Alternatives for Paying Hospital Capital Costs

HRD-86-93: Published: Aug 11, 1986. Publicly Released: Aug 11, 1986.

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In response to a congressional request, GAO reported on the Department of Health and Human Services' (HHS) methods for including capital costs related to inpatient services in Medicare's Prospective Payment System or for modifying the current cost-reimbursement system, specifically: (1) the general principles involved with prospective payment of capital costs; (2) the effects of various types of proposals on hospitals; and (3) alternatives that might lessen any potential adverse effects.

GAO found that Medicare's capital cost-reimbursement method provides several incentives that could result in increased program costs. The cost-reimbursement method provides incentives to: (1) substitute capital for labor; (2) borrow to acquire assets, rather than using equity sources; (3) acquire new equipment, even though it may be only marginally needed; and (4) refinance debt. Cost reimbursement: (1) would increase incentives for efficiency, since it implies regulation; and (2) guarantees that Medicare will pay its share of each hospital's capital costs for providing care to beneficiaries, thus ensuring that beneficiaries have access to quality health care. However, GAO found that prospective payment of capital costs would reduce or eliminate the incentives under cost reimbursement, thereby decreasing Medicare costs. Advantages to the prospective program are that it would: (1) treat labor and capital equally; (2) encourage the most economical mix of debt and equity; and (3) encourage reductions of current hospital excess capacity and proper future sizing. Under the prospective payment program: (1) efficient hospitals would be rewarded more; (2) hospitals would receive less than their actual costs during the first years of an asset's useful life and more than their actual costs in later years; and (3) some hospitals would receive higher payments, depending on their average costs and occupancy rates. Since the system has not been tested, the long-term effect on hospitals' ability to raise capital improvement funds cannot be predicted.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress directed HHS to make prospective payments for capital costs beginning in fiscal year (FY) 1992. The most recent HHS proposal incorporated the first two alternatives in this recommendation.

    Matter: To lessen the immediate effects of prospective capital payment on hospitals, the House Ways and Means Committee's Health Subcommittee may wish to consider alternatives to the HHS proposal, including: (1) using a long transition period to full prospective capital payment to lessen the immediate effect on individual hospitals, identify emerging problems, and make adjustments if necessary; (2) initially covering only movable equipment under a prospective capital payment system, which also would lessen the effect on individual hospitals, permit HHS to gain experience with prospective capital payments, and provide information to be used in deciding whether to move to a total prospective payment system for capital costs; and (3) making changes to the current cost-reimbursement system to give hospitals greater incentives for efficiency similar to those of prospective capital payment. These changes could be targeted at perceived capital payment problems and therefore affect fewer hospitals.


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