Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Early Effects of the 
Prospective Payment System 
on Access to Skilled Nursing Facilities 
Nursing Home Administrators Perspective 
JUNE GIBBS BROWN 
Inspector General 
OCTOBER 1999 
OEI-02-99-00401  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's New York regional office prepared this report under the direction of John I. Molnar, 
Regional Inspector General, and Renee C. Dunn, Deputy Regional Inspector General.  Principal 
OEI staff included: 
REGION  HEADQUARTERS 
Jodi Nudelman, Project Leader  Jennifer Antico, Program Specialist

Lucille Cop  Barbara Tedesco, Statistician

Danielle Fletcher

Miriam Gareau

Judy Lin

To obtain copies of this report, please call the New York Regional Office at (212) 264-2000. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  E X E C U T I V E  S U M M A R Y  
PURPOSE 
To identify any early effects of the prospective payment system on Medicare beneficiaries 
access to skilled nursing facilities based on the perspective of nursing home administrators. 
BACKGROUND 
The Health Care Financing Administration (HCFA) asked the Office of Inspector General 
to assess whether the new prospective payment system for skilled nursing facilities (SNFs) 
is causing access problems for Medicare beneficiaries.  The Balanced Budget Act of 1997 
changed SNF reimbursement to a prospective payment system.  Beginning with the SNFs 
first cost reporting period after July 1, 1998, SNFs are paid through per diem, 
prospective, case-mix adjusted payments which cover routine, ancillary, and capital-
related costs.  Concerns have been raised about the effect of the new system on patients 
and on nursing homes. 
To address these concerns, the OIG issued a study entitled, Early Effects of the 
Prospective Payment System on Access to Skilled Nursing Facilities OEI-02-99-00400 in 
August 1999 which is based on interviews with hospital discharge planners and on an 
analysis of Medicare data.  This inspection found that, so far, no serious problems in 
placing Medicare patients in nursing homes are apparent.  However, nursing homes are 
changing their admission practices in response to the prospective payment system.  As a 
supplement to this study, we conducted a study based on interviews with a random sample 
of 57 nursing home administrators and personnel responsible for assessing residents 
needs. 
FINDINGS 
Few nursing home administrators believe that access to nursing home 
care has become a problem because of the prospective payment 
system 
Seventy percent of nursing home administrators report that access to nursing home care is 
not at all  a problem for Medicare patients in their area. They most commonly explain 
that access is not a problem because there are beds available in their area.  Only 8 percent 
of all nursing home administrators attribute access problems to the prospective payment 
system.  They more frequently attribute such problems to a shortage of beds in their area. 
1 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  Seventy-four percent of administrators report that their own facility never or not often 
refuses Medicare patients because it does not have a Medicare-certified bed available. 
Individuals in nursing homes who are responsible for assessing patients needs, the MDS 
coordinators, also believe that the prospective payment system is not preventing access 
to nursing home care.  Ninety-four percent of them believe that their facility has not 
refused residents because of the new reimbursement system. 
Nursing homes have changed their admissions practices 
Seventy percent of nursing home administrators report that their admission practices have 
changed as a result of the prospective payment system.  Most administrators state that 
they scrutinize patients medical status to a greater extent than they did prior to the 
implementation of the prospective payment system. 
Medical condition has become more important in nursing home 
admissions decisions 
Seventy-four percent of nursing home administrators report that a patients medical 
condition has become a more important factor in admissions decisions under the new 
reimbursement system.  When asked specifically, 53 percent of administrators report that 
they are less likely to admit patients who require expensive supplies or services such as 
expensive intravenous medications, ventilators, feeding tubes, wound care or dialysis.  At 
the same time, 46 percent of administrators report that they are more likely to admit 
patients who require special rehabilitation services, such as physical, occupational, or 
speech therapy.  It is important to note that while administrators say that they prefer to 
admit certain types of patients, Medicare data show no changes in nursing home 
placements, as noted in our companion report. 
Most support the concept of prospective payment 
Over 80 percent of nursing home administrators support the overall concept of the 
prospective payment system.  They agree that matching reimbursement with services 
rendered is generally a fair method of payment.  Despite their overall support, many 
administrators also stress the need to revise some of the current reimbursement rates. 
2 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  CONCLUSION 
The findings in this report support those in our companion report.  Together, the two 
reports show that nursing homes are changing their admissions practices in response to the 
prospective payment system but that, so far, access to skilled nursing care is not a 
problem, most likely because beds are available.  These early assessments note, however, 
that these practice changes may affect beneficiaries with certain medical conditions and 
may also affect nursing homes reimbursement.  Accordingly, we believe that the 
Department must remain vigilant to potential problems for Medicare patients and for 
nursing homes. 
COMMENTS 
We received comments on the draft report from the Health Care Financing 
Administration.  They generally agree with our findings and our conclusion and will 
remain vigilant in their efforts to assess potential changes that could affect quality and 
access to skilled nursing care for Medicare beneficiaries.  A copy of their comments is 
provided in Appendix C. 
3 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  T A B L E   O F   C O N T E N T S  
PAGE

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FINDINGS 
Access to nursing homes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Admissions practices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Medical condition  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Support of the prospective payment system  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

CONCLUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

APPENDIX 
A: Nursing home administrator confidence intervals . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

B: MDS coordinator Confidence Intervals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

C: Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

4 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  I N T R O D U C T I O N  
PURPOSE 
To identify any early effects of the prospective payment system on Medicare beneficiaries 
access to skilled nursing facilities based on the perspective of nursing home administrators. 
BACKGROUND 
The Health Care Financing Administration (HCFA) asked the Office of Inspector General 
to assess whether the new prospective payment system for skilled nursing facilities (SNFs) 
is causing access problems for Medicare beneficiaries.  Concerns have been raised about 
the effect of the new system on patients and on nursing homes.  To address these 
concerns, the OIG conducted this study and a companion inspection.  This study is 
primarily based on interviews with nursing home administrators. 
The companion inspection entitled, Early Effects of the Prospective Payment System on 
Access to Skilled Nursing Facilities OEI-02-99-00400, which was issued in August 1999, 
is based on interviews with hospital discharge planners and on an analysis of Medicare 
data.  This inspection found that, so far, there are no serious problems in placing Medicare 
patients in nursing homes.  More specifically, most discharge planners report that they can 
place Medicare patients in nursing homes.  Further, Medicare data show no changes in 
nursing home placements for Medicare patients.  Discharge planners, however, also report 
that nursing homes are changing their admissions practices in response to the new 
prospective payment system.  They note that patients who need extensive services have 
become more difficult to place, whereas patients who need rehabilitation services have 
become easier to place. 
Medicare Payments to Nursing Homes 
Skilled nursing facility care is covered by Medicare Part A under certain conditions. 
Specifically, the patient must have been hospitalized for three or more days within the last 
30 days for the condition that will be treated in the SNF.  The SNF stay must also be 
certified as medically necessary and the patient must require daily skilled nursing or skilled 
rehabilitation services.  The number of SNF days provided under Medicare is limited to 
7100 days per benefit period, with a co-payment required for days 21 through 100.  A 
patient must be in a bed certified by Medicare for a facility to be reimbursed by Medicare. 
5 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  Medicare Part A payments for SNF care cover routine costs such as the room, dietary 
service, nursing service, minor medical supplies, and social service.  Payments also cover 
capital costs for the building and equipment, and ancillary care for specialized services 
such as therapy, laboratory tests, and transportation.  Until recently, SNFs were 
reimbursed on a retrospective, reasonable cost basis. 
The Balanced Budget Act of 1997 changed SNF reimbursement to a prospective payment 
system.  Beginning with the SNFs first cost reporting period after July 1, 1998, SNFs are 
paid through per diem, prospective, case-mix adjusted payments which cover routine, 
ancillary, and capital-related costs.  The per diem payment is based on fiscal year 1995 
Part A & B costs adjusted using the SNF market basket index (minus 1 percent), case-mix 
from resident assessments, and geographical wage variations.  The market basket index 
represents an inflation factor.  The case-mix index recognizes that SNF residents require 
different levels of care and is based on an assessment that assigns each resident to 1 of 44 
Resource Utilization Groups (RUGS-III).  This new payment system is being phased in 
over a 3 year transition period. 
Under the prospective payment system, SNFs are required to classify residents into one of 
the RUGs based on assessment data from the Minimum Data Set (MDS).  This data set 
contains a standardized set of clinical and functional status measures for each resident 
which are collected at specific intervals during a residents nursing home stay.  The MDS 
coordinators work with others to complete these assessments that also determine how 
much the facility will be reimbursed under the prospective payment system. 
Nursing Home Concerns 
The nursing home industry has raised several concerns about the new reimbursement 
system.  The industry believes that the system will reduce payments to SNFs and may 
cause access problems for Medicare beneficiaries.  In media reports, industry 
representatives have expressed concern that the new system may cause some SNFs to go 
out of business. 
METHODOLOGY 
This inspection is based on interviews with a random sample of nursing home 
administrators and MDS coordinators.  To do this, we selected a total of 64 nursing 
homes in eight States.  We contacted the nursing home administrator by telephone and an 
MDS coordinator by mail in each of these facilities.  We asked each respondent about 
changes in both their admissions practices and in access to nursing home care that have 
resulted from the new prospective payment system.  Seven nursing facilities in our sample 
do not accept Medicare Part A patients.  Our analysis, therefore, is based on the responses 
6 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  of the 57 administrators from  nursing homes that accept Medicare Part A patients.  We 
conducted these interviews in July 1999. 
Sample Selection 
We selected a two-stage stratified cluster sample for this inspection.  The first stage of 
sampling was a stratified sample of eight States: 
the four States with the most SNF beds (CA, NY, IL, TX);

two of the four States currently using a Medicaid demonstration prospective

payment system (MS, ME); 

two States randomly selected from the remaining 40 contiguous States (VA, CT).

At the second stage, we selected a simple random sample of eight nursing homes that had 
greater than 60 beds within each of these States.  The State sample is the same as the one 
used for three related studies being conducted by the Office of Inspector General.  These 
studies are:  Early Effects of the Prospective Payment System on Access to Skilled 
Nursing Facilities, OEI-02-99-00400;  Nursing Home Financial Screening and Distinct 
Part Rules, OEI-02-99-00340; and Nursing Home Resident Assessment, OEI-02-99-
00040. 
Limitations 
The findings in this report are primarily based on self-reported data that were not 
independently verified.  Further, the precision of the estimates is limited by the small 
sample size.  Appendix A provides the confidence intervals for the key estimates used in 
the report.  Results are best interpreted when compared to findings in the main report, 
Early Effects of the Prospective Payment System on Access to Skilled Nursing Facilities, 
OEI-02-99-00400. 
This inspection was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and Efficiency. 
7 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  F I N D I N G S  
Few nursing home administrators believe that access to nursing home 
care has become a problem because of the prospective payment 
system 
Seventy percent of nursing home administrators report that access to nursing home care is 
not at all a problem for Medicare patients in their area. They most commonly explain 
that access is not a problem because there are beds available in their area for Medicare 
patients.  On the other hand, 24 percent report that access is somewhat of a problem, 
and 6 percent report that access is a large problem in their area.  Only 8 percent of all 
nursing home administrators attribute access problems to the prospective payment system. 
They more frequently attribute such problems to a shortage of beds in their area.  Some 
also point to the lack of beds available in facilities that have good reputations or in 
facilities that are patients first choice. 
Seventy-four percent of administrators report that their own facility never or not often 
refuses Medicare patients because it does not have a Medicare-certified bed available, 
however, some nursing homes do have difficulty accepting patients.  Twenty-five percent 
report that their own facility does not have a Medicare-certified bed available  somewhat 
often, while less than 1 percent report not having a bed available very often. 
Those individuals in the nursing home who are responsible for assessing patients needs, 
the minimum data set coordinators also believe that the prospective payment system is 
not preventing access to nursing home care.  Ninety-four percent of them believe that their 
facility has not refused residents because of the new reimbursement system. 
Nursing homes have changed their admissions practices 
Seventy percent of nursing home administrators report that their admission practices have 
changed as a result of the prospective payment system.  Most administrators state that 
they scrutinize patients medical status to a greater extent than they did prior to the 
implementation of the prospective payment system.  They typically require more medical 
information about the patient and conduct more thorough reviews of the services and the 
types of care the patient needs before making admissions decisions.  In many situations, 
nursing home staff now go to the hospital to review the patients chart or to directly assess 
his or her condition prior to admission.  A few say that in their review, they particularly 
focus on whether a patient requires costly intravenous medication, lab work, or ambulance 
transportation. 
8 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  Nursing home administrators seem to use this information in two ways.  Some state that it 
helps them determine whether their facility can meet the patients needs.  Others state that 
the information helps them determine how much it will cost to take care of the patient. 
Some report that they then compare this estimate to the amount they will be reimbursed 
for that patient under the prospective payment system.  In general, administrators 
comment that they have become more cost-conscious about which types of patients they 
accept and about how they deliver services. 
Medical condition has become more important in nursing home 
admissions decisions 
Seventy-four percent of nursing home administrators report that a patients medical 
condition has become a more important factor in admissions decisions under the new 
reimbursement system.  When asked specifically about which types of medical conditions 
they are more or less likely to admit as a result of the prospective payment system, most 
administrators identify at least one type.  The types of conditions they mention are similar 
to those noted by discharge planners. 
More specifically, 53 percent of all nursing home administrators say that there are some 
types of patients that they are less likely to admit.  They most commonly cite patients who 
require expensive supplies or services such as those who require expensive intravenous 
medications, ventilators, feeding tubes or wound care.  Twelve percent of administrators 
also mention that they are less likely to admit dialysis patients, because they have high 
transportation costs that they are not reimbursed for separately under the prospective 
payment system. 
At the same time, 46 percent of all nursing home administrators say that there are some 
types of patients that they are more likely to admit.  They most commonly point to 
patients requiring special rehabilitation services, such as physical, occupational, or speech 
therapy.  In particular they mention orthopedic patients, who have had fractures or joint 
replacements, and stroke patients. 
It is important to note that while administrators say that they prefer to admit certain types 
of patients, Medicare data show no changes in nursing home placements, as noted in our 
earlier report entitled Early Effects of the Prospective Payment System on Access to 
Skilled Nursing Facilities OEI-02-99-00400.  Specifically in that report, we found no 
difference in where Medicare patients are being placed and in the types of Medicare 
patients that are being placed in skilled nursing facilities between the first five months of 
1998, which is prior to the implementation of the prospective payment system and the 
same five months of 1999, which is after the implementation of the new system. 
9 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  Most support the concept of prospective payment 
Over 80 percent of nursing home administrators support the overall concept of the 
prospective payment system.  They agree that matching reimbursement with services 
rendered is generally a fair method of payment.  Some administrators recognize that there 
were abuses under the cost-based system and support the need for a new system that aims 
to control costs.  Despite their overall support, many administrators also stress the need to 
revise some of the current reimbursement rates.  Some believe that the resource 
utilization groups are not appropriate for all patients and that the current reimbursement 
levels do not cover costs they incur to take care of some patients. 
10 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  C O N C L U S I O N  
The findings in this report support those in our companion report.  Together, the two 
reports show that nursing homes are changing their admissions practices in response to the 
prospective payment system but that, so far, access to skilled nursing care is not a 
problem, most likely because beds are available.  These early assessments note, however, 
that these practice changes may affect beneficiaries with certain medical conditions and 
may also affect nursing homes reimbursement.  Accordingly, we believe that the 
Department must remain vigilant to potential problems for Medicare patients and for 
nursing homes. 
COMMENTS 
We received comments on the draft report from the Health Care Financing Administration. 
They generally agree with our findings and our conclusion and will remain vigilant in their 
efforts to assess potential changes that could affect quality and access to skilled nursing 
care for Medicare beneficiaries.  A copy of their comments is provided in Appendix C. 
11 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  APPENDIX A 
CONFIDENCE INTERVALS FOR KEY FINDINGS FOR NURSING HOME 
ADMINISTRATORS 
POINT  CONFIDENCE 
KEY FINDINGS  ESTIMATE  INTERVAL 
Access to nursing homes care is not a problem for 
Medicare patients in your area.  70%  43 - 97 
Facilities rarely or never refuse Medicare patients because 
they do not have a Medicare-certified bed available.  74%  65 - 83 
Access to nursing home care is a problem as a result of the 
prospective payment system.  8%  0 - 18 
Admissions practices have changed as a result of the 
prospective payment system.  70%  52 - 88 
A patients medical condition has become a more 
important factor in admissions decisions.  74%  55 - 92 
Nursing home administrators say that there are some types 
of patients that they are more likely to admit.  46%  36-57 
Nursing home administrators say that there are some types 
of patients that they are less likely to admit.  53%  45-61 
Nursing home administrators support the concept of the 
prospective payment system.  87%  84 - 91 
12 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  APPENDIX B 
CONFIDENCE INTERVALS FOR KEY FINDINGS FOR

MINIMUM DATA SET (MDS) COORDINATORS

We calculated confidence intervals for the key findings.  The point estimate and 95 percent 
confidence interval are given for each of the following findings.  The point estimates and 
confidence intervals for each finding vary based on the standard error for each individual finding. 
POINT  CONFIDENCE 
KEY FINDINGS  ESTIMATE  INTERVAL 
Facilities do not refuse Medicare patients based on PPS  94%  84-100 
reimbursement. 
The number of Medicare certified beds has remained the  76%  46-100 
same as a result of PPS. 
13 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  APPENDIX C 
COMMENTS

In this appendix, we present in full the comments from the Health Care Financing 
Administration. 
14 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  15 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401  16 
Early Effects on SNFs: Administrators Perspective  OEI-02-99-00401