Capital PPS transition period affects timing differences - prospective payment system

Healthcare Financial Management, Jan, 1992 by Martha Garner, Woodrin Grossman

Because the $100,000 annual amortization of the defeasance loss originated in a time period before Dec. 31, 1991, it is considered "old capital." As a result, Sample Hospital can expect to receive 85 percent of the $70,000 additional reimbursement in each of the remaining years, or a total of $238,000 (Exhibit 5). This $238,000 is the portion of the timing difference expected to reverse in future years.

The following entry would be recorded on the hospital's books at Sept. 30, 1991, to write off the portion of the timing difference not expected to reverse because of the new regulations:

Extraordinary loss 42,000

Deferred Medicare

debit 42,000

To write off the portion of timing difference not expected to be realized in future years due to new payment method $280,000-$238,000).

FEDERAL RATE. If Sample Hospital elects payment at 100 percent of the Federal rate, none of its future capital payments will be based on expenses included in the computation of its hospital-specific base rate. As a result, none of the $280,000 timing difference remaining at Sept. 30, 1991, ever will be considered to reverse.

Consequently, to write off the remaining timing difference, the hospital would record the following entry on its books at Sept. 30, 1991:

Extraordinary loss $280,000

Deferred Medicare

debit $280,000

To write off the remainder of timing difference not expected to be realized in future years due to new payment method.

As Sample Hospital's old capital base declines, its cost-based Medicare payments for old capital also will decline. At some point, payment based on 100 percent of the Federal rate probably will become more advantageous than the hold-harmless payment alternative. The regulations allow a provider being paid under the hold-harmless method to switch to the 100 percent Federal method at the point in time that payment under the Federal rate becomes more advantageous than payment under the hold-harmless rate.

If a hospital experiences such a flip, no reversal of the timing difference can be considered to occur after the point at which the provider switches to fully prospective payment. As a result, any timing difference remaining at the point of the flip should be written off.

Minimum payment levels

HCFA has established a 1992 minimum payment level for hospitals. This is a fixed percentage of the hospital's capital related costs.

For sole community hospitals (SCHs), the percentage is 90 percent; for urban disproportionate share hospitals (DSHs), the percentage is 80 percent; for all other hospitals, the percentage is 70 percent.

A hospital is entitled to an additional payment if its capital payments for the cost reporting periods otherwise would be less than the applicable minimum payment level. In other words, for 1992, a hospital is guaranteed, in the aggregate, at least 70 percent of its actual capital costs. HCFA states that it intends to set a minimum payment level in subsequent years as well, but that the figures published for FY92 may change according to HCFA's experience in 1992.