Early effects of the prospective payment system on inpatient rehabilitation hospital performance

Objective: To assess changes in utilization and financial performance for inpatient rehabilitation facilities (IRFs) that shifted from Medicare's cost-based payment system to the IRF prospective payment system (PPS). Design: A pre-post nonequivalent comparison group design. The intervention group included IRFs that changed to the PPS in fiscal year 2002. The comparison group included IRFs that were paid under the cost-based system. Setting: IRFs in the United States. Participants: Final sample included 120 IRFs, with 26 IRFs in the comparison sample. Interventions: Not applicable. Main Outcome Measures: Outcome measures included utilization (length of stay [LOS], total discharges, Medicare discharges) and financial performance (revenue, expenses, profitability, Medicare payment and cost). Results: PPS IRFs experienced a smaller decline in LOS, whereas Medicare cost per discharge increased at a lower rate. PPS IRFs reduced operating costs per discharge, whereas profit margin had a greater increase. Conclusions: IRFs under PPS implemented cost controls that lead to lower operating costs below the fixed payment to profit under PPS. Discharge growth for PPS IRFs was similar to the comparison group. PPS facilities did not implement a strategy that attempted to admit more patients to increase Medicare payments.