Medicare expenditure on post-acute care (PAC) constitutes a significant portion of overall healthcare spending, accounting for approximately $60 billion annually, or 15% of the total Medicare budget, as detailed in A Data Book Health Care Spending And The Medicare Program published by MedPAC in 2021. This substantial spending also significantly contributes to geographic variations observed in Medicare expenditure across the United States. According to a 2013 report from the Institute of Medicine, a notable 73% of these geographic disparities can be attributed to differences in post-acute care service utilization.
Data from the 2018 Dartmouth Atlas reveals considerable regional variations in per capita Medicare spending, ranging from $8,056 in Burlington, Vermont, to $15,348 in Los Angeles. Despite this wide range in expenditure, evidence does not suggest that beneficiaries in high-spending regions experience superior health outcomes compared to those in lower-spending areas (Fisher et al., 2003). This discrepancy indicates potential inefficiencies within the system, highlighting the critical need for payment models that incentivize healthcare providers to enhance quality while controlling costs, as emphasized by Newhouse and Garber (2013).
This article delves into the post-acute care sector, examining the implications of Medicare’s reimbursement policies for skilled nursing facilities (SNFs), which are key providers of post-acute care services. Drawing insights from a data book health care spending and the medicare program, we aim to provide a comprehensive overview and discuss potential areas for policy improvement.
Understanding Post-Acute Care (PAC)
Post-acute care encompasses a spectrum of services designed to aid patients in their recovery following surgery, medical procedures, or illnesses. These services are delivered across various settings, including skilled nursing facilities (SNFs), home health agencies (HHAs), inpatient rehabilitation facilities (IRFs), and long-term care hospitals (LTCHs). As illustrated in Figure 1, SNFs represent the most prevalent type of PAC provider, followed by HHAs, IRFs, and LTCHs. Reflecting this prevalence, SNFs also account for the largest share of Medicare PAC spending, reaching $27.6 billion, or 48% of total Medicare PAC expenditure in 2019, according to MedPAC’s data book health care spending and the medicare program (2021).
Figure 1. The number of institutions and total spending by four types of PAC institutions (2019)
Source: MedPAC (2021)
A significant proportion of Medicare beneficiaries require PAC services after hospitalization, primarily in SNFs or at home. Figure 2 illustrates the distribution of Medicare fee-for-service discharges into routine discharges, PAC discharges, and other categories, based on 2016 hospital records from New York and Florida. PAC discharges are further categorized into four types. The data reveals that 47% of Medicare patients were discharged to a PAC setting post-hospitalization. SNFs and HHAs were the most common destinations for PAC discharges, accounting for 21% and 22% of total discharges, respectively.
Figure 2. Discharge destination of Medicare fee-for-service inpatient stays, New York and Florida, 2016
Note: Other discharges include transfers to other short-term hospitals, death during hospitalization, and leaving against medical advice.
Skilled Nursing Facilities (SNFs) Explained
Skilled nursing facilities (SNFs) offer the most intensive level of medical care outside of a hospital environment, equipped with specialized staff and resources. Primarily focused on recovery and rehabilitation, SNF stays are typically short-term, averaging around 37 days (MedPAC, 2015). While many nursing homes provide short-term skilled nursing care, some exclusively offer custodial care for long-term residents, assisting with daily living activities such as eating, bathing, and dressing.
It is crucial to note that Medicare coverage for skilled nursing care in certified SNFs is limited to a maximum of 100 days and does not extend to custodial care. Beneficiaries requiring nursing home services beyond 100 days must cover costs out-of-pocket or through long-term care insurance. Medicaid may cover nursing home stays for individuals who have exhausted their assets and meet eligibility criteria, provided the services are received in a Medicaid-certified facility.
In 2019, Medicare covered 2 million SNF stays. Freestanding SNFs accounted for 96% of these stays, with hospital-based SNFs making up the remaining 4%. The majority of SNFs (71%) operate as for-profit businesses, while 23% are nonprofit and 6% are government-owned.
Medicare beneficiaries represent the most lucrative revenue stream for SNFs, generating approximately $500 per person per day, compared to $300-$400 per day for privately insured residents. Medicaid recipients generate the lowest revenue, at less than $200 per resident per day (Lu, Rui, and Seidmann, 2018). This financial dynamic has led to the nursing home industry viewing short-term Medicare recipients as a significant source of revenue (New York Times, 2015).
The Impact of Medicare’s “Three-Day Rule” on SNF Reimbursement
Medicare’s fee-for-service model includes a “three-day rule” that dictates eligibility for SNF care reimbursement. Under this rule, Medicare only covers SNF care if a patient has had a prior hospital stay of at least three consecutive days. For those who qualify, Medicare provides full coverage for the first 20 days of SNF care without any copayment. For days 21-100, partial coverage is provided, and beneficiaries are responsible for a daily coinsurance, currently set at $194.50. Beyond 100 days, Medicare coverage ceases, and the patient assumes full financial responsibility.
Recent research by Jin, Lu, and Lee (forthcoming), referenced in a data book health care spending and the medicare program and other policy analyses, investigates the implications of this “three-day rule”, posing critical questions: Firstly, how does this rule influence discharge destinations post-hospitalization? Secondly, is SNF care superior to home care in terms of patient outcomes, specifically regarding 30-day hospital readmission rates? And thirdly, are there more effective reimbursement models Medicare should consider if the current “three-day rule” proves to be inefficient?
How the Three-Day Rule Shapes Discharge Decisions
The “three-day rule” creates a significant financial incentive for Medicare patients to utilize SNF care after a three-day hospital stay, as it drastically reduces the out-of-pocket cost. Patients with private insurance typically do not face such a stark change in financial incentives based on hospital length of stay.
Analyzing over 600,000 hospital discharge records from New York and Florida between 2005 and 2015, researchers compared discharge patterns between Medicare and non-Medicare patients. Figure 3 reveals that SNF discharge rates are comparable between the two groups during the first two days of hospitalization. However, starting on the third day, Medicare patients are significantly more likely to be discharged to an SNF compared to their non-Medicare counterparts. Conversely, Figure 4 demonstrates that home discharge rates are similar for both groups during the initial days but decline disproportionately for Medicare patients beginning on day three. These findings strongly suggest that the “three-day rule” promotes discharges to SNFs while simultaneously reducing discharges to home care.
Figure 3. SNF discharge rate by hospital length of stay, Medicare vs. non-Medicare patients
Figure 4. Home discharge rate by hospital length of stay, Medicare vs. non-Medicare patients
However, the question remains whether SNF care genuinely provides better outcomes than home care. SNFs offer higher treatment intensity and continuous 24-hour monitoring, which could facilitate earlier detection of complications and prevent hospital readmissions (Werner et al., 2019). Conversely, home care presents advantages such as lower costs and reduced risk of infection. SNFs, by nature of their environment, can facilitate infection spread due to increased patient and staff contact and shared equipment and spaces.
SNF Discharges and Hospital Readmission Rates: Unintended Consequences
Discharging a patient to an SNF incurs substantial costs for Medicare. Assuming an average daily cost of $500 and a 37-day average length of stay, each SNF discharge generates approximately $18,500 in Medicare expenditure. Extrapolating these figures, the cost of SNF discharges attributable to the “three-day rule” could reach $68 million annually.
These significant costs would be justifiable if SNF discharges consistently led to improved health outcomes. However, research indicates the opposite.
Studies examining the impact of SNF discharges on hospital readmission rates, focusing on patients admitted through emergency departments and considering variations in physician discharge tendencies, have revealed that SNF discharges significantly increase 30-day hospital readmission rates for Medicare patients with a three-day hospital stay. This suggests that Medicare patients who receive SNF care instead of home care due to physician tendencies are more likely to be readmitted to a hospital.
Further investigation into the causes of readmissions indicates that the increase in hospital readmissions among these Medicare patients is primarily driven by infection-related diagnoses. Interestingly, SNF discharges do not show a differential impact on readmission rates compared to home discharges for patients not subject to the three-day rule, such as Medicare patients with shorter hospital stays or non-Medicare patients.
To understand this paradoxical outcome, SNF quality becomes a critical factor. SNFs vary in service quality, and higher-quality SNFs tend to have higher occupancy rates compared to lower-quality facilities. This suggests that additional SNF discharges driven by the financial incentives of the “three-day rule” are more likely to occur in areas with lower SNF occupancy rates or, on average, lower quality SNFs.
Data corroborates this pattern: the increase in SNF discharges due to the “three-day rule” is more pronounced in areas with low occupancy rates and higher deficiency citations. The adverse impact on 30-day hospital readmission rates is also concentrated in these areas with lower-occupancy, lower-quality SNFs. These findings suggest that discharging patients to low-quality SNFs may worsen health outcomes for Medicare beneficiaries who utilize SNFs due to the “three-day rule” and who might have otherwise recovered at home.
Medicare’s reliance on inpatient days as a broad indicator of patient condition and its provision of free SNF services for the initial 20 days create a moral hazard, potentially encouraging overuse of SNF care and exposing beneficiaries to the risks associated with lower-quality SNFs. These unintended consequences impose substantial costs on Medicare. Considering both the increased SNF discharges and the subsequent rise in hospital readmissions, conservative estimates suggest that the “three-day rule” may generate an additional Medicare cost of up to $345 million per year.
These calculations are likely underestimates for several reasons. Firstly, they do not account for the potential increase in hospital stays to meet the three-day rule criteria (Grebla et al., 2015). Secondly, lower-quality, low-occupancy SNFs may have financial incentives to prolong Medicare patient stays compared to higher-quality facilities. Data limitations prevent the incorporation of these costs, and the calculations assume uniform SNF stay lengths across all facilities. Thirdly, these estimates are based on a specific sample from New York and Florida, focusing on patients admitted through emergency departments and hospitalized for three days. Given that the “three-day rule” applies to all fee-for-service Medicare discharges, the total cost is likely even greater.
Lessons from Private Insurers for Medicare Reform
Choosing an SNF that balances quality and cost is challenging for patients and families due to the difficulty in assessing and verifying SNF service quality. Insurers play a crucial role in oversight and provider network management. To improve or replace the “three-day rule,” Medicare can draw valuable lessons from private insurance reimbursement policies. The 2021 Federal Employee Health Benefits Program (FEHBP) data reveals three common features in private insurance plans that differ from Medicare:
Firstly, most private plans in FEHBP offer limited SNF coverage or require coinsurance or copayments, even for the initial 20 days. Approximately a quarter of private plans do not cover SNF care at all, and those that do often impose coinsurance rates as high as 50% or copayments exceeding $400 per day for covered SNF days. This cost-sharing approach mitigates the moral hazard of SNF overuse and potentially reduces overall demand.
Secondly, almost all private plans in FEHBP differentiate payment rates for in-network and out-of-network SNFs, requiring patients to pay more for out-of-network facilities. This network-based approach allows insurers to curate SNF networks and control the quality of care provided to their enrollees.
Thirdly, unlike Medicare, FEHBP plans do not typically employ an explicit qualification rule based on inpatient stay duration.
By applying machine learning techniques to predict SNF discharge rates for privately insured non-Medicare patients and extrapolating these models to Medicare, research suggests that adopting the average decision rules of private insurers could prevent numerous SNF discharges that may lead to adverse patient outcomes. These findings underscore the importance of Medicare incorporating more nuanced patient and market characteristics into its SNF qualification criteria, rather than solely relying on hospital length of stay. Furthermore, Medicare can learn from private insurers’ effective use of coinsurance/copayments, network management, and proactive care management and utilization review strategies to optimize the utilization and duration of both hospital and SNF stays.
References
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Grebla, Regina C., Laura Keohane, Yoojin Lee, Lewis A. Lipsitz, Momotazur Rahman, and Amal N. Trivedi. “Waiving The Three-Day Rule: Admissions And Length-Of-Stay At Hospitals And Skilled Nursing Facilities Did Not Increase.” Health Affairs 34, no. 8 (2015).
IOM. **“**Variation in health care spending: target decision making, not geography.” National Academies Press. (2013).
Jin, Ginger Z., Susan F. Lu, and A. Lee. “Patient Routing to Skilled Nursing Facilities: The Consequences of the Medicare Reimbursement Rule.” Management Science, forthcoming.
Lu, Susan F., Huaxia Rui, and Abraham Seidmann. “Does technology substitute for nurses? Staffing decisions in nursing homes.” Management Science 64, no. 4 (2018): 1842-1859.
MedPAC (Medicare Payment Advisory Commission). “July 2021 Data Book: Health Care Spending and the Medicare Program.” (2021).
MedPAC (Medicare Payment Advisory Commission). “Report to the Congress: Medicare Payment Policy.” Washington, D.C. (2015).
Newhouse, Joseph P., and Alan M. Garber. “Geographic variation in health care spending in the United States: insights from an Institute of Medicine report.” Jama 310, no. 12 (2013): 1227-1228.
Thomas, Katie. “In race for Medicare dollars, nursing home care may lag.” New York Times 14 (2015).
Werner, Rachel M., Norma B. Coe, Mingyu Qi, and R. Tamara Konetzka. “Patient outcomes after hospital discharge to home with home health care vs. to a skilled nursing facility.” JAMA Internal Medicine 179, no. 5 (2019): 617-623.
