Final Medicare Rules Better Than Proposal, But Still a Hardship, Officials Say

WASHINGTON -- The final version of regulations changing the way hospitals are reimbursed for Medicare capital costs improves on the original proposal but will still create hardships for many hospitals in the coming years, industry officials said last week.

Despite those predictions of future problems, the rules will go into effect on schedule tomorrow with no attempts by Congress or the hospital industry to block implementation or elicit promises of further changes from the Health Care Financing Administration, the responsible agency.

"No one's happy with this, but the uproar has died down," said John Goetz, a vice president in the health-care group of Moody's Investors Service. "There are going to be a number of hospitals that are going to face severe crunches, but we just haven't bumped into them yet."

Under the current system, hospitals are reimbursed for 85% of all "reasonable" costs they incur for capital attributable to Medicare patients. Beginning tomorrow hospitals will be paid under a so-called prospective payment system, which calculates the amount of money they receive on a flat per-patient rate, called the "federal rate."

When it proposed the new system in February, the health administration also proposed easing hospitals into the new system by allowing those with projects already under way, or "old" capital expenditures, to receive extra subsidies on top of the standard rate during a 10-year transition period. The administration -- an agency within the Department of Health and Human Services -- later revamped the rules to liberalize the treatment of old capital during the transition period.

The final version of the regulations "is certainly a vast improvement," said Irwin Cohen, a partner in the law firm of Fulbright & Jaworski, and a former attorney-adviser to the head of the Health Care Financing Administration.

"While there are some hospitals that may be no better off" than they were under the original version of the regulations, "I don't think anybody is worse off," he added. For example, Mr. Cohen said an important change was the administration's decision to allow leased equipment to be counted in the definition of old capital.

"A lot of hospitals lease major equipment," Mr. Cohen said. "This was certainly an improvement that was welcome and proper."

But the improvements in the rule came at a price to the hospital industry, said Paul Fiduccia, a lawyer with the firm of Winston and Strawn.

The health agency "went a long way toward alleviating problems regarding existing obligations," Mr. Fiduccia said. But "because it's a zero-sum game, that was done at the expense of future capital payments."

Mr. Fiduccia explained that, while it liberalized the rules for old capital, the agency also lowered the federal payment. The agency said it made that change so that the entire proposal would remain "budget neutral."

In fact, the hospitals that are likely to be put in the greatest financial jeopardy by the new rules are those that held off on starting new capital projects to see what the new regulations would contain, said W. Jeffrey Seubel, a first vice president in the municipal investment banking department of PaineWebber Inc. He added that group includes some major teaching and university hospitals.

One bright spot in the regulations is the "payment floor" added by the administration, at the urging of the hospital industry. During the transition period, the administration will guarantee a minimum payment level to hospitals, regardless of what they are scheduled to receive under the new formula.

The health administration added the payment floor "to send a message to the health-care industry" that it plans to keep working on the rule to improve it and ensure that hospitals will not be hurt severely by it, said Robert J. Froehlich, a vice president at Van Kampen Merrit Investment Advisory Corp. When it learns more about how hospitals will fare under the new rules, the agency could decide to make the floor permanent, he said.

But Mr. Fiduccia also said the floor "is not as generous as it seems," because it does not guarantee a minimum payment in each year of the transition period. Rather, it will calculate whether a hospital needs to be subsidized to bring it above the floor by looking at the average of Medicare payments to the hospital in previous years. Thus, if a hospital received payments well above the floor in the first two years of the transition period, it may not be eligible for subsidies if the payment dips below the floor in the third year.

A hurdle for hospitals looming in the future is the adjustments, or "updates," the health administration has pledged to make to reflect changes in hospitals' capital costs, securities officials and lawyers said.

Standard & Poor's Corp., in the Sept. 16 issue of Credit Week, warned that, "in general, ratings may suffer in the long term" if the federal government "fails to adequately adjust rates for inflation and changes in medical technology," as was the case with other types of health-care regulations.

One concern is that the health administration may be pressured to keep any increases low -- or mandate decreases in the rates -- to keep the federal budget deficit from increasing.

For that reason, "one would be prudent not to expect generous updates," Mr. Fiduccia said.

"They can make that number any number they want," Mr. Seubel said. "It doesn't have to have any connection with reality."

A pitfall that will become apparent much sooner is the application deadlines and project completion deadlines that hospitals will have to meet to qualify for some of the grandfather provisions in the regulations.

"We're concerned that at any of these trigger points, some hospitals may fall by the wayside because they can't get their documentation together," said Kenneth E. Raske, president of the Greater New York Hospitals Association. "There are a lot of dates in this thing, and it's like a mine field from that standpoint as you negotiate your way through it."

Those dates and deadlines will be most difficult for hospitals in New York and other states that operate "Certificate of Need" programs, where the state must approve projects before they can go forward.

In those states, "there are hospitals waiting in line, diligently negotiating their Certificates of Need," said Edward L. Shapoff, head of the health-care group at Goldman, Sachs & Co.

Hospitals in Certificate of Need states "are not in control of the situation," and may miss deadlines in the regulations through no fault of their own, he said.

To begin correcting any future problems that will arise, hospitals will have to sift through the minutiae of the regulations and attempt to calculate what their reimbursement level and financial position will be over the next several years, Mr. Fiduccia said. He added that hospital associations are developing software that will help hospitals make those calculations.

"It's important that the underwriters who think they may be wanting to take a hospital to market in the foreseeable future assist the hospital in any way they can and accurately perform an analysis of the impact of the final rule" beyond the transition period "so adverse impacts can be communicated" to the federal government and repaired, Mr. Fiduccia said.

Mr. Goetz said he did not see any significant changes in hospital ratings in the near future as a result of the regulations, because Moody's has been taking the impending new system into account into its ratings recently.

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