Capital pass-through faces termination as Medicare flat-payment system nears

February 13, 1991

A government decision to replace the Medicare capital pass-throughprogram with a system of flat annual payments could be the mostsignificant change in how Medicare makes payments to hospitalssince the advent of diagnosis-related groups eight years

A government decision to replace the Medicare capital pass-throughprogram with a system of flat annual payments could be the mostsignificant change in how Medicare makes payments to hospitalssince the advent of diagnosis-related groups eight years ago.Flat Medicare payments for capital equipment purchases could shiftor reduce hospital expenditures and soften sales of medical imagingsystems.

These regulations, which have yet to be officially releasedby the Health Care Financing Administration, are at least sixmonths from Congressional approval. The current pass-through systemis due to be phased out Oct. 1, and HCFA is responsible for comingup with a replacement.

The first indication that the replacement system for the pass-throughprogram is nearing completion was a letter to Congress from GailWilensky, HCFA administrator. The January letter was followedby briefings for key members of Congress and their staffs. SCANhas obtained the letter and an accompanying briefing paper onthe proposed regulations.

These documents make it clear that if the proposed flat-feesystem replaces the pass-through program, hospital budgeting willundergo a fundamental change and the medical imaging industrycould be seriously affected.

"The hospital chief financial officer will say to theradiology department, `I have to budget prospectively, so tellme whether we need that (piece of equipment) more than we needa new baby wing,'" said William K. Vaughan, administrativeassistant to Rep. Fortney "Pete" Stark (D-CA).

As chairman of the House subcommittee that handles the Medicareprogram and a vocal critic of Medicare spending, Stark was amongthe first in Congress to be briefed on the proposed regulations.The new plan, if implemented, will make hospitals "more disciplined,"said Vaughan, who attended the briefing. "It will force choices.It won't be each department of the hospital saying it wants thelatest gizmo because it's the best way to compete with St. Joseph'sacross town."

Hospitals currently pass through to the government their capitalexpenditures for new construction or medical equipment purchases,such as magnetic resonance imaging scanners or cardiac catheterizationlabs. Medicare reimburses up to 85% of the costs, depending onthe percentage of patients at the hospital who are in the Medicareprogram. That would end under the proposed system. Instead, hospitalswould receive annual capital purchase allowances and would befree to spend--or save--the money as they choose.

"We know that some hospitals will oppose our regulation.Hospitals have grown accustomed to cost-based reimbursement forcapital and some fear that a new system might upset their financialsituations," Wilensky wrote in her letter to Congress.

Wilensky urged members of Congress to reserve judgment on theproposed rule until they have considered all sides of the issue.The HCFA administrator insisted that the agency had dealt fairlywith hospitals' concerns in developing the new regulations. HCFAadministers the Medicare program.

Details of the plan are sketchy, since the actual text of theregulations has not been released. Agency sources predict thefirst draft will be available for public comment in mid-February.An analysis of the Capitol Hill briefing paper indicates, however,that the regulations are intended to be revenue-neutral. The sameor more money will be available to hospitals in the next yearas was dispensed through claims filed this year. The system willalso include a lengthy transition period to phase in the new paymentprovisions, thereby protecting hospitals that have made priorcapital commitments.

"We have heard that the regulation is likely to grandfatherexisting capital at the current pass-through rate of 85% witha 10-year transition," said Robin Wiley, a spokesperson forthe National Electrical Manufacturers Association. "The keyissues are how existing capital (investment) will be defined andwhen the 10-year transition period will begin," she said.

Hospital administrators have feared that a flat-fee systemwould not cover debt incurred by recent purchases or commitments.The briefing paper, however, includes the following statements:

  • old capital commitments will not put hospitals in jeopardy;

  • hospitals that have low capital obligations but expecthigh expenditures for renovations or updating will be protected;and

  • "fair and reasonable" exceptions will bemade to assist hospitals in need of special consideration.

Capital pass-through is one of the few areas of significantMedicare spending that the government continues to reimburse ona cost basis. It has served as an incentive for hospitals to purchasestate-of-the-art equipment; taking it away could precipitate adrop in demand for that equipment.