Changes in Medicare capital PPS rates and rules - prospective payment system

Healthcare Financial Management, Dec, 1992 by Paul Grimaldi

CAPITAL

Author Grimaldi discusses recent changes in Medicare's capital prospective payment system (PPS) regulations, published in the Federal Register, September 1992, as well as major changes in operating cost guidelines that affect capital payments. Policy interpretations that the Health Care Financing Administration (HCFA) has issued in the past year are reviewed, and changes made to the Medicare cost report in order to accommodate capital PPS are summarized schedule by schedule.

The first of October marked the beginning of the second year of Medicare's capital prospective payment system (PPS). The second year is distinguished from the first by slightly higher capital payment rates, revised and expanded regulations, specific (and evolving) procedures that fiscal intermediaries will now use to determine or redetermine a hospital's base year capital costs, and a new Medicare cost report. Moreover, in the second year, reimbursement transition blend shifts from 10 percent Federal and 90 percent hospital-specific to 20 percent Federal and 80 percent hospital-specific.

Rates and payments

Update factor. For FY93, the capital prospective payment rates are based on a two-year moving average of the adjusted actual increases in Medicare inpatient capital costs per discharge for FY89 and FY90. The actual average annual increase, which is based on information from available as-submitted and settled-cost reports, is 11.59 percent. This increase has been adjusted downward by 2.31 percent for additional capital spending attributable to case-mix related increases and by 2.83 percent for expected net adjustments to as-submitted and settled-cost reports. The update factor for the Federal capital rate and the hospital-specific rate is, therefore, 6.07 percent.

Standard rate. Given the update factor of 6.07 percent, it is surprising that the standard Federal capital rate for FY93 is $417.29, a mere 0.41 percent higher than the $415.59 rate for FY92. The difference can be attributed to the budget neutrality adjustment that will affect the Federal capital rate in FY96. Current law requires that Federal capital payments must equal 90 percent of the amount that would have been reimbursed on a reasonable cost basis. Use of the $415.59 figure caused FY92 capital payments to equal about 92.9 percent of reasonable costs. The Federal rate for FY93, therefore, had to be lower than it would have been otherwise.

Exhibit 1 compares the adjustment factors used to calculate the standard Federal capital rate for FY92 and FY93. Each factor for FY93 is lower than the corresponding factor for FY92, particularly the nearly 5 percent budget neutrality reduction. The factor differentials explain how an update factor of 6.07 percent results in an increase of only 0.41 percent in the standard Federal capital rate.

The calculation in the exhibit includes a factor (geographic adjustment factor/diagnosis-related group--GAF/DRG) to offset changes in capital payments that otherwise would occur due to DRG recalibration and reclassification and geographic reclassification. This adjustment was unnecessary in the first capital PPS year.

Geographic reclassification. As Exhibit 2 details, the final rule significantly tightens the criteria that must be met for a hospital to qualify for geographic reclassification and, therefore, to receive higher Medicare capital (and operating) payments. The new criteria will become effective Oct. 1, 1993 (not 1992).

A coalition of hospitals, however, has filed a lawsuit in District Court for the Northern District of Mississippi challenging the new "108 percent" rule for wage index reclassifications. Pending the court's decision, Dr. Louis Sullivan, Secretary of Health and Human Services, agreed to allow hospitals to file applications on or before Oct. 1, 1992, under the old and new percentage rules. The Medicare Group Classification Review Board (MGCRB) has agreed not to apply the 108 percent rule to deny applications before Dec. 15, 1992. Sullivan has agreed to allow hospitals to appeal MGCRB denials based on the 108 percent rule. A final decision on such appeals will not be made before Jan. 31, 1993.

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Many hospitals' capital payments also will be affected in FY94 when wage indexes are updated based on information that the Health Care Financing Administration (HCFA) is currently collecting. In addition, new definitions and boundaries of metropolitan statistical areas (MSAs) will apply. Many changes may be significant, including those that affect the formation, merging, or elimination of certain areas, as well as inter-MSA shifting of certain counties.

Total payments

Total capital payments may increase faster or slower than the update factor for reasons not considered when the update factor is derived, reasons such as a change in the transition blend or a case-mix increase. HCFA estimates that total capital payments will rise 6.2 percent in FY93. The increase would have been an estimated 9.6 percent if capital payments in FY92 had been at the budget-neutral 90 percent level rather than the actual 92.9 percent level.