Spurred by a report from HHS' inspector general's office, both the House and Senate budget bills passed last week would eliminate Medicare depreciation adjustment payments made when a hospital changes hands.
Under current law, Medicare shares in the gain or loss on a hospital sale based on the depreciated value of the assets.
If a hospital is sold for more than the book value of the assets, Medicare receives part of the gain. If the assets are sold below value, Medicare pays the selling hospital part of the loss.
But according to a report released last week by HHS' inspector general, hospitals have been artificially suppressing sale prices below book value to squeeze Medicare for depreciation payments.
The agency contends that behavior cost Medicare more than $500 million between 1990 and 1996. For every dollar Medicare shared in gains it paid out eight dollars in losses, the inspector general's office said. The average payment per hospital was about $2.3 million, with payouts as high as $10 million, it said.
Congress agreed with the agency and called for the elimination of the provision in both the House and Senate budget bills.
According to the explanation that accompanies both budget bills, Congress "is concerned (that) providers may be gaming the system by creating specious `losses' in order to be eligible for additional Medicare payments."
Eliminating those payments would save Medicare-and cost hospitals-about $300 million from fiscal 1998 through 2002, according to the Congressional Budget Office.
Executives at investor-owned healthcare companies, which do a lot of hospital buying, say they aren't costing federal taxpayers anything.
Steve Dominguez, vice president for government programs for Tenet Healthcare Corp. of Santa Barbara, Calif., said the loss and subsequent Medicare payment go to the seller, not the buyer.
Dominguez added that in certain hospital acquisitions, the depreciation recapture provisions don't come into play at all.
For example, when Tenet acquired OrNda HealthCorp to form the nation's second-largest hospital company earlier this year, it didn't cost Medicare anything because it was a stock transaction, Dominguez said.
Both the House and Senate bills would give hospitals a three-month grace period after the budget is enacted before the payments are halted.
According to Tony Orlando, a senior manager in the national healthcare practice for Ernst & Young, hospitals that are considering transactions should consider the change. "If you are in the process of doing a deal, you need to be aware of the effective date and consider it when you evaluate the value," Orlando said.
-With Bruce Japsen