Korbin Liu

Emily Jones

Urban Institute

2100 M Street, NW

Washington, DC 20037

MedPAC

601 New Jersey Avenue, NW

Suite 9000

Washington, DC 20001

(202) 220-3700

Fax: (202) 220-3759

www.medpac.gov

•

•

The views expressed in this report

are those of the authors.

No endorsement by MedPAC

is intended or should be inferred.

Closures of Hospital-Based

SNF Units: Insights from

Interviews with Administrators,

A study conducted by staff from the Urban Institute 

for the Medicare Payment Advisory Commission

March 2007 • No. 07–1

Discharge Planners and

Referring Physicians
Closures of Hospital-Based SNF Units: Insights from Interviews with 

Administrators, Discharge Planners and Referring Physicians

Korbin Liu 

Emily Jones 

The Urban Institute 

2100 M Street, N.W. 

Washington, D.C. 

Research in this report was supported by the Medicare Payment Advisory Commission 

(MedPAC), Contract Number RFP 02-06-MedPAC. Guidance was provided by 

MedPAC staff Sally Kaplan (Project Officer), Craig Lisk and Kathryn Linehan. 

Inferences and conclusions in this report are solely those of the authors and do not 

necessarily reflect the views of the Urban Institute or MedPAC. 
1 

I. Introduction 

Skilled Nursing Facility (SNF) units provide Medicare post-acute care services either in 

acute hospitals or in freestanding nursing homes. While there is also great variation 

within each category, hospital-based (HB) units tend to differ from freestanding (FS) 

SNFs in terms of average patient acuity, staffing, and costs of care. Since the 

implementation of the Medicare SNF prospective payment system (PPS) in 1998, more 

than one third of HB SNFs have closed. The total number of FS SNFs has increased 

slightly over the same time period. 

The high closure rate of HB SNFs raised questions about the reasons, and consequences, 

of hospitals’ decisions to close their SNF units. To gain insight on these issues, we 

conducted interviews with officials at fifteen acute care hospitals with Medicare SNF 

units in 1998, which today are either open or closed. We selected a convenience sample 

of hospitals in several urban and rural geographic areas for this qualitative study. We 

also interviewed administrators of three FS SNFs that are geographically near to some of 

those hospitals. 

Hospitals that closed their SNF units mentioned various reasons. Financial losses 

associated with operating the SNF were cited as one major reason for closing the unit. 

The need for additional acute beds, or other uses for the space occupied by the SNF unit, 

was cited frequently as another important reason. Hospitals justified the alternative use 

of space as related to their basic goals of focusing on the provision of acute medical care. 

Other factors contributing to hospitals’ decisions to close their SNF units included 

burdensome SNF regulations, reflected by the survey and certification process, and 

difficulties in providing skilled staffing. Such factors were noted to add costs to the 

operation of the units. 

Hospitals that kept SNF units open noted that the units fostered savings on the acute care 

side by providing an easily accessible source of post-acute care (PAC). In some areas, 

there were few PAC alternatives particularly for medically complex patients. Other 
2 

hospitals reported that keeping the SNF open was important to maintain continuity of 

care or good relationships with physicians in the community or provide resources for 

teaching health care professionals. 

 

The consequences of SNF closures varied among the hospitals we interviewed. In some 

cases, especially for metropolitan hospitals, there were so many PAC options that the 

process of patient discharge from hospitals were apparently unaffected by closure of HB 

SNF units. In other areas, however, discharge from hospitals was more problematic, due 

to the limited capacity of PAC providers. In such situations, acute hospital length of stay 

(LOS) likely increased with the SNF units’ closures. 

Regardless of the presence of other PAC options, hospitals told us that some categories of 

patients were hard to place with alternative PAC providers. Medically complex patients, 

such as those requiring wound vacuum assisted closures (VAC) care, ventilator, or 

intensive IV antibiotic care, can be hard to place because many FS SNFs are not staffed 

with requisite RN or respiratory specialists needed by such patients. Some hospitals 

noted that placement of such patients could be improved if the SNF PPS were refined to 

more directly address the types and intensity of services needed by these patients. Where 

available, long-term care hospitals (LTCHs) accepted some of these difficult cases. 

Extended stays in acute care inpatient units were another option. 

The next section presents background on differences between HB and FS SNFs based on 

extant research, Medicare’s SNF PPS, and the landscape of PAC providers available to 

Medicare beneficiaries. We then describe our methodology in selecting the sample and 

conducting the study. Findings are then presented in four sections addressing why 

hospitals opened SNFs in the pre-PPS period, hospitals that closed SNFs after PPS, 

hospitals that maintained their SNF units after PPS, and challenges to the placement of 

patients after hospitals closed their SNF units. The last section discusses implications of 

our findings from the interviews. 

 
3 

II. Background 

Medicare provides coverage in SNFs for beneficiaries in need of additional rehabilitation 

or recuperative care after a prior hospital stay of 3 days or longer. Because SNF services 

under Medicare are strictly for post-acute care, the prior hospital stay, which must have 

occurred in the past 30 days, is a necessary event for individuals to be eligible for these 

services. In addition, the SNF benefit covers a maximum of 100 days of care in any 

given spell-of-illness. A new spell-of-illness begins only after an individual has not been 

in an institution for 60 consecutive days. There is no deductible for SNF care, but a daily 

coinsurance payment (equal to one-eighth the hospital deductible in a given year) is 

required after the first 20 days of a SNF stay. 

Until the late 1980s, SNF services accounted for only a small percentage of total 

Medicare expenditures and were viewed as cost-effective and less intensive alternatives 

to extended acute-care hospital stays. After implementation of Medicare’s acute-care 

hospital PPS in 1984, however, Medicare expenditures for SNF services began to grow 

rapidly. For more than a decade after the acute PPS was instituted, Medicare SNF 

spending rose an average of 30 percent each year.1 2 The rapid increase in SNF 

expenditures catalyzed concern among policy makers that use of these services had 

become excessive and did not necessarily improve the health of Medicare beneficiaries. 

Acting on these concerns, Congress enacted provisions in the 1997 Balanced Budget Act 

(BBA) mandating that Medicare SNF services should be paid under a PPS. 

Consequently, the Medicare SNF PPS was implemented starting in 1998. Overall SNF 

spending grew, but at slower rate than in the preceding period. In 2003, Medicare 

spending on SNF care totaled $14.4 billion, or 6% of total Medicare spending.3

Change in the supply of Medicare SNFs also showed two distinct phases that coincide 

with the periods before and after implementation of the SNF PPS, but the magnitude of 

 

1

 GAO-01-816. 

2

 Changes in Medicare SNF coverage guidelines, resulting from Fox v. Bowen (1986), were also a major 

catalyst of increased utilization and expenditures during this period. 

3

 MedPAC, 2006. 
4 

these changes differed for HB and FS SNFs. Between 1992 and 1998, the number of HB 

SNFs increased dramatically from 1,300 to over 2,100 (Figure 1). The number of FS 

SNFs also increased, but at a slower rate, from 9,500 to 13,000. After a peak in 1998, the 

supply of HB SNFs declined to about 1,400 in 2004. Unlike HB SNFs, the total number 

of FS SNFs did not decline, but the rate of increase was much slower than before the 

PPS. 

Figure 1 Trend in the supply of HB SNFs shows rapid increase before, and 

decline after, implementation of the SNF PPS 

0

500

1000

1500

2000

2500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

A. Hospital-Based and Freestanding SNFs 

Medicare SNF services can be provided either by facilities that are in or on the grounds 

of acute care hospitals (HB) SNFs or by facilities that are primarily independent nursing 

homes (FS SNFs). SNFs must have a transfer agreement with a hospital to accept 

patients recommended for SNF care, sufficient staff to provide 24-hour nursing services, 

a physician who supervises patient care and is available 24 hours a day on an emergency 

basis, and dietary, pharmaceutical, dental, and medical social services available. 
5 

In 2003, 90% of SNFs were freestanding, and 83% of Medicare patient days were 

provided in FS SNFs.4 Although the main function of most FS SNFs is the provision of 

long-term care services to people with chronic conditions and disabilities, HB SNFs 

generally focus on the provision of post-acute care. FS SNFs tend to be larger than HB 

SNF units, and have about 100 beds on average, compared to 20-30 beds in HB SNFs. 

HB SNFs have, on average, much higher proportions of Medicare post-acute care patients 

than FS SNFs. 

Based on analyses of nursing home patient assessment data and constructed case mix 

indices, HB SNFs have larger proportions of patients with medically complex problems 

than do FS SNFs.5 FS SNFs have higher proportions of rehabilitation therapy patients, 

but HB SNFs have higher proportions of patients in the “extensive services” category 

(11.3% vs. 6.6%)6, which includes patients who are medically complex. Differences in 

the case-mix of HB and FS SNFs appear associated with differences in staffing. On 

average, HB SNFs have higher nurse-to-patient ratios.7 Patients in HB SNFs receive, on 

average, almost twice the number of nursing hours per day as do patients in FS SNFs.8 

The average length of stay (LOS) also differs between HB and FS SNFs. HB SNFs have 

an average LOS of around 13 days, while FS SNFs have an average LOS that is twice 

that long. The shorter LOS of HB SNFs is due partly to their greater likelihood than FS 

SNFs of selecting patients who are likely to recover faster and be discharged home 9

Despite the differences between HB and FS SNFs, when considering national averages, it 

is important to recognize the fact that overlap exists between the two types of Medicare 

SNFs. Some FS SNFs, for example, have high nurse-to-patient ratios and large 

proportions of patients with medically complex problems, while some HB SNF have very 

low proportions of Medicare patients and look like traditional FS facilities. 

 

4

 MedPAC, 2006. 

5

 Pizer, White, and White, 2002. Liu and Black 2003. 

6

 Liu and Black, 2003. 

7

 Liu and Black, 2003. 

8

 Health Care Financing Administration, 2000. 

9

 Dalton, Stearns, and Thorpe, 2004. 
6 

B. Medicare Payment Policies 

Prior to the implementation of the PPS in 1998, SNFs were reimbursed by Medicare on a 

cost-related basis, and new providers were exempt from the routine-care cost limits for 

four years.10 Although cost limits applied to nursing services, SNFs were effectively 

fully reimbursed for all costs they incurred for rehabilitation therapy and non-therapy 

ancillary (NTA) services (e.g., respiratory therapy, drugs, supplies). 

The Medicare SNF PPS pays an all-inclusive per diem rate, adjusted for case-mix, 

urban/rural status, and area wage rates. The daily rate covers all nursing, rehabilitation 

therapy, and NTA services. The nursing and therapy components are explicitly adjusted 

for variations in case-mix by the RUG-III patient classification system. Variations in 

NTA service costs were not researched in the development of the patient classification 

system, and NTA service cost variations were assumed to reflect variations in nursing 

service costs under the SNF PPS. Thus, payments for NTA services are conceptually 

bounded by the range of nursing weights, of which the highest value is approximately 

twice that of the lowest one. Many types of NTA service (e.g., intensive IV antibiotic 

therapy, ventilator care) can, in fact, involve costs that greatly exceed the expected 

payment inferred from the range of nursing component weights.11

The PPS for SNF was implemented following a period of rapid growth in Medicare SNF 

expenditures that raised concerns among policymakers that use of these services had 

become excessive and did not necessarily improve the quality of care delivered to 

Medicare beneficiaries. Because of policymakers’ concerns about the level of hospitalbased SNFs costs, the derivation of the PPS base rates explicitly did not recognize all of 

the higher costs of HB SNFs. The base rates for the SNF PPS were set at a weighted 

average of the FS SNF average cost plus 50 percent of the difference between the FS 

 

10 GAO-03-183 

11 The GAO found that, in 1999, two thirds of SNFs had actual NTA costs that were outside the possible 

range of payments. 
7 

average and a weighted average of all facilities’ (FS and HB) costs. In addition, the base 

rate did not include the costs of SNFs that were exempt from Medicare cost limits.12 

Only a few services are excluded, or carved out, from the case-mix adjusted per diem 

rates of the SNF PPS. These include physician services, dialysis, cardiac catheterization, 

MRI and CT scans provided in an outpatient setting, angioplasty, some chemotherapy 

and radioisotope services, and custom prosthetics. To be excluded, services generally 

have to meet three criteria; they must be high cost, infrequent, and unlikely to be 

overprovided.13

Under the PPS, Medicare SNF services are paid regardless of actual costs of service 

provision. While FS SNFs lowered their costs by $49 per diem between 1997 and 1999, 

HB SNFs’ costs rose by $29 per diem during the same period.14 In absolute terms, per 

diem costs of HB SNFs are approximately twice that of FS SNFs. On average, HB SNFs 

have higher nursing and NTA costs, while FS SNFs have higher rehabilitation therapy 

costs. 

In light of the persistent cost differences between HB and FS SNFs, average Medicare 

margins have differed widely between HB and FS SNFs since 1998. For example, the 

2004 margin for FS SNFs was 13.5 percent, while the margin for HB SNFs was minus 86 

percent.15 Differences due to staffing, case mix, and types of services provided likely all 

contribute to the observed differences in margins between the two types of Medicare 

SNFs. In addition, interpreting the negative Medicare margin for HB SNFs is 

complicated by the standard practice of allocating the hospital’s overhead costs across all 

of the units in its facility. The effect of this practice may be that HB SNF units likely 

record higher overhead and total costs than they would if they only recorded costs of 

providing services to SNF patients. The magnitude of the effects of the different factors 

 

12 MedPAC, 2001. 

13 GAO-01-816. 

14 GAO-13-183. 

15 MedPAC, 2006. 
8 

are difficult to quantify because of inadequate data on case-mix and services provided, 

and lack of transparency in accounting practices. 

C. Post-Acute Care Landscape 

In addition to SNFs, Medicare post-acute care can be provided by other institutional and 

non-institutional entities. The most relevant other institutional PAC options are inpatient 

rehabilitation facilities (IRFs), and long-term care hospitals (LTCHs). Medicare also 

finances home health care provided by home health agencies (HHAs). Selection of a 

particular setting for each patient depends on a number of factors, including clinical and 

functional status, patient and family preference and the capacity of the different providers 

in a given market area. The importance of these other entities, when examining the 

effects of HB SNF closures, is that they become, along with FS SNFs, PAC providers for 

patients who would otherwise have been cared for by the HB SNFs. 

IRFs were designed to provide care for patients who need—and can tolerate—at least 3 

hours of physical, occupational, or speech therapy each day. Orthopedic patients and 

other patients recovering from surgery or trauma, rather than medically complex patients, 

populate IRFs. Most SNF patients do not require or can tolerate this amount of 

rehabilitation therapy services. While more than 85 percent of SNF patients receive some 

level of therapy services daily, the highest rehabilitation payment category in the SNF 

PPS calls for 720+ minutes (approximately 12 hours) of therapy per week. 

LTCHs were designed to serve patients who need long-term acute care due to multiple, 

complex medical problems. Since they are an acute care facility, LTCHs have the 

capacity to provide intensive medical and nursing care. A LTCH is often the only option, 

other than continued care in a general hospital, for some types of hard-to-place patients, 

such as people who are ventilator dependent.. In fact, many LTCHs focus on the 

provision of care to patients with respiratory problems Because Medicare certification 

requires an average LOS of 25 days or more, LTCHs are most suitable for patients who 

need extended stays in a hospital setting. 
9 

HHAs provide care to persons in residential settings who are home bound and require 

only intermittent care. Under Medicare, skilled nursing, rehabilitation therapy, social 

work and aide services are provided to eligible persons. The health and functional status 

of persons receiving HHA care, which is intermittent, is likely to be different than those 

requiring care from one of the institutional providers, which provide round-the-clock 

supervision. HHA service recipients may also have stronger informal care networks that 

allow them to be in residential rather than institutional settings. 

There is overlap in the types of patients served by Medicare PAC providers. For 

example, patients with different degrees of need for rehabilitation are found in all of the 

PAC providers’ caseloads. Patients with intensive medical problems are more likely to 

be found in HB SNFs or LTCHs. In the absence of suitable PAC providers, patients 

could remain for extended periods of time in acute care inpatient units. 

Motivation 

The high rate of closures among HB SNFs after 1998 appears to be linked to the 

implementation of the SNF PPS. Despite the likely relationship, there are important 

policy-relevant questions that remain unanswered. One question is why so many HB 

SNFs did not respond to the incentives of the Medicare SNF PPS by lowering costs per 

day or reducing the range of services they provide. Second, why did some hospitals 

maintain their SNF units while others closed theirs? Third, what was the role of financial 

isssues relative to other factors? Fourth, how did HB SNF closures affect placement of 

patients who required PAC? This study was initiated to develop insight on these issues. 

III. Methods 

We conducted structured interviews in person or on the telephone with knowledgeable 

persons working at hospitals with SNF units that were open prior to the SNF PPS in 

1998. Because we selected a convenience sample of hospitals, our findings are not 

necessarily generalizeable. Nevertheless, they provide insights on factors behind 
10 

hospitals’ decisions regarding their SNF units, and the effects of closures on placement of 

patients with alternative PAC providers. 

We spoke with administrators of fifteen HB SNFs and three FS SNFs. At the hospitalbased facilities, we also spoke with discharge planners and referring physicians whenever 

possible. Ten of the interviews were conducted by phone, and we visited the other eight 

facilities in person. We designed an Interview Protocol to cover all of our issues of 

interest, and most of our interviewees had a chance to prepare for the interview by 

reviewing the Protocol. Each informant was told of the confidential nature of this study, 

and assured that their facility would not be identifiable in the public version. 

The facilities included in our study are from eight market areas around the country, 

including five in mid-to-large cities in Maryland, California, New York, Nebraska, and 

Florida. We originally chose our target cities with an eye toward geographic diversity, 

and thus balanced our choice of two East Coast cities, and one in Florida, with a city in 

California and one in the Midwest. We also wanted to look at two fairly large cities, in 

addition to a few midsized choices with nearby rural areas. We also focused on the 

proportion of SNF units that closed in each city. Three cities that we selected 

experienced the closure of more than half of their HB SNF units, while the other two had 

fewer closures. 

Originally, we sought to focus on five market areas, but we chose additional areas to 

further understand the unique considerations facing rural and suburban facilities. We 

chose one rural area near the urban area we investigated in Nebraska because we were 

interested in why none of the HB facilities there had closed. We chose the other rural 

area in West Virginia because all of the HB SNFs there closed, and we were interested in 

the effect on patient placement in post-acute care. 

Once we had chosen our target cities, we chose the facilities to interview. When 

possible, we interviewed individuals from at least one hospital that closed its SNF in each 

city. Since it was too difficult to speak with someone at a facility that was closed before 
11 

2004, we spoke almost exclusively with administrators from hospitals that closed their 

SNFs more recently. Regardless of the date of closure, many facilities refused to speak 

with us, further narrowing our choices of closed facilities to speak with. 

Many hospitals with open SNFs also refused to speak with us, but we were able to choose 

more freely which facilities to speak with since they refused at a lower rate than closed 

facilities. Within each city, we sought balance in our target facilities in terms of 

ownership status (private, public, or nonprofit), teaching status, the presence of other 

PAC or psychiatric units, size of the hospital and the SNF unit, proportion of SNF 

patients covered by Medicare, and SNF profit margin. In all, eighteen facilities refused 

to speak with us, ten of them with closed SNF units and eight with open units. 

IV. Findings 

Hospitals with which we spoke viewed themselves as being primarily in the business of 

providing acute medical care. Decisions regarding opening, closing, or retaining SNF 

units were incidental to their views about their acute care missions. Subsequently, the 

specific factors that were noted to be important determinants of those decisions—

shortening LOS, keeping referring physicians connected, use of space, continuity of 

patient care, financial consequences—were all considered in the context of the primary 

goal of the hospital. Each hospital tried to optimize the specific factors, but ultimately 

had to make trade-offs. How each of the factors influenced the decision was a function 

of each hospital’s unique situation. When hospitals closed their SNF units, some 

patients with certain conditions were challenging to place with FS SNFs and other PAC 

providers. While straightforward rehabilitation patients seemed to be relatively easy to 

place, some types of clinically complex patients were difficult, because they required 

intensive nursing and extensive NTA services. 

With the acute care mission and complex set of factors influencing decisions and their 

effects as a backdrop, the following sections present findings on (a) reasons for opening 

hospital-based SNF units, (b) hospitals that closed their units after PPS, (c) hospitals that 
12 

retained their SNF units after PPS, and (d) challenges in placing patients with alternative 

PAC providers after HB SNFs closed. 

A. Why Hospitals Opened SNFs: Pre-PPS Period 

Hospitals opened SNFs for a variety of reasons, ranging from maximizing Medicare 

payments to improving continuity of care. The ability to place patients more quickly and 

easily in post-acute care was cited by most respondents as a major reason for opening the 

SNF unit. Under Medicare’s hospital PPS, implemented in 1984, hospitals had strong 

incentives to reduce inpatient length of stay (LOS). Having SNF units could facilitate 

discharge from acute care while also receiving Medicare SNF payments. Prior to the 

PPS, Medicare payments for SNFs were reimbursed on a cost-related basis. While limits 

were imposed on routine services (e.g., nursing, accommodations), all ancillary services 

were essentially reimbursed their full costs. A few hospitals we spoke with also faced 

excess demand for inpatient beds, so reducing average LOS enabled them to admit 

greater numbers of inpatients. At the same time, other hospitals with low occupancy 

rates opened SNF units to fill the excess capacity. 

Several hospitals indicated that they opened the SNF unit to fill a community need for 

post-acute care services, while others noted that SNF units were opened to improve 

continuity of care, since physicians like the convenience of having the patient close by, 

where they could easily make visits and order diagnostic tests as needed. One hospital 

noted that opening the SNF unit helped it to create a niche in a competitive hospital 

market. 

B. Hospitals That Closed SNF Units After PPS 

Although most hospitals noted multiple contributing reasons for closing their SNF units, 

chief among them were financial losses and alternative use for the space occupied by the 

SNF unit. Additional considerations leading to the decision to close SNF units included 

difficulties meeting staffing needs, administrative burdens associated with the SNF 
13 

survey and certification process, and awareness that providing SNF care was not 

contributing directly to the hospitals’ broader goal of providing acute medical care. 

Financial Reasons

Many hospitals we interviewed cited financial losses because the costs of operating their 

SNF units exceeded Medicare payments. While some HB SNF units were not profitable 

before, the PPS system exacerbated financial losses. These financial losses stem from 

two general reasons-- the clinical needs of the patients in the HB SNFs and care patterns 

associated with being a unit in an acute care hospital. Many patients in these HB SNFs 

were medically complex and had high NTA service costs (e.g., IV antibiotic drugs, 

respiratory therapy). As noted above, the SNF PPS assumes that NTA costs are 

proportional to the case-mix weights for the nursing component. Exceptionally costly 

NTA services can greatly exceed expected payment for those services. 

We also heard from most respondents that HB SNFs’ practice patterns were strongly 

influenced by the parent facility being an acute care hospital, which tends to lead to 

higher staffing and utilization costs. Nursing coverage was extensive, in terms of hours 

per patient and skill level of nursing staff. All of our respondents said their HB SNFs 

had, for example, registered nurses (RNs) on the unit around the clock. Salary levels and 

benefits of HB SNF staff were also comparable to those of other units of the hospital. The 

hospitals expressed a tension between keeping staffing levels sufficiently high to manage 

medically complex patients, while wanting to lower staffing to control costs. Concerns 

about cost control aside, our interviewees indicated that HB SNFs are usually unable to 

reduce staffing levels because physicians, as well as patients and their families, expect 

SNF staffing to be about the same as other units in the hospital. 

Because of easy access to patients in HB SNFs, referring physicians visited HB SNF 

patients often and tended to order lab and other diagnostic tests on a relatively frequent 

basis. In contrast, we were told that physicians’ visits to patients discharged to FS SNFs 

were less frequent, if at all, because it was less convenient or physicians did not have 

“credentialing” arrangements with particular FS SNFs. 
14 

While the frequent contact between patients and physicians in HB SNFs was considered 

attractive, our respondents also suggested the possibility of some degree of overutilization, which led to financial losses. They said that referring physicians were 

generally not aware of Medicare’s methodology for paying SNF care, and ordered 

services for patients as if they were in standard medical/surgical units. 

Among the hospitals that emphasized the issue of financial losses, some seemed to 

consider the financial health of the SNF unit in isolation, without factoring in how the 

SNF functions to reduce acute LOS and draw additional reimbursement. While 

concerned about the financial impact of closing their SNF units, other hospitals were 

employing “hospitalists,” or applying other strategies to help control inpatient LOS in the 

absence of the SNF unit. 

Alternative Use of Space 

The second major reason mentioned for closing the SNF unit was the need to use the 

space for acute care beds. While the financial losses on the SNF operation affected the 

consideration of alternative uses for the space, some hospitals already had pre-conceived 

plans for the space. Some hospitals noted increasing occupancy and excess demand for 

standard medical/surgical unit beds, which could not otherwise be met because of the 

constrained size of their physical plant. Other hospitals had specialty acute care units 

they planned to install in the SNF space. Cardiac catheter labs, orthopedic “joint camps,” 

and imaging departments are examples of such alternative uses mentioned by our 

interviewees. One hospital was also making room available for the opening of a LTCH, 

while two were deliberating opening IRFs in the SNF space. Yet another hospital was 

renting the former SNF space for the purpose of clinical research. 

Additional Considerations

Staffing Problems 

Several hospital noted that nursing shortages forced them to use temporary agency nurses 

to fully staff their SNFs. Because costs of agency nurses are higher than those of 
15 

employed nurses, this need added to financial problems. In addition, hospital nurses had 

a preference for medical/surgical units, rather than SNF units, because they actually cared 

for fewer patients in the former. Given identical salary and benefits for nurses across all 

of a hospital’s units, these hospitals experienced difficulty in retaining nursing staff for 

the SNF units. One hospital closed its SNF unit simply because it could not staff it, and 

found that it was more convenient to discharge its acute care patients to alternative PAC 

providers. 

Burdensome Survey and Certification Process 

Another consideration leading to closing the SNF unit was the burden of the survey and 

certification process, as noted by several hospitals. While functioning like a hospital unit, 

the HB SNFs have to be responsive to a process focused on nursing homes. This paradox 

presented multiple problems. For example, because hospital-wide departments such as 

housekeeping and food service also serve the SNF unit, employees in these units had to 

be screened by the SNF even though they were not directly under the SNFs’ 

management. In addition, the nursing home standards expect SNF patients to be active 

and move about the facility, but our respondents indicated that many patients in their HB 

SNFs were too sick to leave their rooms. 

 Contributing to Hospitals’ Broader Goals 

Another reason cited by hospitals for closing SNF units was their sense that operating 

SNF units was not contributing to, and possibly detracting from, the hospital’s major 

mission of providing acute medical care. Several hospitals we interviewed were tertiary 

care centers, which had clear preferences for focusing on “new and innovative 

directions” like opening specialty (e.g., cardiac, trauma, cancer) units. 

C. Hospitals That Maintained SNF Units After PPS 

Our interviews with hospitals in different states, and urban and rural settings, indicated 

that goals and operations of HB SNFs are not uniform. Information from the respondents 

suggests three broad models of HB SNFs with respect to the patients they serve. The first 
16 

model focuses on selecting patients who need short-term rehabilitation care and are likely 

to be discharged home. In the absence of alternative PAC options, these HB SNFs also 

provide care to medically complex patients. The second model focuses on selecting 

medically complex patients to shorten their hospital LOS. These HB SNFs have more 

nursing staff than other SNFs, and patients are visited by physicians frequently. Patients 

requiring uncomplicated rehabilitation are discharged by the hospital to FS SNFs. The 

third model focuses on providing care to a small number of Medicare patients and a large 

number of long-term care residents. This model, similar to FS SNFs, was found in New 

York. 

Most hospitals continuing to maintain SNF units indicated that the units were operating 

under financial losses, but some, particularly ones focusing on rehabilitation patients, 

were approximately “breaking even.” When asked why they continue to operate the 

SNF, three sets of reasons were mentioned. First, some hospitals are keenly aware of the 

need to manage the acute care DRG payment. Second, some facilities stated that PAC 

alternatives were unable or unwilling to accept certain types of medically complex 

patients. Third, some hospitals reported that maintaining the SNF met broader goals of 

the hospital, including fostering continuity of care to the satisfaction of both patients and 

physicians, and providing resources for teaching health care professionals. 

Managing the DRG 

Under Medicare’s inpatient PPS, hospitals have strong incentives to discharge patients 

from acute care as soon as possible. Keeping the acute LOS short was noted to be a 

major reason for keeping the SNF unit open by many hospitals with open SNF units. 

Moreover, transferring the patient to the hospital’s SNF “restarts the flow of Medicare 

reimbursement for that patient.” 

Clinical Need and Community Supply of PAC Providers 

Access to suitable PAC services in the community was noted by some hospitals as 

another important reason to keep the SNF unit open. This situation was a particular 

problem for high cost NTA patients and others who were at high risk of developing 
17 

complications and required continuous monitoring by skilled nursing staff. Some 

hospitals determined that FS SNFs in their market areas were not sufficiently staffed to 

care for some of these complex patients. Other hospitals were directly informed by FS 

SNFs that they would only admit rehabilitation patients. Although LTCHs could manage 

some of these patient types, LTCHs are not available in many market areas. Thus, in 

many locations, HB SNFs are retained to serve the most nursing intensive and clinically 

challenging patients, because of necessity, and therapy patients are discharged to FS 

SNFs. 

Broader Goals 

Some hospitals that maintained their units placed very high value on the contribution of 

the SNF to their broader role as a community hospital. These hospitals cited the 

important value to them of providing opportunities for physicians to easily follow-up 

their patients after they were transferred to PAC. In fact, the SNF stay is often explicitly 

built into the plan of care, even before a (orthopedic) procedure is performed during the 

acute care stay. They also noted the value of increasing the satisfaction of patients and 

their families, because of the frequent physician visits in their HB SNFs. Moreover, we 

were told that some of these hospitals’ patients feared FS SNFs as destinations where 

people are discharged to die. In addition, some teaching hospitals saw maintaining the 

SNF as a useful resource for training geriatricians and nurses. 

D. Effects of HB SNF Closings on Patient Placement 

In general, our interviewees indicated that hospitals’ closing their SNF units did not 

create a systematic problem with placing PAC patients. They tended to concur that 

uncomplicated rehabilitation patients, because of their financial attractiveness under the 

SNF PPS, are relatively easy to place in almost all market areas. Some medically 

complex patients, however, are challenging to place even in areas with many PAC 

providers present. The following types of cases were mentioned repeatedly in our 

interviews: 
18 

High cost IV antibiotics, and other drugs. Semi-permanent or mainline IV 

patients require extensive skilled nursing care to manage. The SNF PPS reimbursement 

does not explicitly cover the cost of expensive antibiotic and other types of drugs (e.g., 

epogen). While some chemotherapy drugs are carved out of the SNF PPS payment, 

others are not and are prohibitively expensive. 

Wound VAC care. Equipment rental costs are high, in part because the equipment 

is available only from a single vendor. Beyond the equipment rental, nursing costs are 

also high. 

HIV patients. Both drug and nursing costs are high for these patients. 

Ventilator dependent patients. Patients who are not candidates for weaning are 

particularly difficult to place in PAC, because of high staffing costs for respiratory 

therapists and nurses. 

Patients with tracheostomies. Particularly if the wound requires suctioning, 

nursing costs would be high to keep airways open. 

Bariatric patients. Most facilities cannot afford to maintain the necessary 

equipment (e.g., oversized beds, wheelchairs, and lifts) and additional staff to care for 

these patients. 

Psychiatric and behavioral problems. Patients with collateral, or primary, mental 

health problems induce elevated staffing costs. 

Alternative PAC Providers Used 

Information from our interviews suggests that the vast majority of alternative PAC 

providers used by hospitals are FS SNFs. While most FS SNFs do not, or cannot, employ 

the resources needed to manage some of the most medically complex patients, some FS 

SNFs had developed programs to specialize in treating such patients. For example, a few 

FS SNFs have developed the capacity to provide ventilator care. These FS SNFs are able 

to do so by benefiting from the economies of scale associated with serving many (e.g., 

20) such cases on a daily basis. It is notable that one state in our sample provides statefunded supplemental payments for Medicaid ventilator patients in nursing homes. Other 

FS SNFs had developed a specialty in providing wound VAC care. Based on our 

selective sample, such specialty FS SNFs are not numerous. 
19 

We were also informed that larger FS SNFs are better able to absorb the losses from 

unprofitable patients. The size advantage gave such providers latitude, for example, to 

accept high cost medically complex patients in exchange for the hospital transferring 

multiple profitable (e.g., uncomplicated rehabilitation) patients. 

LTCHs were mentioned several times as providers for many of the medically complex 

patients. On the other hand, use of LTCH as a PAC alternative was limited by their being 

few in number and concentrated in particular geographic areas. IRFs were also 

mentioned, but frequently as a facility type that provides complementary, rather than 

substitutable, care with HB SNFs. 

Geographic Variation 

In PAC supply rich areas, the problems of patient placement seemed minimal. Such 

areas contain numerous FS SNFs, as well as IRFs and LTCHs. One hospital noted that, 

given the wealth of alternative PAC providers in its market area, there was no need to 

take financial losses to keeps it own SNF open. 

Hospitals in other market areas said that there are few providers with the capacity to care 

for medically complex patients. While this situation prevents some hospitals from 

closing their SNFs, other hospitals elected to close the SNF units anyway. Hospitals have 

resorted to sending some medically complex patients long distances to receive 

appropriate PAC, including across state lines. In other cases, patients continued to reside 

in medical units of the hospitals In addressing a shortage of PAC capacity in their 

market areas, some hospitals were considering opening other types of PAC units, such as 

IRFs, or encouraging the establishment of LTCHs. A few of the hospitals we talked to 

were also re-considering the SNF option. One hospital, for example, is in the initial 

stages of leasing SNF beds from a local nursing home, in order to set up a unit to care for 

bariatric patients, ventilator patients, and other hard-to-place patients who do not need to 

stay in acute care. 
20 

In sum, many of the particular patient types that our interviewees noted were hard to 

place are those requiring intensive nursing and extensive NTA services. In general, other 

post-acute care providers are likely to restrict acceptance of referrals from hospitals either 

when they are unable with existing staffing to meet care needs or when the costs of care 

substantially exceed Medicare payment. As a last resort, hospitals have to be prepared to 

care for the patients in their acute care units. 

V. Discussion 

The decision by hospitals to close or maintain their SNF units, after implementation of 

the SNF PPS, was complicated and involved several considerations. Regardless of their 

decisions about their SNF units, the hospitals mentioned the same inter-related factors, 

which include financial considerations, alternative use of physical space, capacity of 

alternative PAC providers in the market area, and broader goals of the hospital. Based on 

our interviews, it seems that the “weight” of the each factor in decisions about SNF units 

varied substantially across hospitals. 

Finances. It is likely that moving from a cost-related Medicare payment system to the 

SNF PPS exacerbated financial strains at HB SNF units, leading to closure of one third of 

those units within a few years after PPS implementation. Interestingly, two thirds of HB 

SNF units remained open. Thus, while the financial effects of the SNF PPS appear to be 

an important factor in hospitals’ decisions about operating a SNF unit, it is complicated 

by other related considerations. 

Our interviews suggest two areas where the SNF PPS likely increased financial pressure 

on HB SNFs. First, many of the clinically complex patients, who were also difficult to 

place with other PAC providers, require costly NTA services. Whereas such services 

used to be reimbursed by Medicare on a cost-related basis, now they are paid prices 

constrained by the case-mix weights of the nursing component. Second, the nursing 

costs of the HB SNFs were not fully recognized in the construction of the nursing base 
21 

rate under the PPS, because policy makers had been concerned about the high costs of 

HB SNFs. While policy makers might expect hospitals to respond to the incentives of the 

SNF PPS by lowering nursing costs, our interviews suggest that it may be difficult for 

hospitals to so, given expectations of physicians referring patients to the hospital, patients 

and their families, and broader goals of the hospitals themselves. 

Space. Many of the hospitals in our sample indicated that alternative use for the space 

occupied by the SNF unit was an important reason for closing the unit. Some had 

specific plans for new acute care activities. Others indicated a need in their community 

for additional medical and surgical units. In these cases, the closing of the SNF unit after 

the PPS was implemented seems coincident with pre-conceived plans of the hospitals. In 

other cases, the SNF PPS might have caused hospitals to consider alternative uses for the 

SNF units’ space that could generate higher revenues or lower costs for the overall 

hospitals’ budgets. Other hospitals seemed to close their SNF units with no other plans 

for the use of the space. 

Supply and capacity of alternative PACs. The range and patterns of PAC markets varied 

widely among the hospitals in our sample. At one end were markets which contained 

many FS SNFs, including some which were specializing in the provision of care for 

medically complex and costly patients. These markets were also likely to contain LTCHs 

and IRFs. In such areas, the extensive capacity of alternative PAC providers fostered a 

degree of internal competition that allowed some hospitals to easily discharge patients 

after closing their SNF units. At the other end of the spectrum, some hospitals’ market 

areas contained only FS SNFs that were specializing in the provision of long-term care. 

In these cases, hospitals were able only to discharge patients with uncomplicated 

rehabilitation needs. Clinically complex cases could sometimes be referred to a 

geographically distant provider. While some of these hospitals kept their SNF units 

open, others closed the units and continued to care for these patients in their medical 

units. 
22 

Goals. Regardless of whether hospitals closed or maintained their SNF units after the 

PPS, most hospitals maintain that their primary goal is to provide acute medical care. 

The SNF units helped to increase overall hospital revenues prior to the SNF PPS, but they 

also fostered continuity of care after the acute care stay, which, also fostered better 

relations with referring doctors and patients’ families. Financial pressures resulting from 

the PPS meant that hospitals had to carefully consider the relative importance of different 

goals. Whatever choices were made, however, do reflect their primary acute care 

mission. For example, preserving DRG savings by hospitals that maintained SNFs, and 

using the SNF space for a cardiac catheter labs by hospitals that closed SNFs, are both 

illustrations of hospitals’ primary goal of advancing their acute care programs. Some of 

the teaching hospitals indicated that it was important to maintain SNFs units, even with 

financial losses, to provide a training resource for geriatricians and other professionals. 

In conclusion, this study was designed to develop increased insight on hospitals’ 

decisions to close or retain their Medicare SNF units after implementation of the SNF 

PPS. Based on the interviews, the decisions are complicated and involve numerous 

factors. While potential financial losses are an important factor, its weight on hospitals’ 

decisions about SNF units varies with each hospital’s unique situation. Finally, because 

of the nature of this study, we cannot draw strong inferences about the implications of 

HB SNF closings on beneficiary access to PAC. Findings from our interviews suggest 

that hospitals that closed SNFs have generally worked out ways to place discharged 

patients with alternative PAC providers. Nevertheless, some policy consideration might 

be given to facilitate placement of particular subgroups of PAC patients. 
23 

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