Terminating The 'Medical Arms Race'

As hospitals' capital spending soars, medicare grows tightfisted

Each day, 35% of the nation's 1 million hospital beds lie empty. With that sort of overcapacity, you'd think hospitals would be cutting back on construction and equipment purchases. Instead, medical facilities are spending billions on capital improvements--everything from the latest in scanning technology to artworks for private rooms--designed to attract patients. And all of this investment, needed or not, is subsidized by the federal government. "We've set up a system that in no way rewards prudent behavior," says Gail R. Wilensky, chief of the Health Care Financing Administration (HCFA), which runs medicare. "In fact, the more you spend, the more you get."

Now, Washington is putting its foot down. Medicare, which over the past five years has paid $26 billion--40% of hospitals' capital investment--wants to tie its subsidies to occupancy rather than outlays. The HCFA has proposed regulations that would change the way the government reimburses hospitals for interest and depreciation on construction and equipment purchases. The rules will go into effect on Oct. 1 unless Congress blocks them. Wilensky says the change will end a federally financed "medical arms race."

INHERENT INEQUITIES. Hospitals contend the rules would force many institutions now making worthwhile investments into insolvency. "The regulations will inordinately reward some facilities and harm others--and not necessarily on the basis of efficiency," says William J. Cox, a lobbyist for the Catholic Health Association of the U.S.

Currently, the government pays 85% of a hospital's capital costs attributable to medicare. If medicare patients account for half of a hospital's business, the government will pay 42.5%--85% of 50%--of capital outlays. And it doesn't much matter what the money buys. HCFA pays as willingly for a lobby waterfall as for an inner-city emergency room.

Under the new system, the government would pay a hospital an annual fixed amount for each medicare patient it serves. A hospital with low capital costs would use the money for other things. A facility that wants to spend more would have to find other financing.

Wilensky's goal is to encourage hospitals with low occupancy to merge or share equipment. Now, many facilities, knowing that medicare will pick up much of the tab, often seek to attract doctors by buying expensive technology. Capital expenditures drive up costs throughout the system, Wilensky argues, because the hospital must hire new staff to tend the equipment.

The result is higher health costs, for private insurers as well as for the government. "We have found business leaders very supportive," Wilensky says. "They understand that getting incentives for hospitals to buy more prudently is in their interest."

But the hospital industry and its financial advisors say there's no need to revise the reimbursement system. Since 1983, when medicare began cutting payments for inpatient services, hospitals have shortened stays and shifted treatment to outpatient settings. As a result, they say, the annual rise in per-case capital reimbursement already has slowed.

'TOO BLUNT'. Worse, hospital representatives argue, changing the reimbursement formula could prove diastrous for some well-run facilities. That's because, they say, the proposed system would not take into account the worthiness of projects. "This is a blunt instrument that could be too blunt," says Michael Colopy, director of the Health Care Financing Study Group, sponsored by the securities industry.

At Good Samaritan Hospital in Suffern, N.Y., Sister Joan Regan, its president, is worried. In 1986, the hospital began an $80 million renovation and expansion after two local hospitals closed. Sister Regan says that in the first year of the new rules, Good Samaritan, which broke even last year, will get $238,000 less from medicare than it expected when it incurred the debt.

Hospitals that plan to borrow in the future also could face difficulties. "To the extent that the regulations create uncertainty, it could make borrowing more expensive," says Nancy Rubini, vice-president of the health finance group of Standard & Poor's Corp.

The hospital industry persuaded Congress to stop two proposed capital-investment regulations in 1986 and 1987. But it's doubtful that lobbyists will do as well this time. Even the industry admits that Wilensky has gone a long way to compromise, such as agreeing to a 10-year phase-in.

Besides, hospitals know that medicare could take a more draconian approach. If costs continue to soar, the government could require approval for each new project. That really would be tough medicine to swallow.

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