HCFA releases final capital rule - Health Care Financing Administration to implement prospective payment system

Healthcare Financial Management, Oct, 1991

The Health Care Financing Administration's (HCFA's) final rule implementing a prospective payment system (PPS) for Medicare inpatient capital costs was published in the Aug. 30 Federal Register, just making the statutory deadline. The final rule contains several industry-suggested changes resulting from negotiations with HCFA throughout the summer. For exaple, the FY92 Federal rate in the final rule is based on FY89 data rather than FY88 data, as the proposed rule suggested.

HCFA also revised its method of calculating the various adjustments made to the Federal rate. As a result, although the Federal rate now starts at $692.21 (above the $684.96 in the proposed rule), it ends up at $415.59 (11.9 percent below the $471.54 originally proposed).

In a major change, the final rule establishes differentiated payment floors, a protection strongly advocated by the hospital industry. The floors are set at 90 percent for sole community hospitals (SCHs), 80 percent for disproportionate share hospitals with more than 100 beds and a disproportionate share percentage greater than 20.2 percent, and 70 percent for all other hospitals. The payment floor is cumulative throughout the transition, so that a hospital can fall below the floor in a given year as long as it receives the minimum cumulatively.

HCFA considers the differentiated payment floors to be sufficient revision of its exceptions policy and rejected an industry-suggested case-by-case exceptions policy. Total exceptions payments will be kept to 10 percent of total PPS capital payments. Consequently, if the outlay in the first year is greater than expected, these floors could drop in later years of the transition.

The final rule also provides a special exception for hospitals that must make unexpected capital expenditures of more than $5 million. These facilities may receive 85 percent of the costs associated with the capital project while still receiving protection from the applicable payment floor:

The final rule also establishes an adjustment to the Federal rate for indirect medical education. The adjustment factor will increase approximately 2.8 percent for each 10 percent increase in a hospital's ratio of residents to average daily hospital inpatient census.

Another major change from HCFA's original proposal is the recognition under the hold harmless payment method of old capital projects that were "legally obligated by an enforceable contract" on or before Dec. 31, 1990, and are put in patient use by Oct. 1, 1994. Certain project delays caused by certificate of need processes or extraordinary circumstances may warrant a further extension of these deadlines.

Old capital was further redefined to include:

* Leases and rental payments within certain limits as long as the same asset remains in use;

* Taxes, insurance, and other capital costs, apportioned on the basis of the ratio of the gross asset values of old capital to total capital asset value; and

* Costs of the capital assets of a related organization when the assets are not on the hospital's premises.

Unfortunately, to compensate for these more liberal provisions, HCFA reduced the hold harmless payment to 85 percent of reasonable costs for most hospitals, subject to further reductions for budget neutrality. HCFA protected SHCs by raising their hold harmless payments to 100 percent of reasonable costs, subject to budget neutrality adjustment.

For years in which the payment system must be kept budget neutral--FY92 through FY95--the final rule bases the Federal rate updates on a moving two-year average of actual increases in capital costs two and three years before the payment year. The FY93 update will be based on a comparison of FY90 to FY88 costs.

The final rule also proposed a preliminary design of an update framework for FY96 and beyond. Two factors would be taken into consideration under the proposed framework: changes in the price of capital and appropriate changes in capital requirements on account of new technology and other factors.

Expanded highlights of the final PPS capital regulation are available from either HFMA office.