Medicare payment and hospital capital: Future policy options

Augmenting Medicare's prospective payment system through developing a method of paying for hospital capital involves decisions concerning the aggregate amount of payment, the method for determining payments to individual hospitals, and a transition from the existing cost-based method to the new method. Given the federal budget deficit, the decline in the number of hospital admissions, and the policy decisions limiting growth in expenditures, the appropriate aggregate amount is probably one of budget neutrality. A prospective method of paying individual hospitals is desirable to encourage cost-effective behavior by hospitals. The need for additional complexity beyond a uniform add-on to the DRG rates does not appear to have been established. Finally, major relief for hospitals whose construction or renovation projects have turned out to be ill-timed with regard to the switch from cost-based payment to prospective payment is essential. Such transitional provisions need to cover at least five years and should include relief for hospitals with projects not already obligated. The blended rate, possibly coupled with provisions for hospitals to borrow forward, is an attractive mechanism to accomplish this.