Academic journal article Health Care Financing Review

Expansion of Medicare's Definition of Post-Acute Care Transfers

Academic journal article Health Care Financing Review

Expansion of Medicare's Definition of Post-Acute Care Transfers

Article excerpt


Prior to the enactment of the Balanced Budget Act (BBA) of 1997, the only cases designated as transfers under Medicare's inpatient hospital prospective payment system (PPS) were those discharged from one acute care facility and readmitted to a similar facility on the same day. Under the current acute-to-acute transfer payment policy, the sending hospital is paid twice the DRG per diem amount for the first day and the per diem for all remaining days up to the full DRG payment amount. The final discharging hospital still receives the full DRG payment amount (Prospective Payment Assessment Commission, 1993). The transfer payment policy was based on the belief that it was inappropriate to pay the sending hospital the full DRG payment for less than the full course of treatment (Buczko, 1993).

Growth in PAC

Fundamental changes in the health care market over the past decade have caused health policy analysts to rethink the traditional distinction between acute and PAC services (Lee, Ellis, and Merrill, 1996). An increase in the number of PAC providers, as well as technological advances in medicine, have enabled these providers to treat a wider range and severity of conditions, thereby permitting patients to be discharged earlier from acute care hospitals (Schneider, Cromwell, and McGuire, 1993; Medicare Payment Advisory Commission, 1998; Federal Register, 1998b). Figure 1 tracks the share of Medicare patients discharged from an acute care hospital to a PAC provider, defined as a skilled nursing facility (SNF), home health agency, or facility exempted from PPS reimbursement. PAC transfer rates rose steadily during the 1990s, from 20.5 percent in 1991 to 30.2 percent in 1998 (Gilman et al., 2000). A 10-percentage point increase translates into 1 million more Medicare patients annually receiving PAC services after discharge. The percent increase in the 20 DRGs with the highest PAC rates in 1991 was even greater, i.e., 38 to 54 percent (Gilman et al., 2000).


Reimbursing acute care hospitals for short-stay patients transferred to PAC can be justified on the same grounds as acute-to-acute transfers. When PPS standardized amounts were first constructed in 1983, they were based on much longer stays and far lower PAC rates. Costs for services that were originally being incurred by hospitals are now being incurred by PAC providers that bill Medicare for their services. The program often pays twice for the PAC-level care previously provided on an inpatient basis.

Because annual recalibration of DRG relative weights supposedly captures shifts in site of care through lower inpatient charges, any transfer payment policy focused on PAC may seem redundant. Annual recalibration, however, does not automatically reduce payments for either acute-to-acute or PAC-related transfers. Greater reliance today on PAC is found in practically all DRGs, but any diffused PAC effect is factored out of payment updates by normalization of the annual DRG relative charges per case. More significantly, PAC transfers under current policy are weighted by the ratio of their acute lengths of stay (LOS) to the DRG geometric mean stay before being included in the denominator of CMS's calculation of the charges per discharge. The effect is to raise average charges for PAC discharges in order to ensure that nontransfer discharges receive an actuarially fair DRG full payment.

Description of PAC Transfer Policy

In 1997, Congress responded to the burgeoning PAC utilization and possible double payment by directing HCFA to identify 10 DRGs to test the feasibility of extending the PPS acute care transfer payment policy to include transfers to PAC settings. BBA 1997, section 1886(d)(5)(J) required the Secretary of the Department of Health and Human Services to select 10 DRGs "... based upon a high volume of discharges classified within such group and a disproportionate use of . …

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