Payment for nursing home care is an important policy concern for federal and state governments. Total government expenditures for nursing home care in the United States amounted to $58.2 billion in 1999 (Centers for Medicare and Medicaid Services 2002). The federal government paid for more than half of these expenditures through the Medicare program and through matching contributions to state Medicaid programs. While Medicaid expenditures are nearly four times higher than Medicare expenditures, the Medicaid proportion has declined through the 1990s and Medicare expenditures have tripled, both in magnitude and as a proportion of government nursing home expenditures. To restrain cost growth, Medicare introduced a prospective payment system (PPS) for Part A skilled nursing facility (SNF) benefits in July of 1998. The PPS increases control over government expenditures by transferring the financial risk for Medicare residents to nursing home facilities (Grimaldi 1999, 2002). The change may affect nursing home resident treatments because PPS changes the factors that drive reimbursement rates. To date, there has been no research on the effect of PPS on treatment patterns for residents.

The purpose of the present research is to identify the effect of PPS on the delivery of rehabilitation therapy treatment. Rehabilitation therapy is an important focus for study because this treatment (1) is an expensive component of care and hence sensitive to payment; (2) is measurable at the individual resident level; (3) is provided to between one-third and one-half of all nursing home residents (Murray et al. 1999); and (4) is an important component of care that may have substantial effects on resident outcomes such as functional health and return to the community (Joseph and Wanlass 1993).