Performance of freestanding inpatient rehabilitation hospitals before and after the rehabilitation prospective payment system

Background: Inpatient rehabilitation hospitals provide important services to patients to restore physical and cognitive functioning. Historically, these hospitals have been reimbursed by Medicare under a cost-based system; but in 2002, Medicare implemented a rehabilitation prospective payment system (PPS). Despite the implementation of a PPS for rehabilitation, there is limited published research that addresses the operating and financial performance of these hospitals. Purpose: We examined operating and financial performance in the pre- and post-PPS periods for for-profit and nonprofit freestanding inpatient rehabilitation hospitals to test for pre- and post-PPS differences within the ownership groups. Methods: We identified freestanding inpatient rehabilitation hospitals from the Centers for Medicare and Medicaid Services Health Care Cost Report Information System database for the first two fiscal years under PPS. We excluded facilities that had fiscal years less than 270 days, facilities with missing data, and government facilities. We computed average values for performance variables for the facilities in the two consecutive fiscal years post-PPS. For the pre-PPS period, we collected data on these same facilities and, once facilities with missing data and fiscal years less than 270 days were excluded, computed average values for the two consecutive fiscal years pre-PPS. Our final sample of 140 inpatient rehabilitation facilities was composed of 44 nonprofit hospitals and 96 for-profit hospitals both pre- and post-PPS. We utilized a pairwise comparison test (t-test comparison) to measure the significance of differences on each performance variable between pre- and post-PPS periods within each ownership group. Findings: Findings show that both nonprofit and for-profit freestanding inpatient rehabilitation hospitals reduced length of stay, increased discharges, and increased profitability. Within the for-profit ownership group, the percentage of Medicare discharges increased and operating expense per adjusted discharge decreased. Practice Implications: Findings suggest that managers of these hospitals have adapted their administrative practices to conform with the financial incentives of the rehabilitation PPS. Managers must continue to control costs, increase discharges, and reduce length of stay to remain financially viable under the rehabilitation PPS.