Opportunities under capital PPS - prospective payment system

Healthcare Financial Management, Jan, 1993 by Ronald N. Sutter

Most hospitals are now receiving Medicare payments for capital costs under a prospective payment system (PPS). Hospitals that study this system carefully may discover significant opportunities to increase their Medicare payments during the course of the ten-year transition period established by the government.

Payment methodologies. Capital PPS has two different payment methodologies. One is known as the hold-harmless methodology. Most hold-harmless hospitals will be reimbursed 85 percent of the "reasonable cost" of their "old capital" plus a percentage of a national rate for their "new capital." "Old capital" generally refers to capital that was either in place or "obligated" by Dec. 31, 1990. The other methodology is known as the fully prospective payment methodology. Payment for fully prospective hospitals will be based partly on their "hospital-specific rate," defined as their allowable capital costs per discharge for a base year.

Hospitals with a high hospital-specific rate will be paid under the hold-harmless methodology, while those with a low hospital-specific rate will be paid under the fully prospective methodology. For the first capital PPS year, most hospitals will be paid under the fully prospective methodology.

Hospital-specific rate redeterminations. Fully prospective hospitals should carefully consider throughout the transition period the possibility of requesting a redetermination of their hospital-specific rates. A successful redetermination will at the very least increase a hospital's payment rate under the fully prospective methodology. It may even convert the hospital to hold-harmless status. A fully prospective hospital may become a hold-harmless hospital during the course of the transition period; if it does, it will remain a hold-harmless hospital for the remainder of the period.

A hospital's normal base year under capital PPS will be its first cost reporting year ending on or before Dec. 31, 1990. However, a fully prospective hospital may request a redetermination of its hospital-specific rate using a later cost reporting year. This means, in effect, that the hospital will have several base years from which to choose. For instance, a hospital with a June 30 year-end may choose any of four years (its 1990, 1991, 1992, or 1993 cost reporting year) for its first capital PPS year (its 1993 cost reporting year).

Relevant factors. A redetermination of the hospital-specific rate for a subsequent year will be based on a hospital's allowable "old capital costs" per discharge for that year. A hospital that had significant "obligated" capital as of Dec. 31, 1990, will almost certainly find that its hospital-specific rate for the year in which this obligated capital is placed in operation is higher than its hospital-specific rate for its normal base year. However, even hospitals with little or no obligated capital may find that a redetermination is beneficial. Fully prospective hospitals should consider the following possibilities:

* Was a significant amount of capital put into operation near the end of the normal base year? If so, the hospital-specific rate is likely to be higher in the following year when the full annual effect of the related capital expenses will be recognized.

* Was a significant amount of capital put into operation after the normal base year, but before Jan. 1, 1991? If so, the hospital-specific rate is likely to be highest in the second year following the normal base year.

* Was the funded depreciation account spent down after the year? If so, allowable interest expense related to old capital may be significantly higher in a later year than in the base year.

* Are portions of a building that were nonreimbursable in the base year now being used for patient-care purposes? As long as part of the building was used for patient-care on Dec. 31, 1990, the government regards other portions subsequently converted to patient-care use as old capital.

* Has the number of Medicare discharges declined since the base year? The government does not allow a redetermination based solely on a decline in the number of Medicare discharges. However, a slight increase in old capital costs, coupled with a decline in Medicare discharges, may result in a very favorable redetermination.

Procedures. Redeterminations are not automatic. Hospitals must file requests for redeterminations. Hospitals that wish to do so should carefully review and adhere to the established deadlines and formats. They should also keep careful records identifying "old capital" and segregating "old capital" from "new capital."

A hospital cannot be harmed by a redetermination request. If the Medicare intermediary determines that the hospital-specific rate for the later year is less than for the normal base year, it will simply deny the redetermination request.

Ronald N. Sutter, JD, is a partner at Powers, Pyles & Sutter, a Washington, D.C., law firm specializing in healthcare matters. "Medicare/Medicaid Litigation" appears quarterly in HEALTHCARE FINANCIAL MANAGEMENT.