Capital update factor: a new era approaches - Capital

Healthcare Financial Management, Feb, 1993 by Paul L. Grimaldi

Furthermore, HCFA believes that Medicare capital payment rates should maintain hospitals' capital stock at the level that would prevail in a competitive market. In such an environment, the number of excess beds (as suggested by a national occupancy rate of 66 percent for community hospitals in 1991) would likely be lower than today's level, and expensive, high-technology equipment might be regionalized or operated through community networks.(c)

Future outlook

Important changes will be made in HCFA's preliminary capital update model. The number of cost centers will probably grow, depending primarily on the availability of appropriate price proxies. Separate cost centers for leases and rental expenses may be introduced to sidestep challenges to the assumption that their unit costs rise at the same rate as do those for owner-operated assets.

One potential source of updated cost weights is Schedule G of the Medicare cost report (Form 2552). Beginning with the cost report for 1992, hospitals must supply HCFA with separate cost information about old and new capital assets, including land, building, leasehold improvements, fixed equipment, automobiles and trucks, major movable equipment, and minor equipment. Information about other capital-related expenses and debt levels could be extracted from other Medicare schedules.

The new capital update method is scheduled for implementation on Oct. 1, 1995. The Prospective Payment Assessment Commission (ProPac) has recommended implementation by Oct. 1, 1993.(d) The hospital industry is likely to favor a later implementation date, partly to have more time to analyze the issues and partly to postpone apparently impending cutbacks in capital payments.

TABULAR DATA OMITTED

a. The actual average annual increase is 11.5 percent based on information from available as submitted and settled cost reports. This increase was adjusted downward by 2.31 percent for increased case-mix and 2.83 percent for expected net adjustments to as submitted and settled cost reports.

b. Federal Register, September 1, 1992, p. 40021.

c. Hospital Statistics, American Hospital Association.

d. Report and Recommendations to the Congress, Prospective Payment Assessment Commission, March 1, 1992, p. 41.

Paul L. Grimaldi, PhD, is vice president, Applied Reimbursement Strategies, St. Anthony's Consulting, Alexandria, Va.