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.     

Tracking the Response to the Balanced Budget Act of 1997: Impact on Medicare Managed Care Enrollment in Rural Counties

The impact of the Balanced Budget Act of 1997 on recent changes in enrollment of Medicare beneficiaries into managed care plans is examined. The Balanced Budget Act of 1997 created a new payment structure for Medicare risk contracts, which, in 1998, resulted in all counties receiving either a minimum payment or a payment with the increase restricted at 2 percent growth over the 1997 rate. Using a baseline of December 1997 and enrollment data through June 1998, differences in early enrollment trends between urban and rural counties and between counties at various rates of payment are examined. As expected, continued enrollment increases in all counties is observed but with some concerns about slow enrollment growth--and announcements of plan terminations--in counties with payment rates in the mid-range, above the floor payment but subject to the 2 percent growth. In addition, evidence of considerable changes in the benefits offered by plans and the premiums charged to beneficiaries also was observed during the first nine months of 1998. The implications for growth of managed care options in rural areas are still unclear. The floor on payments may be helpful, but constraints in payment increases and delays in implementing a blended rate can be expected to create a negative impact on decisions to market managed care plans.     

Why do so few HMOs offer Medicare risk plans in rural areas?

Only 17 of the 38 health maintenance organizations (HMOs) that have Medicare risk contracts and offer coverage to commercial clients in rural counties include the rural counties in their Medicare plan service areas. Rural counties in which HMOs offer Medicare coverage have higher average adjusted average per capita costs (AAPCCs), larger populations, and more physicians per capita than rural counties excluded by risk plans. Interviewed plans cite low and erratic AAPCCs, scarcity of potential enrollees, lack of negotiating power with physicians, and adverse selection as drawbacks in rural areas. Proposed changes to the payment methodology would probably lead HMOs to increase their Medicare offerings in urban fringe areas, but not in isolated rural areas.     

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.     

Multiple payers,commonality and free-riding in health care: Medicare and private payers

Managed health care plans and providers in the US and elsewhere sell their services to multiple payers. For example, the three largest groups of purchasers from health plans in the US are employers, Medicaid plans, and Medicare, with the first two accounting for over 90% of the total enrollees. In the case of hospitals, Medicare is the largest buyer, but it alone only accounts for 40% of the total payments. While payers have different objectives and use different contracting practices, the plans and providers set some elements of the quality in common for all payers. In this paper, we study the interactions between a public payer, modeled on Medicare, which sets a price and takes any willing provider, a private payer, which limits providers and pays a price on the basis of quality, and a provider/plan, in the presence of shared elements of quality. The provider compromises in response to divergent incentives from payers. The private sector dilutes Medicare payment initiatives, and may, under some circumstances, repair Medicare payment policy mistakes. If Medicare behaves strategically in the presence of private payers, it can free-ride on the private payer and set its prices too low. Our paper has many testable implications, including a new hypothesis for why Medicare has failed to gain acceptance of health plans in the US.     

A big problem for health plans. Some providers won't play the managed-care game

Lost in all the criticism of HMOs for their decision to abandon many Medicare managed-care markets is a core problem: Many providers are unwilling to join networks serving that population. Hospitals and doctors say they can't offer services to seniors for the low reimbursements from Medicare + Choice and stay solvent. As a result, plans are lobbying Congress for payment relief.     

Vulnerability of rural hospitals to Medicare outpatient payment reform

Because the Balanced Budget Act (BBA) of 1997 requires implementation of a Medicare prospective payment system (PPS) for hospital outpatient services, the authors evaluated the potential impact of outpatient PPS on rural hospitals. Areas examined include: (1) How dependent are rural hospitals on outpatient revenue? (2) Are they more likely than urban hospitals to be vulnerable to payment reform? (3) What types of rural hospitals will be most vulnerable to reform? Using Medicare cost report data, the authors found that small size and government ownership are more common among rural than urban hospitals and are the most important determinants of vulnerability to payment reform.     

Lessons from the Essential Access Community Hospital Program for Rural Health Network Development

The Essential Access Community Hospital (EACH) Program is testing a concept for limited-service hospitals established under Medicare called the Rural Primary Care Hospital (RPCH). The program uses cost-based reimbursement and relaxed regulatory requirements to help low-volume rural hospitals shift emphasis from acute care to primary care and emergency services. RPCHs must form "horizontal" networks with larger hospitals and may form "vertical" arrangements with ambulatory service providers and practitioners. A small number of rural hospitals have converted to the RPCH status since the program entered the implementation stage in late 1993. It is unclear how many other hospitals will convert given uncertainty regarding the financial impact of RPCH conversion and concerns with certain requirements. The program illustrates how payment policies can provide incentives for network development and reflects the importance of physician involvement and technical assistance in developing limited-service hospitals. In addition, it appears that EACH/RPCH networks that form under the program may serve as building blocks for broader networks, as the seven states involved in the program look to develop rural health networks that go beyond the EACH/RPCH model.     

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.     

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.     

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.     

The March to Accountable Care Organizations—How Will Rural Fare?

Purpose: This article describes a strategy for rural providers, communities, and policy makers to support or establish accountable care organizations (ACOs). Methods: ACOs represent a new health care delivery and provider payment system designed to improve clinical quality and control costs. The Patient Protection and Affordable Care Act (ACA) makes contracts with ACOs a permanent option under Medicare. This article explores ACA implications, using the literature to describe successful integrated health care organizations that will likely become the first ACOs. Previous research studying rural managed care organizations found rural success stories that can inform the ACO discussion. Findings: Preconditions for success as ACOs include enrolling a minimum number of patients to manage financial risk and implementing medical care policies and programs to improve quality. Rural managed care organizations succeeded because of care management experience, nonprofit status, and strong local leadership focused on improving the health of the population served. Conclusions: Rural provider participation in ACOs will require collaboration among rural providers and with larger, often urban, health care systems. Rural providers should strengthen their negotiation capacities by developing rural provider networks, understanding large health system motivations, and adopting best practices in clinical management. Rural communities should generate programs that motivate their populations to achieve and maintain optimum health status. Policy makers should develop rural‐relevant ACO‐performance measures and provide necessary technical assistance to rural providers and organizations.     

Payment Policy and Inefficient Benefits in the Medicare+Choice Program

We investigated whether constraints on premium rebates by health plans in the Medicare+Choice program result in inefficient benefits. Since relationships between revenue and benefits could be confounded by unobserved variation in the cost of coverage, we took advantage of a natural experiment that occurred following passage of the Benefits Improvement and Protection Act of 2000. Our findings indicate that benefits in zero premium plans were more sensitive to changes in payment rates than were benefits in plans that charged nonzero premiums. These results strongly suggest that current Medicare policy induces plans to offer benefits that are not valued by enrollees at or above their cost.     

Impact of the BBA on post-acute utilization

In this article, the author summarizes recent changes in Medicare post-acute payment policies, discusses the implications of certain design and implementation issues, and analyzes whether different types of patients are using skilled nursing facilities (SNFs), home health agencies (HHAs), and rehabilitation hospitals and units. If similar populations are treated by these three types of providers, service patterns may be affected by the financial incentives in the new, more restrictive payment policies. The author describes new post-acute care (PAC) payment policies, service patterns prior to the Balanced Budget Act of 1997 (BBA), differences in the populations using these providers, and possible effects of the new payment systems on site-of-care decisions.     

Medicare-the development of publicly financed health insurance: Medicare's impact on the nation's health care system

It is useful for health care managers to understand Medicare's history and the impact on providers of ever-changing Medicare payment methods. Initially, Medicare payments resembled those of commercial insurance plans and Blue Cross Blue Shield plans. When Congress became concerned about the increasing costs of Medicare, new payment methods were created to limit payments to providers. The prospective payment system, imposed on hospitals in 1987 and later on nursing homes, home health agencies, and other services, has been adapted by commercial plans, Blue Cross Blue Shield associations, and state Medicaid programs. Changes in payer reimbursements require health care managers to adjust the department's charge master and exert more control of departmental costs. The story of Medicare's beginnings and development can provide some insight into the possibility of national health insurance, given the historic and current politics that limit publicly financed social programs. This article discusses the development of Medicare and its administration and serves as an introduction to the complex realities of health care reimbursement policy.     

The first 3 years of Medicare prospective payment: an overview.

This article provides a synopsis of the available evidence on the impact of the Medicare prospective payment system (PPS) for hospitals over the first 3 years of its implementation. The impact of PPS on hospitals, Medicare beneficiaries, post-hospital care, other payers for inpatient hospital services, other health care providers, and Medicare program operations and expenditures is examined.     

How Successful Is Medicare Advantage?

Context

Medicare Part C, or Medicare Advantage (MA), now almost 30 years old, has generally been viewed as a policy disappointment. Enrollment has vacillated but has never come close to the penetration of managed care plans in the commercial insurance market or in Medicaid, and because of payment policy decisions and selection, the MA program is viewed as having added to cost rather than saving funds for the Medicare program. Recent changes in Medicare policy, including improved risk adjustment, however, may have changed this picture.

Methods

This article summarizes findings from our group''s work evaluating MA''s recent performance and investigating payment options for improving its performance even more. We studied the behavior of both beneficiaries and plans, as well as the effects of Medicare policy.

Findings

Beneficiaries make “mistakes” in their choice of MA plan options that can be explained by behavioral economics. Few beneficiaries make an active choice after they enroll in Medicare. The high prevalence of “zero-premium” plans signals inefficiency in plan design and in the market''s functioning. That is, Medicare premium policies interfere with economically efficient choices. The adverse selection problem, in which healthier, lower-cost beneficiaries tend to join MA, appears much diminished. The available measures, while limited, suggest that, on average, MA plans offer care of equal or higher quality and for less cost than traditional Medicare (TM). In counties, greater MA penetration appears to improve TM''s performance.

Conclusions

Medicare policies regarding lock-in provisions and risk adjustment that were adopted in the mid-2000s have mitigated the adverse selection problem previously plaguing MA. On average, MA plans appear to offer higher value than TM, and positive spillovers from MA into TM imply that reimbursement should not necessarily be neutral. Policy changes in Medicare that reform the way that beneficiaries are charged for MA plan membership are warranted to move more beneficiaries into MA.