The escalating costs of healthcare in the United States continue to be a major concern, with Medicare expenditure representing a significant portion of this financial burden. Within Medicare, post-acute care (PAC) services account for a substantial amount of spending, contributing significantly to the geographic variations observed across the nation. Data consistently reveals that there is no clear correlation between higher spending in certain regions and improved patient health outcomes. This disparity suggests potential inefficiencies within the system, highlighting the critical need to refine payment models to incentivize healthcare providers effectively, ultimately aiming to enhance both the quality of care and cost-effectiveness. This analysis delves into the realm of post-acute care spending within the Medicare program, focusing particularly on skilled nursing facilities (SNFs) and the implications of the Medicare “three-day rule,” drawing insights from comprehensive data books on health care spending and the Medicare program.
Understanding Post-Acute Care (PAC) and Skilled Nursing Facilities (SNFs)
Post-acute care (PAC) encompasses a spectrum of services designed to aid patients in their recovery process following surgery, medical procedures, or illnesses. These services are primarily delivered through four main types of providers: skilled nursing facilities (SNFs), home health agencies (HHAs), inpatient rehabilitation facilities (IRFs), and long-term care hospitals (LTCHs). Among these, SNFs stand out as the most frequently utilized PAC setting and command the largest share of Medicare expenditure within the PAC sector. In 2019, Medicare spending on SNFs reached $27.6 billion, constituting 48 percent of the total Medicare PAC expenditure.
Figure 1: Distribution of Post-Acute Care Institutions and Medicare Expenditure in 2019, highlighting Skilled Nursing Facilities as the leading category.
Following a hospital stay, a significant portion of Medicare beneficiaries require PAC services, predominantly delivered in SNFs or at home. Data from New York and Florida in 2016 indicates that 47 percent of Medicare fee-for-service discharges were directed to a PAC setting. SNFs and HHAs emerged as the most common destinations, accounting for 21 percent and 22 percent of total discharges, respectively.
Skilled nursing facilities are distinguished by their capacity to provide the most intensive level of medical care outside of a traditional hospital environment. Equipped with specialized staff and equipment, SNFs primarily cater to patients requiring short-term rehabilitation and recovery. The average duration of stay in an SNF is approximately 37 days. While many nursing homes offer short-term skilled nursing care, a subset exclusively provides custodial care, focusing on assisting long-term residents with daily living activities. It is crucial to note that Medicare coverage is limited to skilled nursing care within certified SNFs, extending up to a maximum of 100 days, and explicitly excludes custodial care. For extended nursing home services beyond this period, patients must bear the costs out-of-pocket or through long-term care insurance. Medicaid may provide coverage for eligible individuals in Medicaid-certified nursing homes once their assets are exhausted.
In 2019, Medicare covered 2 million SNF stays, with the majority (96 percent) occurring in freestanding facilities. Notably, the ownership structure of SNFs is predominantly for-profit (71 percent), with nonprofit (23 percent) and government-owned facilities (6 percent) constituting smaller portions. Financially, Medicare residents are the most lucrative for SNFs, generating approximately $500 per person per day, significantly higher than revenues from privately insured or Medicaid recipients. This revenue disparity underscores the financial attractiveness of short-term Medicare patients to the nursing home industry.
The Medicare Three-Day Rule: An Overview
A critical component of Medicare’s reimbursement policy for SNF care is the “three-day rule.” This rule stipulates that Medicare fee-for-service will only cover SNF care if a patient has had a prior inpatient hospital stay lasting at least three consecutive days. Upon meeting this condition, Medicare provides full coverage for SNF care for the initial 20 days without any copayment requirement. For days 21 through 100, Medicare offers partial coverage, with the patient responsible for a daily coinsurance, currently set at $194.50. Beyond 100 days, Medicare coverage ceases, and the patient assumes full financial responsibility.
This reimbursement structure raises several pertinent questions regarding its effectiveness and potential unintended consequences. Research has focused on understanding the impact of the three-day rule on discharge patterns, patient outcomes, and the overall efficiency of Medicare spending on post-acute care. Specifically, key inquiries include: How does the three-day rule shape discharge decisions following hospitalization? Does SNF care lead to better patient outcomes compared to home care, particularly in terms of hospital readmission rates? And are there more efficient reimbursement models that Medicare should consider?
Impact of the Three-Day Rule on Hospital Discharge Destinations
The Medicare three-day rule creates a distinct financial threshold for patients. For Medicare beneficiaries, the rule substantially reduces the out-of-pocket cost of SNF care after a three-day hospital stay. This sharp change in financial incentives based on length of stay is generally not experienced by patients with other forms of health insurance.
Comparative analysis of discharge patterns between Medicare and non-Medicare patients, using over 600,000 hospital discharge records from New York and Florida (2005-2015), reveals the influence of the three-day rule. During the first two days of hospitalization, SNF discharge rates are comparable between both groups. However, starting on the third day, a significant divergence emerges. Medicare patients are disproportionately more likely to be discharged to SNFs compared to their non-Medicare counterparts. Conversely, home discharge rates remain similar in the initial days but exhibit a disproportionate drop for Medicare patients starting from the third day of hospitalization.
Figure 3: SNF Discharge Rate Variation by Hospital Stay Duration: A Contrast Between Medicare and Non-Medicare Patients.
Figure 4: Home Discharge Rate Variation by Hospital Stay Duration: A Contrast Between Medicare and Non-Medicare Patients.
These findings strongly suggest that the three-day rule incentivizes discharges to SNFs while simultaneously discouraging discharges to home care settings for Medicare patients. However, the question remains whether SNF care genuinely provides superior outcomes compared to home-based care. SNFs offer a higher intensity of treatment and continuous 24-hour monitoring, potentially enabling earlier detection of complications and prevention of hospital readmissions. Conversely, home care presents advantages such as lower costs and reduced risk of infection, a significant concern in SNFs where infections can spread rapidly.
Consequences of SNF Discharges: Hospital Readmission Rates and Costs
Discharging a patient to an SNF incurs a substantial cost for Medicare. With an estimated daily cost of $500 and an average stay of 37 days, each SNF discharge translates to approximately $18,500 in Medicare expenditure. Extrapolating these figures nationally suggests that SNF discharges attributable to the three-day rule contribute to a significant annual cost.
Intriguingly, despite the higher cost, evidence indicates that SNF discharges do not necessarily lead to improved health outcomes. In fact, research reveals the opposite. Studies focusing on patients admitted through emergency departments and analyzing variations in physician discharge tendencies have found that SNF discharges significantly increase 30-day hospital readmission rates for Medicare patients who stay in the hospital for three days. This indicates that Medicare patients discharged to SNFs due to the three-day rule are more likely to be readmitted to a hospital compared to those discharged to home care, based on their physician’s typical discharge patterns.
Further investigation into the causes of readmissions reveals that the increased readmission rates for Medicare day-three patients are primarily driven by infection-related diagnoses. Notably, SNF discharges do not show a similar adverse impact on readmission rates for patients not subject to the three-day rule, such as Medicare patients with shorter hospital stays or non-Medicare patients.
To understand this disparity, it is crucial to consider the quality variations among SNFs. Higher-quality SNFs tend to operate at higher occupancy rates compared to lower-quality facilities. Consequently, SNF discharges driven by the financial incentives of the three-day rule are more likely to occur in areas where SNFs have lower occupancy rates and potentially lower average quality. Data analysis confirms this pattern, showing that the increase in SNF discharges due to the three-day rule is more pronounced in regions with low SNF occupancy rates and higher deficiency citations. Correspondingly, the unintended consequence of increased 30-day hospital readmission rates is also concentrated in these areas with lower-occupancy, lower-quality SNFs. These findings suggest that discharges to lower-quality SNFs may worsen health outcomes for Medicare patients who utilize SNFs due to the three-day rule, patients who might have otherwise recovered at home.
The Medicare system’s reliance on inpatient days as a proxy for patient condition, coupled with the provision of free SNF services for the initial 20 days, creates a potential moral hazard. This design may encourage overuse of SNF care by Medicare beneficiaries, exposing them to the risks associated with lower-quality SNFs. Accounting for both the increased SNF discharges and subsequent hospital readmissions, conservative estimations suggest that the three-day rule may generate an additional cost to Medicare as high as $345 million annually. It’s important to note that this calculation is likely an underestimate, as it does not fully account for factors such as potentially prolonged hospital stays to meet the three-day rule, variations in SNF length of stay, and the analysis being based on specific patient samples from New York and Florida.
Lessons from Private Insurers and Potential Policy Improvements
Given the complexities in assessing SNF service quality for patients and families, insurers play a vital role in oversight and network management. The absence of adverse effects from SNF discharges among privately insured non-Medicare patients prompts an examination of private insurance reimbursement policies.
Private insurance plans, as observed in the 2021 Federal Employee Health Benefits Program (FEHBP), employ several strategies distinct from Medicare’s three-day rule. Firstly, many private plans feature limited SNF coverage or mandate cost-sharing mechanisms, such as coinsurance or copayments, even for the initial 20 days. Approximately a quarter of private plans do not cover SNF care at all, while those that do often impose substantial coinsurance rates or daily copayments, effectively mitigating the incentive for overuse.
Secondly, almost all private plans differentiate payment rates for in-network and out-of-network SNFs, incentivizing patients to choose higher-quality, in-network providers. This network-based approach allows insurers to exert greater control over the quality of care received by their enrollees. Thirdly, unlike Medicare, private plans generally do not utilize an explicit qualification rule based on the length of inpatient hospital stay.
By employing machine learning techniques to predict SNF discharge rates for privately insured patients, researchers have suggested that implementing decision rules similar to those used by private insurers could significantly reduce potentially adverse SNF discharges within Medicare. These findings underscore the importance for Medicare to incorporate a broader range of patient and market characteristics into its SNF qualification criteria, moving beyond a sole reliance on hospital length of stay. Furthermore, Medicare can draw valuable lessons from private insurers in the strategic use of cost-sharing, network inclusion, and proactive care management to optimize the utilization and duration of both hospital and SNF stays, ultimately aiming to enhance patient outcomes and control healthcare expenditure.
Conclusion
Analysis of data on health care spending and the Medicare program reveals that the three-day rule for SNF reimbursement likely contributes to inefficient utilization of post-acute care services and may negatively impact patient health outcomes. The rule’s financial incentives appear to drive increased discharges to SNFs, sometimes to lower-quality facilities, leading to higher hospital readmission rates and increased costs for Medicare. By drawing lessons from private insurance models, Medicare has the opportunity to refine its reimbursement policies. Incorporating patient-specific factors, utilizing cost-sharing mechanisms, and implementing network-based strategies could lead to a more efficient and effective post-acute care system, ultimately improving patient care and responsibly managing healthcare spending within the Medicare program. Data-driven insights, such as those derived from comprehensive data books on health care spending, are essential for informing evidence-based policy reforms in this critical area of healthcare.
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