Does prospective payment really contain nursing home costs? - Policy Impact - Statistical Data Included

Health Services Research, April, 2002 by Li-Wu Chen, Dennis G. Shea

DISCUSSION

The results of our study show that quality does have a positive effect on cost in the nursing home industry. This result has important implications on nursing home policies because of the significant changes in the nursing home industry within the last two decades. Nursing homes have been "held to higher standards of accountability... particularly with respect to the quality of care" (Castle et al. 1997, p. 43). On the one hand, under the Nursing Home Reform Act of the OBRA 1987, nursing homes must meet more (e.g., patient rights and patient assessment) and higher (e.g., training for nurse aides) quality requirements to be eligible for Medicare/Medicaid reimbursement. Also, under the new law, nursing homes will face more stringent penalties if they violate the regulation. On the other hand, the increasing stringency of Medicare and Medicaid payments and the growing role of the managed care in long-term care financing have compelled nursing homes to compete increasingly for private pay patients on the basis of quality and price. In addition, increasing competition between nursing homes and hospitals (for postacute care patients) and home care providers (for lower acuity level patients) will force nursing homes to enhance their quality of care and services (Castle et al. 1997).

Under the newly shaped operating environment, nursing homes are expected to provide higher quality of services to their customers than ever before. In fact, some evidence suggests that the quality of care has been improved in terms of the declining use of physical restraints and psychotropic medications as well as the decreasing likelihood of residents' hospitalization and functional decline in nursing homes since the implementation of the OBRA 1987 (Castle et al. 1997; Phillips, Hawes, and Mor 1996). Based on the previously mentioned observation and the results of our study, nursing homes right now may have higher costs than ever before because of their enhanced quality.

The research findings also show that the PPS is not more effective in containing nursing home costs than the cost-based retrospective payment system. The common thoughts and expectation that nursing homes under PPS have lower costs than their counterpart facilities under a cost-based retrospective payment system may be misleading. The "cost savings" of these nursing homes under PPS may result from quality cuts. In other words, these facilities may not operate more efficiently in response to the financial incentives of PPS. Instead, they may cut the quality level provided to their patients to reduce their production costs. This response, however, can only take place in certain ways. Because of continued concerns about quality of care in nursing homes (Institute of Medicine 1986), nursing homes have faced increased regulatory restraints on quality in recent years. These regulations have increasingly focused on patient care process and outcomes issues, in contrast to previous regulations that addressed structura l aspects of quality. Our results suggest that if prospective payment is not coupled with some method of monitoring quality, payers may find costs and quality reduced. Payers who care about both cost efficiency and quality must find ways to link PPS to measures of quality to reward those who achieve both desired outcomes.