CMS should remove hospital capital cost exemption from IPPS, OIG says

Photo: Rick Legg/Getty Images

Medicare paid new hospitals three times more for their capital costs than they would have been paid under the inpatient prospective payment system (IPPS), according to an audit report from the Office of Inspector General.

The report revealed the new hospital capital cost exemption of the IPPS caused Medicare to incur up to $423.2 million in costs between 2012 and 2018. The audit concluded Medicare could have saved $283 million on capital costs in that period had hospitals been paid through IPPS.

Medicare regulations require that established hospitals be paid for capital costs through the IPPS, regulations which also allow new hospitals to be exempt from the IPPS payment methodology for capital costs and, instead, to be paid for these costs on a cost reimbursement basis for their first two years of operation.

The stated rationale for this IPPS exemption is that new hospitals may not have adequate Medicare utilization in those initial two years and may have incurred significant startup costs.

"Although new hospitals incur slightly higher capital costs and have somewhat lower Medicare utilization during their first two years of operation than they do in the subsequent two years, these differences are not so significant as to justify capital payments that are triple what they would have been paid through the IPPS," the audit stated.
 
WHY THIS MATTERS

The report recommended that the Centers for Medicare and Medicaid Services  review the findings. If CMS determines that a separate payment methodology for capital costs at new hospitals is no longer warranted, it should change its 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.

CMS concurred with the report's recommendation and stated it would further review the OIG's findings and determine whether any modifications to the capital payment methodology for new hospitals should be proposed in future federal rulemaking.

"CMS concurs with this recommendation," CMS Administrator Chiquita Brooks-LaSure wrote in a letter published alongside the OIG report. "CMS will further review the OIG's findings and determine whether any modifications to the capital payment methodology for new hospitals should be proposed in future notice-and-comment rulemaking."

THE LARGER TREND

Before implementation of the IPPS in October 1983, hospitals were paid under a retrospective cost-based payment system for both operating and capital costs, meaning that, essentially, hospitals were paid what they spent.

However, the OIG found significant potential cost savings to Medicare if the IPPS exemption were removed and capital payments to new hospitals were made through the IPPS.

ON THE RECORD

"Although new hospitals incur slightly higher capital costs and have somewhat lower Medicare utilization during their first two years of operation than they do in the subsequent two years, these differences are not so significant as to justify capital payments that are triple what they would have been paid through the IPPS," the OIG wrote. "By using the IPPS for new hospitals in lieu of cost reimbursement, CMS could create incentives for hospitals to operate more efficiently,"

Twitter: @dropdeaded209
Email the writer: nathaneddy@gmail.com