To our knowledge, this is the first study to assess the effects of competition in PAC markets in the prospective payment era. Our conceptual framework suggested that, under prospective payment, the influence of competition on resource use and health outcomes is theoretically ambiguous and must be determined empirically. The framework also suggested that the effects of competition on costs and health outcomes may differ across clinical conditions as a result of differences in the quality elasticity of demand and other factors. Consistent with these notions, our empirical analyses found that the effects of competition on IRF costs and outcomes were complex and differed between our two study conditions, hip fracture and stroke. Specifically, we found that higher competition increased resource use and led to worse outcomes for hip fracture patients, whereas higher competition reduced resource use and led to worse outcomes among stroke patients.
Our findings suggest that IRFs may be competing for hip fracture patients on costly dimensions of care, but that the extra costs do not improve health outcomes; instead, the extra costs are associated with worse outcomes. One possibility is that facilities are spending more on furnishings and other amenities that may appeal to families and patients but do not influence outcomes, rather than focusing on the therapy needs of patients (Goldman and Romley 2008
; Romley and Goldman 2008
;). Unfortunately, our data did not enable us to explore the mechanisms underlying the deleterious effects of competition on health outcomes in more detail. A minimum of 3 hours of therapy is mandated daily in IRFs. However, studies have found considerable variation across providers in rehabilitation practices for hip fracture patients, and that these practices influence outcomes (Munin et al. 2005
; Chudyk et al. 2009
;). Possibly, facilities that produce better hip fracture outcomes are able to provide more therapy than the mandated minimum, or different, more effective, types of therapy without increasing costs, by focusing on care processes. Studying the determinants of rehabilitation outcomes for hip fracture patients is an important area for future research.
By contrast, IRFs that face higher levels of competition appear to scale back on resource use for stroke patients. Higher competition also has a negative effect on stroke outcomes by 120 and 180 days posthospital discharge. Stroke patients or their families may have a lower quality elasticity of demand due to, for example, reduced cognitive functioning that would make it harder for them to discern the amenities offered by IRFs or other dimensions of quality (Heruti et al. 1999
; Magasi et al. 2009
;). The poor health status of stroke patients, compared with hip fracture patients, might also make it harder for them to search for a facility they like. Interestingly, studies have found that certain components of a rehabilitation program, such as exercise training and practice targeted at specific tasks, are the most important in improving function (Kwakkel 2006
; Dewey, Sherry, and Collier 2007
;). If IRFs reduce the costs of treating stroke patients by cutting back on these components, they could also compromise outcomes.
Of note, the notion that hip fracture and stroke patients differ in their quality elasticity suggests that either IRFs provide different levels of quality to the two types of patients or the two types of patients tend to be found in different IRFs. In separate analyses, we found some evidence for both phenomena. The correlation between facility-level outcomes for stroke and hip fracture was only 0.27 and the rank correlation was only 0.21. In addition, although the study sample was about evenly split between stroke and hip fracture patients, in one-third of IRFs the ratio of stroke to hip fracture patients exceeded 2-to-1.
Our study has implications for evaluating the effects of payment reform. Our findings highlight that the effects of payment reform on patient outcomes and costs might depend on the competitive environment. For example, there is evidence to suggest that the switch from a cost-based payment system to a PPS is likely to reduce costs on average. However, this study suggests that the magnitude and even the direction of this effect in individual markets might depend on the level of competition. Assessing these effects for different types of providers and different clinical conditions is important for understanding and predicting the effects of payment policy reform.
In evaluating payment policy reform it is also important to consider the effects of the reform on the level of competition in markets. For instance, bundled payments might have the effect of reducing competition if providers contract with fewer PAC facilities and acute care hospitals have more control over which facilities patients use. On the other hand, bundled payments may force postacute providers to compete for contracts from hospitals, introducing some price competition into a current scheme with little to none of it. These changes in competition might have important consequences for patients and should be considered in evaluating bundled payments or other policy reform options being discussed in the current health care debate. Our findings suggest that the effects of bundled payments or other reforms on costs and health outcomes might vary across markets and across patients with different conditions. Evaluations of major payment reforms and regulation and antitrust policies that could make entry, exit, or merging in this market more difficult should take these complexities into account.
Our study has several limitations. First, it is likely that the care provided after the initial IRF stay affects health outcomes. Thus, it may be inappropriate to attribute the competition-related differences in outcomes that we found for hip fracture patients solely to the behavior of IRFs. Studying therapies used after the IRF stay, such as home health care, is an important area for future research (Intrator and Berg 1998
; DeJong et al. 2009
;). Still, the treatments patients receive within the first few weeks after acute care discharge—that is, in the IRF—are expected to have an important influence on their outcomes.
Second, we could not measure functional gain, a crucial outcome of rehabilitation care, using the available Medicare data. Nonetheless, the ability to return to the community is likely to be a good proxy for functional gain in this case, and an important outcome in its own right for hip fracture and stroke patients. Third, we studied a time period just after the introduction of the PPS for IRFs in January 2002. Consequently, we may have studied a period of transition, where behavior in response to competition under prospective payment had not reached equilibrium. However, this may not be a significant limitation, as facilities could anticipate the change to prospective payment and respond quickly. Prior research has shown that facilities changed resource intensity very quickly in response to incentives introduced by the PPS (Sood et al. 2008
Empirical evidence is crucial to guiding payment policy and understanding the effects of competition on health care costs and outcomes. This is the first study to document the effects of competition in PAC markets on costs and health outcomes for IRFs after the introduction of prospective payment. Our finding that higher competition under prospective payment for IRFs led to worse raises concerns and suggests a need for additional investigation to confirm the results and clarify the mechanisms. Future research should also examine how competition affects costs and outcomes for patients with other conditions and how payment reforms might alter the effect of competition across markets and patient groups.