Subacute care: a changing landscape.

Nursing homes will need commitment - and specialization 

Clearly, the biggest issue with respect to the future of nursing home-based subacute care is the prospect of Medicare reform and the resulting changes in reimbursement. Medicare is trying to balance its budget, and reducing provider payments is a lot easier - not to mention, politically safer - than reducing benefits to beneficiaries.

To that end, everyone expects prospective payment to come to subacute care and, given Medicare's cost-reduction agenda, it is clear that there will be reduced reimbursement for services in general.

Under the current reimbursement system, providers apply for exceptions and exemptions to limits for routine costs while, on the ancillary side, there really are no limits. This is one reason that subacute care has been fairly profitable for SNFs - and this is what would change under a prospective payment system, with a combined limit that would cover ancillary as well as routine costs. In light of this, nursing homes that haven't already committed to subacute care may prefer to fill most of those beds with other types of patients.

Hospital Competition

This decision could be reinforced by competition from hospital-based programs which, I believe, will be significant. Unlike nursing homes, a hospital that doesn't have a large number of empty beds is rare. Under the new reimbursement system, hospitals would certainly be inclined to fill beds that are now generating no revenue at all with patients needing subacute care. And hospitals can be attractive subacute providers despite their higher overhead since they only need to charge enough to cover their variable costs.

Filling beds with subacute patients is precisely what hospitals across the country are doing, the biggest constraint being the certificate-of-need process, in states where it exists. How this plays out is therefore subject to whatever constraints individual states place on hospitals.

Hospitals have also been working at developing integrated delivery systems and, in many cases, are trying to take some form of risk for managed care. When hospitals are capitated or, more often, assume some other form of risk, the skilled nursing component is frequently bundled with hospital payments. So from that perspective, hospitals have an interest in trying to keep that component in-house.

The Nursing Home Future

The SNFs that will stay in subacute are those that provide the most specialized programs. Nursing home-based subacute programs range from Medicare services simply relabeled as "subacute care", to full-scale specialized programs that compete quite effectively with hospital-based or any other programs. For those "in the margin," competing with the more specialized and hospital-based programs will be increasingly difficult.

Nursing homes will also probably continue to be stronger and more competitive on the rehab side than on the complex medical side, where hospitals have some advantages: strong relations with medical staff accustomed to the convenience of seeing patients in hospitals, and a range of related diagnostic and back-up services for the most medically complex subacute patients, which may be difficult for nursing homes to duplicate.

I believe, therefore, that subacute care will continue to be provided in both hospital and nursing home settings, but in a higher proportion in hospitals than we're seeing today, and with nursing homes leaning more heavily toward the rehab side. While there will also continue to be nursing homes with strong complex medical programs, they will definitely have to specialize to do well.

Networks & Managed Care

As I talk with providers and associations around the country, a recurring theme seems to be the growing importance of geographic networks as health plans consolidate.

In most areas of the country, the major managed care plans have been the regional rather than the national ones. This is true even of the national HMO companies like Kaiser and United Healthcare, where their operations are managed by fairly autonomous regional plans. In the past, these plans have operated primarily out of major metropolitan markets. More and more, these regional plans are extending their reach outside these markets to establish state-wide or even broader networks. When that happens - as it already is - it becomes increasingly attractive for managed care organizations (MCOs) to be able to offer their customers networks of providers that cover as much of their geographic territory as possible.

This trend toward favoring organizations with broad geographic networks was illustrated quite dramatically in an article in a recent issue of the National Report on Subacute Care. The article dealt with the Veteran Administration's selection of seven national chains for all of its contracted business (accounting for an average daily census of 9,000), based on their broad geographic coverage. These seven national contracts are replacing 3,200 local contracts, a reality that certainly drives home the need for nursing homes to take a close look at the extent to which they need to be part of a regional network to be attractive to payers.

Over time, we'll probably see a stronger interest on the part of MCOs in contracting for subacute care. Nationally, Medicare risk programs only enroll on the order of 12% of the Medicare population. As that number grows, which it is doing rapidly, subacute becomes more important to managed care because, by my estimates, three quarters of the need for subacute services arises from the Medicare population.

So, with this growing involvement in Medicare risk, MCOs will be more and more interested in subacute care, and practitioners will find new ways to substitute subacute for acute care, as new ways to modify practice patterns are developed.

The bottom line would seem to be that, in terms of demand, the outlook for subacute will still be good. And long-term care providers that compete for that demand with high-quality specialized programs will likely not only survive, but succeed.

Harold M. Ting, PhD, is President of Ting Healthcare Consulting, Mercer Island, WA.