The Department of Health and Human Services moved yesterday to impose new limits on Medicare payments to hospitals, amid estimates by the agency's inspector general that hospitals made high profits on their Medicare operations in 1984, averaging 15 percent and totaling $5.5 billion nationwide.
One proposed curb, announced by HHS Secretary Otis R. Bowen, would raise Medicare payment rates to hospitals for in-patient care by only 0.5 percent in fiscal 1987. President Reagan had indicated Feb. 5 that he might allow a 2 percent rise in Medicare payments.
Medicare chief actuary Guy King said at an HHS briefing that by raising rates only 0.5 percent, Medicare would save about $530 million in fiscal 1987.
The second curb is the revolutionary system of paying hospitals for Medicare's share of their capital outlays for new buildings, major reconstruction and large items of equipment.
Capital reimbursements, which Medicare now pays separately from its bills for patient care -- and with virtually no limits -- would be eliminated, on the theory they constitute a blank check for wasteful investments.
Instead of being reimbursed for whatever they spend on capital, hospitals would have to pay for their capital costs out of the fixed, flat fees that Medicare pays them for patient care under its prospective payment system, which went into effect in 1984. These fees are set in advance annually and remain the same regardless of how many days a patient stays and how many tests he or she has.
To compensate for loss of separate capital payments, patient-care payments per stay would be increased about 8.1 percent for urban hospitals when fully phased in and 6.3 percent for rural ones.
King said that the new capital payment system, which HHS proposes to phase in by 1991, would save Medicare $10.6 billion over five years.
Michael D. Bromberg, executive director of the Federation of American Health Systems, representing about 1,300 for-profit hospitals, called the 0.5 percent increase "an insult, sure to have a bad impact on quality of care and access to care." He said it would be the third year in a row with little or no increase.
But King and Medicare Administrator William L. Roper said that taking into account changes in productivity, patterns of practice and hospitals' mix of cases, a payment reduction in 1987 of 0.9 percent could have been justified.
Bromberg also attacked the four-year phase-in for the new capital system, saying "it's too short" and would hurt hospitals that have recently made large capital investments. He said the industry would try to get Congress to alter both proposals. The House has already approved a provision blocking any capital changes for a year while Congress considers the issue.
Henry Bachofer, speaking for the American Hospital Association, which represents almost all of the nation's 6,100 hospitals, called the 0.5 percent increase "inadequate" and said, "Given what they're doing on rates, it raises some serious questions about the viability of inorporating capital" in the rates for patient care. He said AHA preferred a 10-year transition on capital.
Roper said he will consider appeals for a longer transition and other possible changes before deciding whether to make the regulation final.
While Bowen, in announcing the proposed new payment policies yesterday, did not link them with the inspector general's report on 1984 hospital profits, the report does support the belief of many in the Reagan administration that Medicare reimbursements can be curtailed without damaging the hospital industry.
HHS Inspector General Richard P. Kusserow, in an internal memorandum addressed to Roper and obtained by The Washington Post, said his agency surveyed hospitals using the new prospective payment system in 1984, its first year, and found that their average profit on Medicare in-patient operations was 14.97 percent of the revenues received from Medicare, $5.5 billion if projected to all 5,405 hospitals then in the payment system. His agency did not calculate the non-Medicare portion of hospital operations. While profits measured 14.97 percent on Medicare inpatient revenues, they were 24.87 percent profit as a return on invested capital.
Kusserow's memorandum was based on a survey of 2,099 of the 5,405 hospitals involved in the prospective payment system. It said that 82 percent of the hospitals surveyed made a profit, averaging $1.3 million per facility. The memorandum said one tax-exempt teaching hospital in Ohio earned $24 million on $88 million in Medicare revenue, a second such hospital in California earned $22 million on $52 million in Medicare income while another facility in Texas earned $22 million on $55 million.
Sections of the study that have been reported on earlier said that teaching hospitals averaged 18.28 percent profit on Medicare income while nonteaching averaged only 12.42 percent; that for-profit hospitals averaged 17.89 percent profit on Medicare operations while nonprofit averaged only 14.75 percent, and that urban hospitals averaged 16.08 percent while rural hospitals averaged only 9.22 percent.
Kusserow's memorandum said profits were so high because the government had set initial prospective payment rates too high for certain illnesses when the new Medicare payment system began.
Bromberg said this data on profits 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." Jack Owen, AHA executive vice president, said, "Talking about data that goes as far back as October 1983 is moot. If hospitals were in fact earning those profits at that time, it should have no bearing whatsoever on decisions affecting rates of payment for 1986 and 1987."