AHA meeting spotlights Medicare capital payments - American Hospital Association

Healthcare Financial Management, April, 1991 by Joseph A. Kuchler

AHA meeting spotlights Medicare capital payments

Changes pending in Medicare's method for paying hospitals' capital costs dominated discussions at the American Hospital Association's (AHA's) annual meeting Jan. 27-30 in Washington, D.C.

Under current law, capital costs will be incorporated into Medicare's prospective payment system (PPS) beginning Oct. 1, unless Congress extends the deadline. At the time of AHA's meeting, the Health Care Financing Administration (HCFA) was nearing completion of proposed rules to fold capital into PPS.

The four-day meeting provided an opportunity for HFMA members and hospital executives to discuss with their senators and representatives healthcare issues that will be considered by Congress and HCFA during the year. These issues included the Administration's proposed FY92 budget, challenges to tax-exempt status, and outpatient payment changes.

AHA's position on capital

A "legislative action packet" outlined AHA's position on capital and provided data and arguments for members to use in discussions with their legislators. AHA said it "opposes incorporation of capital costs into PPS and supports full-cost, pass-through payment for inpatient and outpatient capital expenses." This position was adopted in 1989 "on the premise that incorporation of capital into PPS is neither technically feasible in a fair and equitable manner nor necessary to create positive incentives to use capital resources efficiently," AHA said.

AHA urged participants to make four points in their meetings with members of Congress. They were: * Treatment of Medicare capital

costs - the expenses of investment

in patient care - is hospitals'

highest priority in 1991; * It is a "riverboat gamble" to incorporate

capital costs into PPS and

redistribute more than $6 billion

in Federal funds when only 35

percent of variation in patient

care investment costs across hospitals

can be explained by PPS

variables. The Prospective Payment

Assessment Commission

verifies this wide variability in

capital costs across hospitals and

agrees that full incorporation is

inappropriate; * Hospitals cannot take incorporation

seriously when the Administration

already has indicated it

will renege on the recent five-year

budget deal as it affects

Medicare hospital payments; and * After HCFA's incorporation proposal

is released, hospitals will

return to Capitol Hill with an assessment

of its effect on individual

hospitals and with a specific

request for help.

Arguments against incorporation of capital included: * All options suggested for incorporating

payments for Medicare

patient care investment costs into

PPs could restrict patient access

to high-quality care, disrupt hospital's

ability to meet existing obligations

and future capital needs,

restrict diffusion of new technology,

disrupt financial markets,

and cause hospital charges to

rise; * Incorporation proposals offered

to date would pit hospitals with

newly completed capital projects

against those planning future

projects, and hospitals that must

borrow heavily against those with

greater equity; and * Current payment incentives and

other factors are restraining hospital

investment in patient care.

Since 1984, Medicare capital costs

have been stable, averaging

slightly more than 9 percent of

operating costs. In 1989, approximately

8.5 percent of total hospital

costs were for capital expenses.

Although HFMA members believe the pass-through method currently in place is the best method for paying long-term obligations, they are taking a fresh look at the capital issue in anticipation of the publishing of HCFA's new proposed rules. It is HFMA's goal to provide its members with the tools to make informed decisions on the capital question.

While the outcome of members' examination of capital may be to recommend to HFMA to continue advocating for the current payment method, HFMA urges careful examination of the proposal and its effects on individual institutions before going forward with any efforts to block HCFA implementation.

FY92 Medicare budget

The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) cuts FY92 Medicare hospital payments by $2.5 billion. The Administration's FY92 budget is expected to call for an additional $2 billion in hospital payment cuts beyond those included in OBRA '90.

AHA urged its members to inform their legislators that "AHA opposes Medicare spending reductions in excess of that agreed to in last year's deficit reduction package." The average hospital Medicare operating margin for FY91 is projected to be a negative 8.9 percent. AHA noted that many consecutive years of below-market basket hospital payment increases have greatly reduced projected Medicare spending but have widened the gap between payment rate increases and market basket increases.

AHA linked its position on the Administration's budget to its opposition to folding capital costs into PPS. AHA said that". . . indications that the White House will seek Medicare spending reductions in excess of those agreed to in the five-year deficit reduction package have damaged the credibility of any Administration-proposed capital incorporation plan."