Medicare beneficiaries who need intensive rehabilitation services following an acute hospital stay are sometimes treated in inpatient rehabilitation facilities (IRFs), where they must be able to tolerate and benefit from intensive therapy. An earlier analysis by the Medicare Payment Advisory Commission (MedPAC) found that some case types under the IRF payment system are more profitable than others and that provider differences in the coding of functioning status could factor in IRF profitability. Differences in profitability for different types of patients could motivate providers to admit some types of patients over others, which could reduce access to care for some patients and affect quality of care.

In this study prepared for MedPAC, we analyze the degree to which profitability varies across IRF patient stays over broad impairment categories, case-mix groups, comorbidity tiers, motor functioning scores, and cognitive functioning scores. Even though the payment weights of Medicare's payment system for IRFs are updated each year to reflect recent cost patterns, we find substantial differences in ratios of payments to costs (P/C ratios) across impairment categories. Within selected types of impairment, we show that P/C ratios vary substantially across case-mix groups and tiers. Our findings show that P/C ratios are generally higher for patients with lower motor and cognitive functioning levels. These patterns could lead IRFs to steer their case mix towards certain types of patients for financial reasons. We find that P/C ratios vary substantially at the facility level as well. At most, a third of facility-level variation in P/C ratios can be explained by facility-level differences in case mix. Further analysis is needed to understand the key drivers of variation in profitability across IRFs and patient types.