Hospitals, which feared they would suffer substantial losses under government rules that limit Medicare payments, actually made above-average profits the first year of the program, a government study reveals.
Hospital profit margins on Medicare operations rose to 14 percent in 1984, the first year of a prospective payment system, about triple the average profit margin for all patients in recent years, according to an internal report by Richard P. Kusserow, inspector general of the Department of Health and Human Services.
"They're doing better under Medicare than anybody thought they would," said Kusserow, who did not release the report but agreed to comment after a copy was obtained by The Washington Post.
The report said the profit margins "raise questions" as to whether the Medicare rate schedule provides "excess payments" to hospitals.
Kusserow said his office's survey of about one-sixth of all hospitals operating under the system shows that Medicare is paying its way and is not being subsidized by higher charges on private patients where, apparently, the profit margins are smaller.
The prospective payment system was instituted at the end of 1983 to curb years of explosive growth in Medicare outlays. It sets a flat payment per case in advance for each hospital patient. Since the payment remains the same regardless of the length of stay or the number of tests given, hospitals are discouraged from stretching out treatment or requiring needless tests.
Hospitals obtain a set-in-advance fee for each procedure. For example, the fixed payment for cases of heart failure and shock might be $2,790. Whether the patient was hospitalized for 7.6 days (the actual national average in such cases) or for 10 days, the hospital would get $2,790. Previously, hospitals were paid by the day.
Kusserow's report comes as Congress nears a decision on how much to raise the rates Medicare will pay hospitals in 1986. The administration wants rates frozen at 1985 levels, with no increase to cover inflation. The House has voted a 1 percent increase, and the Senate, 0.5 percent.
Jack Owen, executive vice president of the American Hospital Association, and Mike Bromberg, director of the Federation of American Hospitals, said that assuming Kusserow's figures for 1984 are correct, they merely reflect tough cost-cutting efforts, such as a 3 percent personnel slash, to prepare for the start-up of the prospective payment system. They said such savings cannot be repeated year after year.
Owen said that despite the profit margins found by Kusserow, the cost-cutting efforts by hospitals resulted in Medicare paying $2 billion less than anticipated in 1984 and thus saved the government money.
He said that for 1985, Congress increased hospital rates less than 4 percent, a figure 2 percentage points below the cost of things hospitals buy. "We'll be lucky to get an increase of three-fourths of 1 percent in 1986 while estimated inflation is running 4 percent," so any earlier-year profits will be quickly eaten up, he said.
A Medicare spokesman said the report is being studied but that the government goal is not to limit hospital profits but to control government Medicare costs. He said the new system held the 1985 increase in Medicare payments to hospitals to 6 percent, the lowest in history.
Kusserow's office surveyed unaudited records of 892 hospitals, both for-profit and nonprofit ones, in nine states. For nonprofit hospitals, it calculated profits as the difference between operating revenues from Medicare and operating costs. The 892 represented a sixth of the 5,405 hospitals subject to the new system. The survey found that:
*"Hospitals earned a net average of 14.12 percent profit under the Medicare prospective payment reimbursement system." Net profits at these hospitals were $833 million. Four-fifths of this was at nonprofit hospitals and therefore not taxable. Projected nationwide, the report said, the figures suggest $5 billion in profits on Medicare operations.
*If profit is measured as the percent of return on investment, instead of the surplus of revenues over costs, average net profit was 24.17 percent.
Kusserow said one explanation for the high profits, which he expects to turn up in studies for later years as well, is that the initial payment scale was too high.