Payment and provider profiling of episodes of illness of clinical illnesses involving rehabilitation.

The prevailing trend in American health care finance for the last two decades and likely for the forseeable future, is the movement from a system based on fee for service payments to one dominated by capitation arragements. At the core of this change is a shifting of risk from payers to providers. Such a fundamental transition is not without its difficulties. This is exemplified by some of the problems experienced by the Health Care Financing Administration (HCFA) as it has begun to encourage beneficiaries to move from traditional fee for service Medicare to capitated HMOs. The most recently published regulations involving risk adjustment of rates of payment for managed care organizations (MCOs) did not find much favor as the statistical power was poor and the clinical meaningfulness of the risk adjustment was highly problematic. Specifically, the risk adjustment explained less than 10% of the variation in costs (compared to approximately 30% when DRGs were first implemented). From a clinical perspective, the methodology only used hospitalization data for adjustment of capitation rates; that is, anyone who was not hospitalized was assumed to be healthy! It is known that payment for rehabilitation services is among the most difficult to understand and predict of all medical care. This article will summarize the development of a new risk adjustment methodology which should be particularly useful for payment and monitoring of episodes of clinical conditions that involve rehabilitation. The article will conclude with directions for future research.