Skip to main content
U.S. flag

An official website of the United States government

Dot gov

The .gov means it’s official.
Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.


The site is secure.
The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

Post-Acute Care Issues for Medicare: Interviews with Provider and Consumer Groups, and Researchers and Policy Analysts

Publication Date


U.S. Department of Health and Human Services

Post-Acute Care Issues for Medicare: Interviews with Provider and Consumer Groups, and Researchers and Policy Analysts

Executive Summary

Korbin Liu, Urban Institute
Jennie Harvell, U.S. Department of Health and Human Services
Barbara Gage, The MEDSTAT Group

May 2000

This report was prepared under contract #100-97-0010 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and The Urban Institute. For additional information about this subject, you can visit the DALTCP home page at or contact the ASPE Project Officer, Jennie Harvell, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201. Her e-mail address is:

The views expressed in this report are solely those of the authors and should not be attributed to The Urban Institute, the Department of Health and Human Services or The MEDSTAT Group, Inc.



A. Introduction

Until the implementation of Medicare's hospital prospective payment system (PPS), post-acute care provided by skilled nursing facilities (SNFs), home health agencies (HHAs), rehabilitation facilities and long-term care hospitals accounted for only a small part of Medicare spending. After implementation, post-acute spending began to grow at a remarkably rapid rate. Concerned about this trend, policy makers enacted multiple provisions in the 1997 Balanced Budget Act (BBA) aimed at curbing the spending growth. Beyond the spending trend, the increased level of post-acute care activity created other issues that warranted further Medicare policy consideration. For example, as the patient populations served by different provider types appeared to blur with increasing Medicare spending for post-acute care, the problem that Medicare was paying different amounts for similar patients also intensified.

Widespread interest in Medicare post-acute care issues, particularly after the BBA passed, prompted the Office of Disability, Aging and Long-Term Care Policy in the Office of the Assistant Secretary for Planning and Evaluation (ASPE) within the Department of Health and Human Services to sponsor an "early indication" qualitative study of the potential effects of the BBA provisions and other related issues. To obtain timely information on such issues, this study collected information through interviews with individuals knowledgeable about Medicare post-acute care issues. They included representatives of post-acute care providers (including discharge planners) and their organizations, quality of care experts, consumer groups, researchers, and health policy analysts.

It is important to note that while we interviewed a large number of individuals affiliated with many different organizations, the respondents were clearly not representative of all parties interested in or involved with Medicare post-acute care services. Hence, the issues and concerns discussed in this report should be viewed as those of a purposive sample of individuals. This report records most of the issues that were mentioned to us, but we did not select nor attempt to weigh the relative importance of different issues in terms of their importance to providers, consumers, or the Medicare program.


B. Provider and Consumer Perspectives

Skilled Nursing Facility Issues

According to the provider and consumer respondents, the SNF-related issue that warrants the most urgent policy consideration is ensuring that patients in need of intense rehabilitation services or who are medically complex have access to SNF services they need. Directly accounting for non-therapy ancillary services (possibly through outlier payment policies) and refining BBA policies that restrict payment for therapy services were suggested. In addition, respondents noted that refinements to the SNF PPS classification system may be needed simply to reflect changes in types and amounts of resources used in SNFs (e.g., new prescription medications) since the casemix classification system was originally designed.

Respondents indicated that refinements to the SNF PPS are needed because access for some types of SNF patients has reportedly been constrained by the PPS. Nursing homes now have very strong disincentives to admit patients with high non-therapy ancillary costs, because such costs were not explicitly accounted for in the design of the payment system. In addition, the inherent incentives of a price-based PPS have induced some facilities to reduce therapy costs by providing less of it or by shifting such functions to staff other than certified therapists. In general, the provider and consumer respondents questioned whether the casemix adjustments in the SNF PPS adequately distribute nursing and therapy costs across patient groups. Several respondents noted that many providers have not yet been able to calculate the effects of the new payment system on their facility, and that the uncertainty tends to lead to conservative cost cutting practices, raising questions about patient access and quality of care.

The need for cost cutting associated directly with the SNF PPS is also compounded by other BBA provisions, including a requirement that all Medicare costs for nursing home patients be billed only by SNFs. When implemented, this "consolidated billing" requirement means that some services and supplies (e.g., durable medical equipment) that used to be provided by external vendors and billed by them directly to Medicare Part B must be accounted for under the SNF PPS payment rate. The SNF, in turn, pays the external provider or supplier a fee that is negotiated between them. Consolidated billing further raises the cost consciousness of the SNFs while increasing their administrative burden.

The rehabilitation therapy industry, by most accounts, has been strongly affected by several BBA provisions, including Medicare Part B caps on physical therapy and speech and language pathology, and occupational therapy expenses, and the cost savings incentives in the price-based SNF PPS. Layoffs or reductions in compensation have been widespread among all types of therapists.

Home Health Agency Issues

Provider and consumer respondents had a smaller set of concerns about the BBA home health provisions than they did about those for SNFs. A major concern centered on their perception that the limits on allowable costs per beneficiary, instituted by the HHA interim payment system (IPS) as one "stop gap measure" before the HHA PPS is implemented, have "taken much more money out of the system" than Congress intended. They thought that payments are less than agencies need to care for many types of patients with long episodes, such as wound care patients, heart patients, and diabetics.

Another issue cited by the respondents was that some agencies are closing because they often have no capital and no reserves to absorb higher cost patients. As HHAs close, the concern is that higher cost beneficiaries will have more trouble accessing home health care. In addition, beneficiaries that are accepted by agencies might not receive the amount of services (e.g., therapy visits) that they need. Respondents further suggested that this reduced access may lead to increased Medicaid nursing facility use.

A third issue noted by the respondents was an uneven impact of the IPS across HHAs. Some felt that agencies most likely to close because of BBA changes were freestanding, for-profit agencies in dense markets. Hospital-based HHAs (as was also suggested for hospital-based SNFs) may have some long-term protection relative to free-standing facilities, because their link to the hospital setting may give them the opportunity to select patients first, referring high-cost patients to freestanding agencies.

The respondents suggested that the retroactive payment limits on per-beneficiary costs be eliminated as one way to improve the short-term health of the most vulnerable agencies. With respect to the future, some respondents were looking forward to a casemix-adjusted PPS as a viable option for HHAs, particularly if the BBA-required 15 percent payment cut currently planned for the PPS is eliminated.

Rehabilitation Facility and Long-Term Care Hospital Issues

The BBA attempted to address the inequities between new and old providers and reduce the incentives to reduce costs in years following the provider's base year with various policy changes including modifications to reduce variations in payment caps and limits. The BBA also required the Secretary of Health and Human Services to begin on October 1, 2000 a three year phase-in of a casemix and wage adjusted Medicare PPS for rehabilitation hospitals and units. For long-term care hospitals, the BBA required the Secretary to develop a legislative proposal for establishing a casemix-adjusted PPS be submitted to Congress by October 1, 1999.

For both rehabilitation facilities and long-term care hospitals, respondents concerns focused on the reduced "bonus/relief payments" (already implemented). Respondents said that all facilities are feeling the financial pains of these reductions.

With respect to prospective payment for rehabilitation facilities, the main concerns addressed technical aspects of the system's design. Respondents universally favored a per-case rather than a per-diem PPS. The fundamental point they made was that a per-diem system would provide an incentive for facilities to increase lengths of stay, at the same time it limited the resources they could use on a given day--a combination that tends to defeat the goal of rehabilitation (to restore function and discharge home). In contrast, with a per-case unit of payment, facilities would have greater clinical flexibility to provide needed care during a stay and improve rehabilitation outcomes. Most respondents preferred a PPS based on the Functional Independence Measure/Function Related Group (FIM/FRG) classification system previously developed and tested in rehabilitation facilities.

The major options suggested by respondents are now being addressed by HCFA, which announced in July 1999 that the rehabilitation PPS would be a per-case, FRG-based system. HCFA also is studying ways to refine the resident assessment instrument used for SNFs in order to better explain the characteristics and needs of rehabilitation facility patients. It is also addressing measurement issues basic to monitoring quality of care in rehabilitation facilities.

With respect to a PPS for long-term care hospitals, respondents concerns were less immediate, since long-term care hospitals will continue to be paid on a cost basis beyond the time when other post-acute care settings have switched to prospective payment, and work on the design particulars of such a system is still in the formative stages. Respondent concerns focused on their preference for an episode-based payment system for long-term care hospital providers based on the DRG system used in short-stay acute hospital payments.

Post-Acute Care System Issues

The post-acute care system, in the opinion of some respondents, had achieved a continuum of care in which patients were shifted from one setting to another according to what was most appropriate for their conditions. In general, more and more complex patients were being shifted from acute care hospitals "downstream" to post-acute settings. They thought that the BBA payment changes have arrested and are possibly reversing this trend. While many respondents suggested this was a negative outcome, others thought that it may be more medically appropriate to serve certain complex patients in medically intensive settings (i.e., acute care hospitals rather than post-acute care placement).

Various observers thought that the previous system, prior to the BBA, tended to blur the distinction between services provided by the different providers and the patients they serve. Because of the growth in SNFs under the old system, the concern used to be that their patients were overlapping increasingly with the patients served in rehabilitation facilities and long-term care hospitals. As the post-BBA system is evolving, the concern about blurring boundaries is being directed more at overlaps between the patient groups served by rehabilitation facilities and long-term care hospitals.

Home Health and SNF Perspectives. Industry representatives argued that the payment changes were effectively removing the option of home health care for some high cost patients, such as those with medically complex conditions or who require extensive rehabilitation. One consequence is the increased likelihood that high-need patients will remain in institutional settings. At the same time, given the SNF PPS as implemented, nursing homes reportedly are also reluctant to admit extensive rehabilitation and medically complex patients. Such patients, according to this viewpoint, are backing up in hospitals due to lack of placement opportunities in post-acute settings.

Rehabilitation Facilities and Long-Term Care Hospitals. In contrast to the home and nursing home settings, admissions directly from hospitals to rehabilitation facilities are increasing, according to reports. Rehabilitation facilities reportedly now have waiting lists and little competition from SNFs and HHAs for the more complex patients. But they are having increasing difficulty finding home health services following discharge from rehabilitation facilities. Long-term care hospitals reportedly are also seeing increased admissions directly from acute care hospitals and longer lengths of stay. As with the rehabilitation facilities, long-term care hospitals reportedly have waiting lists of medically complex patients that SNFs and HHAs no longer serve.

Quality of Care. The big issue raised with respect to quality of care was the perceived exodus of and reductions in competent specialized staff (such as clinical nurse specialists and therapists) from SNFs and HHAs. The concern was that this would reduce the quality of care available to patients. Interestingly, this view of quality of care trends was not universally shared by our respondents. Some noted that it was too soon to assess the situation, while others thought that quality of care might actually be improved if some of the potential SNF or HHA patients received more care from hospitals.


C. Researchers and Policy Analysts Perspectives

The health care researchers and policy analysts discussed their perspectives on some of the same BBA-related issues raised by the provider and consumer respondents, and offered views on more general issues related to Medicare post-acute care services and the need for future research.

Skilled Nursing Facility Issues

The most important SNF-related issue noted by many of the analysts was a need to make refinements to the casemix payment system for SNFs. Consistent with the providers and consumer representatives' view that the system does not adequately account for the costs of some patients, the analysts saw several areas in which the casemix system could be adjusted to better reflect the range of patients' needs and costs, including non-therapy ancillary costs.

Some analysts thought that, beyond having to address the high non-therapy ancillary costs of some patients, the SNF casemix system needed to be refined to better recognize the high skilled nursing service costs of Medicare SNF patients, while reducing some of the incentives to provide rehabilitation therapy services. Because the rehabilitation therapy categories in the SNF casemix classification system generally have higher payments than the medical and clinical categories, incentives are strong for SNFs to classify patients into one of the rehabilitation therapy categories. The analysts noted the possibility of an increase in "non-traditional" therapy patients (e.g., those with congestive heart failure, chronic obstructive pulmonary disease) classified as therapy patients as an example of the casemix system's incentives.

The analysts also noted that the SNF PPS is likely to affect facilities differentially depending on a host of factors, including historical costs, payment mix of patients, and size. Consequently, access to SNF services by subgroups of patients, even those patients with high non-therapy costs, will also vary. In general, while the analysts expect potential access problems to SNF care for some patient groups (e.g., medically complex), the extent of the problem is unclear. They also were not convinced that increased hospital lengths of stay were evidence of access problems.

In discussing ways to refine the SNF PPS, the analysts suggested that a combination of options may be appropriate, after it is determined how many people are "underpriced" by the payment system. Adjustments should be made without creating perverse incentives, and particular types of services requiring payment adjustments could be addressed more or less readily depending on the resulting potential for "gaming" the payment system. The researchers thought that, in addition to refining the casemix classification system, some type of outlier payments might be warranted (e.g., prosthetics, but not prescription medications).

Home Health Agency Issues

The analysts expressed concern for medically needy or rehabilitation intense home health patients who require either extensive durations of, or high intensity, services. Both situations would equate to high numbers of home health visits and relatively high per-person costs. It seemed plausible that agencies' costs would exceed their per beneficiary payment limit, and that such patients could have, therefore, higher risks of hospitalizations or emergency room use.

Although the casemix-adjusted HHA PPS will be implemented soon, it is not clear how well that system will account for the medically needy home health patients. The analysts generally felt that, regardless of the details of the HHA PPS, it is possible that more research will be required to refine the way that Medicare pays for care provided by HHAs. The analysts expressed the opinion that future research on casemix classification systems should focus on the needs of patients, rather than on the services they received.

Several analysts also noted the fundamental need for a policy clarification (and consensus) of the goals of the benefit. Medicare's home health benefit appears to cover two general populations, individuals with chronic conditions requiring skilled nursing supervision, and those needing restorative care for acute medical conditions. Whether Medicare's home health benefit should cover both groups should be explicitly addressed.

Rehabilitation Facility Issues

The BBA provisions affecting rehabilitation facilities were regarded by the analysts as important improvements in the way that such Medicare providers are paid. The prior payment methodology was regarded as "broken," because it unduly favored new hospitals relative to older ones. Although the PPS for rehabilitation facilities is still under development, the analysts agreed generally that a per-case payment unit, rather than a per diem one, better suits the nature of the product of rehabilitation facilities--a bundle of intensive, time-limited services leading to functional improvement. Moreover, measurement tools applicable to rehabilitation facilities already exist to quantify outcomes of patient care in those facilities (e.g., changes in functional status between admission and discharge).

Post-Acute Care System Issues

Discussion with the analysts about the post-acute care system focused on the extent to which the payment methodologies for the various post-acute care providers could realistically be integrated, and factors that determine utilization patterns of post-acute care providers.

The importance of payment integration in future Medicare payment policy reform efforts depends largely on the extent to which there is overlap of similar patients served by the post-acute care providers. Some analysts thought that, beyond having similar DRGs in the prior hospital stay, there is considerable variation in the needs of patients treated by different providers. Although it might be possible to develop an integrated payment system for some patients (e.g., those with hip fractures), the heterogeneity of the post-acute care population may limit the generalization of that option.

The pattern of post-acute care provider use is determined, in large part, by the supply of particular provider types in a given area. Because of the wide geographic variation in supply of provider types, utilization patterns, even for patients with similar needs, also vary widely by geography. The relatively small number of rehabilitation facilities and long-term care hospitals particularly highlight the potential geographic variability in patterns of use of post-acute care providers.

The supply of provider types is determined, in part, by incentives provided by the Medicare payment systems. The analysts noted, for example, that more SNFs are apparently being certified as long-term care hospitals, since the latter are still paid on a facility-specific, cost-related basis. To deal with the revenue maximizing opportunities in the Medicare post-acute care system, the analysts agreed that it is necessary to first learn about the relationship between payment and outcomes in post-acute care settings. This need increases the importance of developing better measures of quality of care.

Research Issues

In discussing important areas for future research on Medicare post-acute care services, the researchers and policy analysts focused on concerns about the impact of BBA provisions on services for subgroups of the post-acute care population, and ways to measure the benefits of Medicare-funded post-acute care services.

The analysts expressed concern about the circumstances of "underpriced" patients, regardless of post-acute care setting. Are they, for example, experiencing problems with access, and is there a problem with the quality of care provided to those patients who are admitted? The analysts thought it important to identify the number of people who might be adversely affected by the various provisions of the BBA and to estimate the personal and program effects of the provisions. Because the BBA provisions were only recently implemented, data had not been available to systematically measure their effects. In the coming year, such empirical research can be conducted with various types of administrative data collected on Medicare beneficiaries and their use of services.

The important longer range research issues described by the analysts focus on deriving a better understanding of the outcomes of post-acute care. One major dilemma is that, without such information, Medicare cannot readily judge what it is purchasing when it pays for post-acute care. As a consequence, it has been difficult to establish an appropriate price for that "product." In addition, it is important to be able to compare patients treated by different post-acute care providers. This information is important for understanding whether an integrated post-acute care system is needed. Such information is also needed to accurately compare outcomes across providers. A common data set of patient characteristics applied across post-acute care providers (as currently being developed by HCFA) will be an essential first step.

Finally, the researchers and analysts noted that in creating casemix adjustments for payment systems, regardless of information on outcomes, research should focus more on patient or condition-specific needs, in contrast to services used. Toward that goal, the analysts indicated that further research is needed to develop normative standards for what patients need given their medical and functional profiles.


D. Endnotes

While this study was in progress, Congress enacted the 1999 Balanced Budget Refinement Act (BBRA), which effectively increased Medicare payments for post-acute care providers. Some of the recommendations noted above were adopted, while other BBA provisions were temporarily suspended until more research could be conducted on the issues.

Despite the changes created by the 1997 BBA and the 1999 BBRA, many important post-acute care policy issues remain unresolved. One is the goal of the Medicare home health benefit. Ambivalence about whether individuals requiring extended personal assistance with skilled supervision (who also tend to have high per-person costs) should be covered has resulted in the use of reimbursement policy strategies, such as the per-beneficiary limit in the HHA IPS, to contain Medicare costs of those recipients. Reimbursement policies, however, do not directly address the underlying issues which are about eligibility and coverage.

Second, provider and consumer representatives, and the researchers and policy analysts, expressed concern about access problems faced by individuals with particularly high service needs, such as SNF patients with high non-therapy ancillary costs, rehabilitation patients who exceed the Part B therapy caps, and home health patients whose costs exceed the per beneficiary limits. In addition, one of the health policy analysts raised the notion that some beneficiaries might have needs (and costs) that Medicare's system of post-acute care services (and payments) cannot accommodate. It will be important to learn about the prevalence of such individuals and the extent to which they have service access problems.

Finally, it is important to recall that the 1997 BBA provisions have only partially been implemented (and modified by the 1999 BBRA) and, in the near future, Medicare's post-acute care environment will continue to be dynamic. Many issues identified by many respondents refer to BBA policies that are in effect or are being designed. Many other issues, extant prior to the BBA, also warrant further research and policy consideration.

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