Excluded facility financial status and options for payment system modification - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by John E. Schneider, Jerry Cromwell, Thomas P. McGuire

It is conceivable that a portion of the cases marked for deletion were valid cases. For example, in the case of distinct part units of short-term acute care hospitals, incentives driven by PPS may have resulted in cost shifting to non-PPS units, thus potentially distorting the true financial status of the unit. While these are legitimate concerns, given the limitations of our data we were not able to distinguish cost-shifting behavior from other types of data quality issues.

Edited and cleaned data were divided into two analytic files. One file contained data for all hospitals and units; the other only for a cohort of facilities with data present in all 3 years. The cohort file contained 4,143 observations (1,381 each year). The cohort file was used to analyze financial impacts of TEFRA, and the complete file (5,291 observations) was used for payment system simulations. Note that as a result of deleting outliers and subsetting to facilities present in all 3 years (in the case of the cohort file), the numbers of observations on our analytic files differ from the numbers presented in Table 1.

FINANCIAL IMPACT ON EXCLUDED FACILITIES

All data presented in this section are based on the cohort file, which only includes facilities reporting data for all 3 years. Unless specified differently on the tables, all of the statistics presented are weighted by Medicare discharges. Results for children's hospitals are de-emphasized because of their very small Medicare caseloads. Also, the small number of observations (28 on the cohort file) cause problems when analyzing facility characteristics, such as bed size groupings and regional groupings. Similar small sample problems apply to longterm care facilities, although results for these facilities are more important to HCFA because of their treatment of a relatively large number of Medicare patients. Profit rates per discharge are presented as the principal measure of financial status and are defined as the Medicare margin per discharge divided by Medicare average costs per discharge.

Across all types of facilities, Medicare profit rates were negative in every year declining rapidly from - 5.6 percent in 1986 to - 10.8 percent in 1988 (data not shown). Different types of excluded facilities treat very different kinds of patients. Therefore, it is useful to examine each type of facility separately.

All four facility types had negative Medicare profit rates in each of the 3 years (Table 2). For psychiatric, children's, and long-term care facilities, profit rates ranged between - 13 and - 14 percent by 1988, versus rehabilitation facilities at - 6.1 percent. Payments per case to rehabilitation facilities grew by 5.3 percent from 1986 to 1988, while average costs per case grew 7.5 percent during the time period. For other types of facilities, average costs grew nearly twice as fast as Medicare payments.

[TABULAR DATA 2 OMITTED]

Rehabilitation facilities were the only group to have reduced average length of stay. While they may have implemented other types of cost controls, their 6.7-percent decrease in average length of stay from 1986 to 1988 was likely an important factor in their slower than average increase i n ave rage costs.