Retroactive reimbursement under HCFA's PPS for capital - Health Care Financing Administration's Prospective Payment System for capital reimbursement; reimbursement opportunities for hospitals

Healthcare Financial Management, Oct, 1993 by S. Ray Coffey

CAPITAL FORMATION AND MANAGEMENT

Most hospitals participating in a diagnosis related group-based prospective payment system (PPS) make the transition to HCFA's PPS for capital reimbursement much as they did to PPS for operating cost reimbursement. However, unlike the transition to a Federal rate of reimbursement for a hospital's operating cost, the initial years of the transition to a Federal rate for Medicare capital cost reimbursement may offer significant opportunities for retroactive reimbursement.

The early years of transition to HCFA's prospective payment system (PPS) for capital will offer the opportunity for retroactive capital cost reimbursement for many hospitals. This opportunity is reflected in the cost reporting forms, specifically Worksheet L. Unlike the cost report settlement for inpatient operating cost reimbursement where the settlement is the difference between diagnosis related group (DRG) computed payment and cash received, PPS for capital continues to use the cost report to calculate a cost settlement.

For PPS inpatient operating cost, the cost report simply summarizes the gross DRG computed payments and subtracts deductibles, coinsurance, and cash received. In theory, for hospitals not using periodic interim payment (PIP) systems, this calculation should result in an insignificant settlement, excluding any bad debts.

Under PPS for capital the cost report will:

* Cost settle old capital cost for hospitals reimbursed under the hold-harmless method;

* Determine if a hospital reimbursed under the PPS method can increase reimbursement through retroactive qualification and reimbursement under the hold-harmless method;

* Determine if hospitals reimbursed under the hold-harmless method could increase reimbursement if paid at 100 percent of the Federal rate;

* Determine if the applicable floor reimbursement is greater than the applicable transitional method; and

* Determine the ratio of new capital to total capital cost, which will be used to pay hold-harmless hospitals for new capital cost.

For hospitals to avail themselves of these opportunities they must notify their intermediary of any capital expenditures that qualified as old capital, make a timely request for redetermination, and maintain a separate accounting of old capital costs and new capital costs.

Obligated capital cost

Scheduling, documentation, and timely notification of the fiscal intermediary of obligated capital must be a priority in every hospital's strategy to optimize capital cost reimbursement. The deadline for requesting obligated capital to be classified as old capital has passed for most hospitals, since the request was due the later of October 1, 1992, or 90 calendar days after the hospital becomes subject to PPS for capital.

Intermediaries are required to issue their decisions on these requests by either the end of the hospital's first year under PPS for capital, or nine months from the date the hospital submits its complete application, whichever is later. Thus far, it appears intermediaries are issuing their decisions sooner than required.

In the event of a negative decision, the hospital may appeal by filing a request for a hearing with the Provider Reimbursement Review Board at the time the denial notification is received.

For those hospitals that experience a change of ownership subsequent to the capital base year, the change of ownership may have a major impact on capital reimbursement. Since capital cost does not change character--that is, capital cost does not change from old to new under a change of ownership--the new owner's old capital cost per discharge could increase (or decrease) significantly.

For example, assume an initial owner's $10 million building is being depreciated over a 40-year life, resulting in $250,000 annual depreciation. The building qualifies as old capital cost since it was placed into patient care prior to January 1, 1991. Further assume the building has been depreciated for 20 years and has a net book value of $5 million.

If the new owner paid $4 million for the building and, based on an appraisal, the remaining useful life is only 10 years, the annual depreciation will be $400,000. This is a 60 percent increase in old capital cost in comparison to the capital base year.

This increase in old capital cost would result in a significant year-end settlement for the new owner, particularly if the initial owner was a low-cost hospital paid under the PPS method and the intermediary continued to reimburse the new owner at the initial owner's rate.

In this example the original owner would have a cost report settlement on the $1 million loss and the new owner would have a significant settlement on the additional old capital cost.

If the initial owner was a low-cost hospital reimbursed under the PPS method, the new owner's first cost report should result in a redetermination which could result in cost reimbursement for old capital cost or an increase in the hospital-specific portion of the blended rate.

Redetermination