Medicare periodically changes payment methods for healthcare providers, and the examples I’d like to present address two different post-acute services: Long Term Acute Hospitals (LTACHs, or LTACs) and Inpatient Rehabilitation Facilities (IRFs). Upon close examination of these reimbursement changes it appears that the result was increased healthcare cost for patients and taxpayers. I can only guess as to what thinking brought about these changes. In this section, I’ll focus on LTACHs.
Prior to 2002, LTACHs were reimbursed on a cost basis. (LTACHs are hospitals specifically for patients with chronic diseases or conditions, whose length of stay (LOS) is expected to be more than 25 days.) At that time, LTACHs were required to submit a year-end “cost report” which detailed the costs associated with the treatment of Medicare patients in these hospitals. The costs incurred were examined by auditors, and allowable expenditures were paid to the provider. To insure adequate cash flow to the hospital, estimated interim payments were made, and settled up after the cost report settlement. This was called the TEFRA payment system.
Then Medicare devised an LTACH “Prospective Payment System” (PPS), which would pay a fixed amount per patient stay, based on a complex formula of rating patient acuity. With PPS, the sicker or more complex the patient, the higher the payment would be. (A similar PPS already had been in place for acute hospitals for some years.)
This change led to upheaval in the LTACH business. Although an option existed to transition from cost reimbursement to PPS over several years, almost all providers immediately chose PPS. You need not wonder why. A Medicare profit was now attainable, in place of mere cost reimbursement. Unsurprisingly, LTACH providers found that they were able to do well under the new methodology. http://digitalcommons.library.tmc.edu/dissertations/AAI1444903/. The average Medicare profit margin rose from a pre PPS <1% to > 9% post PPS!
Under PPS, a Medicare patient admitted to an LTACH is given a diagnosis. Based on that diagnosis, a length of stay and a payment is assigned. Now, if the patient were discharged at 5/6 of that estimated LOS (don’t even ask where 5/6 came from) then the hospital would get the full payment. So if a 30-day LOS was estimated based on a certain diagnostic category, a full payment could be expected on the 25th day or after. If the patient stayed longer, no extra payment could be expected (unless they stayed a lot longer). Obviously, the incentive would be to discharge on the 25th day, and not the 30th, thereby avoiding 5 days of inpatient expenses. Patient lengths of stay went down.
However, LTACH patients MUST have a yearly average LOS of at least 25 days, or the provider can forfeit their LTACH designation. The discharge incentive is balanced by the need to assure that in the aggregate, all patients stay that minimum amount of time. But the incentive for the earlier discharge was put in place by Medicare. Although it shortened LOS, PPS didn’t save Medicare much money, as will be shown below. It only incentivized less care to the patient, and gave tax dollars to provider profits.
Now, recall that before PPS, Medicare paid costs and arguably allowed for a small profit. At that time, most LTACH profit margins came from the private insurers. With PPS, Medicare rocketed into the position of top payer. This allowed private insurers to negotiate lower rates. For example, with PPS, a typical Medicare reimbursement was around $1400 per day, while some of the private insurer rates were as low as $950 per day. So, it appears that PPS came as a gift to both LTACH providers and private insurers, but not to taxpayers and patients. What was Medicare thinking?
In terms of total costs, Medicare paid all LTACHs an average of $24,758 per case in 2003 (the last year of TEFRA cost payment) but $38,600 per case in 2010, an increase of 56%, or 38% when adjusted for inflation. This was coupled with shorter patient stays. A brilliant idea! Pay lots more, get less care.
If a mechanism for profit exists, then assuredly, there are the many who will seek to profit, and some that will seek to exploit it. This sort of basic behavior seemed to be overlooked by the designers of the LTACH Medicare PPS.
