Medicare Reimbursement System Encourages Increased Payments To Rehabilitation Hospitals

October 01, 1997

The economic incentives of Medicare's reimbursement system for rehabilitation hospitals encourage millions of dollars in increased payments each year.

This was the conclusion of a study conducted by researchers with the University of Washington for the federal Health Care Financing Administration (HCFA) and reported in the Oct. 2 issue of the New England Journal of Medicine.

Unlike acute care hospitals, all rehabilitation, psychiatric, long-term care, cancer and children's hospitals are paid under regulations of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

Researchers analyzed Medicare claims data for 190,000 patients discharged from 69 rehabilitation hospitals between 1987 and 1994. By comparing shifts in patient charges and length of stay, increases in Medicare payments totaling approximately $210 million were identified.

"These findings clearly highlight some defects built into the TEFRA-based payment system," said Dr. Leighton Chan, UW assistant professor of rehabilitation medicine, who conducted the study while in the Robert Wood Johnson Clinical Scholars Program.

Under TEFRA, a hospital's Medicare reimbursement level is based upon average allowable patient charges at the facility during a one-year or "base-year" period. While payments are capped following the base year, a hospital can receive additional incentive payments by reducing its yearly patient charges.

Study results showed hospitals increased patient charges by roughly 28 percent and length of stay by more than 20 percent during the base-year period. During the following year, decreases of 9 percent in patient charges and 10 percent in patient length of stay were noted.

"Larger hosptials and for-profit institutions appeared to respond more strongly to the financial incentives built into this system, and most of the increases in Medicare payments we found went to these facilities," Chan explained. "To increase charges in the base year, most patients simply stayed in the hospital longer. However, we also found that hospitals selected patients with lower cost diagnoses after the base year."

Changes in the TEFRA system are already in progress. While the essential structure of the program will remain intact, next year HCFA will reduce payments under TEFRA, lowering the payment limits and decreasing incentive payments. For rehabilitation hospitals, more dramatic changes are in store, including a shift to a prospective payment system over the next five years.

"It is unclear if the adjustments HCFA is making will adequately address the problems we have highlighted," Chan noted. "About 900,000 Medicare admissions a year are paid under the TEFRA system, and only about 20 percent of these are to rehabilitation hospitals. It is hoped that our findings will support future changes in the payment system for these other facilities."

The study was supported through funding by the Robert Wood Johnson Clinical Scholars Program and the Northwest Health Services Research and Development Field Program at the Veterans Affairs Puget Sound Health Care System.

University of Washington

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