HCFA plan cuts capital funds - Health Care Financing Administration rules on Medicare payments

Health Industry Today, April, 1991 by Donald E.L. Johnson

HCFA plan cuts capital funds Manufacturers of high-technology capital equipment for hospitals will be hit hard when their best customers begin feeling the effects of reduced capital payments by Medicare, a prominent financial consultant to hospitals predicted in an interview last month.

Under a prospective capital payment plan from the Health Care Financing Administration for the Medicare program, "The dollars over time will be transferred from hospitals that have developed high tech expertise to those that tend not to practice that way," noted Kenneth Kaufman, president of the consulting firm Kaufman, Hall & Assoc., Northfield, Ill. "So if you are a maker of sophisticated radiology equipment, your traditional buyers who have sophisticated physicians are going to take a hit," he said.

If capital-intensive hospitals reduce capital expenditures, they will be most likely to purchase facilities and devices that serve high volumes of patients and patients insured by private payers rather than by Medicare. Devices that are used mostly to serve Medicare patients are likely to lose favor. About 35% of hospital expenditures are insured by private insurers and self-insured employers.

HCFA's administrator, Gail Wilensky, Ph.D., has developed a pretty good plan and she is doing a good job of selling it on Capitol Hill, Candace L. Littell, vice president, policy, research and evaluation, of the Health Industry Manufacturers Assn., said at the association's annual meeting in Tucson, Ariz., last month. It has "a reasonably good chance of implementation," she said. The American Hospital Assn., Chicago, is evaluating the plan and has no position on it. The biggest investors in capital equipment are the 300-plus hospitals, which account for 80% of the nation's inpatient health care. They have the highest Medicare severity of illness indexes and are investing in equipment needed to treat even more severely ill patients. They also are planning to invest in renovations to handle increased ambulatory care business paid for by Medicare and other payers. In some areas, they have the best profit margins and will be able to maintain their current spending levels. Hospitals that are likely to be hit hardest, trade sources predict, are those that have spent heavily on plant and equipment, have high Medicare and Medicaid patient loads and low profit margins or substantial losses.

Kaufman urged manufacturers to submit comments on the HCFA proposal and demand a more generous payment plan than the one HCFA plans to phase in over a 10-year period beginning Oct. 1. "Anyone who sits this out is making a giant mistake," Kaufman said. HCFA has no understanding of the impact reduced capital spending will have on technological innovation in the medical device industry, he added.

Hospitals won't be able to estimate the impact on their capital reimbursements until HCFA distributes promised work sheets and the American Hospital Assn. distributes software designed to help analyze the proposal, Kaufman said. To make matter bleaker, he predicted, other payers will attempt to impose similar capital reimbursement controls on hospitals to fight cost shifting to private payers.

What is clear is that capital-intensive hospitals will see dramatic reductions in their cash flows and be forced to cut operating expenses, Kaufman predicted. Hospitals already are cutting capital expenditures in the face of shrinking profit margins. If a hospital has reduced its labor cost and is fairly lean but not doing well, its only alternative will be to cut capital budgets.

"I think the capital-intensive hospitals will have to be much more selective on investments they make," Kaufman said. He also said that many hospitals will not be able to sell 30-year bonds to finance new equipment or the facilities needed to house that equipment. This is because HCFA's hold harmless clause is effective for only 10 years. Under the hold harmless clause, hospitals that have made major capital investments will have Medicare's share of the cost covered as in the past. For highly leveraged hospitals, it will be hard to invest in big ticket items, he predicted. In 1988, Medicare accounted for 27.5% of hospital revenues and the federal government accounted for 40.9%. Medicaid accounted for 9.5% of hospital revenues and state and local governments paid 13.4%, according to HCFA.

Under HCFA's proposal, HCFA will take a 15% discount on capital payments to hospitals in 1991. From 1992 to 1995, it will take a 10% discount, but this could be increased. Based on estimated 1992 average capital costs, hospitals will receive about $685 per case. AHA News quoted Wilensky as saying that 46% of high-cost hospitals would be paid an average of $1,125 per case in fiscal year 1992 for their capital costs. Unless they change their spending patterns, 37% of them would lose an average of $100 per case in fiscal 1992. HCFA estimates 35% of hospitals will gain more than $100 per case in 1992. These will be less capital-intensive hospitals--rural, government-owned and urban New England hospitals. About 18% of hospitals will lose more than $100 per case in 1992. These will be investor-owned, teaching and urban hospitals with more than 100 beds.