Executive Summary of Analyses for the Initial Implementation of the Inpatient Rehabilitation Facility Prospective Payment System

In the Balanced Budget Act of 1997, Congress mandated that the Health Care Financing Administration (HCFA) implement a Prospective Payment System (PPS) for inpatient rehabilitation under Medicare. This new PPS will be implemented beginning January 1, 2002. This report describes the research that RAND performed to support HCFA's efforts to design, develop, and implement this Inpatient Rehabilitation Facility PPS, or IRF PPS. It presents recommendations concerning the payment system and also discusses our plans for further research on the monitoring and refinement of the PPS. The new PPS will apply to rehabilitation hospitals and to distinct rehabilitation units of acute care hospitals that were excluded from the acute care PPS. Medicare patients in such facilities must receive intensive therapy (generally at least three hours per day). In addition, 75 percent of each facility's patients must have one often specified problems related to neurological or musculoskeletal disorders or burns. Since 1982, Medicare payment for these rehabilitation facilities has been made under the Tax Equity and Fiscal Responsibility Act (TEFRA). The payment amount depends on a per-case target amount that is calculated from historical costs at the facility trended forward and on the hospital's actual cost per case. Under TEFRA, there is no adjustment for changes in a hospital's case mix or for outlier cases. This lack of adjustment creates incentives for providers to specialize in relatively less-expensive cases and, as a result, might limit beneficiary access. TEFRA pays for discharges that do not include a full course of rehabilitation (e.g., short stays for evaluation, transfer cases) as full cases. These payments in excess of costs may have both quality and cost-control implications. TEFRA was widely perceived to be unfair to older hospitals.