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Medicare does not pay for a skilled nursing facility (SNF) unless a fee-for-service patient has stayed in the hospital for at least three days. Discharges after the three-day cutoff consistently result in more transfers to SNFs. Using the three-day rule as an instrument, we find that SNF discharges decrease hospital readmission for patients with comorbidities. However, for knee and hip replacement patients, we find significant increases in readmission. This perverse effect is more severe when local SNFs have lower quality. Back-of-the-envelope calculations suggest that the three-day rule may have generated extra Medicare payments to SNFs by $100-447 million per year.

Medicare Payment to Skilled Nursing Facilities: The Consequences of the Three-Day Rule