• Mystery solved? Medicare’s return on capital payments

    It seems likely that the mystery of the demise of Medicare hospital cost+2% payments is solved. Rob, a sharp-eyed reader, suggested in the comments that I look at several documents. Below I quote the key passages.

    First, the cost+2% scheme was established within the first year of Medicare, according to a paper in Health Affairs by Brian Kinkead,

    What emerges from this review of Medicare capital payment is the conclusion that in the negotiations over Medicare in 1965 and 1966, capital payment became an issue of larger significance than the casual observer would expect. […]

    HEW [Department of Health, Education, and Welfare] compromised […]  by offering to pay hospitals a “plus factor” equal to 2 percent of allowable costs.

    This “plus factor” was reduced to 1.5% in 1983 when the Medicare hospital prospective payment commenced.

    The fact that the legislation changing this policy emanated from proprietary nursing homes rather than proprietary hospitals is an interesting historical nuance given the prominence of the latter in efforts to save return on equity in the 1983 legislation establishing Medicare’s prospective payment system. […]

    HEW lowered the “plus factor” for proprietary institutions from 2 percent to 1.5 percent of allowable costs, a measure taken to reduce the duplication of purpose between this provision and the return on-equity payment.

    Finally, according to the 1988 decision  in National Medical Enterprises, et al. v. Otis R. Bowen*

    Congress […] authorized the phasing out of return-on-equity payments between fiscal year 1987 and fiscal year 1990. See 42 U.S.C.A. Sec. 1395ww(g)(2) (Supp.1987).

    Thus, until 1983 the cost+2% payment seems to have been in effect. For the rest of the 1980s some additional return-on-equity payments were made as the “plus factor” was phased out.

    I’ll see if this story satisfies the Medicare policy experts I can interest in reading this. If it does then to commenter Rob, if you want some acknowledgement in the paper I’m writing in which a very brief summary of this will appear, send me a private message with your full name. Otherwise, just know that your help is appreciated!

    * I’m not expert in citing legal documents. I don’t know if this is how to do it. I suspect there’s a standard set of other glop I’m supposed to include in the citation. I trust someone will tell me or I’ll ask one of my lawyer friends for advice.

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