Capital payment plan discourages buying binge

March 13, 1991

A last-minute buying binge will not permit hospitals to escapethe proposed phase-out of the Medicare capital pass-through program(SCAN 2/13/91). Payments for old medical equipment will be protectedonly if the equipment was purchased prior to October

A last-minute buying binge will not permit hospitals to escapethe proposed phase-out of the Medicare capital pass-through program(SCAN 2/13/91). Payments for old medical equipment will be protectedonly if the equipment was purchased prior to October 1990.

The Health Care Financing Administration, which runs Medicare,released the details of a plan last month to fold capital reimbursementinto the prospective payment system. The proposed effective dateof Oct. 1 had been expected. The surprise was in the definitionof "old capital" that would remain covered under thecurrent 85% reimbursement rule.

Analysts had speculated that equipment installed, or purchasedbut not yet installed, just prior to the effective date wouldbe grandfathered into the current plan. It was thought that suchgrandfathering might prompt a surge in purchases aimed at beatingthe deadline for the new rules.

Anticipating such a buying spree, HCFA threw the industry acurve. To be considered old capital--and to have interest paymentsand depreciation covered under the current reimbursement systems--capitalpurchases must have been on the books by the end of the government'sfiscal year 1990, which ended Sept. 30. The effect of that strategicmove on the makers of high-tech, high-cost equipment is not certain.

"It's premature to say that capital equipment purchaseswill suffer, because it depends on the individual hospital andhow well the administrators are managing capital right now,"said Robin Wiley, a spokesperson for the diagnostic imaging andtherapy systems division of the National Electrical ManufacturersAssociation. "Some hospitals may actually increase theircapital expenditures because they are going to get more than underthe current system."

Rather than paying 85% of hospital capital costs, HCFA proposesto give hospitals an allowance that administrators can spend anyway they choose. HCFA analysts have used a mathematical modelto predict the effect of such a plan on hospitals and to forecastwhich hospitals would be winners and which would be losers.

Proprietary hospitals and others with high capital costs, thosewith a heavy teaching load and those in urban areas will be hitthe hardest. About 37% would lose more than $100 per case in fiscal1992; about 16% would gain more than $100 per case.

Hospitals with low capital costs, such as government hospitals,those in rural areas and urban hospitals in New England wherestate restrictions have slowed capital purchases, would likelydo better. About 52% of these hospitals are expected to gain morethan $100 per case; less than 2% are expected to lose more thanthat amount.

Such win/lose scenarios are still a long way off. A publiccomment period is now under way.

"HCFA has been very reasonable in their efforts to reachout to interested parties," Wiley said. "They've indicatedthat there's some flexibility in the definition of existing capital.I think it's clear that this is just step one in the process andthat HCFA is willing to negotiate on some of these points."

HCFA has not had direct contact with equipment vendors butwould be glad to discuss implications with those manufacturers,said director Gail Wilensky.

"We believe that, because this regulation is budget-neutral,it gives the incentive to be more prudent in purchases, ratherthan to shut them off," Wilensky said.

The target of the proposed rule change is the hospital industry,not manufacturers of medical equipment, Wiley said. Radiologistspurchasing equipment for use outside the hospital will not beaffected by the changes.

AN ANALYSIS RELEASED BY HCFA specifically cited MRI as exemplifyingthe high-cost equipment that hospitals have bought unnecessarilyin the past. The analysis implies that hospitals might be betterserved under the new plan by contracting for services, ostensiblythrough the use of mobile providers of high-cost equipment orequipment leasing.

That concerns NEMA because the regulation is vague about howleased equipment will be handled. Some hospitals consider leasedequipment as capital equipment, particularly if it is financedwith a lease-to-buy program, Wiley said.

"A major concern is that leased equipment does not appearto be covered under the definition of existing capital,"Wiley said. "However, further analysis is needed before NEMAstates a formal position on the regulation."

Concerns over the proposed regulations may prove to be mootin the face of what is shaping up as a frontal assault againstthe proposed regulation by the hospital industry. The AmericanHospital Association began criticizing the plan even before alldetails of it were known.

In an attempt to blunt objections from hospitals, HCFA hasdevised a number of formulas to ease the pain of transition fromthe current to the proposed system. These include groupings, specialexceptions and contingency equations that attempt to considerthe individual circumstances of hospitals. A 10-year transitionto the nationally calculated federal rate is also part of theproposed transition.

Nonetheless, hospitals are expected to fight the proposal.

"It's (posssible) that the hospital industry will be ableto kill it like they have other attempts to regulate hospitals,"Wiley said.