How Does the Volume of Post-acute Care Respond to Changes in the Payment Rate?

Abstract

Measure the effect of changes from 1997 to 2001 in Medicare's payment rates for skilled nursing facilities (SNFs) on the volume of SNF services and services in other settings. This study uses as its source of variation in payment rates the substantial changes that occurred as a result of the Balanced Budget Act of 1997. SNF volume equals the number of Medicare-covered SNF days per fee-for-service beneficiary per year, measured at the level of the hospital service area. The estimated elasticity of SNF volume with respect to SNF payment rates is 0.13, meaning that an increase in SNF payment rates is associated with an increase in SNF volume and a decrease in payment rates is associated with a decrease in volume-this implies that SNFs exhibit a normal supply curve, consistent with standard economic theory. In an extension of our main analysis, we find that volume changes appear to be driven largely by facility openings and closures. Among facilities that remained open throughout the study period, volume responses were influenced by changes in the number of admissions (rather than length of stay) and changes in payer mix (rather than changes in capacity). We also find that changes in SNF volume primarily reflect net changes in total days of Medicare-covered institutional care, rather than substitution of one setting for another.