Impact of Medicare's prospective payment system on hospitals, skilled nursing facilities, and home health agencies: how the Balanced Budget Act of 1997 may have altered service patterns for Medicare providers

The prospective payment system is one of many changes in reimbursement that has affected the delivery of health care. Originally developed for the payment of inpatient hospital services, it has become a major factor in how all health insurance is reimbursed. The policy implications extend beyond the Medicare program and affect the entire health care delivery system. Initially implemented in 1982 for payments to hospitals, prospective payment system was extended to payments for skilled nursing facility and home health agency services by the Balanced Budget Act of 1997. The intent of the Balanced Budget Act was to bring into balance the federal budget through reductions in spending. The decisions that providers have made to mitigate the impact are a function of ownership type, organizational mission, and current level of Medicare participation. This article summarizes the findings of several initial studies on the Balanced Budget Act's impact and discusses how changes in Medicare reimbursement policy have influenced the delivery of health care for the general public and for Medicare beneficiaries.     

Rural Long‐term Care: What Do We Need to Know to Improve Policy and Programs?

This article examines what is known and what we need to know about rural long-term care populations and the formal and informal service systems that support their long-term care needs. The article provides a framework for identifying some of the critical policy and research questions concerning the financing and delivery of rural long-term care that merit the attention of health services researchers and policymakers. It documents differences in the demographic and health characteristics of the rural and urban elderly and in the availability, organization, and use of health and long-term care services in rural areas that have significant implications for long-term care policy and programs. With this background in mind, the author discusses specific topics and questions relevant to long-term care policy and program improvements for rural communities and people: (a) the changing role of the rural nursing home; (b) residential care alternatives in rural areas; (c) health personnel and rural long-term care; (d) the quality of rural long-term care; (e) innovations in long-term care financing and service delivery; (f), use of technology in rural long-term care; and (g) the effects of Medicaid and Medicare policy changes on the rural long-term care system.     

Medicare's Payment Strategy For End-Stage Renal Disease Now Embraces Bundled Payment And Pay-For-Performance To Cut Costs

Since 1973 Medicare has provided health insurance coverage to all people who have been diagnosed with end-stage renal disease, or kidney failure. In this article we trace the history of payment policies in Medicare's dialysis program from 1973 to 2011, while also providing some insight into the rationale for changes made over time. Initially, Medicare adopted a fee-for-service payment policy for dialysis care, using the same reimbursement standards employed in the broader Medicare program. However, driven by rapid spending growth in this population, the dialysis program has implemented innovative payment reforms, such as prospective bundled payments and pay-for-performance incentives. It is uncertain whether these strategies can stem the increase in the total cost of dialysis to Medicare, or whether they can do so without adversely affecting the quality of care. Future research on the intended and unintended consequences of payment reform will be critical.     

The spillover effects of Medicare managed care: Medicare Advantage and hospital utilization

More than a quarter of Medicare beneficiaries are enrolled in Medicare Advantage, which was created in large part to improve the efficiency of health care delivery by promoting competition among private managed care plans. This paper explores the spillover effects of the Medicare Advantage program on the traditional Medicare program and other patients, taking advantage of changes in Medicare Advantage payment policy to isolate exogenous increases in Medicare Advantage enrollment and trace out the effects of greater managed care penetration on hospital utilization and spending throughout the health care system. We find that when more seniors enroll in Medicare managed care, hospital costs decline for all seniors and for commercially insured younger populations. Greater managed care penetration is not associated with fewer hospitalizations, but is associated with lower costs and shorter stays per hospitalization. These spillovers are substantial – offsetting more than 10% of increased payments to Medicare Advantage plans.     

Rural Implications of Medicare''s Post-Acute-Care Transfer Payment Policy

CONTEXT: Under the Medicare post-acute-care (PAC) transfer policy, acute-care hospitals are reimbursed under a per-diem formula whenever beneficiaries are discharged from selected diagnosis-related groups (DRGs) to a skilled nursing facility, home health care, or a prospective payment system (PPS)-excluded facility. Total per-diem payments are below the full DRG payment only when the patient's length of stay (LOS) is short relative to the geometric mean LOS for the DRG; otherwise, the full DRG payment is received. This policy originally applied to 10 DRGs beginning in fiscal year 1999 and was expanded to additional DRGs in FY2004. The Secretary may include other DRGs and types of PAC settings in future expansions. PURPOSE: This article examines how the initial policy change affected rural and urban hospitals and investigates the likely impact of the FY2004 expansion and other possible future expansions. METHODS: The authors used 1998-2001 Medicare Provider Analysis and Review (MEDPAR) data to investigate changes in hospital discharge patterns after the original policy was implemented, compute the change in Medicare revenue resulting from the payment change, and simulate the expected revenue reductions under expansions to additional DRGs and swing-bed discharges. FINDINGS: Neither rural nor urban hospitals appear to have made a sustained change in their discharge behavior so as to limit their exposure to the transfer policy. Financial impacts from the initial policy were similar in relative terms for both types of hospitals and would be expected to be fairly similar for an expansion to additional DRGs. On average, including swing-bed discharges in the transfer policy would have a very small financial impact on small rural hospitals; only hospitals that make extensive use of swing beds after a short inpatient stay might expect large declines in total Medicare revenue. CONCLUSION: Rural hospitals are not disproportionately harmed by the PAC transfer policy. An expanded policy may even benefit rural hospitals by recognizing their lower use of post-acute-care and readjusting DRG weights so that they are paid more appropriately when providing the full course of inpatient care.     

Use and cost of physician and supplier services under Medicare, 1986.

There is general consensus that the present Medicare physician payment system and related policies should be revised. Therefore, the Health Care Financing Administration and Congress are examining the physician reimbursement system for potential changes that could reverse the inflationary incentives in the present system and induce greater incentives for efficiency and cost savings. Medicare program data and information are provided to assist health care managers and administrators in the development and analysis of Medicare physician research and policy initiatives. The data may also be helpful in monitoring and measuring the use and cost of Medicare physician and supplier services as related to program performance and administration.     

Medicaid and Rural Health Care

The impact of Medicaid policies on systems of rural health care has typically been understood in terms of payment methods and rates. But Medicaid agencies have multifaceted influences, including service funding, promotion of access and quality, and infrastructure. We present in this article a general framework to explore these facets and examine literature that has attempted to identify and measure the impacts of the Medicaid program on rural health cure systems. While the literature is relatively sparse, there is evidence that rural health systems have been both bolstered and challenged by Medicaid policies in several areas. Several contemporary developments in Medicaid, including increased state flexibility, uneven coverage expansion, and aggressive Medicaid purchasing strategies, suggest that tensions between Medicaid policy and rural health care needs could grow in the future. These tensions provide focus for developing a research agenda that explores the intersection of Medicaid and rural concerns; a number of research questions that would be a part of this agenda are presented.     

Challenges and opportunities for Medicare's original prospective payment system

The Medicare program initiated prospective payment for inpatient hospital services in 1983. Although the payment system has achieved many of its goals, changes in the health care market and the public nature of the program will continue to present both challenges and opportunities for improvement. Looking forward, policymakers must consider how to balance paying accurately for services with using Medicare to achieve broader policy objectives. Paying for new technologies, responding to market segmentation and specialization, and encouraging quality improvement must also be addressed. To successfully navigate these issues, policymakers and program administrators need accurate and timely information.     

Institutional alternatives to the rural hospital

An important aspect of the ongoing debate on rural health policy is how to deliver inpatient care in sparsely populated rural areas. One alternative is to create a new classification of rural inpatient facility that would deliver more limited services than available in a rural hospital, have more flexibility in staffing requirements, and possibly be reimbursed differently. The support of the Health Care Financing Administration for the concept of a limited service rural hospital is critical, since such a facility would not be financially viable without Medicare payment. Several organizational and public policy issues that merit consideration in the design and implementation of institutional alternatives to rural hospitals are discussed, including licensure and certification, scope of services, personnel, quality assurance, and payment.     

Medicare's operational history and impact on health care

Medicare was originally designed in the 1960s to fit into the existing health care delivery system. However, the program's early years showed an inflationary impact on health care costs. Medicare was the second largest federal domestic program and the fastest growing one, making it a target for those concerned about the size of government in general. By 1980, Medicare constituted 15% of the nation's expenditures for personal health care; and Medicare's administrators recommended substantive changes in provider payments through the introduction of the prospective payment system. Prospective payment system legislation impacted hospitals initially and later skilled nursing facilities and home health agencies. As policymakers made changes in Medicare payments to providers, providers made changes in the way services were delivered. What eventually evolved, in an insidious manner, was implicit management of the nation's health care delivery system by the Medicare program.     

Achieving Equity in Medicare Disproportionate Share Payments to Rural Hospitals: An Assessment of the Financial Impact of Recent and Proposed Changes to the Disproportionate Share Hospital Payment Formula

Historically, the Medicare Disproportionate Share Hospital (DSH) payment program has been less favorable to rural hospitals: eligibility thresholds were higher and the payment adjustment was smaller for rural than for urban hospitals. Although the Medicare, Medicaid, and SCHIP Benefit Improvement and Protection Act (BIPA) of 2000 established a uniform low-income threshold and increased the magnitude of the adjustment for certain small and rural hospitals as a means to promote payment equity, the DSH distribution formula continues to vary by location. This study examines how the DSH revisions mandated under BIPA are likely to affect rural hospitals' financial performance and simulates the financial impact of implementing a uniform DSH payment adjustment. Using data from the 1998 Medicare cost report and impact files, this study found that two-thirds of both rural and urban hospitals would have qualified for DSH payments following BIPA compared with only one-fifth of rural hospitals and one-half of urban hospitals prior to BIPA. Although the impact of BIPA revisions on rural hospitals' total margins were found to be modest, the financial impact of a uniform payment adjustment would be somewhat greater: rural hospitals' average total margins would have increased by 1.6 percentage points. Importantly, 20% of rural hospitals with negative total margins would have been "in the black" if rural and urban hospitals were reimbursed using the same DSH formula. These findings suggest that elimination of rural and urban disparities in DSH payment could strengthen the rural health care safety net.     

Do financial incentives matter? Effects of Medicare price shocks on skilled nursing facility care

Skilled nursing facility (SNF) spending has been one of the fastest growing categories of Medicare spending over the past few decades, and reductions in SNF payments are often recommended as part of Medicare cost containment efforts. Using a quasi‐experiment resulting from a policy‐driven and facility‐specific Medicare payment change, we provide new evidence on how Medicare payment changes affect the amount of SNF care provided to Medicare patients. Specifically, we examine a one‐time, plausibly exogenous change in the hospital wage index, an area‐level adjustment to SNF payments that affected the majority of SNFs nationwide. Using a panel dataset of SNFs, we model the effects of these payment changes on more than 12,000 SNFs across the United States. We find that increases in Medicare payment rates to SNFs increased the total number of Medicare resident days at SNFs. Specifically, a 5% payment increase raised Medicare resident days by 2.33% at facilities with a 10% Medicare share relative to 0%. Further, the effects were asymmetric: Although Medicare payment increases affected Medicare days, payment decreases did not. Our results have important implications for policies that alter the Medicare base payment rates to SNFs and other health care providers.     

Diagnosis related group prospective payment: implications for health care and medical technology

This paper reviews the major features of the new DRG prospective payment system which was introduced for the payment of hospitals under the Medicare program October 1, 1983 in the United States. It explores its general implications for the health sector, and then examines its specific implications for the development, diffusion, and utilization of medical technology. It concludes with some of the research questions that require investigation to provide an informed basis for modification to the payment system that will ensure that quality health care will be provided at an affordable cost.     

Medicare Mental Health Parity: A High Potential Change that is Long Overdue

Recent changes in legislation regarding mental health parity in Medicare will revolutionize payment for mental health care and delivery systems. This commentary discusses why this policy change was essential to promote adequate care for populations served by Medicare and to address expected changes in beneficiary, provider, and plan behavior as more equitable payments by Medicare are implemented.     

Has Medicare Been a ‘Bad Deal’ for Rural Hospitals?

Understanding the links between Medicare involvement and financial performance in rural hospitals is important for evaluating reimbursement policy under Medicare's prospective payment system (PPS). While simple comparisons between urban and rural hospitals suggest that the latter have lower PPS profit margins on average, there is little multivariate evidence on how Medicare involvement affects financial performance in rural hospitals and whether this relationship differs between rural and urban hospitals. Existing multivariate evidence suggests that Medicare involvement improves PPS profits in both rural and urban hospitals after controlling for other hospital- and market-specific factors. By contrast, the present analysis considers the relationship between Medicare involvement and broader measures of profitability than PPS profits. This provides insight into whether Medicare reimbursement is adequate relative to other forms of third-party payment. The results indicate that Medicare involvement has a markedly different effect on the profitability of rural versus urban hospitals. Greater Medicare involvement is associated with lower patient care profitability in rural hospitals but has a strong positive and significant effect on both patient care and overall (i.e., patient and nonpatient) profitability in urban ones. Medicare involvement is not significantly related to overall profitability in rural hospitals, however, suggesting that these hospitals may be able to mitigate patient care revenue shortfalls from greater Medicare involvement by increasing their nonpatient care revenue sources.     

An economic history of Medicare part C

Context: Twenty‐five years ago, private insurance plans were introduced into the Medicare program with the stated dual aims of (1) giving beneficiaries a choice of health insurance plans beyond the fee‐for‐service Medicare program and (2) transferring to the Medicare program the efficiencies and cost savings achieved by managed care in the private sector. Methods: In this article we review the economic history of Medicare Part C, known today as Medicare Advantage, focusing on the impact of major changes in the program's structure and of plan payment methods on trends in the availability of private plans, plan enrollment, and Medicare spending. Additionally, we compare the experience of Medicare Advantage and of employer‐sponsored health insurance with managed care over the same time period. Findings: Beneficiaries’ access to private plans has been inconsistent over the program's history, with higher plan payments resulting in greater choice and enrollment and vice versa. But Medicare Advantage generally has cost more than the traditional Medicare program, an overpayment that has increased in recent years. Conclusions: Major changes in Medicare Advantage's payment rules are needed in order to simultaneously encourage the participation of private plans, the provision of high‐quality care, and to save Medicare money.     

Home health care agency staffing patterns before and after the Balanced Budget Act of 1997, by rural and urban location.

CONTEXT: The Balanced Budget Act (BBA) of 1997 and other recent policies have led to reduced Medicare funding for home health agencies (HHAs) and visits per beneficiary. PURPOSE: We examine the staffing characteristics of stable Medicare-certified HHAs across rural and urban counties from 1996 to 2002, a period encompassing the changes associated with the BBA and related policies. METHODS: Data were drawn from Medicare Provider of Service files and the Area Resource File. The unit of analysis was the 3,126 counties in the United States, grouped into 5 categories: metropolitan, nonmetropolitan adjacent, and 3 nonmetropolitan nonadjacent groups identified by largest town size. Only relatively stable HHAs were included. We generated summary HHA staff statistics for each county group and year. FINDINGS: All staff categories, other than therapists, declined from 1997 to 2002 across the metropolitan and nonmetropolitan county groupings. There were substantial population-adjusted decreases in stable HHA-based home health aides in all counties, including remote counties. CONCLUSIONS: The limited presence of stable HHA staff in certain nonmetropolitan county types has been exacerbated since implementation of the BBA, especially in the most rural counties. The loss of aides in more rural counties may limit the availability of home-based long-term care in these locations, where the need for long-term care is considerable. Future research should examine the degree to which the presence of HHA staff influences actual access and whether other paid and unpaid sources of care substitute for Medicare home health care in counties with limited supplies of HHA staff.     

The financial impact of interim and prospective payment systems on home health providers in rural communities

The objective of the study was to examine the financial impact of the interim payment system and prospective payment system (PPS) on home health agencies (HHAs) in rural communities. Data sources used included a survey of administrators in all rural HHAs in Pennsylvania and financial and utilization data provided by 10 rural HHAs in Northwest Pennsylvania. The results of survey showed that, under the PPS, 40% of the HHAs reported financial vulnerability and 24% expressed concern that the fiscal uncertainties arising from the PPS threatened their continued operation. Two prospective analyses were conducted to examine how HHAs would be further affected by payment rate changes implemented in October 2002 and April 2003. The Medicare margin in rural Pennsylvania was 23.3% during the period from October 2000 to June 2002. This margin was slightly higher than the free-standing home health Medicare margin (21.6%) reported in analyses conducted by the Medicare Payment Advisory Commission (MedPac). However, this Medicare margin did not include hospital-based HHAs. The payment rate changes implemented in 2002 and 2003 would increase the proportion of care episodes that incur financial losses, assuming service provision remains constant. As of April 2003, the proportion of all episodes with loss would rise to 46.9%, the proportion of low-utilization payment adjustment (LUPA) episodes with loss would rise to 91.1%, and the proportion of non-LUPA episodes with loss would rise to 40.2%. New payment mechanisms are profoundly affecting the finances of rural HHAs and the use of home health services by Medicare beneficiaries.