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The post-acute care (PAC) sector is a continuum of businesses that serve patients discharged from acute care hospitals for follow-up care in less-intensive, more-appropriate, and lower-cost settings (Figure 14-1). PAC settings include: home healthcare agencies (HHAs), intermediate rehabilitation facilities (IRFs), skilled nursing facilities (SNFs), and long-term care hospitals (LTCHs); some classifications also include hospices.

Figure 14-2 shows the cost advantage of using PAC settings over acute care hospitals, and using noninstitutional over institutional PAC settings.1 For example, home healthcare represents roughly 5% of the cost of a hospitalization and roughly 20% of the cost of an SNF. Due to the growing costs of healthcare (particularly for seniors), the US federal government has exerted considerable effort over time to (1) promote PAC as a cheaper alternative to hospitalization and (2) apply prospective payment systems (PPSs) to generate even greater efficiencies within PAC.

Figure 14-2

Medicare Cost by Care Setting. IRF, Inpatient Rehabilitation Facilities; LTAC, Long-Term Acute Care; SNF, Skilled Nursing Facility. (Source: Medicare Payment Advisory Commission, LHC Group.)

The majority of patients using PAC sites and services are Medicare enrollees.2 Medicare is a major payer of PAC services; Medicare spending is an important driver of PAC utilization and PAC profitability; and PAC providers are heavily reliant on this public funding—all of which bring federal scrutiny. Any analysis of PAC must consider the role played by the Centers for Medicare and Medicaid Services (CMS), which serves as the major federal agency paying for PAC care. Any analysis must also consider the role played by the Medicare Payment and Advisory Commission (MedPAC), which serves as a congressional watchdog over the Medicare program and makes proposals regarding PAC payment.

Following is a brief history of these initial federal efforts. This is followed by a thumbnail description of the 5 major PAC sectors (HHA, IRF, LTCH, SNF, and hospice).3


Traditionally, the Medicare program paid for skilled care, therapy, and other services provided by HHAs, SNFs, IRFs, LTCHs, and hospice on a fee-for-service (FFS) basis. Each PAC provider was paid its average costs, subject to limits, for treating Medicare beneficiaries. As with the case of inpatient acute care, the FFS model for PAC provided no incentives for efficiency but instead incentives to spend more.

There was plenty of supply and demand to fuel this spending. When Medicare was first enacted in 1965, it was primarily an acute care program covering hospital and physician care. During the 1980s, several court challenges forced the Health Care Financing Administration (now known as CMS) to ...

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