Substitutability Across Institutional Post-Acute Care Settings: 1998-2006


U.S. Department of Health and Human Services

Substitutability Across Institutional Post-Acute Care Settings: 1998-2006

Executive Summary

Robert Schmitz and Samuel Simon

Mathematica Policy Research, Inc.

September 25, 2009

This report was prepared under contract #HHS-100-03-0017 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and Mathematica Policy Research. For additional information about this subject, you can visit the DALTCP home page at or contact the ASPE Project Officer, Susan Polniaszek, 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 opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.

When the Medicare prospective payment system (PPS) for skilled nursing facilities (SNFs) was introduced in 1998, long-term care hospitals (LTCHs) were already expanding rapidly, with a corresponding increase in the number of Medicare patients treated in them. In the years immediately following the introduction of PPS, large numbers of hospital-based SNFs closed. While firm evidence has been difficult to adduce, it appeared likely to many that much of the expansion of the LTCH population consisted of patients who might previously have been treated in SNFs--whether freestanding or hospital-based. Because LTCH payments are typically much higher than SNF payments, this trend might well represent an increase in Medicare spending with little or no corresponding benefit to patients. Although LTCHs represent a small fraction of post-acute care providers, the rapid growth in payments to them has been a matter of concern for Medicare Payment Assessment Commission and other policy analysts.

This report examines trends in the provision of post-acute care to beneficiaries with diagnoses indicating a need for complex medical care for the years from 1998 and 2006, with special attention to changes in care provided by LTCHs and hospital-based SNFs. It focuses in particular on the relationship between changes in provider supply at the level of the town or city, as represented by the Core-Based Statistical Area, and characteristics of episodes of Medicare post-acute care.

Episodes were constructed using Medicare Provider Analysis and Review data for calendar years 1997-2007. Medically complex conditions were identified for index hospital stays, using diagnosis codes, procedure codes, and Medicare diagnosis-related group codes. Episodes were defined to include all Medicare-covered post-hospital care with gaps between discharge and subsequent admission of no more than 60 days. The Provider of Service file provided facility-level information, such as ZIP code and facility. Data from all 50 states and the District of Columbia were used for the analysis.

Between 1997 and 2007, both the number of hospital-based SNFs and number of beds declined by over 50 percent. In addition the number of LTCHs more than doubled and the number of LTCH beds increased by 29 percent. By contrast, the number of freestanding SNF beds increased by only 5 percent and the number of inpatient rehabilitation facility beds increased by 1 percent. The supply of LTCH beds increased much more rapidly in cities that lost hospital-based SNFs than in cities that did not.

The analysis of post-acute care episodes found sharp declines in discharge of medically complex patients from hospital to hospital-based SNF in every Region of the country. For the United States as a whole, discharges to hospital-based SNF (among beneficiaries with some post-acute care) fell from 26 percent in 1998 to 9 percent in 2006. There was a corresponding increase in discharges to freestanding SNFs from 54 percent in 1998 to 67 percent in 2006. Although fewer than 10 percent of patients were discharged to LTCHs, the proportional increase was highest for LTCHs in every Region of the United States, but particularly in the South, where discharges to LTCHs nearly doubled from 3.2 percent to 6.2 percent.

In communities that experienced the loss of hospital-based SNF services, medically complex cases shifted to freestanding SNF if there were no LTCHs available. In communities that experienced the loss of hospital-based SNF and the entry of LTCH services, the shift of medically complex case was split between freestanding SNF and the new LTCH.

Episodes that began with a discharge to an LTCH were substantially more expensive ($49,230 in 2006) to the Medicare program than those that began with a discharge to a hospital-based SNF ($14,145) or freestanding SNF ($20,544). To isolate the association between LTCH growth and Medicare episode payment, the analysis focused on a set of 27 communities that lost all hospital-based SNFs between 1998 and 2006 and had no LTCHs in 1998. LTCHs entered 14 of these communities during the period. Mean episode payment in the two groups of communities was almost identical--$13,415 in communities that LTCHs did not enter, and $13,281 in communities that they did enter. Over the period from 1998 to 2006, Medicare episode payment increased by 39 percent in communities that LTCHs did not enter and by 68 percent in communities that LTCHs entered. Hospital readmission rates rose in both sets of communities, slightly more so in communities that did not gain LTCHs. Additional regression analyses confirmed a significant association between LTCH supply and Medicare episode payment, but failed to find any relationship between LTCH entry and hospital readmission.

In the absence of evidence that outcomes of post-acute care have improved markedly as admissions to LTCHs have increased, these results may be viewed as evidence that providers are responding in undesirable ways to the introduction of prospective payment. The per-stay PPS for LTCHs encourages LTCHs to accept medically complex patients that had previously been served by hospital-based SNFs for short-stays before being discharged to freestanding SNFs.

Centers for Medicare and Medicaid Services (CMS) is currently working toward a revision of payment for post-acute care to support value-based purchasing and weaken the association between payment and the site of care. The Post-Acute Care Payment Reform Demonstration is currently testing the systematic collection of patient data upon hospital discharge and admission to and discharge from all forms of post-acute care via the Continuity Assessment Record and Evaluation instrument. Data from the evaluation may eventually support both a post-acute payment that relies more on patient needs and less on the location of care, and also a set of guidelines that define (with varying specificity) which patients and conditions are appropriately suited to the richer mix of services provided by LTCHs and which can appropriately be served by SNFs.

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