Complexity, caution mark start of PPS for capital - prospective payment system's effect on hospitals and healthcare facilities

Healthcare Financial Management, Nov, 1991 by Marion M. Torchia

In fact, HCFA already applied this principle in its use of the inpatient operating diagnosis related group weights for capital and in its establishing single capital-operating threshods for outlier payment. HCFA's adoption of a "total costs" payment simulation method confirms its intent to collapse the two payment systems into one. At the end of the 10-year transition, identifiable payment for capital may be a thing of the past.

Updating the rates

Although the relationships of the Federal rate and its adjustments must be proper, it is equally important that the level of the Federal and hospital-specific rate be established on a correct cost base and that adequate annual updates be provided. Controversy over HCFA's methods of deriving and updating the rates has been intense.

HCFA initially proposed that the Federal rate be based on FY88 Medicare capital costs andupdated to FY92 on the basis of the estimated increase in capital outlays during those years. Unfortunately, HCFA based its projections on problematic assumptions about trends in Medicare eligibility and utilization.

AHA and ProPAC expressed concern that HCFA set the rate too low in the proposed rule. In comments to HCFA and a subsequent letter to Congress, ProPAC urged HCFA to "develop more appropriate update factors..." HCFA ultimately raised its projection of FY92 capital cost per case somewhat--from $684.96 to $698.50.

But this sllight increase has little practical effect. As previously noted, the actual applicable Federal rate, reduced to account for the payment adjustments, is actually lower than the February proposal.

Nevertheless, the issues surrounding HCFA's rate setting remain "live." because rates must be updated each year, any systemic flaws will be cumulative. Between FY92 and FY95, HCFA must update the rates so that they are budget neutral--so that aggregate payments are neither more nor less than what would have been paid to hospitals under stipulations contained in the Omnibus Budget Reconciliation Act of 1990.

During these years, HCFA will update the rates based on two-year average of actual increase in capital costs three and four years in the past. The FY93 update will be based on a comparison of FY 90 data to FY88 data. HCFA originally proposed to update the rates based on increases in capital expenditures two years in the past. ProPAC and industry representatives expressed concern tha this method moght penalize hospitals for responding to HCFA's cost saving incentives. This change should satisfy those concerns.

From FY96 through the end of the transition the level of the update has not been determined. It presumably will be set by Congress based on HCFA and ProPAC recomendations. Hospital administrators are rightly concerned that what happens to capital payments after FY95 will be subject to the whims of a budget-conscious Congress.

A rational update framework, used each year in a public debate about the appropriate level of next year's payments, is an important defense against the budget cutters. ProPAC's annual review of PPS rates bases on "discretionary adjustment factors" has been important to the defense of inpatient paymetn levels. An analogous framework based on empirical data should be created for capital payments.