Skilled Nursing Facilities

In 1998, Medicare began the transition to a prospective payment system for skilled nursing facility services provided to Medicare beneficiaries. Medicare began paying fixed, preset rates for each day of care?a major change from the former system of cost-based reimbursement. GAO found that the ability of Medicare beneficiaries to obtain needed care does not appear to have decreased since the implementation of the prospective payment system, although some patients may stay longer in the hospital before being admitted to a nursing home or may receive care from other post-acute-care providers. The new system does appear, however, to have affected the willingness or ability of some nursing homes to accept some types of Medicare patients. Hospital discharge planners report that facilities are reluctant to admit patients needing high-cost services, including some expensive drugs and infusion therapy, because they believe that Medicare payments for these patients may be too low. GAO also found that nursing homes prefer Medicare patients needing short-term rehabilitation, raising concerns that payments for these patients may be too high. Although the new payment system has significantly changed financial incentives, GAO concludes that aggregate payments to providers are adequate, given that inflated costs were used to establish the per diem payment rates. However, the case-mix classification system used to adjust payments to reflect the needs of patients may not appropriately allocate payments across patients and providers. GAO notes that the preferred provider system is only one of several factors contributing to the poor financial performance of Sun Healthcare Group, Inc., and Vencor, Inc., two corporations that run a large number of nursing homes.

GAO noted that: (1) Medicare beneficiaries' ability to obtain needed care does not appear to have decreased since the implementation of the SNF PPS, although some patients may stay longer in the hospital before being admitted to a nursing home or may receive care from other post-acute-care providers; (2) the PPS does appear to have affected the willingness or ability of some nursing homes to accept certain types of Medicare patients; (3) hospital discharge planners reported that facilities are reluctant to admit patients requiring certain high-cost services, indicating the payments for some types of SNF patients may be too low; (4) GAO found Medicare patients needing short-term rehabilitation are preferred by nursing homes, raising concerns that payments for these patients may be too high; (5) these findings were confirmed in recent surveys of hospital discharge planners and nursing home administrators by the Office of Inspector General of the Department of Health and Human Services; (6) although the new payment system results in major changes in financial incentives, it is likely that aggregate SNF payments to providers are adequate, given that inflated costs were used to establish the per diem payment rates; (7) however, the case-mix classification system used to adjust payments to reflect the needs of patients may not appropriately allocate payments across patients and providers; (8) payments may be too low for certain types of patients and too high for others; (9) the generally low proportion of patient-days covered by Medicare at most nursing homes will dampen the initial effects of PPS on providers, and the transition to the full PPS rates was intended to give them time to adjust; (10) some facilities will have to make bigger changes in their treatment patterns, particularly facilities with a large proportion of patient-days covered by Medicare, those with inefficient practices, and those that historically furnished excessive services to patients to maximize revenues; (11) other facilities may be more selective in their admission policies until refinements in the classification system fully account for differences across patients; (12) the SNF PPS is only one of the many factors contributing to the poor financial performance of Sun Healthcare Group, Inc., and Vencor, Inc., two corporations that operate a large number of nursing homes; and (13) the large total losses reported by the corporations stem from high capital-related costs that have shrunk SNF margins, reduced demand for ancillary services, related to several Budget Balance Act of 1997 provisions, and substantial nonrecurring expenses and write-offs, reflecting reductions in future anticipated earnings.