Altman sees industry unwilling to control costs - interview with Stuart H. Altman of the Prospective Payment Assessment Commission - interview

Healthcare Financial Management, April, 1991 by Richard L. Clarke

As it has turned out, two things have happened. One is, it is fair to say that putting together a capital incorporation into PPS is complicated. It's only complicated because we want this sense of equity. . . . I don't think it's impossible, but surely you can't just do it by the snap of your fingers. The second thing that's happened is that what started out as a discounting policy for purely budgetary reasons (5 percent discount on capital, 10 percent discount, 15 percent discount) is merging into back-door public policy. I call it a coinsurance on capital, similar to what we say to individuals: "You have to pay 20 percent of the value of the service because you should feel that it's not free." To say to a hospital: "We're not going to pay you 100 cents on the dollar. We're going to pay you 85 or even 80 cents on the dollar. And the only way you should invest in that capital is if you think you can make it up by generating the extra funds from the operating budget, which means you're going to have to be efficient in the use of that capital to the operating budget."

It actually is a policy, but the people on [Capitol] Hill laugh because they didn't develop it as a policy. I'm persuaded that it's an interesting option to look at, one that I never thought about before. It seems to be working, if you define "working" as capital spending going up at the same rate as the operating budget. In the last three years, the ratio of capital to operating has held about constant. Maybe that's a policy worth looking at. On the other hand, I still believe there is value in treating capital and labor in the same manner. So that's why I've backed myself into thinking seriously about an intermediate position of just folding movable equipment into DRG payment, because such expenses are much closer to operating expenses.

From a theoretical basis, I don't have any problem with folding capital into the PPS system. It's just operationally so complicated that maybe we can develop another system that does the same thing. How others on PROPAC feel, I think it runs the gamut. There are some who are just philosophically opposed to folding it in, some who are pragmatic like I am, and a few who, I think, would fold it in today.

CLARKE: You indicated that one of the reasons why capital ought to be incorporated into PPS is because capital and labor ought to be basically in the same payment mechanism. Shouldn't there be incentives to increase capital to improve productivity?

ALTMAN: Yes, but it ought to be because productivity generates lower costs, and hospitals can win by receiving payments that exceed their costs. One of things we've learned from the tax system is that when the Congress introduced those very lucrative incentives for capital formation in the early 1980s, it generated too much capital. It's a given.

It's a very dangerous thing to try to fine-tune a system like this because we don't know how much we're turning the sleuth. . . . And I'm very leery about overworking the system. I think PPS does provide incentive for the appropriate use of capital, but I don't want to see it more of an incentive for using capital efficiency than labor efficiency.