Background: Medicare's system for the payment of rehabilitation hospitals is based on limits derived from a hospital's average allowable charges per patient discharged during a base year. Thereafter, payments are capped, but hospitals receive incentive payments if charges per patient are reduced in succeeding years. We hypothesized that per-patient charges would increase during the base year and then decrease in subsequent years. Hospitals would thus have higher reimbursement limits and receive incentive payments for reducing their charges. Methods: We analyzed Medicare claims data for 190,921 discharges from 69 rehabilitation hospitals from 1987 through 1994. We compared total charges, length of stay, and interim payments before, during, and after each hospital's base year. Results: After we controlled for inflation and temporal and seasonal trends, mean charges per patient discharged increased from $25,131 for patients discharged before the base year to $32,167 for patients discharged in the base year (a 28 percent increase, P<0.001) and the mean length of stay increased from 22.1 to 26.7 days (a 21 percent increase, P<0.001). After the base year, mean charges decreased to $29,307 (a 9 percent decrease) and the mean length of stay decreased to 24.0 days (a 10 percent decrease) (P<0.001 for both comparisons). Analysis of data on patients according to diagnosis - for example, spinal cord injury, brain injury, stroke, amputation or deformity, hip fracture, and arthritis or other joint disorders - showed similar findings for each, with increases in charges and length of stay in the base year, followed by small reductions thereafter, For-profit hospitals had greater increases than non-profit hospitals in their per-patient charges (mean increase, $7,434 vs. $2,929; P<0.001) and length of stay (mean increase, 4.6 vs. 2.3 days, P<0.001) during the base year. Conclusions: Although Medicare's reimbursement system for rehabilitation hospitals put an upper limit on total payments, its design was associated with substantial extra costs, including significantly increased payments to hospitals and doctors and increased numbers of hospital days for the average patient.
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