The impact of the prospective payment system for skilled nursing facilities on therapy service provision: a transaction cost approach.

Objective: To examine skilled nursing facilities (SNFs) "make-or-buy" decisions with respect to rehabilitation therapy service provision in the 1990s, both before and after implementation of Medicare's Prospective Payment System (PPS) for SNFs.

Data Sources: Longitudinal On-line Survey Certification and Reporting (OSCAR) data (1992-2001) on a sample of 10,241 freestanding urban SNFs.

Study Design: We estimated a longitudinal multinomial logistic regression model derived from transaction cost economic theory to predict the probability of the outcome in each of four service provision categories (all employed staff, all contract, mixed, and no services provided).

Principal Findings: Transaction frequency, uncertainty, and complexity result in greater control over therapy services through employment as opposed to outside contracting. For-profit status and chain affiliation were associated with greater control over therapy services. Following PPS, nursing homes acted to limit transaction costs by either exiting the rehabilitation market or exerting greater control over therapy services by managing rehabilitation services in-house.

Conclusions: The financial incentives associated with changes in reimbursement methodology have implications that extend beyond the boundaries of the health care industry segment directly affected. Unintended quality and access consequences need to be carefully monitored by the Medicare program.