Recently, the United States Department of Health and Human Services Office of Inspector General (HHS OIG) released a report that found Medicare paid new hospitals three times more for their capital costs than they would have been paid under the Inpatient Prospective Payment System (IPPS).
Under the Medicare program, established hospitals must be paid for capital costs through the IPPS while new hospitals are allowed to be exempt from the IPPS payment methodology for those capital costs. If a new hospital opts for that exemption, they choose to be paid for the costs on a cost reimbursement basis for the first two y ears of operation. HHS OIG sought to understand whether there was a cost savings to Medicare if the IPPS exemption were to be removed for new hospitals, thereby forcing their capital payments to be made under the IPPS.
The Audit Findings
In conducting the audit, HHS OIG found Medicare program payments totaling $423.2 million for capital costs paid to 112 new hospitals under the reasonable cost methodology for fiscal years 2012 through 2012. The agency then calculated what the IPPS payments to new hospitals would have been by using the Provider Statistical and Reimbursement Reports, cost report data from the Centers for Medicare and Medicaid Services’ (CMS’) Healthcare Cost Report Information System, and inpatient claim data. HHS OIG also compared actual capital costs and utilization reported by 35 of those 112 hospitals.
For the 112 hospitals HHS OIG reviewed, Medicare paid a total of $283,021,741 million more for capital costs through the reasonable cost methodology than it would have paid if the hospitals had been paid through IPPS. According to HHS OIG, the IPPS exemption resulted in an average of $1,269,156 million more per cost report (roughly three times more) than if the hospitals had been paid for their capital costs under the IPPS.
HHS OIG also compared the data of 25 of the hospitals from the first two years of operation of the new hospitals with the next two years of operation (the third and fourth years of operation). For those 35 hospitals, average Medicare-related capital costs were only 3% higher in the first two years of operation and Medicare utilization was 15% lower. Most of the new hospitals were also part of a larger healthcare chain that may have been able to provide reserve capital to the newer hospitals, if needed.
HHS OIG Recommendations
In conclusion, HHS OIG recommended CMS review the report and potentially change its regulations if it determines that a separate payment methodology for capital costs at new hospitals is no longer warranted. HHS OIG suggests that CMS potentially change the regulations to require new hospitals to have their Medicare capital costs paid through the IPPS with an option for payment adjustments or supplemental payments, if necessary.
HHS OIG noted that CMS did agree with the recommendation and would be further reviewing the audit and its findings to determine whether any modifications should be proposed via Federal rulemaking regarding the capital payment methodology for new hospitals.