Inpatient Rehabilitation Facilities: Key Market Developments

Vertical: Inpatient Rehabilitation Facilities (IRFs)
Date: March 2020

A Rebounding Market Transitions to For-Profit Providers

According to the March 2020 Medicare Payment Advisory Commission (MedPAC) report, there were roughly 1,170 inpatient rehabilitation facilities (IRFs) in the US in 2018, up from 1,161 in 2013. While the total number of IRFs has remained fairly constant over this interval, the composition of IRFs has changed drastically. From 2013 to 2018, the number of freestanding IRFs rose from 243 to 290 (19.3% increase), while the number of for-profit IRFs rose from 322 to 400 (24.2% increase). The number of hospital-based and non-profit IRFs has experienced a concurrent decrease.

The number of Medicare fee-for-service IRF cases grew from 356,312 in 2008 to 408,038 in 2018, representing a 14.5% increase. Freestanding IRFs enjoy a higher occupancy rate (69%) than the overall average (66%).

MedPAC Links IRF Quality and Efficiency with Scale

As the IRF market shifts toward a for-profit model, scale is proving quite beneficial. In its report, MedPAC found that the most efficient IRFs (which rated higher on quality metrics and had lower average costs) were larger, linking their efficiencies to greater economies of scale. The report also revealed that freestanding and for-profit facilities tend to have above-average representation among these “relatively efficient” IRFs.

Medicare IRF Margins Are High

Figures from the MedPAC report indicate that, in the past decade, IRF payments per discharge have grown quicker than IRF costs per discharge. MedPAC noted that IRFs’ marginal profit – which measures the extent to which IRFs with excess capacity have an incentive to treat more Medicare beneficiaries – was over twice as high for freestanding IRFs when compared with hospital-based IRFs (41% v 20%). MedPAC calls this “a strong incentive to admit Medicare patients”, as a provider with excess capacity will receive marginal Medicare payments that are larger than the marginal costs of treating an additional beneficiary.

Freestanding and for-profit IRFs total margins were identified as 10.7% and 13.2%, respectively. Aggregate Medicare margins have grown each year since 2009. Facility size has a significant impact: IRFs with fewer than 10 beds have a negative 5.5% total margin, compared to a positive 21.1% margin for those with 65+ beds. Smaller facilities also have a 48% higher median standardized cost than those with 65+ beds and a lower average occupancy rate (54% and 74%, respectively).

IRF Market: Key Data Point

Between 2008 and 2017, the number of IRF discharges with “other neurological conditions” (e.g. multiple sclerosis, Parkinson’s disease) more than doubled, growing by 103%.

Source: MedPAC, Report to Congress, March 2020

IRF Market: Key Chart

Mix of Medicare Fee for Service IRF Cases by Provider Type, in 2018

GHA-IRF-FFS-Case-MIx

GHA’s IRF Market Brief includes the following sections:

  • IRF Market-At-A-Glance
  • IRF Market Developments
  • Regulatory Trends of Note
  • The Mergers & Acquisitions Landscape

To inquire about a copy, please contact research@ghadvisors.net.