Nearly forgotten Medicare hospital payment history

With the help of reader Rob, I think I now understand what happened with historical Medicare hospital payments. The roughly six readers who are following this saga will recall the prior posts. The three others who wish to catch up, read these prior posts: [1], [2], [3]. The rest of you can ignore this trivia lesson. What follows is my reconstruction of this nearly forgotten Medicare hospital payment history.

1966: When the program began, Medicare paid hospitals their reimbursed costs plus 2% for non-profits and plus 1.5% for for-profits. The “plus factor” amounts were called “return on capital” (ROC) payments (Weiner, 1977). The rationale of ROC payments was to compensate for hospital expansion. In addition for-profits received a “return on equity” (ROE) payment of 2% of equity (Kinkead, 1984). The rationale seems to have been to compensate investors in for-profit hospitals with a return on their invested capital.

1969: The ROC plus factor was eliminated, as I explained in a prior post (see also U.S. Senate, 1970). In its place an 8.5% “nursing differential” was added. According to Kinkead (1984),

[C]alculated as 8.5 percent of inpatient routine nursing salary costs, the differential was equivilant to one-half to three-quarters of the funds previously paid under the “plus factor” provision.

However, the ROE payment to for-profits remained.

1981: The 8.5% nursing differential was reduced to 5% (SSA, 1983).

1983-1989: The for-profit ROE payment was phased out as the hospital prospective payment system was phased in. I explained this in a prior post (Kinkead, 1984). Also, by 1984 the nursing differential had been eliminated (Inzinga, 1984).

Thus, Medicare paid a guaranteed profit on some or all of costs into the early 1980s. Moreover, hospitals could increase their absolute (not relative) profit by increasing their costs.


Inzinga M. Legislative Issues and Health Care Trends–Quality Assurance. Nursing Administration Quarterly 8(4):80-84, Summer 1984.

Kinkead B. Medicare payment and hospital capital: the evolution of policy, Health Affairs, Fall 1984; 3(3): 49-74.

SSA (Social Security Administration), Summary of 1982 Legislation Affecting SSI, OASDI, and Medicare, Social Security Bulleting 46(7), July 1983.

Weiner S, Reasonable Cost” Reimbursement for Inpatient Hospital Services Under Medicare and Medicaid: The Emergence of Public Control, American Journal of Law & Medicine, 1977, Vol. 3, No.1, pg 1-47.

U.S. Senate, Committee on Finance: Medicare and Medicaid: Problems, Issues, and Alternatives. Washington. U.S. Government Printing Office, 1970.

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