Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

OCTOBER 1999 

OEI-02-99-00401 

Early Effects of the 

Prospective Payment System 

on Access to Skilled Nursing Facilities 

Nursing Home Administrators’ Perspective 
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 
EXECUTIVE SUMMARY 

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 SNF’s 

first cost reporting period after July 1, 1998, SNFs are paid through “per diem, 

prospective, case-mix adjusted” payments which cover routine, ancillary, and capitalrelated 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. 

Early Effects on SNFs: Administrators’ Perspective 1 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 patient’s 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. 

Early Effects on SNFs: Administrators’ Perspective 2 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. 

Early Effects on SNFs: Administrators’ Perspective 3 OEI-02-99-00401 
TABLE OF CONTENTS 

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

Early Effects on SNFs: Administrators’ Perspective 4 OEI-02-99-00401 
INTRODUCTION 

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. 

Early Effects on SNFs: Administrators’ Perspective 5 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 SNF’s 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 resident’s 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 

Early Effects on SNFs: Administrators’ Perspective 6 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 President’s Council on Integrity and Efficiency. 

Early Effects on SNFs: Administrators’ Perspective 7 OEI-02-99-00401 
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 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 patient’s 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. 

Early Effects on SNFs: Administrators’ Perspective 8 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 patient’s 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 patient’s 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. 

Early Effects on SNFs: Administrators’ Perspective 9 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. 

Early Effects on SNFs: Administrators’ Perspective 10 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. 

Early Effects on SNFs: Administrators’ Perspective 11 OEI-02-99-00401 
APPENDIX A 

CONFIDENCE INTERVALS FOR KEY FINDINGS FOR NURSING HOME 

ADMINISTRATORS 

KEY FINDINGS ESTIMATE 

POINT 

INTERVAL 

CONFIDENCE 

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 patient’s 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 

Early Effects on SNFs: Administrators’ Perspective 12 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. 

KEY FINDINGS ESTIMATE 

POINT 

INTERVAL 

CONFIDENCE 

Facilities do not refuse Medicare patients based on PPS 

reimbursement. 

94% 84-100 

The number of Medicare certified beds has remained the 

same as a result of PPS. 

76% 46-100 

Early Effects on SNFs: Administrators’ Perspective 13 OEI-02-99-00401 
APPENDIX C 

COMMENTS

In this appendix, we present in full the comments from the Health Care Financing 

Administration. 

Early Effects on SNFs: Administrators’ Perspective 14 OEI-02-99-00401 
Early Effects on SNFs: Administrators’ Perspective 15 OEI-02-99-00401 
Early Effects on SNFs: Administrators’ Perspective 16 OEI-02-99-00401