Linking Medicare Capital Payments to Hospital Occupancy Rates

Document Type


Publication Date

Fall 1989


Economics | Medicine and Health Sciences | Social and Behavioral Sciences


Prologue: How to reimburse hospitals for their capital costs has remained a thorn in the side of the Medicare prospective payment system since its enactment in 1983. Congress initially agreed to pay for the portion of “reasonable" capital costs attributable to a hospital’s Medicare patients, while setting a deadline of October 1986 for devising a method of incorporating capital payment into the new system of prospectively determined per case payments (diagnosis-related groups, or DRGs). This deadline has been pushed back several times and now stands at October 1, 1991. In the meantime, capital payments to hospitals have been subjected to across-the-board reductions (15 percent in fiscal year 1989) as Congress and the administration strive to lower the federal budget deficit. In this paper, economists Michael Hemesath and Gregory Pope argue that this current method of saving money is “essentially arbitrary” and propose a means of cutting capital payments through occupancy penalties. They write: “A more equitable policy would link payment amounts to the degree of capacity utilization of particular facilities. Such a policy would encourage reductions in unused capacity while not penalizing heavily used facilities.” Though most hospital groups decry such a linkage, Rep. Pete Stark (D-CA) and the Health Care Financing Administration have shown interest in relating occupancy measures to Medicare capital payment. Hemesath and Pope recognize that prospective payment of capital is preferable to occupancy penalties and offer this proposal as “an interim measure.”


DOI: 10.1377/hlthaff.8.3.104