Gaining Value from Post-Acute Care: Incentives, Structure or Management?

Jan. 19, 2015 / By Norbert Goldfield, MD, Richard Fuller, MS

It is well known that a viable source of health dollar savings is the efficient use of post-acute care (PAC) services. MedPAC has identified widespread variation in post-acute care utilization, with limited control over the reasonableness and quality of service provided. This situation has resulted from three factors: confusion as to what constitutes PAC (defined by program benefit), fragmentation of PAC payment (which tends to be site rather than service specific) and the absence of comprehensive risk-adjustment to determine the relative intensity and need for PAC services. Substantial opportunities to improve risk-adjustment will be available after the implementation of ICD-10 (which contains significant numbers of continuation of care codes), particularly if the Continuity Assessment Record and Evaluation (CARE) is also implemented across PAC settings.

Standardization of PAC payments across settings is one part of the challenge, but that alone does not address the impact that acute care hospitals may have on the need for, and intensity of, PAC services. Much of the variation in PAC cost is unrelated to the number of days spent in a skilled nursing facility (which average 27 for Medicare FFS, comfortably exceeding the 20 day, 100% payment limit before coinsurance kicks in for beneficiaries) or the number of therapies provided under a home health episode—the frequent target of fraud and abuse enquiries¹. Instead, it is related to patient management and the selection of a SNF or HHA at discharge. We know, for example, that hospital teams conducting orthopedic procedures, such as hip replacements, have opportunities to better prepare patients so that they can be discharged home rather than rely on care at more expensive nursing or rehabilitation facilities. Hospital strategies for early engagement with patients to discuss fitness and strengthening in advance of surgery, preparation of home and support services (including help with home services such as dressing, cooking, cleaning and home physical therapy) post discharge, ensuring patient confidence after surgery and the quality of the surgery itself can promote the use of lower cost PAC settings. Rewarding hospitals for better management and preparation of patients as they transition to PAC is straightforward. The same episode classification systems that measure total PAC cost for ACOs can be adapted for this purpose by substituting the rates for relative PAC setting use for the more familiar total cost that appears in episode bundled payments². In this model, hospitals are rewarded for delivering patients into lower cost PAC settings (or avoiding PAC settings altogether) with greater frequency rather than reducing the total cost of PAC care that appears in most episode payment designs.

This approach creates behavioral incentives at the point of transition between acute and post-acute care providers. It does not necessitate direct patient management for utilization when the patient has entered the post-acute setting. Separating incentives for PAC site selection from incentives to reduce resources when in the PAC setting limits the need for hospitals to build larger administrative entities to coordinate care and manage total PAC cost. We also reduce the need for ever greater direct patient management by managed care plans, either through care management departments or by third party vendors, such as Navihealth, to assume the risk of PAC spending on their behalf. Extensive direct patient management without institutional integration has a tendency to result in conflict between the managing entity and the PAC provider over what constitutes “appropriate” care. The lack of formal integration between acute and PAC providers does not mean that quality incentives cannot be aligned toward improvement. Hospital and PAC providers have already established working relationships that address quality concerns most notably around readmissions³. These cooperative frameworks can be strengthened and better aligned through common incentives and common metrics applied by payers without requiring the ownership structure of health care organizations to be changed in the process.

In sum, this approach seeks to squeeze value out of PAC by providing performance incentives to hospitals that better manage patients before they transition from an acute to PAC setting. While not being as all-encompassing as the full risk relationship for PAC costs present within an episode payment system, it provides a path to incentivize reduced utilization without pushing formal organizational integration.

Richard Fuller, MS, is an economist with 3M Clinical and Economic Research.


² Vertrees JC, Averill RF, Eisenhandler J, Quain A, Switalski J, Gannon D. The Ability of Event-Based Episodes to Explain Variation in Charges and Medicare Payments for Various Post Acute Service Bundles.; 2013. Available at:

³ Hospital-SNF collaboration cuts readmission rates. Hosp Case Manag. 2014;22(11):150, 155–6. Available at: Accessed January 13, 2015.