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During the closing session of a national conference on population health, one speaker was recounting how, as a young hospital executive, he asked his CEO about how they could reduce the length of stay for patients in their facility.

“Why would we want to reduce the number of days a patient stays in a hospital? That’s how we get paid,” the CEO responded.

That was a bygone era where hospitals collected money from Medicare for the services rendered, including the number of days in a hospital. During that time, there was financial incentive to keep patients in the hospital since the longer they stayed, the more the hospital was paid.

Much of this changed when Medicare began reimbursing hospitals for a specific condition rather than a la carte services; these conditions are referred to as Diagnosis-Related Groups, or DRGs. For example, a hospital treating a Medicare patient for a heart attack would be reimbursed based on the DRG, not on the number of days the patient stayed in the hospital or the number of aspirin pills the patient received. Hospitals became more cognizant of efficiency when treating patients and lower “length of stays” have remained a target metric for all hospitals.

It is time for Medicare to start paying nursing homes the same way they have paid hospitals for more than 30 years.

Medicare pays for nursing homes in a per diem fashion which incentivizes them to keep patients longer: the first 20 days in a skilled nursing facility is covered 100 percent by Medicare, the next 21-100 days require a daily out-of-pocket expense of $161 from the patient. According to the Medicare Payment Advisory Commission, roughly 20 percent of Medicare patients in a hospital are discharged to a nursing home. And Medicare expenditures on nursing homes have increased from $12 billion in 2001 to $29 billion in 2013.

In the continued drive to focus on promoting efficient, quality care Medicare has developed several models of payment which focus on at-risk payments and accountability beyond the hospital’s four walls. An example is the mandatory bundled payment program called the Comprehensive Care for Joint Replacement (CJR) which Medicare has rolled out for several hospitals in the country. A bundled payment is an alternative payment model where a hospital is given a target price for a hospital diagnosis or procedure, and is held accountable for all the accrued expenses for a set period of time.

In the CJR program, hospitals are held accountable for costs up to 90 days after the patient is discharged, including nursing home costs or a readmission to a hospital. To be successful, a hospital has to work with its nursing home partners to “control costs” but maintain quality. Moreover, if the hospital goes above the target price of the bundle, they have to return money to Medicare.

As programs like CJR and Accountable Care Organizations begin to become the norm rather than the exception, the discussion will change to how to decrease nursing home costs, which amounts to “length of stays.” A better proposition is for Medicare to fundamentally change the structure of how it pays nursing homes. Otherwise, all hospitals will be in the same conundrum of having to ask nursing homes to work against the financial incentives their business is built on.

If Medicare changes to a similar model to how it pays hospitals, nursing homes can work on developing their own internal efficiencies much like hospitals did more than three decades ago.

Susan Craft is director of Care Coordination Initiatives at Henry Ford Hospital. Vikram Reddy is medical director of Quality & Clinical Integration at Henry Ford Macomb Hospital.

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