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.     

Hospital and Medicare financial performance under PPS, 1985-90

Although an increasing number of hospitals are reporting net losses from the Medicare prospective payment system (PPS) for inpatient care, overall hospital facility profit rates remain stable. Hospitals that reported net profits in the Medicare inpatient PPS sector in PPS 7 (1990) had smaller increases in Medicare expenses than hospitals that reported PPS losses in PPS 7. Medicare PPS inpatient net losses in PPS 7 were more than offset by non-Medicare net profits. Even though Medicare PPS revenues grew more slowly than the gross domestic product from 1985 to 1990, other hospital revenues grew more rapidly.     

The impact of PPS on hospital-sponsored post-acute services: a case study of Delaware Medicare providers

Hospitals were the first providers to experience the change in Medicare reimbursement from a cost basis to the prospective payment system (PPS). In the 1980s, this switch was accomplished through the development of diagnosis-related groups, a unique formula for Medicare reimbursement of inpatient hospital services. During that time, the concern was that, with the anticipated reduced payments to hospitals, adverse impacts on Medicare beneficiaries were likely, including premature release of patients from hospital care resulting in medical complications, increased readmissions, prolonged episodes of recuperation, and preventable mortality. The Balanced Budget Act of 1997 (BBA) mandated the implementation of the PPS for Medicare providers of skilled nursing home care and home health care. This change from cost-based reimbursement to PPS raised concerns that these providers would react as hospitals had done-that is, skilled nursing homes might limit their admission of Medicare patients and home health agencies might cut back on visits. As a result of that, hospitals might be faced with providing care for these post-acute patients without receiving additional reimbursement, and these changes in utilization patterns would be of critical importance to both providers and Medicare beneficiaries. This article examines the decisions that providers made in response to the perceived impact of the BBA. Qualitative data were derived from provider interviews. The article concludes with a discussion of how changes in Medicare reimbursement policy have influenced providers of post-acute care services to alter their level of participation in Medicare and the impact this may have on the general public as well as on Medicare beneficiaries.     

A decade of Medicare's prospective payment system--success or failure?

The growth in Medicare spending for inpatient hospital services slowed following the implementation of the prospective payment system (PPS) due to a decline in admission rates and limits on payment increases. Hospital costs, however, have increased faster than payments. Rather than reducing costs further, hospitals responded by charging privately insured patients more than the costs of their care and developing new revenue sources. PPS also redistributed Medicare payments across hospitals and was associated with increased spending in other settings. The PPS experience leaves policymakers with some immediate challenges and provides insights for the development of health care reform initiatives.     

The impact of DRGs on the cost and quality of health care in the United States.

The prospective Payment System (PPS) represents a fundamental change in the way the United States government reimburses hospitals for medical services covered under Medicare, a federal health care insurance program for the elderly and disabled. PPS replaced the retrospective cost-based system of payment for Medicare services with a prospective payment system. Under PPS, a predetermined specific rate for each discharge dictates payment according to the diagnosis related group (DRG) in which the discharge is classified. The PPS was intended to create financial incentives that encourage hospitals to restrain the use of resources while providing high-quality inpatient care. Both objectives appear to have been met under PPS. Hospital utilization has declined, average length of stay has fallen, and the locus of care has shifted from the inpatient setting to less costly outpatient settings. The growth in inpatient hospital benefits has slowed and the impending insolvency of the Medicare trust fund has been forestalled. Studies have found no deterioration in the quality of care rendered to Medicare beneficiaries. Neither the mortality rate nor the rate of re-admission (presumably related to premature discharge) increased under PPS. Indeed, PPS appears to have enhanced the quality of inpatient care by discouraging unnecessary and potentially harmful procedures, and by encouraging the concentration of complex procedures in facilities in which the high frequency of these procedures promotes efficiency. Incentive-based reimbursement also appears to have contributed to the growth in alternative delivery systems, such as HMOs and PPOs, which contain costs by maintaining a high volume of a limited range of services. The success of the PPS/DRG system in controlling costs and promoting quality in this country suggests its application in other countries, either as a method of reimbursement or as a product line management tool.     

Medicare use in the last ninety days of life.

The introduction of Medicare's prospective payment system (PPS) has led to changes in the way hospitals are being used. This article examines concomitant changes in the use of Medicare-covered services during the last 90 days of life, using data on more than 34,000 Medicare beneficiaries who died during the years 1982-1986. We focus on questions pertaining to changes in practice patterns that include location of death, hospital utilization, use of other covered services, and spending. We find that use of hospitals and other health services by Medicare beneficiaries during the last 90 days of life changed markedly over this period, which included the introduction of PPS in late 1983. The percentage of deaths occurring in hospitals decreased sharply from 1982 to 1986, especially in PPS states relative to waivered states; this effect seems primarily due to reductions in length of stay rather than reduced admission rates, which did not change significantly. Use of home care, durable medical equipment (DME), and physicians' office services also increased sharply during the last 90 days of life, but with no consistent evidence that the introduction of PPS was associated with these changes or with the level or mix of Medicare expenditures for these patients. Medicare spending in this period of life rose at the same rate as medical care price inflation, and about 75 percent of reimbursements continued to be hospital payments, despite the utilization changes.     

Effects of institutional services and characteristics on use of postacute care settings

Postacute care under Medicare may be provided in several institutional settings, some of which function as substitutes for each other, including rehabilitation care in either specialty hospitals and hospital units excluded from Medicare PPS or skilled nursing facility care. This study uses Medicare billing data to examine institution-based postacute care utilization for beneficiaries' hospital episodes occurring from February 1, 1992 through June 30, 1992. Data on inpatient and postacute Part A services used by Medicare inpatients receiving care in rehabilitation facilities or skilled nursing facilities are presented. The results indicate that, even after casemix is controlled for, inpatient stay treatment variables affect postacute care utilization patterns. Nonclinical factors such as age and sex also affect choice of postacute care site.     

What affects rural beneficiaries use of urban and rural hospitals?

Analysis of the Medicare provider analysis record (MEDPAR) data during fiscal years 1984 through 1989 indicates that the proportion of rural Medicare beneficiaries hospitalized in urban hospitals has remained constant during the prospective payment system (PPS). Much of the use of urban hospitals by rural beneficiaries during this period was to obtain specialized care or surgery, as suggested by the analysis, and is consistent with historical patterns of referral of rural patients. Thus, the bypassing of rural hospitals by rural beneficiaries for treatment in urban hospitals has probably not increased during PPS.     

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.     

The Balanced Budget Act (1997) and the supplyof nursing home subacute care

This article examines the impact of the Medicare prospective payment system (PPS) on the supply of subacute care services by nursing homes. A quasi-experimental interrupted time-series design using Heckman's two-stage regression model is employed to test for changes before and after the implementation of Medicare PPS. Our findings suggest that the change in Medicare reimbursement from cost-based to PPS under the Balanced Budget Act of 1997 resulted in a decrease of 1.7 percent in the supply of subacute care beds by nursing homes. However, this was a one-time, short-term negative effect. The supply of nursing home subacute care remained stable in the long-term. Other environmental factors, such as Medicare hospital discharges, hospital-based subacute care, Medicare managed care penetration, availability of home health, and per capita income were associated with nursing home subacute care supply. Organizational-level factors, such as occupancy rate, RN staff mix, and Medicare payer mix were also predictors of nursing home subacute care supply.     

Medicare dependent hospitals: who depends on whom?

Small rural hospitals with a large proportion of Medicare patients currently receive special treatment as Medicare dependent hospitals (MDHs) under the prospective payment system (PPS). Other high Medicare hospitals (HMHs)--both urban and rural--have sought to have the additional per case payments extended to them. Current utilization patterns, the availability of alternative facilities, and the socioeconomic and demographic characteristics of the service areas were examined to determine whether either the current MDH or alternative HMH targeting criteria identify hospitals whose closure might impair access to care for Medicare beneficiaries residing in their service areas. Neither MDHs nor HMHs are substantially different from other hospitals in terms of providing access. While some individual MDHs or HMHs might be considered essential access facilities, alternate criteria should be developed to identify these facilities regardless of the proportion of their patients attributable to the Medicare program.     

Change in the Medicare case-mix index in the 1980s and the effect of the prospective payment system.

Persistent increases in the Medicare case-mix index over the 1980s have been ascribed to changes both in medical treatment ("real changes") and in the way medical information is recorded ("coding changes") in hospitals. These changes have been attributed, in the absence of appropriate data and analyses, to the incentives of the Medicare prospective payment system (PPS). Using data for 1980-1986 from 235 hospitals, we estimate the effect on the Medicare case-mix index of a series of variables that reflect medical treatments and coding practices. Each of these underlying real or coding variables was changing prior to PPS and would likely have continued to change even in the absence of PPS. Furthermore, PPS may have had a distinct effect on these variables. These underlying trends and the PPS effects must each be estimated. Thus, the analysis begins by developing separate estimates for each of these real and coding variables (1) in the absence of PPS (autonomous effects) and (2) as a result of PPS (induced effects). Then, changes in the case-mix index are regressed against all of these variables to determine the degree to which specific autonomous real or coding variables or induced real or coding variables actually influenced measured case mix. Results show that real and coding changes each accounted for about half of the change in the Medicare case-mix index between 1980 and 1986, with the influence of coding starting to wane by 1986. PPS-induced factors explain about 80 percent of the change in measured case mix over time, autonomous factors about 20 percent. Especially powerful determinants of case-mix change included PPS-induced substitution of surgical for medical care and PPS-induced improvements in the accuracy of coding that led to assignment of patients to higher-weighted DRGs. Also, stringent Medicare peer review organizations appeared to restrain rises in case-mix indexes for their hospitals. Outpatient substitution for inpatient treatment, which others attributed to PPS, was well underway before PPS was announced.     

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 impact of transfer patients on Medicare inpatient cost per discharge

The cost of inpatient transfer cases has concerned hospitals as well as rate-setters. Reform of transfer payment in Medicare's Prospective Payment System has been suggested to ensure access and adequate treatment for these cases in a period where inpatient revenue has been declining. This analysis indicates that both transfer cases received and cases transferred to other hospitals have above average costs per case but their impact on Medicare inpatient cost per discharge is smaller than that of variables such as case-mix, area wages and resident/bed ratio which are used directly in PPS payment. Evidence is provided indicating the desirability of reform of PPS payment methods for transfer cases.     

Case shifting and the Medicare Prospective Payment System.

We assessed impacts of the Medicare Prospective Payment System (PPS) during its first two years of operation (1984-85) on 467 hospitals using data from the Commission on Professional and Hospital Activities and from the American Hospital Association. Medicare discharges as a per cent of total discharges remained constant between 1983 and 1985, but the per cent of uninsured patients increased, especially at large public hospitals. The number of Medicare and total discharges per hospital declined. The number of complex diagnosis related groups (DRGs) increased, both for Medicare and non-Medicare. This trend began before the implementation of PPS and affected all types of hospitals. There was also an appreciable increase in case mix types of hospitals. There was also an appreciable increase in case mix severity within specific DRGs during 1980-85. The proportion of total patients received from or transferred to other hospitals rose after 1983, but these increases were very small. The per cent of Medicare patients admitted through the emergency room increased, especially after 1983. By contrast, the share of total non-Medicare admissions through the emergency room (ER) remained stable. Although the growth of the number of uninsured and Medicare patients admitted through the ER predate PPS, they may be influenced by it and warrant further monitoring.     

Organizational and market factors associated with Medicare dependence in inpatient rehabilitation hospitals.

Rehabilitation hospitals in the USA have been excluded from the Medicare Prospective Payment System (PPS) system since 1982, and have received cost-based reimbursement. However, the 1997 Balanced Budget Act mandated a PPS for inpatient rehabilitation, to be implemented by the end of 2002. This study assesses rehabilitation hospitals' dependency on Medicare. Findings show that not-for-profit hospitals, facilities with fewer services, facilities with lower staffing levels, and hospitals with lower operating expenses and profits, have a higher proportion of their inpatient revenue coming from Medicare. These facilities may be vulnerable to the new PPS payment system.     

Testing a diagnosis-related group index for skilled nursing facilities.

Interest in case-mix measures for use in nursing home payment systems has been stimulated by the Medicare prospective payment system (PPS) for short-term acute-care hospitals. Appropriately matching payment with care needs is important to equitably compensate providers and to encourage them to admit patients who are most in need of nursing home care. The skilled nursing facility (SNF) Medicare benefit covers skilled convalescent or rehabilitative care following a hospital stay. Therefore, it might appear that diagnosis-related groups (DRG's), the basis for patient classification in PPS, could also be used for the Medicare SNF program. In this study, a DRG-based case-mix index (CMI) was developed and tested to determine how well it explains cost differences among SNF's. The results suggest that a DRG-based SNF payment system would be highly problematic. Incentives of this system would appear to discourage placement of patients who require relatively expensive care.     

Hospital responses to price shocks under the prospective payment system

Under the prospective payment system (PPS), hospitals receive a bundled payment for an entire episode of treatment based on diagnosis‐related groups (DRG). Although there is ample evidence regarding the impact of the introduction of the PPS, there is little research on the effects of the ensuing changes in payment levels under the PPS. In 2005, the Medicare PPS changed its definition of payment areas from the Metropolitan Statistical Areas to the Core‐Based Statistical Areas, generating substantial area‐specific price shocks. Using these exogenous price variations, this study examines hospital responses to price changes under the PPS. The results demonstrate that, while the average payment amount significantly increases in the affected areas, no parallel trend is observed in admission volume, treatment intensity, and quality of services. Conversely, hospitals facing a price increase are more liable to the perverse incentives that the PPS is known to encourage, namely, selecting or shifting patients into higher‐paying DRGs. These results suggest that paying a higher price for a given service may not induce hospitals to offer services of better quality, but can rather prompt even higher payments through other behavioral responses.     

An assessment tool translation study

Policymakers hoped to substitute a new, multi-purpose, functional assessment instrument, the minimum data set post-acute care (MDS-PAC), into the planned prospective payment system (PPS) for inpatient rehabilitation hospitals. PPS design requires a large database linking treatment costs with measures of the need for care, so the PPS was designed using the functional independence measure (FIM) database linked to Medicare hospital claims. An accurate translation from the MDS-PAC items to FIM--like items was needed to ensure payment equity under the substitution. This article describes the translation efforts and some of the problems that led policymakers to abandon the effort.     

Hospital DRGs and the need for long-term care services: an empirical analysis.

The Medicare DRG-based Prospective Payment System (PPS) encourages hospitals to reduce length of stay for elderly patients. Thus, discharges to long-term care services are expected to increase. Maryland hospital data for 1980 are used to identify those DRGs which most frequently represent patients discharged to nursing home and home health care services; explores the incentive to discharge earlier under PPS those patients needing long-term care versus short-term care; and describes characteristics of patients most likely to face increased pressure of earlier discharge to nursing homes and home health programs. Because only a limited set of patient characteristics are available from Maryland hospitals, data from a study of San Diego nursing homes are used to explore further the sociodemographic and health status measures associated with unusually long stays in a hospital prior to nursing home placement. This research suggests that the DRG reimbursement system gives hospitals a strong incentive for earlier discharge of patients needing long-term care services. However, hospitals that target only long-term care patients for early discharge will not substantially gain under PPS because these patients represent a small portion of the cases treated in the hospital and a small percentage of unreimbursed days.