How to cut Medicare spending without harming patients

Bruce Japsen | Sep 27, 2018

Sections Public Policy

Collections Health Care

Medicare, the United States’ federal medical-insurance program for people aged 65 and over, occupies a lot of space in the US fiscal landscape. A provider of medical coverage for nearly 60 million people, it accounts for 15 percent of federal spending, according to the Kaiser Family Foundation. In 2016, Medicare spending topped $670 billion. But research by Stanford’s Liran Einav and Amy Finkelstein and Chicago Booth’s Neale Mahoney suggests a straightforward way to trim that total without affecting the quality of patient care. 

The researchers find that Medicare could save more than $4 billion per year—without detriment to patients—if patients were discharged to skilled nursing facilities, rather than long-term care hospitals, for postacute care. Postacute care is medical care provided during recovery from a surgery or other medical event, or to treat severe or multiple illnesses on an ongoing basis. 

Long-term care hospitals first appeared in the early 1980s and are defined in part by the duration of patients’ stay: to be considered an LTCH, a facility must maintain an average inpatient stay of at least 25 days. Although they provide medical care similar to that at skilled nursing facilities, LTCHs constitute “a regulatory loophole for post-acute care facilities to receive substantially higher reimbursements,” the researchers write. Skilled nursing facilities are reimbursed about $450 per patient per day from Medicare, while LTCHs receive roughly $1,400 per patient per day.

Since 2005, the Centers for Medicare & Medicaid Services has made numerous attempts to curb LTCH spending, resulting in what the researchers describe as a “regulatory game of whack-a-mole.”

As of 2014, there were more than 400 LTCHs, which accounted for more than $5.4 billion in annual Medicare spending. But though the average LTCH stay costs Medicare three times what the average skilled nursing facility stay costs, the researchers find “patients discharged to an LTCH owe more money out of pocket, and we find no evidence that they spend less time in institutional care or have better mortality outcomes as a result.”

Einav, Finkelstein, and Mahoney analyzed medical data from 1998 to 2014, looking at what happened when a hospital market received its first LTCH. The first entry of an LTCH into a market made it about 10 percent more likely that patients within that market with a relatively high likelihood of needing postacute care would be discharged to an LTCH. But patients were no more likely to return home within 90 days, and there was no clear difference in 90-day mortality rates.

“Our empirical estimates suggest that by simply eliminating the administratively created concept of LTCHs as an institution with its own reimbursement schedule—and reimbursing them instead like skilled nursing facilities—Medicare could save $4.6 billion per year with no harm to patients,” the researchers write.

Some policy makers, at least, appear to be aware that LTCHs may be a source of waste. Since 2005, the Centers for Medicare & Medicaid Services has made numerous attempts to curb LTCH spending, resulting in what the researchers describe as a “regulatory game of whack-a-mole.”