Excluded Facility Financial Status and Options for Payment System Modification

Psychiatric, rehabilitation, long-term care, and children's facilities have remained under the reimbursement system established under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 (Public Law 97-248). The number of TEFRA facilities and discharges has been increasing while their average profit rates have been steadily declining. Modifying TEFRA would require either rebasing the target amount or adjusting cost sharing for facilities exceeding their cost target. Based on our simulations of alternative payment systems, we recommend rebasing facilities' target amounts using a 50/50 blend of own costs and national average costs. Cost sharing above the target amount could be increased to include more government sharing of losses.