Analysis of Hospital Capital Costs

This final audit report analyzes hospital capital costs during the first 5 years of Medicare's prospective payment system (PPS). We found that capital costs increased much faster than other leading economic indexes, even though the hospital industry had significant excess capacity. We recommend that HCFA propose legislation to continue mandated reductions in capital payments beyond FY 1995 to recognize that the historical costs used in setting PPS rates are inflated because of excess hospital capacity and the inclusion of inappropriate elements (waivers of interest income offsets and depreciation of federally funded assets). The HCFA generally concurred with our position on excess capacity but did not agree on the issue of interest income waivers and depreciation on federally funded assets.