Medicare Payments to Hospitals

GAO discussed two issues related to Medicare reimbursement to hospitals, including: (1) the impact of the Health Care Financing Administration's (HCFA) use of unaudited hospital cost reports in establishing the Prospective Payment System (PPS) payment rates; and (2) the return on equity payments to proprietary hospitals. GAO found that in calculating the national PPS payment rates, HCFA: (1) made substantial dollar adjustments to the 1981 cost reports for unallowable costs; (2) included capital costs that should have been excluded; and (3) made coding and computation errors. GAO also found that the Social Security Amendments of 1983 reduced the rate of return for proprietary hospitals equity invested to equal that earned by Medicare's Hospital Insurance Trust Fund. GAO noted that, under the PPS, hospitals gain or lose a profit on the basis of whether their costs are lower or higher than the prospective payments; however, eliminating the return provisions will have an impact on the availability of investor capital to the hospital industry.