Medicare changes in post-acute care payment

Shaking up the way acute care hospitals approach post-acute care

Three policy levers are joining forces to change the way that Medicare pays for post-acute care.

Why should acute care hospitals care about how post-acute care payment is changing?

​“Humans are intended to be upright, weight-bearing, and in motion and the sooner the patient is mobilized, the better the outcomes in terms of fewer complications, less rehospitalization, and likelihood that the individual will be able to live independently and actively.”– Gerben DeJong1

In 2013, nearly half of all Medicare beneficiaries who stayed in an acute care hospital were discharged into a post-acute care (PAC) setting, with options including skilled nursing facilities (SNFs), inpatient rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), and care in the patient’s residence by home health agencies (HHAs).2 The US Centers for Medicare and Medicaid Services (CMS) uses four payment systems for PAC services in Medicare, and each pays different amounts for care.

For years, acute care hospitals have had few financial incentives to coordinate care across PAC settings, often leading to higher costs and readmissions to acute care hospitals.3 But, three policy levers are joining forces to change the way that Medicare pays for PAC services: 

  • The Improving Medicare Post-Acute Care Transformation (IMPACT) Act of 2014 set into motion the transformation of PAC payments in Medicare. It required the Medicare Payment Advisory Commission (MedPAC) to develop a prototype prospective payment system (PPS) spanning PAC settings. 
  • Hospitals increasingly are focused on avoiding penalties under CMS’ Hospital Readmissions Reduction Program (HRRP).
  • The Bundled Payments for Care Improvement Initiative and Comprehensive Care for Joint Replacement Program are increasing the use of bundled payments to health care providers.

Why should acute care hospitals care about changes in PAC payment? Together, the above initiatives have the potential to shake up the way acute care hospitals approach PAC. For example, MedPAC’s recommendations to Congress, published in June 2016, say that a unified Medicare payment system for PAC, combined with the shift to value-based payments, quality improvement, and reduced readmissions, would emphasize patient acuity and preference over the care setting.4 As a result, PAC providers will likely see higher payments for medical stays, especially for patients on ventilators and for the most medically complex patients, while payments would likely decrease for physical rehabilitation services and for providers with high costs unrelated to their patient mix.

In the near term, acute care hospitals should consider reviewing their approach to PAC referrals and using three strategies: 

  1. Establish stronger policies and processes around patient referrals to PAC to emphasize the most appropriate setting, with goals to reduce readmissions and enhance outcomes.
  2. Strengthen alignment with high-quality PAC providers through acquisitions or strategic collaborations.
  3. Work to minimize the impact of the new payment system on any PAC businesses the hospital owns.

While the unified payment system for PAC services in Medicare may be years down the road, the changes occurring now emphasize the urgency that organizations should consider acting with. Acute care hospitals that start planning now are likely to be well-positioned for the new PAC payment landscape.

1 Gerben DeJong, “Are We Asking the Right Question About Postacute Settings of Care?” Archives of Physical Medicine and Rehabilitation Volume 95, Issue 2 (2014):
2 Medicare Payment Advisory Committee, “Public Meeting” (September 2015), transcript by B&B reporting. Available at

3 Medicare Payment Advisory Committee, “Medicare’s post-acute care: Trends and ways to rationalize payments”
March 2015 Report to the Congress: Medicare Payment Policy (March 2015). Available at's-post-acutecare-
4 Medicare Payment Advisory Committee, “Report to the Congress: Medicare and the Health Care Delivery System” (June 2016).

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