Long-term care hospitals: a case study in waste

There is substantial waste in U.S. healthcare, but little consensus on how to identify or combat it. We identify one specific source of waste: long-term care hospitals (LTCHs). These post-acute care facilities began as a regulatory carve-out for a few dozen specialty hospitals, but have expanded into an industry with over 400 hospitals and $5.4 billion in annual Medicare spending in 2014. We use the entry of LTCHs into local hospital markets and an event study design to estimate LTCHs' impact. We find that most LTCH patients would have counterfactually received care at Skilled Nursing Facilities (SNFs) - post-acute care facilities that provide medically similar care to LTCHs but are paid significantly less - and that substitution to LTCHs leaves patients unaffected or worse off on all measurable dimensions. Our results imply that Medicare could save about $4.6 billion per year - with no harm to patients - by not allowing for discharge to LTCHs.