PPS isn't working.

On October 1, 1998, after 18 months of reading and 13 seminars, my nursing homes entered HCFA's prospective payment system (PPS). In spite of the upbeat forecasting about PPS and its potential positive impact on profitability by government officials and self-proclaimed industry leaders, the mood of my staff spiraled from mild concern to abject fear, with professional depression looming large in the background. We knew instantly that PPS in its present form could not work and that no matter what type of "spin" the regulators, professional trade associations or nursing home industry tried to put on it, PPS was going to be a disaster from its misguided inception. The problem is that PPS was created on the wrong premise, built on the wrong foundation and is being perpetuated on the wrong assumptions.

First the premise: that the federal government is funding excessive and fraudulent nursing home care for Medicare recipients. By making nursing homes responsible for managing their costs, Congress anticipated that such fraud and abuse would be eliminated. Thus, the 1997 Balanced Budget Act included $9 billion in Medicare expenditure reductions for the nursing home industry. To date, however, Congress has never identified $9 billion in fraudulent Medicare spending by skilled nursing facilities.

What's more, nursing homes are not the Medicare providers who are positioned to control Medicare costs or utilization. It is the providers of ancillary supplies and services to nursing homes that control "mark-ups," profits and the potential for fraud and abuse within the nursing home industry. Since HCFA could not historically control such providers or costs under its own Part B billing practices, it passed along the responsibility for doing so to nursing homes, as Part A providers, by establishing the practice of consolidated billing under PPS. When consolidated billing is implemented, nursing homes will become responsible for the billing of most Medicare Part B ancillary costs as part of an all-inclusive per-diem Part A rate.

Now for one of those misguided assumptions: HCFA based its reasoning on the assumption that nursing homes could maintain and increase their profits by managing their Medicare per-diem costs; they would do so through self-regulation of their medical ancillary utilization and by limiting what they would pay medical providers for their products and services. Unfortunately, nursing homes have no more control over ancillary costs than did HCFA. The nursing home industry is not large or influential enough to negotiate realistic charges with ancillary providers. The industry does not have sufficient access to information about ancillary providers' actual costs or profit margins to have much control over them. Indeed, the nursing home industry is not the only - or even a major - client for many medical ancillary providers.

These providers can therefore easily afford to mark up their prices at will, as well as impose restrictive policies on nursing homes that literally force them to use specific providers exclusively. As a result, nursing homes could be forced to pay excessively for medical supplies and services required by a Medicare patient. Nevertheless, HCFA is billed by the nursing home under a PPS Resource Utilization Group (RUG) as part of a pre-established, all-inclusive Medicare Part A RUG rate that does not reflect a nursing home's realistic or reasonable costs for inpatient care.

These inadequate rates, based on a misguided assumption, are made worse by a flaw built into the very foundation of PPS: the selection of 1995 as the base year for computing SNFs' facility-specific Medicare rates. Nursing homes that were not Medicare certified in 1995 are exempt from the PPS blended (facility and federal) rate and allowed to bill at only the higher federal rates. Most nursing homes were not doing enough high-acuity care and rehabilitation to build up their Part A rates in 1995; many others were not reporting the use of contract therapy services in their annual Medicare cost report because these therapies were being billed directly to HCFA under Medicare Part B. Nevertheless, they're stuck with their 1995 data.

There are further misguided assumptions perpetuating unrealistic expectations of PPS. The first is that $9 billion can be cut from the nursing home portion of the Medicare budget with no adverse impact on inpatient care. This reflects the assumption that, under PPS, the nursing home can or should control the utilization of necessary patient services. This is ridiculous and dangerous. This means nursing homes must decide on the necessity, for example, of laboratory tests, x-rays, the type or dosage of medications a patient should receive, and even whether the patient requires an emergency trip to the hospital. All of this is and should continue to be sole responsibility of the patient's attending physician. The nursing home is not a gatekeeper.

The assumption that nursing homes, whether for-profit or not-for-profit, can survive as a business under PPS while providing care to the sickest, most compromised and most expensive patients is also obviously wrong, not to mention worrisome. After all, if the product is too expensive to deliver, no matter how indicated or desirable it is, the product will simply not be delivered; the provider that did so under these circumstances would soon go out of business. PPS can only become cost-effective if there is sufficient profit or margin to compensate the provider for the time, effort and materials expended. There are costs for effectiveness, and someone has to bear them.

In conclusion, it is time to review and revise PPS throughout, i.e., premises, assumptions and foundation. Involvement in PPS is just beginning for most SNFs, but if it is not modified immediately, many nursing homes in small and large operations will be forced to sell or close. Even worse, many will be sold to "smart" business players who operate from the "bottom line" out, with patient care becoming incidental to profits. Isn't that the scenario PPS was intended to prevent?

Howard W. Dickstein, PhD, is owner of two subacute care facilities, Crestfield Rehabilitation Center and Fenwood Manor, both in Connecticut.