Trends across institutional settings in cost and service intensity for Medicare SNF care 1997 – 2003 Kathleen Dalton, PhD, RTI International Co-authors Jeongyoung Park, doctoral candidate, University of North Carolina School of Public Health Rebecca T. Slifkin, PhD, University of North Carolina, Cecil G. Sheps Center for Health Services Research Funded through the federal Office or Rural Health Policy, under cooperative agreement with the N.C. Rural Health Research and Policy Analysis Center. Working Paper available at:

June 26, Academy Health Annual Research Meeting Study Objective To examine changes in average costs and intensity of services, before and after Medicare SNF Prospective Payment (PPS), across each of three institutional settings To examine changes in average costs and intensity of services, before and after Medicare SNF Prospective Payment (PPS), across each of three institutional settings Part of larger funded study of rural hospital participation in SNF care Part of larger funded study of rural hospital participation in SNF care Part of author’s ongoing investigations of institutional responses to Medicare payment Part of author’s ongoing investigations of institutional responses to Medicare payment

June 26, Academy Health Annual Research Meeting Background Medicare payments for inpatient skilled nursing payable to: Medicare payments for inpatient skilled nursing payable to: Freestanding facilities Freestanding facilities (about 13,000) Hospital-based units (distinct, certified) Hospital-based units (distinct, certified) (about 1,500) “Swing-beds” – routine acute-care beds in qualifying rural hospitals “Swing-beds” – routine acute-care beds in qualifying rural hospitals (about 1,000)

June 26, Academy Health Annual Research Meeting SNF services not necessarily similar across settings 2002Admissions (2.2 mill) Covered Days (54.6 mill) Average Length of Stay Freestanding76%87% 28.3 days Hospital-based19%11% 14.1 days Swing-beds6%2% 8.9 days Source: CMS Statistical Supplement, 2004.

June 26, Academy Health Annual Research Meeting Payment systems Freestanding and HB units: began phase-in to SNF PPS rates payments in July Freestanding and HB units: began phase-in to SNF PPS rates payments in July Swing-beds started SNF-PPS in Swing-beds started SNF-PPS in Swing beds in Critical Access Hospitals exempt from PPS Swing beds in Critical Access Hospitals exempt from PPS Ancillary services continue as cost-based Ancillary services continue as cost-based Routine care had been under a fixed per-diem but became cost-based in 2002 (same rates as acute routine) Routine care had been under a fixed per-diem but became cost-based in 2002 (same rates as acute routine)

June 26, Academy Health Annual Research Meeting Presumption: Hoped-for responses to transition from cost-based to prospective payment: Reduce unneeded services (improved care efficiency) Reduce unneeded services (improved care efficiency) Reduce unit costs per service delivered (improved production efficiency) Reduce unit costs per service delivered (improved production efficiency) Eliminate inefficient providers (mergers, acquisitions or closures) Eliminate inefficient providers (mergers, acquisitions or closures) Retain / attract new efficient providers Retain / attract new efficient providers

June 26, Academy Health Annual Research Meeting Post-PPS changes in number of certified skilled nursing facilities Percent change 1997 to 2004 Hospital-based: urban -43% rural rural-20% Freestanding: urban +4% rural rural+11% All+6%

June 26, Academy Health Annual Research Meeting Study Design Descriptive Descriptive Population: Population: all SNFs filing Medicare cost reports all SNFs filing Medicare cost reports Outcomes: Outcomes: Medicare costs, payments and margins Medicare costs, payments and margins Per diem costs: Per diem costs: Therapy Therapy Non-therapy ancillary services Non-therapy ancillary services Routine nursing Routine nursing

June 26, Academy Health Annual Research Meeting Costs and Payments under SNF-PPS:

June 26, Academy Health Annual Research Meeting Costs and Payments under SNF-PPS:

June 26, Academy Health Annual Research Meeting

June 26, Academy Health Annual Research Meeting

June 26, Academy Health Annual Research Meeting

June 26, Academy Health Annual Research Meeting Text text text

June 26, Academy Health Annual Research Meeting What is going on? Freestandings: Freestandings: Immediate reduction in over-used services Immediate reduction in over-used services Control of unit costs elsewhere (reduction in real dollars) Control of unit costs elsewhere (reduction in real dollars) Healthy PPS surplus Healthy PPS surplus Hospital-based: Hospital-based: Immediate market exit (mostly urban), but Immediate market exit (mostly urban), but No apparent cost control among remaining providers No apparent cost control among remaining providers SNF-PPS losses = business as usual SNF-PPS losses = business as usual

June 26, Academy Health Annual Research Meeting Swing-beds Swing-beds Still the setting with shortest stays, but no longer least intensive Still the setting with shortest stays, but no longer least intensive Increase in services could reflect change in patients Increase in services could reflect change in patients Absorbing demand from closed HB units? Maybe Absorbing demand from closed HB units? Maybe Needs a detailed study from SNF claims and MDS data Needs a detailed study from SNF claims and MDS data Costs could decline in future years with PPS implementation Costs could decline in future years with PPS implementation Watch for trends in PPS vs. CAH swing Watch for trends in PPS vs. CAH swing

June 26, Academy Health Annual Research Meeting Surprisingly unrelated to type of ownership In freestanding settings In freestanding settings Immediate reduction in rehab services in for-profit and non-profit institutions Immediate reduction in rehab services in for-profit and non-profit institutions In hospital-based settings In hospital-based settings Closure was associated with for-profit status and higher cost, higher Medicare utilization Closure was associated with for-profit status and higher cost, higher Medicare utilization But continued operations with severe SNF-PPS losses still common in profit and non-profit; also in metro and micropolitan areas But continued operations with severe SNF-PPS losses still common in profit and non-profit; also in metro and micropolitan areas

June 26, Academy Health Annual Research Meeting Measurement limitations? “accounting costs” ≠ “ true costs ” Routine cost per-diems are systematically understated due to averaging of skilled with unskilled patients in “ dual ” units. But … Routine cost per-diems are systematically understated due to averaging of skilled with unskilled patients in “ dual ” units. But … Overstates profit in freestanding – HB units have fewer unskilled days Overstates profit in freestanding – HB units have fewer unskilled days Hospital-based per diems include more fixed overhead costs. But … Hospital-based per diems include more fixed overhead costs. But … Explains only part of the difference Explains only part of the difference HB units truly have more and better paid nurses HB units truly have more and better paid nurses

June 26, Academy Health Annual Research Meeting Question: what is the business objective of a hospital-based SNF? Meeting clinical demand for services at more complex end of SNF care spectrum Meeting clinical demand for services at more complex end of SNF care spectrum If so, unclear why SNFPPS case-mix adjustment doesn’t adjust for this If so, unclear why SNFPPS case-mix adjustment doesn’t adjust for this Discharge management for DRG patients? Discharge management for DRG patients? Accepted wisdom, but not borne out by length-of-stay differences Accepted wisdom, but not borne out by length-of-stay differences Put unused beds & space to “productive” use? Put unused beds & space to “productive” use? (Well, not too productive given these losses…) (Well, not too productive given these losses…)

June 26, Academy Health Annual Research Meeting Interpreting apparently non- rational responses Some of it explainable by accounting artifact? Some of it explainable by accounting artifact? In aggregate, do we know if marginal income from SNF services is greater than marginal costs? In aggregate, do we know if marginal income from SNF services is greater than marginal costs? Turning to organization theory to generate alternative explanations/ models of strategic response Turning to organization theory to generate alternative explanations/ models of strategic response