to be adequate for an efficiently run hospital to
provide quality care to Medicare patients.  If the hospital can treat
the patient for less, it keeps the difference; if it spends more, it
must absorb the loss.
       Capital payments were scheduled to be incorporated into PPS in
FY 1987, but their inclusion has been delayed until Oct. 1, *This is an archive page. The links are no longer being updated. 
1991.
Medicare now reimburses a hospital for a percentage of its capital
costs based on the proportion of hospital days spent treating Medicare
beneficiaries, regardless of whether these capital expenditures were
invested to promote efficient care for Medicare patients.  Under this
"reasonable cost" payment system, Medicare makes the same percentage
payment for a luxury hospital addition as for an emergency room,
subsidizes the shortfall on underutilized projects not justified by a
hospital's patient load, and underwrites the purchase of high cost
equipment in cases where services could have been contracted.
       In FY 1991, capital payments are expected to reach about $6.3
billion, just over 10 percent of total Medicare inpatient hospital
payments.

       "One out of every three hospital beds today lies empty, an
indication that we need to encourage hospitals to shrink excess
capacity and operate more efficiently," said Gail R. Wilensky, Ph.D.,
administrator of the Health Care Financing Administration, which runs
Medicare.

       "In addition, incorporating capital payments into PPS would
help end the expensive medical 'arms race' in which hospitals rush to
purchase sophisticated medical technologies that often could be
shared," the administrator said.

       "Because PPS creates incentives to save on operating costs
while the current capital reimbursement system does not, capital costs
have been growing faster than operating costs.  Our proposal would
help restrain health-care cost inflation by encouraging hospitals to
become more business-like in their capital decisions," Dr. Wilensky
said.

       The regulation, which will be published in the Federal
Register, would establish a standard amount to be paid for every
Medicare discharge to cover capital costs directly related to
inpatient hospital care.  The federal standard rate would then be
adjusted for such factors as the hospital's particular mix of cases,
its geographic location, and whether it has a disproportionate number
of low-income patients.

       The regulation also contains a 10-year transition payment
policy that would protect hospitals that have recently undertaken
capital projects.  A hospital with capital costs above the national
average would receive 90 percent of the reasonable costs of their
existing capital commitments.  For new projects, the hospital would be
paid a portion of the federal rate depending on the percentage of
total costs attributable to new capital projects.  The hospital would
receive the full federal rate instead if it is higher.
       A hospital with costs below the national average would be paid
under a formula that would combine both its actual costs and the
federal rate.  The first year, the formula would be based on 90
percent of the hospital's own specific rate for capital expenditures
and 10 percent of the federal rate.  Thereafter, the federal portion
of the rate would increase 10 percentage points each year.  A fair and
reasonable exceptions policy would also assist hospitals with special
needs.

       This proposal is designed to be "budget neutral."  Under the
present system, Medicare reimburses hospitals for 85 percent of
reasonable costs.  OBRA '90 raises reimbursement to 90 percent of
costs.  Under the proposed new system, total capital costs can not
exceed 90 percent of what would have been reimbursed under a
cost-based system.

       Capital costs are defined in the regulation as depreciation,
interest, taxes, insurance and similar expenses for plant and fixed
equipment, and for moveable equipment.


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