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are tied to specific program expansions that would benefit donors. The States which have levied taxes on hospitals generally establish a fund for making additional payments to hospitals. The results of these transactions are a reduction in the States' net expenditures which affects State/Federal participation percentages.

On February 9, 1990, we published a notice of proposed rulemaking in the Federal Register to revise current policies by requiring States to offset the revenues derived from all provider taxes and donations from Medicaid expenditures prior to calculating Federal financial participation (FFP). The objective of this policy is to ensure that FFP is not affected by States' use of tax or donation programs.

Subsequent to the publication of the notice of proposed rulemaking, Section 4701 of OBRA 90 took away HCFA's ability to limit State taxing practices and precluded a final regulation on donations from being effective until January 1, 1992. Accordingly, we are developing a regulation with a January 1, 1992 effective date.


Question. What progress has been made to expand the amount of claims processed electronically?

Answer. While the percentage of claims received electronically increased slightly from FY 1989 to FY 1990, recent HCFA efforts have begun to push these percentages even higher. Carrier figures for February 1991 show 41.3 percent of claims being submitted electronically. The corresponding figures for FY 1989 and FY 1990 were 35.8 percent and 37.2 percent respectively. At our intermediaries, the February 1991 figure is 75.1 percent of bills received electronically. Figures for FY 1989 and FY 1990 are 74.0 percent and 73.9 percent respectively.

HCFA is continuing its efforts to expand electronic claims submissions, including issuing standard electronic formats, providing electronic access to data for electronic billers, and setting aggressive goals for its contractors to achieve in increasing electronic submissions.


Question. How much more does it cost to process paper claims than electronic claims?

Answer. The results of the Industrial Engineering Study confirm that paper claims average $.50 more to process than electronic claims.


Question. Is it economically feasible for small rural providers of Medicare services to convert to electronic claims processing?

Answer. The Medicare program increasingly sets precedents that

private insurers follow. Electronic claims processing is becoming more and more widely used among all types of insurance companies. Even if a rural provider submits a small number of Medicare claims, he or she could still decide that electronic claims submission is economically feasible since the associated hardware and software can be used to transmit claims to other insurers. There are also other factors that a rural provider would consider in evaluating purchase of automated systems, including receiving payment more promptly.



Question. It has been suggested that doctors and hospitals that repeatedly submit a large volume of erroneous or frivolous Medicare claims be charged an extra fee, to discourage the practice. Wouldn't this be a good source of funds to help meet the rising costs of Medicare claims processing?

Answer. We feel that frivolous claims neither jeopardize the integrity of the Trust Funds nor constitute a significant percentage of claims received. claims that represent fraudulent submissions are investigated by the Inspector General's office; inappropriate payments are recovered and providers are penalized for such submissions. Therefore, the benefits of creating this new fee are not clear.


Question. What other suggestions do you have for reducing improper claims?

Answer. We are exploring ways of rejecting duplicate claims that have been automatically resubmitted before the Common Working File is queried. Other activities which reduce the number of erroneous claims include medical review, utilization screens and criminal prosecution. The more aggressive we are in our application of these existing methods, the fewer improper claims are submitted. We are also seeking to revise administrative policy on the development of incorrect claims, and we foresee the potential to derive savings from these efforts.


Question. Please explain your plan to curtail Medicare spending on hospital capital investments.

Answer. The Omnibus Budget Reconciliation Act of 1987 requires the Secretary, by regulation, to fold inpatient capital into the current prospective payment system (PPS) by October 1, 1991. When fully implemented, the capital prospective payment system will provide hospitals with a fixed amount for each Medicare admission, instead of paying a proportion of total costs.

Ten Year Transition Period

To protect hospitals from major disruption, the regulation proposes a lengthy transition that would phase in a fully federal payment rate over a 10 year period.

Payment Methodology: Two Distinct Types of

Transition Payments

The proposed rule would establish a standard federal rate for all capital-related inpatient hospital costs based on the estimated FY 1991 national average Medicare capital costs per discharge for hospitals paid under PPS. Adjustments would be made to the federal rate to account for each hospital's case mix, extraordinarily costly or lengthy cases, geographic location, and higher costs experienced by certain hospitals that treat a disproportionately high number of indigent patients.

Based on the FY 1990 cost report, a hospitalspecific payment rate will also be determined for all hospitals. The rate will be adjusted for case mix and updated to FY 1992 based on the increase in national average capital costs per discharge.

"Hold Harmless" Payment Methodology

Hospitals that have a FY 1990 hospital-specific rate for capital above the federal rate will receive the higher of either:

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90 percent of the reasonable costs associated with the old capital (a "hold harmless" payment), plus a payment for new capital based on a proportion of the newly created federal rate, or;


100 percent of the federal rate or the blended
rate, if lower.

Hospitals receiving the full federal rate could not subsequently change to "hold harmless" payments. However, hospitals could switch from the "hold harmless" payment to the federal rate when declining capital costs and payments made it more advantageous. After the transition period, all hospitals would receive a fully federal payment rate.

Fully Prospective Payment Rate Methodology

Hospitals with an FY 1990, hospital-specific rate for capital below the new federal rate would be paid a fully prospective payment rate based on a blend of their hospital-specific rate and the federal rate.

The FY 1992 payment would be based on a blend of their hospital-specific rate and 10 percent of the federal rate. Over the next 10 years, the federal portion of the payment would increase by 10 percentage points per year, while the hospitalspecific rate would decrease by the same percentage. In the tenth year, hospitals would be paid 100 percent of the federal rate.

Hospitals paid a fully prospective rate could make a one-time change to "hold harmless" payments if their FY 1991 cost reports show actual costs in that year to be greater than the federal rate.

Market Basket Update

For FY 1992 through 1995, the update to the federal and the hospital-specific rates is based on actual increases in capital-related costs per case that occurred two years previous to the current


federal fiscal year. For example, FY 1994 rates would be updated based on FY 1992 data. Beginning in FY 1996, we propose to determine the update by taking into consideration the capital "market basket" index, changes in capital requirements, and new technology.

Increased Payments and Budget

Aggregate capital payments will increase by 5 percentage points, as specified by law, reflecting a reduction in the payment discount from 15 to 10 percent. Total Medicare payment for capital under the new payment system will be budget neutral for FY 1992 through FY 1995; that is, total payments will be equal to 90 percent of what they would have been under the cost-based payment system.

Puerto Rico and Excluded Hospitals

A specific federal rate for capital-related inpatient hospital costs will be used for Puerto Rico. Hospitals and hospital distinct part units that are currently excluded from PPS will continue to be paid for capital-related costs on a reasonable cost basis.

Question. How much do you expect this plan to save, and to what extent will it reduce overcapacity?

Answer. The plan is budget neutral. We generally expect capital prospective payment to help encourage hospitals' more efficient use of resources. Although it is logical that reduced capital would affect excess capacity, we have no specific estimates of this effect.


Question. will exceptions be granted for specific hospitals that can demonstrate dire hardships resulting from implementation of this plan?

Answer. An exceptions process would be provided for hospitals that would be otherwise financially disadvantaged during the transition. For FY 1992, the regulation proposes that:

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Hospitals with capital costs greater than 150
percent of payments under the capital-prospective
payment system would receive an additional
payment of 75 percent of costs above 150 percent.

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