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No pain, yes gain: How Medicare can save $4.6 billion a year

SIEPR’s Liran Einav shows long-term care hospitals have no patient benefits, but plenty of taxpayer waste.

Stanford economist Liran Einav used to think of health care — and all the money that goes into it — in the simplest of terms: visit a doctor or hospital, get treated, go home.

But that was before he learned about a little-studied segment of the U.S. health market, called "post-acute" care. The term refers to a stop that patients recovering from surgery, a sudden illness or some other medical condition make on the way from hospital to home. Post-acute care providers include skilled nursing facilities and agencies that send caregivers to a patient's home. In 2014, Medicare paid $59 billion to these facilities.

Liran Einav

A third type of post-acute care provider, called a long-term care hospital, caught the attention of Einav and his coauthors after they read a 2015 article in The Wall Street Journal. While LTCHs, as they're known, represent approximately 10 percent of the post-acute care market, they bill Medicare at substantially higher rates than other providers.

"I had never heard of these entities before," says Einav, a Stanford economics professor and senior fellow at the Stanford Institute for Economic Policy Research (SIEPR). "Other people I asked either didn't know or gave completely different answers."

Einav set out to learn more. Now, three years later, his most recent finding about LTCHs and their role in U.S. health care appears in a new working paper with a title that says it all: "Long-Term Care Hospitals: A Case Study in Waste."

Einav and his collaborators are equally blunt about what they think should happen to LTCHs: Get rid of them.

"We can't find any systematic benefit to patients," says Einav, who teamed up on this research with health economists Amy Finkelstein of the Massachusetts Institute of Technology and Neale Mahoney of the University of Chicago Booth School of Business.

Good intentions, unintended consequences

The prescription isn't as radical as it might seem at first. LTCHs are not medical institutions per se; they're administrative constructs, often "hospitals within hospitals," according to Einav's research. They were created in the early 1980s, when Congress changed the way hospitals are reimbursed from a per-diem fee structure to a predetermined, fixed amount based on a patient's diagnosis.

There was one big problem. Regulators worried that hospitals that treat patients with certain chronic and complex illnesses, like tuberculosis, wouldn't be able to stay afloat under the new payment scheme. In response, the Center for Medicare Services mandated that hospitals with patient stays averaging at least 25 days would still be paid a daily rate. The LTCH was born.

Einav and his co-authors note that there are no medical requirements for determining who goes to an LTCH and who goes elsewhere. "LTCHs are a purely regulatory phenomenon," they write. They are also unique to the U.S. health care system.

When the concept was created, about 40 hospitals around the country qualified as LTCHs. Three decades later, in 2014, there were more than 400 of them, collecting $5.4 billion in Medicare payments.

The reason, says Einav, for the dramatic growth in LTCHs is simple: Medicare paid LTCHs at significantly higher rates than it did for skilled nursing or home care, so hospitals and other health care providers raced to meet the 25-day rule for qualifying as an LTCH. On a per-diem basis, LTCHs were earning $1,400 per patient by 2014, the most recent year Einav and his team studied. Nursing homes received $450. In all, a single LTCH patient boosted Medicare spending by $33,000.

And if LTCHs were reimbursed at the same rate as skilled nursing facilities, Medicare would save $4.6 billion a year, the researchers found.

"What happened here is what we see all the time — in education, in taxation, in health care," says Einav, whose research has ranged from movie ticket pricing to subprime auto loans to peer-to-peer markets like Uber. "Lawmakers take action for the right reason and people find a loophole and take advantage."

No benefit to patients

The problem, says Einav, isn't necessarily that LTCHs get paid more money. If they provided benefits to patients it could be a good investment, but the study could not detect such benefits. He and his collaborators analyzed data on outcomes for patients sent to LTCHs as they opened around the country and compared them to similar patients who were treated in those markets before the LTCH openings. They found no difference in the odds that an LTCH patient would die or go home within 90 days versus a patient in another post-acute care setting.

"We just couldn't find any health benefits, at least on the systematic measures available to health economists," says Einav. "If there are benefits to patients beyond mortality or length of stay, then the burden should be on the industry to show that they provide medical benefits that justify their costs."

It's telling, says Einav, that Medicare regulators have been trying, repeatedly, to rein in rising LTCH costs. Twice, for instance, they've put moratoriums on new LTCH licenses. In 2016, they set up a new payment system whereby LTCHs are paid higher rates than other post-acute care providers only when patients spend at least three days in an intensive or coronary care unit before coming to an LTCH or spend at least 96 hours on a ventilator at the LTCH.

"Efforts to manage LTCHs have become a game of whack-a-mole," says Einav. "But there is an easy solution to this problem: Don't pay them more than any other post-acute care provider."

Krysten Crawford is a freelance writer.

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