Patient Routing to Skilled Nursing Facilities: The Consequences of the Medicare Reimbursement Rule

Medicare does not pay for a skilled nursing facility (SNF) unless a fee-for-service patient has stayed in the hospital for at least three days. This Medicare reimbursement rule, or the “three-day rule,” provides full coverage for the first 20 days and partial coverage for days 21–100 for skilled nursing care provided at any Centers for Medicare and Medicaid Services-approved SNF. In this paper, we study how this Medicare reimbursement rule affects patient routing to SNFs and whether an SNF discharge reduces patients’ 30-day hospital readmission rates. Data analysis shows that Medicare patients are more likely to be discharged to an SNF rather than home after the three-day cutoff, and SNF discharges increase hospital readmission rates for Medicare day 3 patients. This perverse effect is driven by infection-related readmissions and is more likely to occur when local SNFs have lower occupancy rates and higher deficiency citations than the median SNF of the same state-year. Back-of-the-envelope calculation suggests that the three-day rule may have generated an extra Medicare cost of $71 million to $345 million per year due to the overuse of SNFs and the subsequent rise in hospital readmissions. Replacing the three-day rule with a machine-learning algorithm mimicking private insurers would help. This paper was accepted by Stefan Scholtes, healthcare management. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4316 .