Medicare pays new hospitals three times more for capital costs than it pays established hospitals, costing taxpayers an extra $1.3 million per hospital each year, according to a report the HHS Office of Inspector General published Monday.
Under the program's inpatient prospective payment system (IPPS) rule, CMS pays new hospitals for Medicare-related capital costs during their first two years in the program based on their expenses. All other hospitals must cover their capital costs with money from their inpatient payments, no matter their costs.
Medicare offers special consideration to new facilities because they may lack adequate Medicare patient volume—and the reimbursements that come with it—and they have have startup costs they need defrayed.
"Unlike established hospitals, new hospitals do not have an opportunity to reserve previous years' capital prospective payment system payments to finance capital projects," CMS Administrator Chiquita Brooks-LaSure wrote in a letter to the OIG.
But the exemption might be unnecessary because average Medicare-related capital costs were only 3% higher for new hospitals than established hospitals. Similarly, average Medicare utilization was just 15% lower for new hospitals, OIG found.
"We identified significant potential cost savings to Medicare if the IPPS exemption were removed and capital payments to new hospitals were made through the IPPS. For the 112 new hospitals that we reviewed, Medicare paid a total of $283 million more for capital costs than it would have paid if these hospitals had been paid through the IPPS," the report said.
Nearly 60% of new hospitals were part of a chain that might have been able to cover their capital costs if needed, according to OIG.
The federal watchdog recommended that CMS evaluate whether to change the policy. The agency agreed.
The Medicare Hospital Insurance trust fund will be insolvent by 2026, with its deficit growing to well over $500 million by 2031, according to an estimate from the Congressional Budget Office. But there is no automatic process in place to address the shortfall. Lawmakers could cut provider payments to rein in Medicare spending, and those with the lowest returns on investment are most likely to be on the chopping block.