The Effect of Medicare's Payment System for Rehabilitation Hospitals on Length of Stay, Charges, and Total Payments

Abstract

Background Medicare’s system for the payment of rehabilitation hospitals is based on limits derived from a hospital’s average allowable charges per patient discharged during a base year. Thereafter, pay- ments are capped, but hospitals receive incentive payments if charges per patient are reduced in suc- ceeding years. We hypothesized that per-patient charges would increase during the base year and then decrease in subsequent years. Hospitals would thus have higher reimbursement limits and receive incentive payments for reducing their charges. Methods We analyzed Medicare claims data for 190,921 discharges from 69 rehabilitation hospitals from 1987 through 1994. We compared total charg- es, length of stay, and interim payments before, dur- ing, and after each hospital’s base year. Results After we controlled for inflation and tem- poral and seasonal trends, mean charges per patient discharged increased from $25,131 for patients dis- charged before the base year to $32,167 for patients discharged in the base year (a 28 percent increase, P ? 0.001) and the mean length of stay increased from 22.1 to 26.7 days (a 21 percent increase, P ? 0.001). After the base year, mean charges decreased to $29,307 (a 9 percent decrease) and the mean length of stay decreased to 24.0 days (a 10 percent de- crease) (P ? 0.001 for both comparisons). Analysis of data on patients according to diagnosis — for exam- ple, spinal cord injury, brain injury, stroke, amputa- tion or deformity, hip fracture, and arthritis or other joint disorders — showed similar findings for each, with increases in charges and length of stay in the base year, followed by small reductions thereafter. For-profit hospitals had greater increases than non- profit hospitals in their per-patient charges (mean in- crease, $7,434 vs. $2,929; P ? 0.001) and length of stay (mean increase, 4.6 vs. 2.3 days, P ? 0.001) dur- ing the base year. Conclusions Although Medicare’s reimbursement system for rehabilitation hospitals put an upper limit on total payments, its design was associated with substantial extra costs, including significantly in- creased payments to hospitals and doctors and in- creased numbers of hospital days for the average pa- tient. (N Engl J Med 1997;337:978-85.