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Medicare's Post-Acute Care Benefits: Background, Trends, and Issues to Be Faced

Publication Date


U.S. Department of Health and Human Services

Medicare's Post-Acute Care Benefit: Background, Trends, and Issues to be Faced

Executive Summary

Korbin Liu, Barbara Gage, Jennie Harvell, David Stevenson and Niall Brennan

The Urban Institute

January 1999

The escalating scale of expenditures for Medicare's post-acute care benefits--from about $2.5 billion in 1986 to more than $30 billion in 1996--has catalyzed concern among policy makers that use of these services has become excessive and does not necessarily improve the health of beneficiaries. Acting on these concerns, the 1997 Balance Budget Act (BBA), among other things, mandated prospective payment systems for skilled nursing facilities (SNFs), home health care, and rehabilitation facilities, and required a legislative proposal on a prospective payment system for long-term care hospitals. Changing from retrospective to prospective payment for post-acute care represents a major policy response to the expenditure escalation. But it does not address many other cost, quality, and access concerns.

Foremost among these is concern that Medicare continues to treat the different types of post-acute care providers differently--in terms of payment, eligibility, coverage, and certification -even though the different types of providers may be becoming more and more similar in the types and intensity of services they deliver, as well as the types of patients they serve. Other concerns include policy-induced incentives to discharge patients for financial rather than quality of care reasons and access problems faced by heavy-care patients.

In response to this changing policy environment and the policy concerns it is raising, the Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services sponsored a study to examine potential problems with Medicare's post-acute care services and explore promising solutions. As the first product of that study, this report provides background on:

  • Recent growth in Medicare's post-acute care expenditures and utilization, and Medicare policy changes that have contributed to these trends.

  • Growth in the supply and changes in the distribution of the four major types of post-acute care providers.

  • Characteristics of beneficiaries, providers, and market areas that are associated with differential use of particular types of post-acute care providers.

  • Analytic and policy issues that need to be addressed in the effort to find effective policy solutions to the problems that now exist with respect to Medicare's post-acute care benefits.


Trends in Utilization and Expenditures

Until very recently, Medicare payments for all types of post-acute care have been growing at 25- 35 percent a year, depending on the type of provider and exact time period covered. They are now declining but are still substantially higher than the roughly 8 percent annual growth that characterizes other parts of the Medicare program. SNF and home health care account for most of the Medicare post-acute care spending (and therefore much of its spending growth). SNF spending growth was due primarily to increases in the numbers of users and increased use of ancillary services, while home health care growth was fueled by increasing numbers of users and increased number of visits per user.

As a result of this enormous growth, Medicare payments for SNF and home health care have grown from 3 percent of all Medicare expenditures in 1986 to 15 percent in 1996. During the same period, Medicare spending for inpatient hospital care declined from 61 percent to 49 percent. (It should be noted that these statistics understate the actual shift from acute- to post-acute care, because post-acute care hospitals are included in the inpatient total.)


Changes in Provider Supply

Between 1990 and 1996, the supply of all major types of Medicare post-acute care providers experienced double-digit growth. The number of SNFs increased from 10,500 to 15,500, the number of home health care providers from 5,800 to 9,900, the number of rehabilitation hospitals and distinct part units from 813 to 1,048, and the number of long-term care hospitals from 90 to 185. Ownership of post-acute care providers has also been shifting, with for-profit status becoming more common. Within these overall trends, the regional distribution of different types of post-acute care providers has remained uneven, with some regions being generally under- or over-represented relative to their shares of beneficiaries and other regions having disproportionately large (or small) shares of some but not all provider types. Regional patterns of use are broadly consistent with the regional patterns of relative supply.


Medicare Eligibility and Coverage Policies

A major reason for the enormous expansion in post-acute care expenditures and supply has been changes in SNF and home health care eligibility and coverage guidelines, some of which were mandated by court decisions. The 1986 court ruling in Fox v. Bowen resulted in revised guidelines for the SNF benefit, effective in 1988, making more explicit the conditions that constituted eligibility for the SNF benefit and forbidding fiscal intermediaries from using "rule of thumb" to facilitate claim denial. The 1988 ruling in Duggan v. Bowen resulted in revised guidelines for the home health care benefit, effective in 1989, which included qualifying patients for skilled observation (and therefore for the home health benefit) with stable health needs -rather than expectations of improvement, as the former criterion had specified. Predictably, denial rates dropped for both types of claims following implementation of the new guidelines.


Payment Reforms Mandated by the BBA

The BBA mandated establishment of prospective payment systems (PPS) for SNFs effective July 1998, home health care effective October 1999, and rehabilitation facilities effective October 2000. It also required that a PPS proposal be developed for long-term care hospitals by October 1999.

It is important to note that (except for home health care) these systems are expected to be based on per diem payments rather than the per episode PPS system instituted in 1984 for acute care hospitals. Per diem systems help contain costs by establishing in advance a unit price for each service. But they do not contain incentives to limit the volume of services delivered. Episode systems, by placing the provider at risk for the entire costs of an episode, embody incentives to control price and volume--although they may present additional quality-of-care problems through their incentive to reduce length of stay.

Skilled Nursing Facilities. BBA moved SNFs into a per diem PPS that covers routine, ancillary, and capital costs--including post-hospital SNF services for which benefits are provided under Part A and most items previously paid for under Part B. The new system is being phased in, with payment for the first three years based on a combination of a casemix-adjusted Federal rate and (in shrinking importance) a facility's historical costs. By the fourth year, the historical cost component is scheduled to disappear. The BBA also included a consolidated billing measure, requiring the SNFs to bill for all services delivered for Part A stays (with specific exceptions to cover hospital-related services generally beyond the capacity of SNFs to provide). This consolidated billing requires SNFs to bill for services under Part B, including services delivered by independent therapists and other non-staff entities.

Home Health Care Providers. The BBA mandated an interim payment system (IPS) to capture Medicare savings until PPS is implemented for these providers. The IPS modified Medicare's home health payment method in two ways. First, it reduced the national cost limits for each service type from 112 percent of the average cost per visit to 105 percent of the median cost. Second, it added a new cost limit criterion to the payment formula. Instead of payments being based on the lower of the agency's actual costs or aggregate cost limit for the year, payments are now based on the lowest of the previous two limits or an average per beneficiary expenditure limit. Responding to concerns that the IPS would adversely impact both providers and beneficiaries, Congress marginally liberalized the IPS limits in the 1998 omnibus appropriations legislation.

Rehabilitation Hospitals. The BBA gave the Secretary of Health and Human Services broad discretion in designing a PPS for these providers, subject to Congressional mandates to: (1) establish patient casemix groups and develop a method of assigning patients within these groups; (2) assign each group a weight that reflects the relative facility resources used by the group; and (3) determinine a prospective payment rate for each group payable under Medicare.

Long-Term Care Hospitals. The BBA required the Secretary to collect the data necessary to develop, establish, administer, and evaluate a casemix-adjusted PPS for these hospitals. A legislative proposal is also to be developed for establishing and administering a payment system that includes a patient classification system that reflects differences in resource use.


Characteristics and Outcomes of Post-Acute Care Users

The policy concern that Medicare may be paying different amounts to different types of post-acute care providers for patients with essentially similar care needs raises important questions: What is the extent of patient overlap? Are payments too high or too low for one type of provider relative to others, for a given quality of care? Most fundamental, what are the appropriate resource levels required to achieve desired outcomes for patients with particular needs?

Little information is available to address these questions. Hospital discharge patterns by DRGs of post-acute care patients show that the same DRGs can be found in the caseloads of all four provider types. At the same time, however, the distribution of patients by DRG is by no means uniform across provider type. In addition, patients within a given DRG can vary in terms of specific diagnosis, conditions, and co-morbidities, throwing back into question how much overlap there really is at this more refined classification level.

The heterogeneity within DRGs has led researchers to look for patient characteristics that might be associated with different types of post-acute care providers. Two conspicuous candidates are health or functional status and availability of informal care. With respect to the former, people who are very frail or disabled are less likely to be able to withstand (or benefit from) intensive rehabilitation therapy. With respect to the latter, availability of informal care almost certainly increases the likelihood that post-acute care can be provided on a home care basis.

Certain hospital characteristics are also associated with the type of post-acute care to which patients are discharged. Larger or teaching hospitals, for example, are more likely than other acute care hospitals to discharge patients to rehabilitation services, plausibly because such hospitals are more likely to contain rehabilitation units. Proprietary hospitals are more likely than non-profit hospitals to discharge patients to home health care, plausibly because they are more likely to own home health agencies. Some interactions between types of post-acute care have also been noted. For example, rehabilitation facility bed supply is positively associated with the rate of Medicare home health care use, suggesting that these two types of care are used in sequence for significant numbers of beneficiaries.

On the relation between patient outcomes and costs, there is a paucity of information beyond the findings of a few studies. One study--comparing patients with hip fracture or stroke in rehabilitation facilities versus subacute SNFs and traditional SNFs--found that stroke patients had better functional recovery and community placement chances as a result of the (higher cost) rehabilitation facilities' environment. But the higher cost therapy did not confer additional benefits on hip fracture patients. Another study found that patients with hip fracture or stroke had better functional improvement in rehabilitation facilities or home care than similar patients discharged to nursing homes--suggesting, in turn, that more targeted discharge placement can achieve functional improvements at little or no additional cost to Medicare.


Unresolved Policy and Analytical Issues

The 1997 BBA provisions mandating PPS for Medicare's post-acute care benefit were an important policy response to the recent, rapid increases in post-acute care expenditures. The BBA provisions, however, are only part of a continuing process to reform Medicare's post-acute care services. Other important cost, quality, and access issues relevant to post-acute care under Medicare were not considered by the BBA. The following questions enumerate some of these concerns.

Are increasing expenditures evidence that Medicare's system of post-acute care services is broken? Greater than expected increases in expenditures are almost always a catalyst for a policy response. It is reasonable to ask, however, whether the growth in spending was justified because of increasing need for post-acute care, particularly in light of declining growth in inpatient hospital spending. Although there is evidence to suggest that some spending may have been inappropriate (e.g., recent GAO reports of fraud and abuse in the Medicare home health program), it is crucial that we improve our estimation of the extent to which the increase in spending reflects real increases in need for post-acute care.

What is the goal of Medicare's home health program? One factor behind the recent growth in Medicare's home health spending was the increase in number of visits beneficiaries received. That trend has raised questions about whether Medicare's home health services have been transformed into a long-term care benefit. We do not know the number of people who are using the benefit in this way. More important, there is lack of agreement about whether Medicare should, as a matter of policy, continue to cover persons needing extended home care services.

What will be the access, quality, and cost consequences of the BBA provisions? Designed to curb future spending increases for post-acute care providers, the BBA provisions could have adverse consequences for beneficiaries, as well as some providers. The prospective payment systems could provide incentives for SNFs, home health care providers, rehabilitation facilities, and other providers to contain costs by selecting for relatively light care patients or by giving fewer services. Similar to the situation after Medicare implemented hospital PPS, there is the danger that patients will be discharged "quicker and sicker." To the extent that post-acute care services in general are constrained by the BBA provisions, increases in hospital readmissions could also result.

Will the supply of post-acute care providers change and how will these changes affect Medicare beneficiaries? According to anecdotal reports, some home health agencies are closing in the wake of the IPS mandated by the BBA. Potential changes in the supply of home health care providers are an indication of the effects of the BBA provisions on the supply of post-acute care providers. Depending on the specific features of the PPS systems to be developed for rehabilitation facilities and long-term care hospitals, incentives may be created that will decrease (or increase) their supply as well. Changes in the supply of post-acute care providers will likely affect beneficiaries' use of acute and post-acute care services.

What is the effect of eligibility and coverage policies on access, quality, and costs? The BBA post-acute care provisions did not extensively address eligibility and coverage policies. Because eligibility and coverage rules are potentially very powerful policy levers, they are likely to receive future legislative attention, either to improve the efficiency with which post-acute care services are delivered or at least to capture additional Medicare savings. As witnessed by changes in the past, any eligibility and coverage policy changes are likely to have important effects on access to post-acute care services.

Is integration of services on the basis of a "patient-centered" payment system a solution for Medicare post-acute care? Despite the major payment reforms mandated by the BBA, some observers note that "Medicare will have to make comprehensive structural changes to its benefit and payment policies" to improve the coordination of services and contain costs in the long run. One strategy that has been considered by HCFA is an integrated payment system that is "patient-centered." In this type of system, payments would be based on the type and intensity of services needed to achieve optimal outcomes, regardless of provider category. This system is conceptually appealing and may be a desirable goal for reforming payment of Medicare post-acute care services. But the urgency and speed with which this strategy is pursued depend on several practical issues.

First, a major motivation behind the strategy is the notion that Medicare beneficiaries with similar needs receive post-acute care services from different providers at different costs to Medicare. To the extent that the patient populations are substantially different across post-acute care providers, the need for an integrated payment system becomes less urgent. Second, there is a paucity of information on quality outcomes associated with use of post-acute care. But the level of effort and time required to analyze jointly patient characteristics, amount and types of services, and outcome-based quality measures is substantial. Thus as a practical matter, an integrated payment system that includes quality outcomes may be able to cover only a portion of the Medicare post-acute care population. Third, assuming that normative payments for post-acute care could be developed for specific groups of patients, decisions have to be made about how the post-acute care payment will be administered. Assignment of the episode payment for post-acute care to any single entity will be controversial and politically sensitive, because of the potential impact of any particular choice on the multiplicity of acute and post-acute care providers.

The Full Report is also available from the DALTCP website ( or directly at
Medicare Beneficiaries