Summary: In response to a congressional request, GAO reported on the Department of Health and Human Services' (HHS) methods for including capital costs related to inpatient services in Medicare's Prospective Payment System or for modifying the current cost-reimbursement system, specifically: (1) the general principles involved with prospective payment of capital costs; (2) the effects of various types of proposals on hospitals; and (3) alternatives that might lessen any potential adverse effects.
GAO found that Medicare's capital cost-reimbursement method provides several incentives that could result in increased program costs. The cost-reimbursement method provides incentives to: (1) substitute capital for labor; (2) borrow to acquire assets, rather than using equity sources; (3) acquire new equipment, even though it may be only marginally needed; and (4) refinance debt. Cost reimbursement: (1) would increase incentives for efficiency, since it implies regulation; and (2) guarantees that Medicare will pay its share of each hospital's capital costs for providing care to beneficiaries, thus ensuring that beneficiaries have access to quality health care. However, GAO found that prospective payment of capital costs would reduce or eliminate the incentives under cost reimbursement, thereby decreasing Medicare costs. Advantages to the prospective program are that it would: (1) treat labor and capital equally; (2) encourage the most economical mix of debt and equity; and (3) encourage reductions of current hospital excess capacity and proper future sizing. Under the prospective payment program: (1) efficient hospitals would be rewarded more; (2) hospitals would receive less than their actual costs during the first years of an asset's useful life and more than their actual costs in later years; and (3) some hospitals would receive higher payments, depending on their average costs and occupancy rates. Since the system has not been tested, the long-term effect on hospitals' ability to raise capital improvement funds cannot be predicted.
