The new floor atop one of the patient towers at Carroll County General Hospital in Westminster, Md., was supposed to be filled with skilled-nursing patients by now.
Completed last year at a cost of $1.2 million, the facility would have been the first in the suburban Baltimore community to provide highly skilled nursing care to patients recovering from extensive surgery or serious illnesses.
Instead, the space temporarily houses a psychiatric day program. The SNF was a casualty of a new Medicare reimbursement system for skilled-nursing facilities, according to hospital President and Chief Executive Officer John Sernulka.
"We have analyzed it from every possible angle and determined that the (skilled-nursing) service would lose between $300,000 and $500,000 a year," he says.
Under Medicare's new prospective payment system, SNFs are paid daily per-patient rates that are adjusted according to the estimated level of care a patient needs. The system includes rates for 44 such resource utilization groups, or RUGs.
Hospitals like Carroll County claim these rates can't cover the costs of patient care.
HCFA based the RUG rates largely on data from freestanding nursing homes. But patients in hospital-based SNFs generally require a higher level of care, which is not factored into the rates, according to Dallas-based healthcare consultant Manie Campbell.
Data collected by Campbell's firm indicates that hospital SNFs spend more than three times on ancillary care than freestanding SNFs do because patients in hospital-based facilities tend to be sicker.
About 1,200 of the nation's 9,000 SNFs are hospital-based.
Sheryl Skolnick, a senior healthcare and business services analyst at BancBoston Robertson Stephens, attributes the high cost of hospital-based SNFs to more than patients' poor health.
"Hospital-based SNFs . . . were really designed to cost-maximize under the old system," she says. "It is not clear that hospitals have the desire to make them streamlined and efficient."
She predicts that the skilled-nursing facility PPS will ultimately prompt "a significant number of hospitals" to exit that line of business.
Carmela Coyle, a senior vice president for the American Hospital Association, says that the new PPS system will cut one-third of payments to hospital SNFs by the time it is fully phased in over about three years.
That's much more than the 17% dip in Medicare payments that nursing homes will see, according to data presented by the American Health Care Association at the National Investment Center conference last October.
Total revenues for skilled-nursing facilities will dip on average only 1.7%, according to the AHCA study. But hospital SNFs have a much higher proportion of Medicare patients and will see much steeper drops in overall revenues, Coyle says.
Hospital-based SNFs are also feeling pressure from an October 1998 HCFA rule. Under this rule, hospitals forfeit part of their acute-care payment if the stay of a patient with one of 10 conditions is shorter than the average length of stay for that condition.
The rule was designed to keep hospitals from being paid twice for the same care.
Skolnick points out that the SNF PPS "disproportionately affects larger, urban, full-service hospitals" with established patterns of patient transfers and discharges.
Some hospitals have already started closing SNF beds. Last year Methodist Hospitals of Dallas shut down the SNF at its smaller hospital. It will continue to run its 20-bed unit in its flagship hospital, 375-bed Methodist Medical Center, because that unit is older.
HCFA rules allow facilities in business for more than three years to make the transition to the lower RUG rates over a three-year period.
"There's no guarantee that we'll get the costs down, but three years is a reasonable period of time to try it," says Michael Schaefer, chief financial officer for Methodist Hospitals of Dallas. "We'll lose some money this first year, but it's something that we can stomach."
Schaefer adds that the hospital might keep the unit open even if it continues to operate at a loss, as long as the system can make up the income elsewhere. Keeping a hospital-based SNF is advantageous because it helps maintain a continuum of care, he says.
Shedding their SNFs, or not having them in the first place, doesn't grant hospitals immunity from PPS-related problems, administrators and analysts say.
Hospitals already report having to keep some patients longer because freestanding SNFs refuse to take patients on whom they think they'll lose money, including patients with kidney failure or in need of intravenous feeding.
Annie Ullman, who coordinates post-acute care for Mercy Hospital Medical Center in Des Moines, Iowa, says that discharge planners there are finding it difficult to place patients who are on ventilators in SNFs. And while the patient waits for placement, the hospital foots the bill.
"The system is asking hospitals to give free skilled-nursing care," Campbell says.
At Sacred Heart Medical Center in Eugene, Ore., a PPS planning team is considering providing free respiratory services to nursing homes that agree to take patients on ventilators.
"It's cheaper to provide that than to keep the patient in the hospital," says one member of the team.
Under the new PPS, some hospitals are actually opening SNFs. Industry watchers point out that hospitals with SNFs will at least have paying beds in which to place patients in need of skilled care.
RehabCare Group operates hospital-based SNFs, and last year the St. Louis-based company signed 10 new contracts with hospital-based SNFs. Four were with hospitals opening a SNF for the first time. For these hospitals, the PPS system clearly made having such a facility more attractive, not less.
Another four of the newly contracted SNFs had been hospital-run. These hospitals opted to keep their SNFs open but to minimize risk under the PPS by outsourcing their operations.
Other hospitals are pursuing different fixes to the PPS problem.
Baylor Medical Center at Irving (Texas), a 231-bed facility that has 18 SNF beds, is planning a joint venture with an outside nursing home company to build a new SNF on hospital grounds.
"It has to be on campus because patients in hospital-based SNFs are sicker, and the doctors will use the SNF only if it is close," says Gerry Brueckner, administrator of geriatric and chronic-care services for Dallas-based Baylor University Health System.
Brueckner says she hopes eventually to move all the system's 120 SNF beds to nearby facilities.
Baylor's Irving campus in-hospital SNF will be converted to acute-care beds, she says.