Taking a deep breath over capital payments - incorporating Medicare payment for capital investments into the prospective payment system - includes related articles on hospitals gearing up for changes - Cover Story

Healthcare Financial Management, April, 1991 by Wendy W. Herr

Taking a deep breath over capital payments

Medicare payment for capital expenses - the Federal health policy issue of 1991 - has sent policy makers scrambling for answers to complex questions about how hospitals make decisions about new buildings, improvements, and major moveable equipment purchases.

In the confusion to implement a new capital payment structure by the Congressionally mandated Oct. 1 deadline, many healthcare groups fear the Federal government may opt for changes based on simplistic generalizations about hospital capital decision making. Industry groups say that an understanding of factors involved in capital decisions may forestall policy changes that could further damage hospitals' ability to acquire capital and continue serving their communities. For this reason, they are urging their members to speak out on the effects of a new capital payment structure on their facilities.

Under a proposal released by the Health Care Financing Administration (HCFA) in February:

* Capital would be folded into the

Medicare prospective payment

system (PPS) over a 10-year period; * Hospitals' previous capital commitments

would be protected

through a "grandfathering"

mechanism; * Facilities with capital costs below

the national average would receive

greater payments; and * Certain rural and inner-city hospitals - those

treating greater proportions

of poor and elderly persons

usually covered under Federal

programs - would be exempted.

The proposal would replace the current "pass-through" method under which hospitals are paid on a cost basis, minus a fixed percentage set by law. Once the rules are published in final form, healthcare groups will have 60 days to comment on the proposal. The changes then become effective on Oct. 1, unless Congress takes action on an alternate plan.

Seven-year struggle

At the outset of PPS in 1983, healthcare groups argued that hospital capital costs were too different from operating costs to be lumped under a single system of diagnosis related groups (DRGs). Hospitals' building cycles were seen as too diverse, along with their degrees of indebtedness and their sources of financing. And once committed to a capital project, healthcare groups argued, hospitals could not free themselves of their financial obligations. Even so, government cost controllers always saw pass-through as a temporary measure and aggressively sought its repeal over the years.

The healthcare industry has been just as assertive in defending the pass-through mechanism. Lobbying efforts during an intensified debate in 1986 led to Congressional action blocking HCFA's plan to incorporate capital into PPS in FY87. Since then, the Federal budget deficit has cut into capital payments, and hospitals have had to accept payments short of costs.

With the release of HCFA's proposed rules earlier this year, the American Hospital Association (AHA), HFMA, and other healthcare groups began assessing the effect of the proposed rules on actual hospital situations. Negatively affected hospitals launched an immediate campaign to block HCFA's implementation of the new rules. The activity of individual hospitals continued healthcare industry efforts begun in early 1990 to explain to HCFA how various options for folding capital into PPS would negatively affect an industry already facing constraints in obtaining capital needed to replace or upgrade obsolete physical plants and equipment. The arguments were repeated in comments on HCFA's proposal and in lobbying efforts on Capitol Hill.

At the same time, Congress has grown weary of the issue and appears ready to lay it to rest - rather than merely put off the rule changes for yet another year. If this sentiment continues throughout the current session of Congress, it will mean that action on changing Medicare's payment structure for capital will occur by the end of the year. The prospect of hasty Congressional action has made healthcare executives especially cautious in reaching conclusions on future capital obligations.

The Prospective Payment Assessment Commission (ProPAC) also has been unable to develop a consensus on the issue. At their December meeting, commissioners attempted to set priorities for current payment options but delayed formal action for a later meeting. The commission delayed action again in January 1991, stating that it wanted to react to the formal HCFA proposal. This postponement sent a message that ProPAC is reluctant to take the lead in the year's most important health policy issue.

On the other hand, HCFA Administrator Gail R. Wilensky, PhD, has been a strong advocate for folding capital into PPS. Soon after her arrival at HCFA in 1990, Wilensky announced her commitment to fold capital into PPS by the 1991 statutory deadline. In January, she reaffirmed her position at the AHA annual meeting in Washington, calling hospital capital "a virtual arms race."

Observers say that Wilensky's public stance on capital makes it unlikely that the Bush Administration will retreat from full incorporation of costs.