Investor-owned hospitals made almost 18 percent in profits on Medicare services in 1984, about one-quarter of it from special payments for return on invested capital, according to a survey by Health and Human Services Inspector General Richard P. Kusserow.
Kusserow's findings are the latest in a series of reports detailing large hospital profits in the first year of a Medicare prospective payment system that is designed to reduce Medicare costs by paying hospitals a fixed rate per stay, instead of a daily rate based on each hospital's regular charges.
Spokesmen for hospital associations disputed the figures and said the study was based on "old and irrelevant" data.
Kusserow, in an internal report, said financial records of 214 of the nation's 1,300 for-profit hospitals showed a profit margin on Medicare in-patient services in 1984 of 17.89 percent, compared to 14.75 percent for about 1,800 nonprofit hospitals. Profits are measured by comparing the hospital's costs and revenues from Medicare inpatient operations.
The report said that the greater profit margin for the investor-owned hospitals came not from greater efficiency but from special payments for return on invested capital. Discounting that payment, the 214 for-profit hospitals would have had a profit margin of 13.24 percent.
Kusserow said the survey shows that for-profit hospitals do not need the special return-on-equity payment in order to be profitable. Congress has just voted to phase out the special payment.
The special payment equals about 10 percent of the portion of a hospital's invested capital attributable to care of Medicare patients. For example, if a hospital's invested capital is $100 million and two-fifths of its patients are Medicare patients, the hospital would get $4 million in special payments.
Kusserow said the three-year phase-out of the special return-on-equity provision will save $700 million over the next five years.
Auditors also calculated that total return on capital of the 214 for-profit hospitals on 1984 Medicare operations -- including the special Medicare payment and operating profits -- was 44.7 percent. For the 1,800 nonprofits, it was 24 percent.
Michael D. Bromberg, director of the Federation of American Health Systems and representing for-profit hospitals, said, "The data is old and irrelevant. Since 1984 we have had two years of near-freezes on rates while costs were going up, and profits have dropped considerably. It also totally ignores the fact that we pay taxes on our profits, so our after-tax profits are only three-fifths of the gross profit."
American Hospital Association officials, without disputing Kusserow's figures, have said their figures show hospitals in 1984 made profits on combined Medicare and non-Medicare patient-care operations of only 2 percent, which rises to 6.2 percent when profits from parking lots, cafeterias and outside ventures are included. They also suggested that hospitals surveyed by Kusserow are not a representative sample.