“Reasonable Cost” Reimbursement for Inpatient Hospital Services Under Medicare and Medicaid: The Emergence of Public Control

Abstract

AbstractIn 1965 Congress, through amendments to the Social Security Act, established the Medicare and Medicaid programs and mandated that hospitals participating in those programs be reimbursed for the “reasonable cost” of providing inpatient services to Medicare and Medicaid patients. In this Article, the Chairman of the Massachusetts Rate Setting Commission contends that HEW—which, like Congress, was anxious to stimulate the voluntary participation of hospitals in the Medicare and Medicaid programs—interpreted “reasonable cost” with excessive liberality toward participating hospitals and created a fiscally burdensome and inflationary reimbursement system lacking principles of efficiency and planning. The author then describes a series of attempts—varying in scope and success—to reformulate “reasonable cost,” as applied to Medicare and Medicaid reimbursement, in a manner more consistent with the author's concept of sound public policy. The culmination of these attempts to date, he states, was Public Law 92-603 (Social Security Amendments of 1972), which introduced to the reimbursement system the concepts of (1) tough evaluation of the reasonableness of hospital costs, with emphasis on efficiency, utilization, and planning; (2) shifting de facto power over reimbursement rates away from the hospitals and into the hands of the agencies that purchase their services; and (3) increased public scrutiny of hospital operations. The author contends that this law, and the philosophy which underlies it, represents a healthy balancing of the needs of hospitals and the needs of the public; that the trend toward cost control and public control which the law embodies has been substantially furthered in those states which have statutorily established hospital budget or charge review programs; and that such trend will continue and profoundly affect any national health insurance plan enacted in the future.