Post-Acute Care Reform

Post-acute care accounts for more than $55 billion in annual Medicare fee-for-service spending across four settings: skilled nursing facilities, home health agencies, inpatient rehabilitation facilities, and long-term care hospitals. In 2024, Medicare spent approximately $30 billion on SNFs, $15.7 billion on home health agencies, and $11 billion on IRFs. MedPAC has recommended a unified PAC payment system for fifteen years. Congress has never enacted it.

The failure to reform PAC payment reflects the political economy of healthcare silos. Each setting has its own trade association, its own congressional champions, its own cost report structure, and its own payment history. A unified payment system based on patient characteristics rather than care setting would create winners and losers among incumbents, and the losers have consistently blocked reform. Meanwhile, the shift from fee-for-service to Medicare Advantage and the growth of ACOs and AHEAD create external pressure that may accomplish what legislation has not: forcing PAC providers to demonstrate value or lose volume.

The PAC Spending Landscape

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The four PAC settings serve overlapping but distinct populations. SNFs provide skilled nursing and rehabilitation services to patients who need 24-hour nursing oversight but not acute hospital care. Home health agencies deliver skilled nursing, therapy, and aide services in patients’ homes. IRFs provide intensive rehabilitation, typically three hours of therapy per day, for patients recovering from stroke, joint replacement, or other conditions requiring concentrated rehabilitation. LTACHs serve patients with complex medical needs requiring extended hospital-level care, often those weaning from mechanical ventilation.

Each setting has its own payment methodology. SNFs are paid under the Patient-Driven Payment Model, which bases payment on patient characteristics including clinical conditions, therapy needs, and nursing requirements. Home health agencies are paid per 30-day period under the Patient-Driven Groupings Model. IRFs receive per-discharge payments adjusted for patient characteristics and facility factors. LTACHs receive per-discharge payments under their own prospective payment system.

The cost concentration is substantial. Joint replacement, hip fracture, stroke, and cardiac conditions drive disproportionate shares of PAC spending. These are also the conditions where research has found overlap in the types of patients treated across settings. A joint replacement patient might reasonably receive rehabilitation in an IRF, a SNF, or at home with home health services. The setting of care affects Medicare spending, patient experience, and outcomes, but the evidence base for which setting produces the best value for which patients remains contested.

For ACOs and AHEAD hospitals, PAC utilization is a primary lever for shared savings and global budget management. Post-acute referral patterns directly affect total cost of care. An ACO that reduces SNF utilization through care coordination and home-based services captures savings. An AHEAD hospital that invests in avoiding hospitalizations reduces not just inpatient volume but downstream PAC spending. The ACO and AHEAD financial models create incentives to scrutinize PAC utilization that fee-for-service payment does not.

MedPAC’s Unified PAC Payment Proposal

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MedPAC has recommended a unified PAC payment system that would establish a single payment method across all four settings based on patient characteristics rather than the setting where care is delivered. Under this proposal, Medicare would pay the same amount for a patient with a given set of characteristics regardless of whether that patient receives care in a SNF, an IRF, or at home.

The policy logic is compelling. If similar patients are treated across settings, payment should reflect patient needs rather than institutional choices. Site-neutral payment would remove the financial incentive to steer patients to higher-cost settings when lower-cost alternatives could produce equivalent outcomes. The inefficiency in current payment stems from paying different amounts for similar services delivered to similar patients.

Who would win under unified payment depends on current payment levels relative to patient acuity. Settings that are currently overpaid relative to the complexity of patients they serve would see payment reductions. Settings that serve more complex patients at relatively lower payment levels would gain. The general expectation is that IRFs, which receive the highest average per-stay payments, would face significant reductions for certain conditions where SNF or home health care could produce equivalent outcomes.

Who would lose includes settings benefiting from favorable payment relative to the patients they treat. IRF trade associations have vigorously opposed site-neutral proposals, arguing that IRF patients are genuinely different from SNF patients and that payment reductions would compromise access to intensive rehabilitation. SNF associations have their own concerns about unified payment methodology and its potential effects on their reimbursement.

Why unified PAC payment has not moved reflects the political economy of each setting’s interests. The American Health Care Association represents SNFs. The National Association for Home Care & Hospice represents home health. The American Medical Rehabilitation Providers Association represents IRFs. Each association mobilizes its members, cultivates congressional relationships, and resists proposals that would disadvantage its setting. The fragmented advocacy structure makes comprehensive reform difficult.

MedPAC’s December 2025 meeting presentation noted that research limitations undermine the case for site-neutral payment. The gap in evidence concerns unmeasured selection into different settings. Patients who go to IRFs may differ from patients who go to SNFs in ways that claims data do not capture. Without better evidence on whether outcomes truly differ across settings for comparable patients, commissioners expressed uncertainty about the value of moving toward site-neutral payment.

The IMPACT Act

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The Improving Medicare Post-Acute Care Transformation Act of 2014 was supposed to build the infrastructure for unified PAC payment by standardizing patient assessment data and quality measures across settings.

The law required CMS to develop standardized patient assessment data elements across SNFs, home health agencies, IRFs, and LTACHs. The theory was that comparable assessment data would enable analysis of patient characteristics and outcomes across settings, supporting eventual development of a unified payment system.

The law also required development of cross-setting quality measures. If patients with similar conditions are treated in different settings, quality measures should enable comparison of outcomes regardless of where care is delivered.

Implementation has been partial. CMS has developed some standardized data elements that are now collected across settings. However, the assessment data standardization gaps remain significant. Different settings use different assessment instruments, collect data at different points in the care episode, and have different clinical documentation practices. The comparability that the IMPACT Act envisioned has not been fully achieved.

Quality measure development has also lagged. Cross-setting measures exist for some domains, but the comprehensive quality measurement infrastructure that would support unified payment decisions remains incomplete. Without reliable quality data, payment reform carries the risk of shifting patients to lower-cost settings that may produce worse outcomes.

PAC Margins and Payment Adequacy

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MedPAC’s December 2025 analysis found that Medicare FFS margins remain high across PAC settings. SNF Medicare FFS margins were 24.4 percent in 2024 and are projected to increase to 25 percent in 2026. For-profit SNFs had margins of 27.2 percent compared to 10.8 percent for nonprofits. High-volume SNFs had margins of 28.5 percent compared to 11.1 percent for low-volume facilities.

Home health Medicare FFS margins have also been substantial. MedPAC has recommended payment reductions for several years, arguing that margins indicate overpayment relative to the cost of providing care.

IRF margins similarly suggest payment adequacy exceeding the cost of care delivery. MedPAC has recommended payment reductions for IRFs, particularly for select conditions where evidence suggests that less intensive settings could produce comparable outcomes.

The pattern of high margins across PAC settings, combined with the overlap in patient populations, has led MedPAC to recommend payment reductions. For fiscal year 2027, the commission’s draft recommendation calls for a 4 percent cut to SNF base payment rates. Home health has faced proposed cuts of 7 percent in prior years. IRF reductions have also been recommended.

Congress has generally not enacted MedPAC’s PAC payment reduction recommendations. The trade associations representing each setting have successfully advocated for continued payment increases or smaller reductions than MedPAC recommended. The political economy that blocks unified payment reform also blocks significant payment reductions within existing payment systems.

The Three-Day Rule and AHEAD

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The SNF three-day prior hospitalization requirement illustrates how benefit design distorts care delivery. Medicare covers SNF care only if the patient had a qualifying inpatient hospital stay of at least three consecutive days. This rule creates incentive to extend hospital stays to meet the three-day threshold when SNF care is clinically indicated.

The rule also creates distortion in the IRF-SNF choice. A patient who does not have a three-day qualifying stay cannot receive SNF care but might be eligible for IRF care, which has no prior hospitalization requirement. This can push patients toward higher-cost IRF care when SNF care would be clinically appropriate and less expensive.

AHEAD changes the hospital incentive structure. Under fee-for-service, extending a hospital stay to meet the three-day threshold costs the hospital nothing while enabling SNF referral that may be beneficial for the patient. Under global budgets, every additional hospital day consumes revenue. AHEAD hospitals have financial incentive to minimize hospital days, which creates tension with the three-day SNF eligibility requirement.

ACO strategies for managing PAC utilization have demonstrated that post-acute spending can be reduced while maintaining or improving outcomes. ACOs have reduced unnecessary SNF admissions through transitional care management, home-based care coordination, and preferred SNF network development. The volume reduction is real: MedPAC data show that PAC utilization patterns have shifted, with declining SNF admissions as a share of hospital discharges.

For PAC operators, this creates strategic pressure. Providers dependent on volume face contraction as ACOs and AHEAD hospitals scrutinize post-acute referrals. Providers that demonstrate value through quality outcomes, efficient length of stay, and successful transitions may thrive in a market where referrers have incentive to choose high-performing partners. The quality-volume tension will sort the PAC market between operators positioned for value-based relationships and those dependent on fee-for-service volume.

Related Reading

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MCR-01_08 AHEAD and Geo AHEAD: Geography as a Cost Control Lever MCR-06_06 The Skilled Nursing and Long-Term Care Axis