Review of Capital-Related Cost Prospective Payment System's Base Year 1992

EXECUTIVE SUMMARY:

This final audit report provides the results of our review to determine the accuracy of base year estimates used by the Health Care Financing Administration (HCFA) to calculate prospective rates for capital expenditures paid to hospitals. Although HCFA used the best data available at the time, current actual cost experience indicates HCFA's forecast estimates for base year 1992 costs were too high. Higher estimates will result in excessive payments to hospitals. By adjusting the estimates to reflect more current data, HCFA would reduce payment rates for capital related expenditures by about 7.5 percent. In order to prevent overpaying hospitals in the future for capital costs, we are recommending that HCFA adjust rates to reflect more current cost data. We are also recommending that HCFA continue to monitor the most current data (i.e., settling of unsettled cost reports for the remaining 36 percent of hospitals) and make any necessary further adjustments to the base rate. The HCFA concurred with our analysis, but did not comment on our specific recommendations.