Want lots of rehabilitative therapy?

How Medicare Rewards Copious Nursing-Home Therapy
by: Christopher Weaver, Anna Wilde Matthews, and Tom McGinty
Aug 17, 2015
Click here to view the full article on WSJ.com

TOPICS: Economic Incentives, Health Economics

SUMMARY: For U.S. nursing homes, Medicare's rules can provide a financial incentive to increase rehabilitative therapy for patients who may not benefit from extra care.

CLASSROOM APPLICATION: Using marginal benefit and marginal cost, students can evaluate the influence of financial incentives on medical decisions. They can also evaluate how economists could determine whether nursing homes are providing inefficiently high levels of care.

QUESTIONS: 
1. (Introductory) Does the Medicare payment mechanism for physical and occupational therapy provided by nursing homes described in the article account for the benefits of the care?

2. (Advanced) Would it be feasible for Medicare to design a payment mechanism for providing nursing home physical and occupational therapy that accounts for the benefits that individual patients would receive?

3. (Advanced) Use marginal benefit and marginal cost to analyze a nursing home's choice of the amount of physical and occupational therapy for a patient covered by Medicare? With Medicare's current payment system in place, why would a nursing home potentially set a resident's physical and occupational therapy at exactly 720 minutes per week?

Reviewed By: James Dearden, Lehigh University

Labels, Rational actor, moral hazard