Testing a diagnosis-related group index for skilled nursing facilities

Interest in case-mix measures for use in nursing home payment systems has been stimulated by the Medicare prospective payment system (PPS) for short-term acute-care hospitals. Appropriately matching payment with care needs is important to equitably compensate providers and to encourage them to admit patients who are most in need of nursing home care. The skilled nursing facility (SNF) Medicare benefit covers skilled convalescent or rehabilitative care following a hospital stay. Therefore, it might appear that diagnosis-related groups (DRG's), the basis for patient classification in PPS, could also be used for the Medicare SNF program. In this study, a DRG-based case-mix index (CMI) was developed and tested to determine how well it explains cost differences among SNF's. The results suggest that a DRG-based SNF payment system would be highly problematic. Incentives of this system would appear to discourage placement of patients who require relatively expensive care.