Hospitals Medicare Nursing Homes

Incentives for Long-term Care Facilities to Hospitalize Patients

Why are hospitalization rates so high for Medicare beneficiaries living in long-term care facilities (i.e., skilled nursing facilities, nursing facilities, and assisted living facilities)?  The first reason is obvious: they are sick.  If they weren’t, they wouldn’t need to be living in these facilities in the first place.  Hospitalizing sick patients is often necessary.  Unnecessary hospitalizations, however, can have adverse affects on patient outcomes.  For instance, unnecessary hospitalizations:

  • Can be physically and emotionally hard on frail patients (e.g., disorientation),
  • Hospital treatment records are rarely passed on to the LTC after patient discharge, and
  • Hospital physicians often prescribe patients new medications without consulting the LTC facility staff.

So why do LTC facilities send so many patients to hospitals unnecessarily? The reason is basically that they have lots of incentives to do so and none not to.  According to this series of interview conducted by the Kaiser Family Foundation, here a breakdown of LTC facility incentives to hospitalize.


  • Limited on-site capabilities to deal with serious medical issues,
  • Reduces liability concerns (i.e., defensive medicine)
  • Allows for more timely diagnostic work,
  • Is more convenient for physicians (especially during weekend and nighttime hours),
  • Preference to send residents to hospital to die to avoid disrupting facility staff and other residents,
  • Is financially beneficial for the physician and facility.


  • None

As an economist, I of course focus in on the financial incentives.  Some quotations from the report:

  • “In the hospital, I am billing every day that [my patient] is there.”
  • “While in the hospital, I would be able to do procedures [on the long‐term care facility resident], which is billable, which is what puts the cost all the way up there.”
  • “As long as [the doctor] is treating them [in the hospital], they’re making money.”

Facilities can also earn money since when the residents return to the facility, they are eligible for skilled nursing care (SNF) which is reimbursed by the more generous Medicare.  Standard residential nursing facilities are paid for by Medicaid which is less generous. In addition, facilities can earn money through bed holds.

  • “The [facility] is getting a bed‐hold on a lot of them. The patient is not in the building, they are not caring for them, and they get money [for the patient] every day.”


In summary, physicians and facilities have lots of incentives to send patients to inpatient care facilities, and very few not to.  How do we change this?  The KFF report offers some suggestions:

  • More training and reduced staff turnover will improve the ability of facility staff to handle a variety of medical situations without hospitalizations.  More training, however, increases the cost of SNF care.  Medicare may need to increase reimbursement rates to encourage LTC facilities to incur this extra expense.  It may be worth the cost to do this, however, if hospitalizations decrease significantly.  If facilities pocket the extra cash, but do not change behavior, then the money will have been wasted.
  • Despite physician aversion, more medical support to back up facility staff during late night and weekend shifts would provide the manpower to reduce hospitalizations. Physicians are expensive, however, so the increased cost from physician or nurse practitioner hours must be less than the expected cost decrease from reduced hospitalizations.
  • Review financial incentives of physicians and facilities.  And the economist always comes back to financial incentives.



  1. Terrific article, Jason.

    As with so many healthcare issues, the local variation is telling. Some hospitals depend on the income from recycling nursing home patients, others do not. My conclusion from looking at regional variation in commercial and Medicare data is that much variation results from management decisions or community ethics and not always general economic forces or physician practice.


  2. My MIL had long hospitalizations during the last years of her life when she was in a nursing home.

    The bill from the home didn’t go down if she was in the hosptial – that was a fixed rate. There really wasn’t a doctor on site at the nursing home so if something came up when the doctor wouldn’t be there for awhile he’d always instruct them to send her to the ER. Apparently he did visit the hosptial regularly.

    We became anxious about getting her out one time because she wasn’t very well cared for, no one bothered to feed her or bathe her and as far as we could tell she could have been back at her home where these small services were more forthcoming – plus we wondered if this was running up our/her bill.

    The hospital guy we talked to made light of it. He tells us that they get paid a flat rate for her admission so we shouldn’t be concerned that she’d been there an extra week because it wasn’t costing us more.

    The report is correct though – even if her admission was a flat fee the doctors kept visiting and she was generating fees for them.

    Hospitals for old sick bed-bound people are miserable places. It’s hard to imagine but they’re worse than a nursing home because there is so much less routine care – like bathing or feeding- going on.

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