Information on Prospective Reimbursement Systems

Questions were raised regarding the use of a prospective reimbursement system under Medicare. Specific issues addressed were the savings that could be achieved, the type of Government-procurement policies most appropriate under such a system, and ways in which various procurement policies handle payments for profit and property-related costs.

Under the prospective reimbursement system, Medicare would determine the amount or rate it would pay a facility for health care services before they are provided. Such a system can be designed to achieve almost any level of program savings. However, reducing reimbursements too much could adversely affect access to and quality of health care. Further, if the prospective reimbursement does not apply to all payers, there may be an incentive to shift costs to non-covered payers. In establishing these systems, hospitals use techniques which can be broadly classified as budget-review, formula, and negotiation. In a recent report, GAO concluded that, while the hospital expenses per case in States were continuing to grow, the rate of increase was lower in States with prospective ratesetting programs. Statistics indicate that the mandatory-regulatory type programs offer the greatest potential for controlling hospital costs. Although Medicare reimbursements are based on principles similar to those used for other Government procurement and Federal Procurement Regulations (FPR's) are similar to Medicare's reimbursement regulations, there are some differences. Both the FPR's and Medicare regulations allow profit for proprietary organizations and reimbursement for depreciation, and both recognize that property-related costs are a part of doing business. A major difference between the regulations is that, while FPR's use acquisition costs, Medicare uses historical costs limited to current reproduction cost less straight-line depreciation or fair market value at the time of purchase.