HCFA finalizes Medicare capital payment rules

September 11, 1991

The Health Care Financing Administration has finally closed thebook on Medicare capital reimbursement reform. Final regulationswere published in the Aug. 31 Federal Register, concluding a seven-yearbattle over how to roll federal payments for new

The Health Care Financing Administration has finally closed thebook on Medicare capital reimbursement reform. Final regulationswere published in the Aug. 31 Federal Register, concluding a seven-yearbattle over how to roll federal payments for new equipment andbuildings into the Medicare prospective payment system.

The capital payment system will be phased in over a 10-yearperiod beginning Oct. 1. About $7 billion a year in federal spendingwill be affected.

Hospitals will be reimbursed according to a complex formulathat includes a payment category for facilities historically abovethe national average for capital spending and a second categoryfor facilities that rank below average.

High-capital-cost hospitals will be paid 85% of the adjustedcapital costs for assets purchased as of Dec. 31, 1990 and inuse before Oct. 31, 1994.

Equipment and buildings that these "hold-harmless"facilities added after the cut-off date will be paid accordingto a prospective payment formula. It blends the hospital-specificrate with a federal rate for reimbursement.

The fully prospective payment method applies to all plant andequipment at historically lower capital-cost facilities. The newapproach favors small hospitals, rural hospitals, urban hospitalslocated in states with stringent capital acquisition laws, andgovernment-owned facilities. It works against for-profit hospitals,teaching hospitals and large urban facilities.

The new system replaces cost reimbursement methods HCFA hastried to discard since implementing PPS in 1984. HCFA chief Dr.Gail Wilensky ranked the reforms as her foremost priority. Underthe old system, the federal government paid 85% of a hospital'scapital acquisition costs, adjusted by Medicare's share of utilization.

Bush administration officials blamed the old payment formulafor runaway health-care inflation. "Under the old system,the more a hospital spent, the more Medicare paid," Wilenskysaid. "With this change, Medicare will improve its abilityto provide incentives for planning and wise investment so as toensure a modern, well-equipped and efficient hospital industry."

The American Hospital Association does not share that view.Although the AHA gained concessions, association officials werenot happy with the new law.

"The current system isn't `broke,' so we think they shouldn'tbe tinkering with it," said Greg Hodur, AHA senior associatedirector of regulatory affairs.

The final regulations include a floor on minimum reimbursementsought by the AHA. Medicare will pay no less than 70% of a hospital'sactual capital costs for Medicare's share of equipment use. An80% floor applies to urban hospitals having more than 100 bedsand hospitals that serve a disproportionate share of poor anduninsured patients. A 90% foundation was set for rural hospitalsand sole community providers.

There was something for everybody in revisions written intothe final regulations.

"While HCFA hasn't satisfied anyone 100%, it attemptedto address the needs the hospital industry and our group expressed,"said Candace Littell, vice-president for payment policy with theHealth Industry Manufacturers Association.

As expected, HCFA added reimbursement covering leased equipment.It rolled back the cutoff date differentiating old and new capitalfor hold-harmless facilities. Under the proposed rules, old capitalhad to be in service before October 1990. The final regulationsexpands the definition to include commitments to acquire new assetssigned by Dec. 31, 1990 and in use by Oct. 31, 1994.

The Wall Street Journal stirred a minor sensation when it erroneouslyreported last week that the cutoff date was rolled back to theend of this year. If true, the change would have meant a year-endequipment sales surge to beat the deadline.

HCFA fielded its own surge of inquiries from hospital administratorsseeking verification. Toshiba Medical Systems received severalcalls from prospective customers who wondered whether the informationwas correct. In both cases, they went away disappointed.

HCFA also changed the payment formula for old capital to payfor the concessions. According to the proposed rules, reimbursementwould have risen to 90% of capital costs on Oct. 1. The finalregulations stipulate that the formula remains at the current85% level of reimbursement for the old capital building and equipmentcategory.

The federal capital base pay rate for hospitals that qualifyfor the fully prospective payment plan will be $415.59 in fiscal1992. That is 11.9% lower than the rate published in the proposedrule. The base rate is factored with the hospital-specific rate,case mix and local cost variations to determine how much moneyper patient Medicare will pay.