Capital PPS 10-year transition up and running - Medicare prospective payment system - includes related article

Healthcare Financial Management, April, 1992 by Marion M. Torchia

CAPITAL

Hospital financial officers must prepare themselves for the long stretch, as the 10-year transition to Medicare's new capital prospective payment system (PPS) gets underway. Documentation related to capital assets and their financing must be assembled and preserved throughout the transition period; audit procedures must be understood; crucial deadlines must be met; and calculations by Medicare fiscal intermediaries (FIs) must be verified by reference to a hospital's records. Most important, lines of communication with FIs must be established and maintained because rates set this year will determine a substantial portion of Medicare payment for the next decade.

As of Oct. 1, 1991, many hospital financial officers have found themselves reluctant participants in an obstacle course of confusing regulations, lengthy rate calculations, and the 10-year transition period that precedes full implementation of Medicare's new payment system.

On that date, Medicare introduced a radically changed method of paying for the capital component of hospital inpatient care. Instead of "reasonable cost" reimbursement, hospitals now will receive a separately identifiable, per-case, Federal payment adjusted for factors similar but not identical to those of the "operating cost" prospective payment system (PPS) and weighted by the "operating" diagnosis-related groups (DRGs).

During the 10-year transition period, hospitals will be divided into two groups according to whether they are deemed "high-cost" or "low-cost" facilities when compared with the Federal average. High-cost hospitals will be paid according to a "hold-harmless" system designed to provide a measure of protection for their existing capital commitments. The hold-harmless system consists of discounted cost-based payments for capital already on the books or demonstrably obligated. Low-cost hospitals will be paid immediately according to a "fully prospective" method, but their payments will be based on a portion of their own costs that will decline gradually over the 10-year transition period.(a)

To begin the transition to the new payment system, the Health Care Financing Administration (HCFA) must quickly accomplish a complex set of tasks. Hospitals, meanwhile, face imminent deadlines for complying with HCFA's request for information needed to set rates and make payments. Fortunately, lines of communication between HCFA and the industry are open.

HCFA has decided against a transition into the transition. Instead, each hospital immediately will be paid according to either the hold-harmless method or the fully prospective payment system, with no purely cost-based payments to tide it over. But because each hospital becomes subject to the new system on its first cost report starting date in Federal FY92, some hospitals now have almost a half-year's experience, while others have received only preliminary information from their fiscal intermediaries (FIs).

Advice to the players

HCFA lost no time in instructing Fls. Three sets of instructions were provided to explain the procedures for setting estimated or "interim" rates. The first two sets of instructions were issued in May and July 1991, before the final capital regulation was published at the end of August. The third, published in September, revised procedures in the light of changes made in the final regulation. FIs are responsible for relaying information in these instructions to hospitals.

At the end of December 1991, another set of instructions describing the scope and conduct of a special audit of capital base-year costs was sent to FIs and simultaneously shared with the industry. Two more publications will complete the set: a revision of Medicare's Provider Reimbursement Manual to (incorporate the new capital payment regulations) and revised cost report schedules with instructions. The industry will have an opportunity to comment on these revisions.

HCFA also plans to distribute periodic question and answer compilations. Again, it will share these responses with hospitals as well as FIs.

HCFA'S unprecedented openness about the new capital payment system is beneficial for the healthcare industry because it will help hospital staff understand and verify their payments, prepare for audits, and cooperate with FIs in the process. Smooth implementation is in all parties' best interests.

On the agenda

HCFA has its work cut out for it in FY92: Virtually every one of the approximately 5,500 PPS hospitals claims capital costs. HCFA or its Fls must complete the following tasks: * 1. Determine an interim hospital-specific rate (HSR) for each hospital; * 2. Compare each HSR to the Federal rate to determine whether the hospital's payment method will be fully prospective or hold-harmless; * 3. Determine the hospital's interim capital payment amount; * 4. Create a new payment mechanism and ensure that hospitals receive capital payments; * 5. Audit base-year costs so that a final HSR can be determined for each hospital; * 6. Identify and verify obligated capital; * 7. Revise the Medicare cost report; and * 8. Audit payment-year costs to make final cost settlements.