Hospital Merger Increased Medicare and Medicaid Payments for Capital Costs

HRD-84-10: Published: Dec 22, 1983. Publicly Released: Jan 18, 1984.

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Pursuant to a congressional request, GAO investigated the acquisition of the assets of Hospital Affiliates International, Inc. (HAI) by the Hospital Corporation of America (HCA). GAO used the merger as an example of changes in hospital costs under current Health Care Financing Administration (HCFA) Medicare policies for reimbursement of capital expenses after changes in hospital ownership. GAO focused on changes in interest, depreciation, and home office expenses because these costs are most likely to increase as a result of such acquisitions.

GAO found that capital costs at the acquired hospitals increased by about $55 million during the first year after the acquisition. This resulted from increased interest and depreciation expenses. These increases were only partially offset by decreases in home office costs. While HCA believes that management improvements instituted in the acquired hospitals will result in substantial savings, GAO was unable to evaluate the claimed savings because HCA was unable to quantify them. GAO also found that, at the two hospitals evaluated, per-patient-day Medicare and Medicaid costs increased. GAO questioned the procedures HCA used to allocate interest to, and compute depreciation on, the acquired hospitals. GAO found that: (1) HCA allocated debt and related interest to Medicare using a method different from that prescribed by HCFA, resulting in higher capital costs being allocated; (2) HCA discounted the debt assumed from HAI that bore below-market interest rates at the time of acquisition, increasing the amount of interest claimed from Medicare; and (3) HCA assigned inaccurate values to the real assets because of inconsistent appraisal and depreciation practices. GAO also questioned the accuracy and independence of the appraisal because the appraised values were changed at the request of HCA.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The intermediaries disallowed the reevaluation of assumed debt, required consistent useful life estimates, and required revisions to the appraisals used in valuing the acquired assets. All these adjustments resulted in lower Medicare and Medicaid costs.

    Recommendation: The Secretary of Health and Human Services should direct the Administrator, HCFA, to ensure that the intermediaries consider the GAO findings when finalizing the amount of increased costs associated with this acquisition that will be recognized as allowable by Medicare.

    Agency Affected: Department of Health and Human Services

  2. Status: Closed - Implemented

    Comments: HCFA clarified the applicable guidelines as GAO suggested. Action was finalized in November 1985.

    Recommendation: The Secretary of Health and Human Services should direct the Administrator, HCFA, to clarify Medicare guidelines as they relate to: (1) procedures for allocating debt and interest expenses for multiasset acquisitions; (2) prohibiting the discounting of assumed debt; and (3) acceptable asset valuation procedures when appraisals are used, including independence of the appraiser, consideration of the ownership of the assets, and useful life consistency.

    Agency Affected: Department of Health and Human Services


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