1. Trends in Financial and Operating Performance of Rehabilitation Hospitals Under the Rehabilitation Prospective Payment System Jon M. Thompson, Ph.D. Professor Health Services Administration Program James Madison University Harrisonburg, Virginia Michael J. McCue, D.B.A. Professor Department of Health Administration Virginia Commonwealth University Medical College of Virginia Campus Richmond, Virginia Presentation to the 135 th Annual Meeting of the American Public Health Association, November 6, 2007

2. Background Inpatient rehabilitation facilities (IRFs) operated under TEFRA with cost-based reimbursement 1983-2001. BBA of 1997 mandated a PPS for inpatient rehabilitation, based on case-mix groups, which started in 2002. IRFs are an important part of the health services industry: –Number of hospitals has increased to 217 in 2005. –Expenditures under Medicare were $6 billion in 2006.

3. Prior Literature Two streams of literature are relevant: Impact of rehabilitation PPS on functional levels and satisfaction (Robert, Howard and Tara, 2007; Shah et al., 2007; DeJong et al., 2005) Financial impacts of rehabilitation PPS -McCue and Thompson (2005): IRFs that converted to PPS early reduced their costs and had higher profitability -Paddock et al. (2007): post-PPS IRFs had higher costs per case relative to mean costs per case compared to pre-PPS

4. Research Question What is the financial and operating performance of for- profit and non-profit IRFs in the two years following conversion to PPS?

5. Data Source and Methodology Identified IRFs from CMS’ Health Care Cost Report Information Systems (HCRIS) database. Sampled only those IRFs that have two consecutive years of financial data Final sample of 171 freestanding IRFs: 51 non-profit and 120 for-profit IRFs Mean comparison (t-test) to measure significant differences between for-profit and non-profit IRFs

6. Study Variables and Definitions Variable Length of Stay (days) Occupancy Rate Medicare Discharge - % of Total Discharges Total Discharges Total Beds Medicare Case Mix FTEs per Census Definition Inpatient Days/Total Discharges Census/Hospital Beds Medicare Discharges/ Total Discharges Total Discharges for IRF Total Hospital Beds for IRF CMS avg. Case Mix Group Weight/Discharge for IRFs 2003 & 2004 IRF full-time equivalents (FTEs)/Census

7. Study Variables and Definitions (Cont’d) Net Patient Revenue per Adjusted Discharge Operating Expense per Adjusted Discharge Medicare Payment per Discharge Salary & Benefit Exp per FTE Operating Profit Margin Total Profit Margin Net Patient Revenue / (Case Mix x Total Discharges x Adjustment Factor) Operating Expenses / (Case Mix x Total Discharges x Adjustment Factor) Medicare Payment / Medicare Discharges (Salary Expense + Benefit Expense) / IRF FTEs (Net Patient Revenue – Operating Expenses) / Total Patient Revenue Net Income / (Total patient revenue + other operating revenue & non-operating Income)

8. Comparison of Performance 2003 VariableFor Profit- Mean Non-Profit Mean P-Value Length of stay15.8514.050.001 Occupancy rate74.30%69.15%0.039 Medicare discharges % of total discharges 75.60%62.90%0.001 Total discharges for IRF 1167.271328.730.106 Total beds for IRF 65.2870.330.207 Medicare case mix 1.091.000.001 FTE per census3.635.310.000

9. Comparison of Performance 2003 (Cont’d) Net patient revenue per adjusted discharge $12,393.00$17,046.000.000 Operating expense per adjusted discharge $10,370.00$17,449.000.001 Medicare payment per discharge $13,168.69$13,619.150.175 Salary & benefit exp per FTE $37,410.12$55,524.530.001 Operating profit margin 17.61%-1.07%0.001 Total profit margin 18.51%3.51%0.001

10. Comparison of Performance 2004 VariableFor Profit- Mean Non-Profit Mean P-Value Length of stay15.6013.740.001 Occupancy rate73.93%70.27%0.073 Medicare discharges % of total discharges 76.69%64.05%0.001 Total discharges for IRF 1179.711396.180.048 Total beds for IRF 65.6871.020.217 Medicare case mix 1.081.020.001 FTE per census3.625.620.001

11. Comparison of Performance 2004 (Cont’d) Net patient revenue per adjusted discharge $12,791.00$17,034.000.001 Operating expense per adjusted discharge $11,190.00$17,263.000.001 Medicare payment per discharge $13,882.79$13,468.590.199 Salary & benefit Exp per FTE $42,421.12$55,364.550.030 Operating profit margin 13.60%-0.79%0.001 Total profit margin 14.95%5.49%0.001

12. Results Year 1 For-profits have significantly higher length of stay, served a higher proportion of Medicare patients, and served more complex cases. For-profits also had significantly lower operating expense per discharge, which may be due to lower wages and staffing levels. For-profits also had significantly higher profitability than non-profits (operating margin and total margin).

13. Results Year 2 For-profits again have significantly higher length of stay, higher Medicare case complexity, and served a greater proportion of Medicare patients, compared to non-profits. Total patient volume was significantly lower among for-profits compared to non-profits. For-profits had significantly lower operating costs which may be due to significantly lower wages and staffing levels. For-profits also had significantly higher profitability than non- profits (operating margin and total margin).

14. Conclusions and Implications Significant differences exist between for-profit and non- profit IRFs in their volume of Medicare patients, case complexity and expenses. For-profits show consistently higher profitability in the two consecutive years after conversion to PPS. IRFs appear to have adapted to the pressures of PPS in different ways in order to provide rehabilitation services. Longitudinal research should address whether these differences are sustained over time.

15. Limitations Sample was limited to only hospitals with two years of data. No assessment of patient functional limitations and or quality. No measurement of services provided.