Updating the Classification System for the Medicare Inpatient Rehabilitation Prospective Payment System

In the Balanced Budget Act of 1997, Congress mandated that the Health Care Financing Administration (HCFA) implement a Prospective Payment System (PPS) for inpatient rehabilitation. RAND contracted with HCFA to carry out the research, and recruited a Technical Expert Panel (TEP) to advise on issues related to the design and development of such a PPS. The TEP convened in May 2000 to review our Interim Report. A key topic discussed there was the construction of Function Related Groups (FRGs), which will be the basis of the payment classification system. This report follows up the TEP suggestions, both formal and informal, for further research into FRGs. In the interim report, we used CART to obtain candidate FRGs. The TEP asked for a broader context within which to view the results. Specifically, the TEP wanted us to (1) Explore alternative model forms. Develop models to compete with CART in terms of having strong predictive performance. (2) Consider indices of function in addition to the cognitive and motor scores. Payment formulas based on these measures might offer better estimates of cost. (3) Evaluate out-of-sample performance of the models. An important element of a payment system is whether payment formulas developed from data in one year apply in future years. In this report, we describe the steps we have taken to update FRGs on newer data while incorporating the above suggestions.