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Donna J. Cameron

Following the implementation of prospective payment for inpatient acute beds (i.e., diagnosis-related groups) in the mid 1980s, hospitals developed postacute programs as a strategy to facilitate transition of patients through the continuum of care. At that time, inpatient rehabilitation, skilled nursing, and long-term acute levels of care continued to be cost-based reimbursed from Medicare.

In 1997, the Balanced Budget Act of 1997 was enacted. The Balanced Budget Act mandated the most significant Medicare reimbursement reform since the implementation of DRGs. The Balanced Budget Act instituted a mandate that postacute venues of care would also be reimbursed prospectively by Medicare. Although a PPS would be put in place for postacute services, there was not an appreciation at the time that each prospective payment system (PPS) would have distinct rules and payment methodologies. The staggered implementation of the various PPS regulations between 1997 and 2002 created much confusion and whirlwind change for hospitals and postacute providers.

Hospitals and independent postacute providers evaluated whether they could sustain the change in reimbursement. To comply with the PPSs, new assessment tools were implemented (e.g., Inpatient Rehabilitation Facility Patient Assessment Instrument [IRF-PAI]), electronic transmission of the assessment data to the Centers for Medicare and Medicaid Services (CMS) was required, substantial personnel training was necessary, and operational processes had to be modified.

Exhibit 1

exhibit-1-How the 1997 Balanced Budget Act Affected Postacute Care
Growth in Postacute Care, 1996-2005. Growth in postacute care providers has moderated, but the number of home health agencies continues to increase.

Hospitals discovered that reimbursement for some programs they were operating was less than their costs to deliver the care. Hospital-based kileed nursing facility (SNF) beds--frequently referred to as "transitional care" or "subacute" units--were admitting more medically complex patients and were experiencing similar admission patterns with far lower reimbursement. Many home health agencies closed as they determined that conforming to new regulations for reimbursement was not possible under a changing reimbursement model.

As a result of the PPS implementation for postacute services, some hospitals decided to maintain postacute services that were losing money and began subsidizing the operation of these programs, while other hospitals elected to close programs, redcing options for their patients at discharge.

Although the postacute PPSs had an impact on hospitals evaluating closure of SNFs and home health agencies, there was growth in inpatient rehabilitation facility (IRF) beds and significant growth in long-term care hospital (LTCH) beds. The increase in these services reflected development in programs with higher reimbursement.

CMS implemented the PPSs at the following times:

  • SNFs-July 1998
  • Home health agencies-October 2000
  • IRFs-January 2002
  • LTCHs-October 2002

The effect on numbers of postacute care providers was as follows:

  • The number of most types of postacute care providers increased from 1996 to 2005.
  • The number of home health agencies reached its peak in 1996 and then dropped. This may be due to many factors, including the interim payment system, increased program integrity scrutiny, and surety bond requirements. The number began to increase again in recent years, climbing 17 percent between 2002 and 2005.
  • Inpatient rehabilitation facilities increased by 20 percent from 1996 to 2005.
  • The number of long-term care hospitals doubled from 1996 to 2005.

Although CMS intended to use these PPSs to control Medicare spending for postacute care, spending increased an average of
7 percent per year from 1999 through 2005.  During this time, Medicare spending for LTCHs increased the most, at 18 percent per year. During the same period, spending for both SNFs and IRFs increased 9 percent per year, and spending for home health agencies increased 7 percent per year. For 2005, CMS estimated that total spending for postacute care was $42 billion. Currently, postacute care makes up about 13 percent of Medicare's total spending.

Exhibit 2

exhibit-2-How the 1997 Balanced Budget Act Affected Postacute Care

Postacute Care Spending, 1999-2005.Growth in postacute care providers has moderated, but the number of home health agencies continues to increase

Donna J. Cameron is a consultant, Health Evolutions, Inc., Indianapolis (

Publication Date: Saturday, March 01, 2008

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