The resource utilization group system: its effect on nursing home case mix and costs

Using data from 1985 and 1986, we examine how New York state's prospective payment system affected nursing homes. The system, called Resource Utilization Group (RUG-II), aimed to limit nursing home cost growth and improve access to nursing homes by "heavy-care" patients. As in Medicare's prospective hospital reimbursement system, payments to nursing homes were based on a "price," rather than facility-specific rates. With respect to cost growth, we observed considerable diversity among homes. Specifically, those nursing homes most financially constrained by the RUG-II methodology exhibited the slowest rates of cost growth; we observed higher cost growth among the homes least constrained. This higher rate of cost growth raises a question about the desirability of using a pricing methodology to determine nursing home payment rates. In addition to moderating cost growth, we also observed a significant change in the mix of patients admitted to nursing homes. During the first year of the RUG-II program, nursing homes admitted more heavy-care patients and reduced days of care to lighter-care patients. Thus, through 1986, the RUG-II program appeared to satisfy at least one of its major policy objectives.