To examine changes in postacute care (PAC) use during the initial Medicare payment reforms enacted by the Balanced Budget Act of 1997.
We used claims data from the 5 percent Medicare beneficiary sample in 1996, 1998, and 2000. Linked data from the Denominator file, Provider of Service file, and Area Resource File provided additional patient, hospital, and market‐area characteristics.
Six disease groups with high PAC use were selected for analysis. We used multinomial logit regression to examine how PAC use differed by year of service, controlling for patient, hospital, and market‐area characteristics.
There were major changes in PAC use, and a portion of services shifted to settings where reimbursement remained cost‐based. During the first reform, the home health agency interim payment system, home health use decreased consistently across disease groups. This decrease was accompanied by increased use in skilled nursing facilities (SNFs). Following the implementation of the prospective payment system for SNFs, the use of inpatient rehabilitation facilities increased.
The shift in usage among settings occurred in two stages that corresponded to the timing of payment reforms for home health agencies and SNFs. Evidence strongly suggests the substitutability between PAC settings. Financial incentives, in addition to clinical needs and individual preferences, play a major role in PAC use.