Long-term care is a set of services delivered over a sustained period of time to people who lack some degree of functional capacity. Put alternatively, long-term care is the help needed to cope, and sometimes to survive, when physical and cognitive disabilities impair the ability to perform activities of daily living (ADL), such as eating, bathing, dressing, using toilet, and walking. Unlike the provision of general health services, which are often targeted toward acute medical problems, long- term care must be continually provided and is, thus, continually expensive.
Long-term care services are needed by a diverse set of individuals who receive care from an equally wide array of providers. As the result of declining functioning, older individuals – especially the very old – are the primary recipients of long-term care services, but in some instances, younger individuals with physical or cognitive limitations also require services. The primary providers of long-term care services in most countries are ‘informal’ providers such as family members and friends. Formal providers include nursing homes, board and care homes, home health care agencies, assisted living facilities, adult foster and day care homes, home and community-based providers, and continuing care retirement communities (CCRCs). Across these different formal providers, a number of different payer types exist including out-of-pocket, public and private insurance. Because consumers are often thought to lack information regarding the quality of services provided, an immense amount of government regulation exists within institutional long-term care settings in countries such as the US.
Long-term care has been an active and distinct subfield of health economics for some time. To paraphrase an old line ‘long-term care economics is like health economics, only more so,’ several of the key features that make the economics of health different from the economics of other goods and services are even more pronounced in the study of long-term care. That is, the assumption of the well-informed, rational consumer is more dubious; the role of government as a payer and regulator is more prominent; the response to financial incentives such as insurance is exacerbated for certain services; and the external costs of illness are often more formidable.
This article provides a broad discussion of the basics of long-term care: who needs it; who provides it; who pays for it; and some background on government regulation of these services. Next, this article provides an overview of some of the central issues in the economics of long-term care: The nonpurchase of private long-term care insurance; long-term care quality; pay-for-performance in long-term care; cost-effectiveness of home- and community-based services (HCBS); effects on informal caregiving; and the integration of long- term care with other health care services.
Who Needs Long-Term Care?
The key to long-term care is functioning. Unlike acute health care where a number of highly technical medical services are typically provided to patients, long-term care is assistance with daily tasks of living. Long-term care personnel have divided these tasks into ADLs, such as eating, using toilet, dressing, bathing, and locomotion and instrumental ADLs (IADLs), such as cooking, cleaning, doing laundry, handling household maintenance, transporting themselves, reading, writing, managing money, using equipment such as the telephone, and comprehending and following instructions. Clearly, the need for assistance with multiple ADLs might necessitate more intensive long-term care such as a nursing home, whereas the need for assistance with one or two IADLs may potentially be provided in the home or community. However, more than health dictates the need for more intensive long-term care services, an individual’s wealth, and presence of family caregivers will also influence the site of care. For example, disabled individuals who are married and have children have been found to have a lower risk of nursing home entry.
Most elderly persons are physically active, able to care for themselves, and do not need long-term care. However, the prevalence of disability rises steeply with age. For example, in the US, only approximately 1 in 10 individuals aged 65–74 years is disabled, but roughly 7 in 10 individuals aged 85 years and older are disabled. Additionally, not all disabled persons are old. For example, individuals under the age 65 years with spinal cord injuries, advanced multiple sclerosis, traumatic brain injuries, developmental disabilities, and mental illnesses may all require some form of long-term care.
Who Provides Long-Term Care?
Although many people associate long-term care with nursing homes, the predominant provider of long-term care is the family. The predominant providers of care within a family have historically been spouses and adult children of elderly individuals and parents of younger individuals in need of services. Although several recent societal trends have worked against informal provision of services (e.g., greater female labor force participation and geographic dispersion of families), this is still the dominant type of long-term care. Among the community-dwelling US elderly with long-term care needs, 95% receive some informal care and two-thirds rely solely on informal care.
Elderly individuals almost universally prefer receiving care in their homes from family members. However, health, familial, and financial issues often precipitate the need for care from a formal provider. A broad continuum of services constitutes the formal long-term care marketplace. Although nursing homes serve less than a quarter of the disabled elderly in the US, they are certainly the most expensive long-term care option and thoroughly studied.
In the US, roughly 1.6 million residents live in nearly 17 000 nursing homes. About two-third of all nursing homes are investor owned, about a quarter are nonprofit, and the remaining are government-owned facilities. Roughly half of all nursing homes are members of a chain and approximately 6% are hospital-based facilities. The average-sized facility has approximately 100 residents and the overall occupancy rate is approximately 88%. Historically, occupancy rates have been much higher within this industry because of the presence of supply constraints such as certificate-of-need (CON) and construction moratorium laws that attempt to limit the growth in beds in an effort to hold down the Medicaid expenditures. However, the recent growth in alternatives to nursing home care has likely competed away some of the ‘healthier’ nursing home residents to other care settings and lowered nursing home occupancy rates.
For individuals who can still live on their own, home care can range from periodic help with shopping and cleaning to full-time nursing help. Social support services such as meals on wheels, adult foster care, and adult day care, may enable individuals in need of long-term care to remain in the community. Assisted living facilities are residential settings that provide more supportive services than boarding houses but less medical care than a nursing home. Assisted living may provide lodging; meals; protective oversight; activities; and some assistance with medications, personal care, and ADL.
From an economic perspective, one intriguing development within the US long-term care market is the blurring of the roles of provider and insurer in CCRCs. Under this model, residents pay a large initial fee on entry and rent an apartment for an additional monthly fee in a community setting designed specifically for elderly individuals. As health declines, the individual may move on from the independent living section of the CCRC to onsite-assisted living and onsite nursing home care for additional charges. Given that this model is typically geared toward wealthier individuals, CCRCs make up a relatively small part of the US market.
Who Pays For Long-Term Care?
Similar to acute health care services, long-term care is paid by a number of sources. What is most striking about this sector in the US, relative to the acute health sector, is the lack of private insurance coverage. Less than 5% of all long-term care expenditures are paid by private insurance. Individuals who use long-term care typically pay it out of their own (or their family’s) income and assets, or they must qualify for public coverage. Thus, long-term care represents the largest source of catastrophic costs for the elderly in the US. Although Medicare does cover some rehabilitative (or short-stay) nursing home care, the primary payers of long-term care services are state Medicaid programs. For example, Medicaid accounts for about half of all expenditures on long-stay nursing home services, which amounted to approximately $45 billion nationwide in 2009. Individuals must qualify for Medicaid by meeting income and asset criteria at the time of nursing home entry or by ‘spending down’ during their stay.
Although HCBS have been found to be associated with lower long-term care expenditures for individuals with certain care needs, most state Medicaid programs are more generous in covering nursing home services because of a perceived moral hazard problem. Individuals generally do not want to enter a nursing home, with research suggesting that these services are relatively price inelastic with respect to Medicaid eligibility policy. However, HCBS attracts some individuals who otherwise would have received care from family members and friends in the community. Thus, in recognition of this potential moral hazard problem, states are more likely to cover nursing home services relative to HCBS. Nevertheless, spending for Medicaid HCBS has grown substantially, increasing from $4 billion in 1992 to $22 billion in 2007. Nursing home expenditures have also increased over this period, HCBS grew from 14.5% to 31.6% of Medicaid long-term care spending between 1992 and 2007.
The emotional, physical, and financial burden on informal caregivers can be quite high. Historically, US long-term care policy has not financially reimbursed informal care provision by family members and friends. Although such services are not reflected in the national health accounts, never trigger a payment from an insurer; do not inflate the federal deficit, and are rarely included in any calculation of the overall cost of long term care; they nonetheless represent a genuine opportunity of cost burden. For example, if an adult child is taking care of an elderly parent, this individual is forgoing other work and leisure opportunities. Policymakers in the US have experimented with several measures to support informal care by family and friends with the idea that these savings might offset higher cost institutional services. For example, the ‘cash and counseling’ program, currently active in 15 states, provides Medicaid beneficiaries with a budget to hire their own personal care aides. Recent economic research in the US and elsewhere has begun to calculate the direct (e.g., opportunity cost) and indirect (e.g., health implications) costs of informal caregiving.
Government Regulation Of Long-Term Care
Reflective of government spending over the past several decades, regulation in the US long-term care sector has largely been defined by the regulation of nursing homes where government continues to play a vital role in protecting a potentially vulnerable resident population. The reason for the high degree of government intervention and oversight is often thought to relate to the inability of many nursing home consumers to monitor quality effectively. Dating back over three decades, a number of reports and studies have documented low-quality care within this industry. In response to this issue, the US government has placed a number of restrictions on the industry. For example, the Nursing Home Reform Act was passed in 1987 mandating that nursing facility care should be more consistent with expert recommendations for assuring quality care. These recommendations included reduction in the use of physical restraints, prevention of pressure ulcers, reduction of psychoactive medications, and some minimal staffing standards including the stipulation that a registered nurse must be on duty 24 h a day and all nurses’ aides must be certified.
The US government is also an overseer of care via the survey and certification process. To accept the Medicaid and Medicare recipients, a nursing home must be annually certified via Centers for Medicare & Medicaid Services survey. Several alternative remedies may be imposed on facilities that receive a high number of deficiencies. These punishments include civil money penalties of up to $10 000 a day, denial of payment for new admissions, state monitoring, temporary management, and immediate termination. In addition to this survey process, certified nursing homes must fill out Minimum Data Set (MDS) assessments for every resident on a quarterly basis. Thus, the government generates an immense amount of quality information at a substantial cost. One estimate suggested that the survey and certification process costs the government nearly $400 million annually, which equates to approximately $22 000 per nursing home or $208 per nursing home bed. This figure does not include the indirect costs to the facility of the certification process, such as interacting with the regulatory agency, preparing for and hosting survey visits, gathering and providing data, and responding to complaint investigations. Experience from other sectors of the economy suggests that the indirect costs of the certification process to the nursing home are likely greater than the direct costs to the government.
Beyond setting and enforcing quality standards, examples also exist of market entry and price regulations in the US long-term care sector. Regulated barriers to entry are present in many long-term care markets via state CON laws and construction moratoria. Most of these state laws focus on nursing home beds, although states are increasingly grappling with whether and how to expand these policies to other long-term care settings, such as assisted living facilities. A CON law constrains market growth by employing a need-based evaluation of all applications for new construction. A construction moratorium is even more stringent in that it effectively prevents any market expansion. The stated rationale for these regulations is that lower capacity ultimately results in lower public expenditures, although research suggests that the repeal of these policies does not lead to increased state Medicaid long-term care expenditures. As a related barrier to entry, some states exercise greater scrutiny over the ownership status of nursing homes (e.g., New York State does not allow out-of-state for-profit chains to operate facilities in the state). Although infrequently used, an example of price regulation in the US long-term care sector is nursing home rate equalization laws. Both North Dakota and Minnesota prohibit nursing homes from charging a private pay price above the state Medicaid rate.
Key Economic Questions In Long-Term Care
Nonpurchase Of Private Long-Term Care Insurance
As noted above, relatively few individuals in the US purchase private long-term care insurance. Researchers have explored a number of potential supply and demand-side explanations for this nonpurchase. On the supply side, research has observed that long-term care insurance premium pricing has relatively high loads compared to other types of insurance – that is, a lower portion of the premium dollar translates into benefits. These high loads are consistent with several supplyside market failures including transaction costs, imperfect competition, asymmetric information, and a range of dynamic contracting problems. Empirical support exists for the asymmetric information and dynamic contracting explanations. However, these supply-side factors cannot entirely explain the limited size of the market. Research suggests that even if actuarially fair policies (i.e., policies with zero load) were made available, the majority of elderly individuals would still not purchase these policies. Thus, research suggests that most of the nonpurchase relates to demand-side factors.
On the demand side, one explanation for the nonpurchase of long-term care insurance is incomplete information on the part of consumers. Many studies have found that individuals underestimate their need for long-term care or mistakenly assume it is covered by Medicare. Another possible demandside explanation is that the form of the utility function may not be constant in the context of chronic health conditions. That is, individuals may place a lower value on consumption while in a nursing home than when healthy at home, which would serve as a disincentive to purchase long-term care insurance. Demand for long-term care insurance may also be limited by the availability of imperfect but less costly substitutes such as unpaid care provided by family members. Another potential explanation is that illiquid housing wealth can be used to insure long-term care. An individual may prefer to use their housing wealth in the event of a health shock rather than pay long-term care insurance premiums out of liquid wealth.
One prominent demand-side theory is that the Medicaid program ‘crowds out’ the purchase of long-term care insurance. Using simulation models, one study found that the implicit tax imposed by Medicaid (i.e., the part of the premium going to benefits Medicaid would have otherwise provided) explains why more than 60% of the wealth distribution does not purchase a policy. Importantly, the same researchers note that reducing the implicit tax of Medicaid on long-term care insurance would likely be an insufficient mechanism to expand the market, in part, because of the consumer misperceptions and supply-side failures described above.
Long-Term Care Quality
A number of studies have suggested poor quality of care in long-term care markets, especially the US nursing home market. A large health economics literature has focused on the economic explanations for low-nursing home quality. Economists have generally focused on four explanations for variation in the quality of nursing home care: public payment generosity; supply constraints; asymmetric information between nursing homes and patients; and macroeconomic factors.
The health economics literature on nursing home quality of care in the 1980s and 1990s was largely based on Scanlon’s model in which nursing homes face two markets. One market is for private-pay residents with downward sloping demand, and the other is for Medicaid residents who are insensitive to price. Scanlon’s empirical work suggested the Medicaid side of this market could be characterized nationally by an excess demand. CON and construction moratoria policies had constrained growth in the supply of nursing home beds, and nursing homes preferred to admit the higher paying private patients. As a result, when a bed shortage existed, it was the Medicaid patients who would be excluded.
At the time, many noneconomists thought that the problem of quality in nursing homes could only be solved by raising Medicaid reimbursement rates. By incorporating a quality variable into Scanlon’s model, several early research papers showed that raising Medicaid rates in a market with excess demand would result in nursing homes facing a reduced incentive to use quality of care to compete for the private patients. The decline in nursing home occupancy rates, repeal of CON laws in certain states, and emergence of improved data over the past decades have all contributed to a renewed interest in the relationship between the Medicaid payment and nursing home quality. Unlike the earlier research on this issue, results from more recent studies have generally found a modest positive relationship between the state Medicaid payment rates and nursing home quality. Importantly, the more recent studies provide little support for a negative relationship between the Medicaid payment level and quality.
Asymmetric information may also be a potential explanation for low-quality nursing home care. Although nursing home care is fairly nontechnical in nature, monitoring of care can often be difficult, and the quality learning period may be nontrivial relative to the length-of-stay in some instances. The nursing home resident is often neither the decision maker nor able to easily evaluate quality or communicate concerns to family members and staff. Furthermore, elderly individuals who seek nursing home care are disproportionately the ones with no informal family support to help them with the decision process. Finally, relatively few transfers occur across nursing homes. Movement among homes may be impeded by tight markets due to supply constraints such as CON and construction moratorium laws and health concerns regarding relocation (termed ‘transfer trauma’ or ‘transplantation shock’). Thus, consumers may not be able to ‘vote with their feet’ by taking their business elsewhere.
To address this perceived lack of consumer information, the US government publishes a web-based nursing home report card initiative called ‘Nursing Home Compare’ (www.medicare.gov/NHCompare), which contains information on nurse staffing, regulatory deficiencies, and MDS-based quality indicators. If consumers use this information to make informed decisions about nursing home entry, then public information may help to improve quality. The existing literature to date suggests that the Nursing Home Compare report card initiative has led to a modest (but inconsistent) positive effect on nursing home quality of care. Key factors that may impede the use and efficacy of nursing home report cards include the heterogeneity in the preference of short-stay and long-stay consumers; potential difficulties in accessing report card information during times of crisis; potential difficulties in interpreting report card data when the measures conflict or fail to provide a clear signal; key role of hospital discharge planners in the selection process; and limited choice set many nursing home consumers face due to rural markets, price, high occupancy, or other extenuating circumstances.
Macroeconomic factors such as wage rates for nursing home staff may also be important toward explaining the level of quality. For example, one study measures the extent to which nursing homes substitute materials for labor when labor becomes relatively more expensive. From a quality perspective, factor substitution in this market is important because materials-intensive methods of care are associated with greater risks of morbidity and mortality among nursing home residents. Indeed, as the market wage rises, nursing homes are more likely to employ labor-saving practices such as the use of antipsychotics.
Pay-For-Performance In Long-Term Care
Through the Medicare and Medicaid programs, the US government purchases significant amounts of nursing home services. Moreover, an emerging literature suggests poor nursing home quality results in higher Medicare spending for acute care services. As such, the government seeks to obtain high-quality services for Medicare beneficiaries. However, administrative pricing arrangements mean that – for many residents – nursing homes cannot charge higher Medicare or Medicaid prices for better quality. Moreover, the government cannot simply ask for a level of quality for Medicare beneficiaries. This set of circumstances can be analyzed using a principal agent model. In this instance, the ‘principal’ is the government, whereas ‘agent’ is the nursing home.
This principal–agent model in economics is useful in analyzing circumstances in which providers, such as nursing homes, are not driven by market forces to the level of quality desired by the purchaser and, further, where the purchaser cannot contract directly for a given level of provider quality. One way to induce nursing homes to improve quality is to make payments at least partly contingent on an indicator of nursing home effort to deliver high-quality care. Such indicators of nursing home effort are embodied in various structural (e.g., staffing), process (e.g., physical restraint use), and outcome (e.g., pressure ulcers) measures. These indicators only measure a few of the many dimensions of quality that a health care purchaser (and consumers) might care about, and each of them may require separate, costly efforts to generate improvement. That is, the structures and processes that create improvements in pressure ulcers might be largely distinct from what is needed to raise performance in lowering resident pain or depression. Purchasers must decide which dimensions of quality to target and consider how outcomes on unrewarded dimensions of performance might be affected. Pay-for-performance schemes in this way introduce a form of price flexibility that rewards desirable performance. Theoretically, the effectiveness of payments contingent on quality measures depends principally on the relative magnitude of expected costs and benefits to the provider of improving quality. That is, do expected incremental nursing home payments exceed the costs to facilities of supplying the desired level of quality? Costs should be thought of broadly here and may include, for example, the value of additional unreimbursed time spent with patients or investments in information technology.
Pay-for-performance arrangements also have the potential for unintended consequences. Critics of paying for quality in health care have identified a number of drawbacks that might arise from the introduction of such schemes. The principal category of unintended consequences that might result from pay-for-performance is generally termed gaming where participants find ways to maximize measured results without actually accomplishing the desired objective of improved quality of care. In the nursing home setting, providers or administrators might ‘game’ incentive systems by miscoding diagnoses or services or selecting patients on the basis of the likelihood of a positive outcome or compliance with treatment protocols rather than need. Selecting healthier patients for treatment may reduce aggregate health benefits; miscoding may also have longer run effects on quality because of missed opportunities to identify and improve low quality. A second major concern with paying for quality is known in the economics literature as the multitasking problem. If the goal of the payer is multidimensional and not all dimensions can be measured and ‘paid on’ (e.g., resident quality of life), compensation based on available measures will distort effort away from unmeasured objectives that may be important to patient wellbeing. Finally, concerns have been raised about the impact of paying for quality on intrinsic motivation, cooperation, and professionalism, particularly among physicians.
Recent concerns have also been raised about the impact of market-based approaches for quality on racial and ethnic disparities in health care. In the context of the nursing home market, published research has described its two-tiered nature, with the lower tier consisting mainly of residents with Medicaid-financed care and having fewer nurses, lower occupancy rates, and more health-related deficiencies. These low-performing facilities are disproportionately located in the poorest communities and are more likely to serve African-American residents than are other facilities. Even within markets, African-American and poorly educated patients have been found to enter the worst-quality nursing. Although pay-for-performance initiatives are typically aimed at improving quality of care broadly, it is important to monitor whether these initiatives further disadvantage poor performing providers and the individuals they serve.
Cost-Effectiveness Of Home And Community-Based Services
Individuals generally prefer care in least restrictive setting possible, and for certain individuals with less intensive care needs, it may be possible to provide lower per capita cost care at home or community relative to a nursing facility. However, the historic institutional bias in long-term care coverage relates partially to a perceived moral hazard problem (or woodwork effect) whereby publicly financed noninstitutional services substitute for informal services previously provided by family members and friends. Program administrators have found it very difficult to structure coverage such that only individuals who otherwise would have entered nursing homes utilize noninstitutional services. States have employed targeting (or screening) mechanisms in an attempt to limit care to only those individuals who otherwise would have accessed nursing home care.
If targeting were perfect, then the noninstitutional treatment model would need to be only marginally less costly than the institutional model to generate savings. However, as targeting becomes less perfect, the aggregate savings from noninstitutional care needs to increase in order to cover the increased costs associated with the moral hazard effect. The empirical literature has generally supported the idea that spending from increased HCBS utilization typically exceeds the savings from decreased nursing home utilization. However, this type of cost analysis is distinct from a cost-effectiveness analysis, in which differences in costs are benchmarked against differences in outcomes. Even if rebalancing toward HCBS is associated with higher aggregate costs, the services may still be cost-effective due to an even greater increase in aggregate effectiveness. Toward the end, a number of research studies have supported the idea that psychosocial outcomes such as life satisfaction, social activity, social interaction, and informal caregiver satisfaction were higher under HCBS. Moreover, unmet needs have been shown to decrease under HCBS. To date, research has not formally balanced the costs and benefits of HCBS.
Effects On Informal Caregiving
Economic theory suggests a range of supply- and demand-side factors may influence the provision of informal caregiving. On the supply side, given the potential substitution of formal and informal care services, changes in the generosity of public payment for home health care services may influence the provision of informal care. Research suggests that older US adults with functional limitations who were exposed to more restrictive payment caps offset reductions in Medicare home health care with increased informal care, although this effect is only observed for lower income individuals. Direct public payment of family caregivers may also influence informal caregiving. The US ‘Cash and Counseling’ program, currently active in 18 states, provides Medicaid enrollees with a monthly cash allowance to purchase personal assistance and related goods and services. The majority of recipients purchase this care from family members. In a randomized three-state demonstration evaluating Cash and Counseling against the traditional agency-directed model of home care, the program was found to reduce some unmet needs and greatly enhance quality of life, but Cash and Counseling increased overall program spending.
Several economic analyses have considered the effect of demand-side factors on the provision of informal care services. Using US data, the availability of immediate family such as a spouse or adult children, being male, being a minority, and owning a home were all associated with a greater likelihood of informal care use. When income is treated as exogenous, studies have found that higher income is associated with a lower probability of informal care use. However, when the Social Security ‘benefit notch’ was used as instrument for income, higher permanent income is not found to have a statistically meaningful effect on the provision of informal care among older adults with lower education.
Integration Of Long-Term Care With Other Health Services
Individuals who require long-term care services typically also require a mix of primary, acute, postacute, and palliative services at different times. The coordination of these different services has become a major issue within the US health care system. Importantly, the coordination of health care services at the delivery level relates directly to the financing and payment of those services.
At the financing level, the presence of multiple payers in health care is known to introduce conflicting incentives for providers, which may have negative implications for cost containment, service delivery, and quality of care. The fundamental issue is that the actions of one payer may affect the costs and outcomes of patients covered by other payers. These ‘external’ costs and benefits can occur both within and across health care settings, and little incentive exists for a payer to incorporate them into payment and coverage decisions. As a result, the behaviors of health care payers – even public payers – often deviate substantially from the social optimum.
This observation is particularly relevant in regards to the coverage of acute and long-term care services in the US The federally run Medicare program provides a set of insurance benefits for virtually all individuals age 65 years and older, regardless of income, and for younger people with disabilities 2 years after they qualify for Social Security’s disability benefit. Medicaid, a state-run program jointly funded by the state and federal governments, provides coverage for its low-income enrollees that supplements Medicare coverage. Many individuals who are dually eligible for both Medicare and Medicaid require both extensive acute and long-term care services. However, given the bifurcated coverage of acute and long-term care under Medicare and Medicaid, neither program has an incentive to internalize the risks and benefits of its actions as they pertain to the other program. Each program has the narrow interest in limiting its share of costs, and neither program has an incentive to take responsibility for care management or quality of care. For example, under the traditional benefit structure for duals, little incentive exists for state Medicaid programs to enact policies to lower Medicare financed hospitalizations because they do not accrue any of the potential savings. Indeed, state Medicaid programs often enact policies such as bed-hold payments that increase hospital and postacute expenditures for the Medicare program. A model that blends Medicare and Medicaid financing introduces a stronger incentive to minimize transitions for dually eligible beneficiaries from Medicaid-financed nursing home care, for example, to higher cost Medicare-financed hospital care.
Payment structure also has implications for the coordination of care. Cost-shifting occurs for reasons beyond the fragmentation of financing across programs. For example, the high rate of 30-day hospital readmissions from Medicare financed skilled nursing facilities is an example of poor coordination within the Medicare program. Traditional fee-for-service payment creates little incentive for providers to manage the volume and intensity of services because providers are rewarded with greater revenue when they deliver more services. Indeed, hospitals are rewarded with higher revenue when beneficiaries are readmitted to the hospital.
Through risk-based capitation, managed care potentially encourages more efficient care delivery. Under this model, a single entity receives a fixed predetermined monthly payment (i.e., capitation rate), which provides the incentive to minimize wasteful care. Ideally, under capitation, hospitals would not be rewarded when individuals are readmitted. Similarly, other risk-based models such as accountable care organizations, bundled payment, global budgeting, and medical homes also provide similar incentives to coordinate care in ways that could reduce inefficient medical and long-term care service use.
With respect to care delivery, the coordination of financing and payment can be thought of as necessary, but not sufficient, conditions for the coordination of services. For example, at the delivery level, care coordination activities might include case management, team-based care models, patient education, management of care transitions, communication protocols for providers, and shared clinical and social information. However, without an alignment in payment and financing in which providers can internalize the costs and benefits of their actions, there is little reason to suspect any sustainable coordination in service delivery at the ground level.
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