In 1998 the Medicare Program began a 3-year transition in its form of payment for nursing home care, from a cost-based method to a system of prospectively set prices per severity-weighted day of care known as the SNF PPS. Following a decade of extraordinary growth in Medicare payments for skilled nursing and other post-acute care, the Balanced Budget Act (BBA) of 1997 mandated this transition as a strategy to encourage efficiency and discourage unnecessary services. The new rates had already been under development for several years by the Health Care Financing Administration, and the background and methods for their computation have been described in detail in the Federal Register (1997; 1998). Rates were derived from inflation-updated average allowable rural and urban per diem costs in an earlier base year, that had been standardized for regional input price differences using an area wage index, and for case-mix differences using a system of resource utilization groups (RUGs). During the 3-year transition facilities were paid based on a blend that incorporated decreasing proportions of their own historical cost per day; payments were not based on 100 percent of the Federal rate until 2001.
At the start of the PPS transition period there was widespread industry concern about the adequacy of the new system, and its impact both on facility profitability and on the quality of skilled nursing care. Nursing facilities that delivered substantial amounts of care to Medicare beneficiaries faced rapid changes in financing that were likely to affect their short-term profitability, as they made necessary clinical and managerial adjustments in response to the incentives posed by PPS. A few high-profile bankruptcies of major shareholder-owned nursing home chains drew public attention to the new payment system, prompting reviews from congressional and other Federal agencies (Office of the Inspector General, 1999; U.S. General Accounting Office, 1999a, b, c; Medicare Payment Advisory Commission, 1999). The U.S. General Accounting Office testified before Congress that the 1999 bankruptcy filings by major chains were the result of overinvestment in ancillary service delivery settings. In their opinion, the filings were indicative of a period of industry adjustment to PPS, but did not pose a threat to beneficiaries' access to care and did not constitute evidence that the rates were fundamentally inadequate (U.S. General Accounting Office, 2000). Provisions included in the BBA 1999 and again in the Benefits Improvement and Protection Act of 2000 modified several components to the new system, and provided some payment relief by temporarily raising rates for certain complex admission types. These legislative reforms, together with other rate changes implemented by CMS as part of its annual update process, addressed some of the industry's concerns about the fairness and adequacy of the system. The essential structure of a fixed, all-inclusive payment per case-mix adjusted day, however, remains unchanged.
This study's objective is to investigate the impact of SNF PPS on market expansion, and to identify differences in market responses to the new payment system by type of ownership, hospital affiliation and location. The nursing home industry is characterized by considerable entry as well as exit activity, and in gauging the impact of SNF PPS it is important to take a longer-range perspective by looking at patterns of market growth over several years. This article takes advantage of the historical information maintained in the certification files, by tracking openings and closings of SNFs for the 12 years before implementation (1985-1997) and the 3 years of PPS transition (1998-2000). Market entry and exit is only one of many possible markers for changes in long-term care (LTC) supply. Although this study examines only the number of operating facilities, changes in bed capacity, changes in the levels or …