Impact of a function-based payment model on the financial performance of acute inpatient medical rehabilitation providers: A simulation analysis

Abstract

Objectives: To operationalize research findings about a medical rehabilitation classification and payment model by building a prototype of a prospective payment system, and to determine whether this prototype model promotes payment equity. This latter objective is accomplished by identifying whether any facility or payment model characteristics are systematically associated with financial performance. Design: This study was conducted in two phases. In Phase 1 the components of a diagnosis-related group (DRG)-like payment system, including a base rate, function-related group (FRG) weights, and adjusters, were identified and estimated using hospital cost functions. Phase 2 consisted of a simulation analysis in which each facility's financial performance was modeled, based on its 1990–1991 case mix. A multivariate regression equation was conducted to assess the extent to which characteristics of 42 rehabilitation facilities contribute toward determining financial performance under the present Medicare payment system as well as under the hypothetical model developed. Participants: Phase 1 (model development) included 61 rehabilitation hospitals. Approximately 59% were rehabilitation units within a general hospital and 48% were teaching facilities. The number of rehabilitation beds averaged 52. Phase 2 of the stimulation analysis included 42 rehabilitation facilities, subscribers to UDS in 1990–1991. Of these, 69% were rehabilitation units and 52% were teaching facilities. The number of rehabilitation beds averaged 48. Main Outcome Measure: Financial performance, as measured by the ratio of reimbursement to average costs. Results: Case-mix index is the primary determinant of financial performance under the present Medicare payment system. None of the facility characteristics included in this analysis were associated with financial performance under the hypothetical FRG payment model. Conclusions: The most notable impact of an FRG-based payment model would be to create a stronger link between resource intensity and level of reimbursement, resulting in greater equity in the reimbursement of inpatient medical rehabilitation hospitals.