WASHINGTON -- Federal regulators have revamped their proposal for overhauling the way Medicare reimburses capital costs to help hospitals that are highly leveraged with tax-exempt bonds avoid credit-quality problems under the new system.
The Health Care Financing Administration on Friday issued its final version of regulations governing the changeover, and those rules contain several new provisions designed to give many hospitals bigger capital payments than they would have received under the agency's original proposal. The new system is scheduled to go into effect Oct. 1.
Most industry officials and bond lawyers questioned about the change said they could not comment until they had studied the approximately 100 pages of regulations in detail. But Michael Rock, a lobbyist for the American Hospital Association, said he believes the final rules "answer many of the industry's concerns, and it's unlikely -- at least this year -- that we'll seek to block it."
Under the current system, hospitals are reimbursed for 85% of all "reasonable" costs they incur for capital attributable to Medicare patients. In February, the health agency proposed that hospitals be reimbursed under a so-called prospective payment system, which calculates their reimbursement levels based on an flat per-patient rate.
Municipal issuers have been concerned about the changeover to the new system because Medicare payments to hospitals form part of the revenue stream for both public-purpose and 501(c)(3) hospital bonds. The new system is expected to reduce those payments, which could lead to bond defaults, downgrading of hospital ratings, or project postponements, those issuers had warned.
The agency had proposed to ease hospitals into the new system by giving them a 10-year transition period and extra subsidies to counteract payment reductions. Hospital industry officials have been pushing for more generous transitional relief.
For bond-financed hospitals, one of the biggest issues raised by the regulations proposed in February was how to define "old capital." During the transition period, hospitals with high capital costs would receive 90% of the reasonable costs of old capital, which was defined as interest and depreciation costs on their books as of Oct. 1, 1990. On top of that amount, the hospital would also receive a portion of the new standard rate to cover future projects.
But the hospital industry said that definition needed to be broadened. In its final regulations the agency moved the cutoff date to Dec. 31, 1990, and included in the definition many other capital-related costs, such as taxes and insurance.
The administration also agreed to recognize obligated capital as old capital, provided the hospital has a binding legal agreement made on or before Dec. 31, 1990, and the asset is put into patient use by Sept. 30, 1994. In addition, capital-related costs for assets that were not legally obligated as of Dec. 31, 1990, may still be recognized as old capital under certain circumstances outlined in the regulations.
Hospital industry officials had also asked the health agency to lengthen the 10-year transition period, but the administration did not include such a change in the final rules. It did, however, say it would "evaluate the need for a permanent floor as we gain experience during the 10-year transition period."
The agency also granted the industry's request that there be a "payment floor" to assure hospitals of a certain level of payments during the transition period. For 1992, most hospitals will be assured of receiving at least 70% of their Medicare inpatient capital costs. Sole community hospitals will receive at least 90%, and certain urban hospitals with a disproportionate number of Medicare patients will receive at least 80%. The administration said those percentages may be adjusted downward in later years.
Industry officials had wanted the payment floor made permanent, but the administration said it would not allow that "because this would continue the inappropriate incentives of cost reimbursement."
The final regulations also give the secretary of Health and Human Services the authority to further subsidize, on a case-by-case basis, hospitals that encounter "extraordinary unanticipated circumstances" that force them to replace plant and equipment.
In addition, the final rules also exempt new hospitals from the capital prospective payment system for their first two years of operation and pay them 85% of reasonable costs during that period.
The final rules follow the proposed rules in how they treat hospitals with low capital costs. Those hospitals will will receive a payment reflecting a "blended rate" that combines the reimbursement rate and 10% of the standard rate. In each of the next nine years, the old reimbursement rate will decline by 10 percentage points and the standard rate will increase by 10 percentage points, until the hospital is phased in to the full standard rate in the 10th year.