Beyond the Water's Edge: Charting the Course of Managed Care for People with Disabilities - Conference Resource Book. Perspective and Analysis--Market Forces: Medical Rehabilitation Undergoing Major Shakeup in Advanced Managed Care Markets


Gerben DeJong, Ph.D.; Ben Wheatley, B.A.; and Janet Sutton, Ph.D.
Managed Care Reporter 2:138-141 (February 7, 1996)

The fast-growing $27 billion medical rehabilitation industry is undergoing its greatest transformation since the traditional inpatient model of medical rehabilitation came of age in the 1980s. Nowhere is this transformation more evident than in the most advanced managed care markets such as San Diego, Minneapolis-St. Paul, and Worcester, Mass. These markets presage the changes that are beginning to hit medical rehabilitation in other markets as managed care makes its march through the American health care economy.

For many years, medical rehabilitation occupied a largely unnoticed niche in American health care, providing restorative services to people who acquire a disabling impairment because of a congenital condition, a traumatic injury, an acute illness, or a chronic health condition that limited their ability to function independently. Through an array of therapeutic services, such as physical, occupational, and speech therapies, and through the use of prosthetics, orthotics, and other assistive technologies, medical rehabilitation services enabled people with impairments to manage their own daily needs and, whenever possible, return to an active and productive lifestyle.

Since the mid-1980s, organized medical rehabilitation has become a major player in the post-acute continuum of health care services. The number of inpatient programs more than doubled in the ten-year period since then. From 1985 to 1994, the number of free-standing rehabilitation hospitals increased 175 percent from 68 to 187 hospitals, and the number of rehabilitation units based in acute-care hospitals increased by 118 percent from 386 units to 804 units. With this growth, medical rehabilitation physicians, know as physiatrists, enjoyed increasing compensation and new-found recognition among their physician peers.

With the dramatic growth of managed care, however, the Golden Age of hospital-based medical rehabilitation has come to an abrupt end. This change of fortune is particularly evident in the more advanced managed care markets often considered harbingers of things to come. To find out what has been happening to medical rehabilitation providers in these markets, the National Rehabilitation Hospital (NRH) Research Center, as part of a grant from the National Institute on Disability and Rehabilitation Research, conducted dozens of interviews with leading payers, providers, and health care experts in the San Diego, Minneapolis-St. Paul, and Worcester areas. Researchers supplemented these interviews with data from local newspapers, the trade literature, published market data, and other third-party information sources.



In all three markets, according to the Group Health Association of America, well over 50 percent of the total population is now enrolled in health maintenance organizations (see table). Managed care has also penetrated the senior population through the use of at-risk Medicare contracts. Seniors are an important market segment for inpatient rehabilitation providers. Nationally, these providers depend on Medicare for 70 percent of their revenues.

In two of the markets, San Diego and Minneapolis-St. Paul, high levels of managed care penetration have precipitated the consolidation of health care providers into three or four competing integrated provider networks and have forced rehabilitation providers to realign themselves accordingly.

In the San Diego market, the dominant provider networks now include Sharp Health Care, Scripps Health, and the University of California San Diego or UCSD Healthcare Network. Both Sharpe and Scripps include medical rehabilitation providers who, as network members, are in a strong position to capture medical rehabilitation patients.

Large unaffiliated for-profit rehabilitation providers such as the San Diego Rehabilitation Institute (SDRI) and Continental Hospital, part of the national Continental Medical Systems chain, are scrambling to retain market share by diversifying their rehabilitation capacity to include lower-cost settings, such as subacute beds and outpatient care, to make themselves price competitive with the major networks. Both SDRI and Continental are for-profit providers that entered the San Diego market in the late 1980s and early 1990s mainly as inpatient rehabilitation providers.

In Minnesota--dubbed the land of 10,000 mergers--the consolidation movement includes mergers between provider networks and health plans, effectively blurring the line between providers and payers. The Minneapolis-St. Paul market has consolidated into three payer-provider networks: Blue Cross and Blue Shield of Minneapolis, Allina Health System Inc., and HealthPartners which, combined, control 78 percent of the market.

The Allina system includes Sister Kenny Institute, a long-standing and well-recognized name in the nation's rehabilitation industry. Sister Kenny appears well positioned mainly on the strength of Allina's market position. By contrast, North Memorial Hospital has sought to maintain its independence but finds itself effectively frozen out of many rehabilitation admissions. Once patients participate in one of the larger systems, they usually stay in those systems.

In a much smaller market, Worcester's leading health plan has been the Fallon Community Health Plan, a group-model HMO that has also been caring for Medicare beneficiaries since 1980. Although able to contain costs, Fallon experienced very little price competition until Boston area-based Pilgrim Health Plan (now, Harvard Pilgrim Health Care) entered the central Massachusetts market in 1994 and New Hampshire-based Healthsource Inc. entered in 1995 by acquiring Central Massachusetts Health Care of Worcester.

Fairlawn Hospital remains Worcester's only major inpatient rehabilitation provider, but it has seen a decline in census as HMOs have looked to subacute rehabilitation providers. Fairlawn has responded by making strategic alliances through shared ownership. Fairlawn is now one-third owned by Fallon and one-third owned by Advantage Health, a large publicly traded rehabilitation chain.



Thus, one common denominator across the three markets has been the desire of rehabilitation providers to integrate vertically with larger health systems for fear of losing patient referrals from acute-care hospitals if they remain outside large systems. Several rehabilitation providers have remained independent either from conscious choice or from lack of foresight. One informant in the later category said: "We thought we were God's gift because we were the premier hospital for many diagnoses." Most providers have come to realize that fierce independence often comes at a price--survival.

Vertical integration is also occurring within rehabilitation as providers assemble a broader array of rehabilitation settings that will enable them to move patients more quickly to lower-cost settings at the earliest possible moment. In addition to the traditional inpatient program, the "rehabilitation continuum of care" increasingly includes a subacute program, an outpatient program, and a home-based rehabilitation program. Informants often spoke about a "seamless" continuum of care in which physicians and therapists follow the patient as he or she moves into less-structured settings.



The economic driver in establishing a wider array of rehabilitation settings is simply costs, particularly the cost of traditional inpatient rehabilitation, which can quickly reach $1,000 per day and more. In many instances, managed care payers bypass inpatient rehabilitation altogether and insist that patients traditionally seen in inpatient programs obtain their rehabilitation in subacute units instead. Inpatient rehabilitation's "bread-and-butter" patients, such as older patients with a stroke or hip fracture--which previously made up more than 50 percent of traditional inpatient programs--are now going to subacute settings instead. In the three highly managed care markets, inpatient programs are being reserved for a handful of impairment groups such as persons with severe traumatic brain injury, spinal cord injury, and younger persons with stroke.

Inpatient utilization has declined dramatically in the three advanced managed care markets. Occupancy rates are off by 40 percent or more in some facilities. An average length of stay of 30 days or 35 days only five years ago is now down to 19 day or 20 days, but appears to be leveling off because, as one respondent indicates, "results were falling off as well." In the face of declining lengths of stay, some observers have begun to question whether inpatient rehabilitation, as traditionally organized and practiced, may be a vanishing breed.



As the utilization of inpatient rehabilitation has declined, subacute rehabilitation has become the new growth industry in highly managed care markets. Respondents in the three markets report that "there is a huge, huge explosion of subacute providers." "Subacute is booming everywhere." One informant in the Worcester area reports that "there are five brand-new subacute facilities within a 15-minute drive."

The growth of subacute rehabilitation appears to spring from three sources of sponsorship. First are the traditional inpatient providers who have diversified by offering a subacute alternative. Second are existing skilled nursing facilities (SNFs) that have added a rehabilitation component in response to what is seen as a new market opportunity. And third are the fast-growing national for-profit chains, such as Manor Care, NovaCare, and TheraTx, that have anticipated the demand for subacute rehabilitation in more highly managed care markets.

Subacute providers typically price their services at about $300 to $500 per day, half the inpatient rate. People usually remain in subacute care longer than they do in traditional inpatient rehabilitation, however.



Traditional inpatient providers insist that predictions of their demise are premature and have responded by slashing their costs in order to become more price competitive. The Sharp system in San Diego, for example, reduced its administrative overhead by eliminating 100 positions through layoffs and attrition and by removing entire levels of management. "On a system basis," said one respondent, "there's been a radical reorganization, and we are doing everything we can to reduce our costs...It's moving very, very quickly."

At Sharp, managers are now responsible for multiple entities throughout the system. There is no longer a therapy director at every site within the system, but one director for the entire system. One respondent characterized the approach as being "system-oriented rather than entity-based." At Fairlawn Hospital in Worcester, the staffing mix has changed. Fairlawn has eliminated LPNs entirely from its mix of RNs, LPNs, and nurse aides. Many providers have resorted to using more therapy extenders and fewer higher-salaried professional therapists.



The need to slash costs has prompted inpatient providers to reevaluate one of rehabilitation's most cherished institutions, the "interdisciplinary team approach" to rehabilitation in which each discipline or department develops a treatment plan that is reevaluated and renegotiated in weekly team meetings. One facility in the Minneapolis-St. Paul market has adopted what it calls a "transdisciplinary team approach," in which the team comes together initially to identify "the barriers to discharge" and to designate the steps that each therapy will take to remove the barriers identified.

Other providers have turned to one of health care's latest rages, critical pathways, as a way of making treatment plans more predictable and as a way of representing the expectations for each patient to managed care payers. Providers are attempting to break down the boundaries and turf issues between the professional therapies that often add to the cost of doing business.



Rehabilitation providers have learned that reengineering, cost-cutting, and downsizing are not enough. These internal adjustments cannot substitute for the market savvy that is needed in a rapidly changing market. As managed care markets mature and become crowded with new entrants, rehabilitation providers are learning to create niches and to emphasize their uniqueness in contract negotiations.

According to one marketing director, rehabilitation providers will, in the future, offer a menu of niche services. "They have a short window of opportunity to become specialists in wound care, HIV, etc. If they can franchise it, they can ride that market segment for a while. They have to make themselves have value." "They need to stop thinking of the rehabilitation hospital as the $35 million centerpiece of their business."

Another rehabilitation market strategy has been to form alliances and joint ventures with somewhat similar competitors in order to shore up market share and to develop a unique continuum of services that will be attractive to payers. Such market strategies also allow competitors to eliminate duplication and achieve economies of scale. As one respondent indicated: "Why do you have to have cardiac rehabilitation services at four or five locations in the community when you could funnel all of that into one and be more efficient and have better outcomes too?" The respondent did not address the potential restrain-of-trade and anti-trust issues implicit in horizontal integration strategies.



With managed care, the fee-for-service and cost-based methods of rehabilitation payment are vanishing rapidly, but full case-rate capitation has yet to come to rehabilitation in any significant way. Most acute and subacute rehabilitation providers in the three markets studied are being paid on a fixed per-diem basis, where length of stay is negotiated depending on patient status and progress.

One rehabilitation hospital reports being paid a declining per-diem amount the longer the patient remains in the hospital. For a given type of patient, for example, the hospital receives twice as much payment for Days 1 through 7 than for Days 31 through 35. "In effect," said one respondent, "it's risk sharing because once you go beyond the 21st day, you're getting a reimbursement rate that's well below your cost. It's not a DRG, but it's certainly a front-loaded system to get your patients out quickly..."

Capitation arrangements, where they do exist, typically do not extend yet to the individual rehabilitation facility. An entire provider network may be capitated for a health plan member's hospitalization, but that hospitalization may include all types of inpatient care--acute care, rehabilitation care, psychiatric care. Interest in full case-rate capitation for rehabilitation specifically remains limited to niche programs with considerable experience serving well-defined populations; for instance, people with spinal cord injury.



Informants in the three markets report that functional outcomes are not, for the most part, being considered by payers. Quality is more or less assumed. In contract negotiations, informants say, managed care payers give price much greater consideration. One informant said, "Frankly, in this market place, nobody asks, nobody cares [about outcomes]. While this is a huge market in terms of HMO penetration, the level of sophistication still is not where it should be."

Informants complain that payers are only looking at price; they do not consider functional outcomes gained per dollar. Hospital-based providers in particular would like to see payers give more consideration to outcomes and functional gains per dollar spent in order to create a more level playing field between them and their subacute competitors.

Some providers report that payers are beginning to ask the right questions, especially for people with catastrophic injuries. They are asking, "Do you have outcomes for your brain-injured patients? Do you have critical pathways for your brain- and spinal-injured patients?



Most rehabilitation providers are already experiencing, to some degree, many of the trends in leading managed care markets. Providers in other markets would do well to consider the experiences of their counterparts represented in the three-market study.

A central finding is that traditional hospital-based rehabilitation should no longer be considered the focal point of a rehabilitation service delivery system. Diversification attempts that merely remake the rehabilitation hospital as the hub of a larger multifacility program will fall short of the changes required by the new marketplace. The need for rehabilitation hospitals will continue, but is therapeutic mission will be more focused and targeted.

Traditional rehabilitation providers will thrive to the extent to which they form strategic alliances that will guarantee them a supply of patients. To be nonaligned, a rehabilitation hospital will have to be a fairly specialized center of excellence with a national or broad regional market base. Very few rehabilitation programs qualify. Whether national or local in focus, rehabilitation programs of all kinds require a therapeutic focus or identity that separates them from their competitors.

Despite the doom and gloom that grips parts of the rehabilitation hospital industry, demographic demands will require that health systems include a substantial rehabilitation component in order to accommodate a rapidly growing disabled population, especially in the older age groups. Rehabilitation will remain a growth industry. The point of market saturation has yet to be determined.

The greatest change demanded by the managed care revolution is the change in mind set. In the former fee-for-service, cost-based reimbursement systems, more was better: the more service rendered, the more revenue produced. In the emerging fixed-fee or fixed-cost environment, less is better: the less service provided, the more net income produced. Managed care has reversed the financial incentives governing provider behavior in the past.



The question remains whether quality and outcomes are being sacrificed when financial incentives are reversed. In the drive for lower costs and prices, purchasers may be overlooking the product they are purchasing. Managed care payers would do well to demand quality and outcome data upon which they can make comparisons across provider networks. Rehabilitation providers are far more sophisticated in outcome measurement than purchasers assume. Standardized and reliable, cross-provider, functional outcome data are already available, and managed care payers would do well in making these data one of the bases upon which they make their purchase and payment decisions.


Gerben DeJong, Ph.D., Director, Ben Wheatley, B.A., Research Assistant, and Janet Sutton, Ph.D., Senior Research Associate, Research and Training Center on Medical Rehabilitation Services and Health Policy, NRH Research Center, Medlantic Research Institute, Washington, DC.


The production of this article was supported in part by the NRH Research Center's Research and Training Center on Medical Rehabilitation Services and Health Policy (RTC-MRS&HP) which is funded with a grant from the National Institute on Disability and Rehabilitation Research (NIDRR). Grant #H133B40025.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the NRH Research Center, National Rehabilitation Hospital, Medlantic Research Institute, or any other organization with which the authors are affiliated.

TABLE 1. HMO Penetration
Market 1991 1994 Increase
San Diego 36.0% 53.8% +49.4%
Minneapolis/St. Paul 46.0% 55.1% +19.8%
Worcester 51.0% 58.8% +15.3%

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