Prospective capital payments to hospitals

Now that Medicare will pay hospitals on the basis of diagnosis-related groups (DRG) prospective payment will likely become the dominant method by which hospital care is purchased. In addition to the states that have established mandatory hospital rate-setting programs for all or most payers, the addition of Medicare, which is responsible for over 35 percent of hospital billings. means that almost half of hospital revenues will soon come from prospective systems. The Medicare DRG system and the prospective system of some states apply only to the payment of operating costs, however. While the Congress recognized the need to revise the way that capital costs are reimbursed to be consistent with prospective payment of operating costs, it deferred the decision to allow time for additional analysis. States are reviewing their methods of paying for capital as well. This article examines payment for hospital capital in the context of prospective payment for operating costs. It begins with some background material on hospital capital financing, including an examination of problems with continuing the current method of capital reimbursement. It then reviews methods for payment for capital in other industries. The largest section is devoted to three major issues that Medicare and other third-party payers face in deciding how to pay for capital - how much to reimburse in the aggregate, how to distribute it to individual hospitals, and how to smooth the transition from the current system to one more consistent with prospective payment of operating costs.