Medicare Payment Reform and Provider Entry and Exit in the Post‐Acute Care Market

Objective

To understand the impacts of Medicare payment reform on the entry and exit of post-acute providers.

Data Sources

Medicare Provider of Services data, Cost Reports, and Census data from 1991 through 2010.

Study Design

We examined market-level changes in entry and exit after payment reforms relative to a preexisting time trend. We also compared changes in high Medicare share markets relative to lower Medicare share markets and for freestanding relative to hospital-based facilities.

Data Extraction Methods

We calculated market-level entry, exit, and total stock of home health agencies, skilled nursing facilities, and inpatient rehabilitation facilities from Provider of Services files between 1992 and 2010. We linked these measures with demographic information from the Census and American Community Survey, information on Certificate of Need laws, and Medicare share of facilities in each market drawn from Cost Report data.

Principal Findings

Payment reforms reducing average and marginal payments reduced entries and increased exits from the market. Entry effects were larger and more persistent than exit effects. Entry and exit rates fluctuated more for home health agencies than skilled nursing facilities. Effects on number of providers were consistent with entry and exit effects.

Conclusions

Payment reform affects market entry and exit, which in turn may affect market structure, access to care, quality and cost of care, and patient outcomes. Policy makers should consider potential impacts of payment reforms on post-acute care market structure when implementing these reforms.Provisions in the Affordable Care Act represent an important restructuring of payment for health care providers. Accountable care organizations and “bundled” payments for acute and post-acute care create incentives for coordinating and reorganizing the delivery of health care by changing provider payment for an episode of care, where care during an episode can be provided across multiple settings. These reforms affect both the average payment received by providers for an episode of care and the “marginal” or additional payment received for the provision of additional services during the episode. These latest policies are a continuation of earlier reforms implementing prospective payment systems for acute care (1983) and post-acute care (1997–2003) that replaced prior cost-based systems of payment. As now, the earlier reforms were conceived to reduce unnecessary utilization, and considerable research has studied how these policies affected health care costs and patient outcomes (e.g., McKnight 2006; Sood, Buntin, and Escarce 2008; Grabowski, Afendulis, and McGuire 2011).Payment reforms impact providers'' profitability and financial risks through changes in both the overall level of payment and the marginal payment for additional services. Consequently, payment reform may impact provider entry and exit, market concentration, and providers'' organizational structure (e.g., vertical integration). Such changes may have important consequences for provider competition, access to care, and patient choice. While prior research has considered the impact of specific reforms on entry and exit, there is limited evidence of how the design of payment systems more generally affects market structure. In this article, we use a series of Medicare payment reforms for post-acute care providers to investigate how payment system design affects provider entry and exit, and the implications for market structure.