Trends in financial and operating performance of rehabilitation hospitals under the rehabilitation prospective payment system

Inpatient rehabilitation hospitals operated under an exemption from the acute hospital Prospective Payment System (PPS) established by Medicare in the period 1983-2002. However, amendments to the Balanced Budget Act of 1997 called for the implementation of an inpatient rehabilitation PPS which began in 2002. Under the current system, payment is made to facilities prospectively according to a patient classification system. Despite the implementation of a PPS for inpatient rehabilitation, there is no knowledge of rehabilitation hospitals' financial and operating performance over time. Prior research has shown that those facilities making an early conversion to PPS showed great profitability in the first year of PPS (McCue and Thompson, 2006).

This paper presents results from a study of inpatient rehabilitation hospitals in the U.S. to determine their operating and financial performance under the new PPS. Data was extracted from the CMS Health Care Costs Report Information System for the years 2002 and 2003. The final sample consisted of 120 for-profit facilities and 51 not-for-profit facilities. Differences in hospital performance in each of the two years were analyzed by facility ownership status. Findings show that for-profit rehabilitation hospitals had lower costs and higher profitability in both years as compared to not-for-profit facilities. In addition, for-profit facilities served higher proportions of Medicare patients and had a higher Medicare case acuity. We conclude that for-profit facilities have adapted to the incentives of the rehabilitation PPS by keeping costs down, serving more complex rehabilitation patients and enjoying sizable profitability. Implications of these findings are discussed.