Use of Unaudited Hospital Cost Data Resulted in Overstatement of Medicare's Prospective Payment System Rates

HRD-85-74: Published: Jul 18, 1985. Publicly Released: Jul 18, 1985.

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GAO reviewed: (1) the effect of the Health Care Financing Administration's (HCFA) use of unaudited cost reports to determine the standardized amount used in computing prospective payment system (PPS) rates; and (2) the effect of not removing all capital costs from the cost data even though these costs are paid separately from PPS rates.

GAO noted that HCFA used unaudited data and some capital costs to compute the average cost per Medicare discharge, which overstated the standardized amount used to determine PPS payments. GAO found that: (1) unallowable costs included in the cost reports averaged about 3 percent of the total operating costs per hospital discharge; (2) HCFA overstated the allowable cost per discharge by about $73; (3) HCFA did not exclude capital costs allocated to ancillary departments and special care units; and (4) HCFA used its 1981 cost data as the base period for PPS rates. GAO also found that: (1) HCFA needs to make adjustments to ensure that PPS rates do not reflect unallowable costs or capital costs; and (2) adjustments would reduce Medicare payments to hospitals by about $1 billion in fiscal year (FY) 1986.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HHS froze the prospective payment rates for FY 1986. However, this action will not correct the problem with the databases used to compute the rates, so future updates to the rates will still be based on erroneous data that overstates hospital costs. Thus, future updates based on this data could result in inflated payments to hospitals.

    Recommendation: The Secretary of Health and Human Services should direct the Administrator, HCFA, to adjust the standardized amounts for FY 1986 to remove the overstatement resulting from using unaudited cost data and the inclusion of some capital costs in calculating the base year costs.

    Agency Affected: Department of Health and Human Services

  2. Status: Closed - Implemented

    Comments: HHS agreed to use audited cost data which excludes all capital costs when it rebases hospital prospective payment rates. However, rebasing may not occur for a number of years.

    Recommendation: The Secretary of Health and Human Services should direct the Administrator, HCFA, to use audited cost data and ensure capital costs are appropriately handled if the standardized amount is rebased.

    Agency Affected: Department of Health and Human Services

 

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