Digest

Medicaid Rate Setting for Nursing Homes

Rate Variation

Payers and Home Variation: Findings

The average Medicaid per diem rate in Connecticut is considerably less than the other two major payers - about $100 a day less than Medicare and $65 less than the average private pay rate.

There is considerable difference in the rates Medicaid pays in Connecticut - there is more than $100 a day difference between the lowest and highest paid facility.

Great variation among per diem Medicaid rates was due to profit status - with average rates in non-profit facilities $15.72 higher than for-profit homes.

Unionized homes received $8.15 a day more than non-unionized homes; non-profit, unionized received $24.49 more per day for each Medicaid resident than for-profit, unionized homes.

Rate Increases: Findings

The highest paid facilities in FY 01 received the highest dollar increases to their rates over the period but the lowest percentage increase, indicating those facilities started at higher rates in FY 92.

The 77 facilities with the lowest rates in FY 01 received a 36 percent increase over the 10-year period, about average for all facilities.

The 77 facilities in the lowest-paid group received about $3.00 less per day than the facility average overall and about $6.00 a day less than the two higher paid groups.

Staffing, Costs, and Rates: Findings

On average, slightly more than half a facility's costs are for direct care - salaries and fringe for nurses and nurse aides.

There is a positive relationship between rates and total direct care -- nursing and aides -- staffing levels (hours per patient day).

Average direct care staffing levels grew from 3.2 to 3.6 hours per patient day from 1999 to 2000, a 12.5 percent increase, indicating the 1999 Wage Enhancement Act targeting funding to increasing staff and benefits has had an impact.

Average non-profit direct care staffing levels are higher than for-profits - 3.9 nurse and aide hours per resident day -- compared to 3.51 hours in for-profit facilities.

Fairfield County direct care salaries are higher than the rest of the state. This difference is expected and is built into the rate system with different cost ceilings placed on certain cost components for Fairfield County facilities than the rest of the state.

Connecticut's rates are fifth highest in the nation and second highest in the Northeast; most of the variation can be explained by wage differences between Connecticut and the other Northeastern and Mid-Atlantic states.

Rate Setting: Overall Impact

Findings

Adoption of flat increases for rate reimbursement has eliminated the relationship between facilities allowed costs and the Medicaid rate ultimately issued.

Application of a flat rate increase has also had an adverse effect on fair reimbursement rates.

There is no evidence in the statute that the stop gain provision takes precedence over the statutory requirement that nursing home costs be rebased very two to four years.

Medicaid reimbursement and overall rate increases -- including interim rates and special adjustments - are higher than inflation because of:

• the Wage Enhancement Act of 1999 raised overall rates but its funding was targeted to wage and staffing increases, but did not address other inflationary increases;
• higher percentages based on interim rates and special adjustments drive the overall average increase, but a majority of facilities are not receiving interim rates;
• measuring rate increases alone does not account for other factors that also drive costs like bed conversions to a higher license type; and
• property costs are readjusted for rates each year.

Recommendations

For FY 03-04, nursing home Medicaid rates should be calculated according to the statutory system currently in place with the following modifications:

1. In years that nursing home costs are not rebased, rates should be adjusted using the Skilled Nursing Facility Market Basket index annual (third quarter to third quarter) increase in inflation.

2. C.G.S. 17b-340(7) shall be amended to repeal the use of the Regional Data Resources Incorporated McGraw-Hill Health Care Costs: Consumer Price Index (all urban) as the inflation index used to inflate nursing home costs. For years in which costs are rebased, the SNF Market-basket Index shall be used to inflate costs for the time period currently required in statute, mid-point of the cost year to mid point of the rate year.

3. C.G.S. 17b-340(8) shall be amended to require nursing home costs be rebased every three years, notwithstanding C.G.S. 17b-340(4) that limits nursing home rate increases to specified percent increases or decreases.

4. A case-mix system, shall be adopted and implemented beginning in the FY 04 rate year (see recommendation 6).

5. The commissioner of DSS shall amend its regulations regarding nursing homes Medicaid reimbursement as described in C.G.S. sec. 17b-340.

Case Mix and Medicaid Reimbursement

Findings

There is no correlation between facilities' case mix and their:

• Medicaid per diem rates;
• direct care costs; and
• aide hours per resident day.

A very weak relationship was established between facilities' case mix and their:

• nursing hours per resident day;
• total nursing hours (nurse and aide) per resident day.

Not only is there no correlation between facilities' case mix and direct costs, but there is wide variation in direct costs, even when facilities have similar case-mix indices.

Although both the union and industry oppose adoption of a case-mix system, the extent of disconnect between resident acuity and Medicaid reimbursement poses unfairness and inequity that cannot be ignored.

Recommendation

6. A resident case-mix Medicaid reimbursement system shall be adopted by the Department of Social Services beginning in FY 04 for chronic and convalescent nursing homes and rest homes with nursing supervision. The case-mix system shall be implemented as follows:

First, facilities shall be separated into the peer groupings that currently exist - by license type, and by Fairfield county and the rest of the state.

Second, for years in which nursing home costs are rebased to set Medicaid rates, RUG scores shall be calculated by the Department of Social Services, in conjunction with the Department of Public Health, for each Medicaid resident residing in a nursing home. The RUG score shall be based on any full MDS assessments within the last cost report period period. The case-mix weights established by the Centers for Medicare and Medicaid appropriate for 34-group RUG-III classification shall be applied to the calculated RUG to establish each facility's average Case Mix Index for the cost report period used to rebase costs. If a Medicaid resident has more than one RUG group for the year, because of a significant change in health or functional status, the case mix weights shall be applied to each group and weighted for the Medicaid days the resident was in each group.

For the purposes of determining allowable direct care costs under the Medicaid reimbursement system, three case-mix peer groups shall be established for each level of nursing care. All facilities' case-mix indices shall be arrayed and the case-mix peer groups shall be as follows:

• a low case-mix peer group shall be established and comprised of facilities with Case Mix Indices in the lower third of the total index range;
• a middle case-mix peer group shall be established and comprised of facilities with Case Mix Indices in the middle third of the total index range; and
• a high case-mix peer group shall be established and comprised of those facilities with Case Mix Indices in the top third of the total index range.

Direct care costs shall be arrayed for each case mix peer group and per diem maximum allowable direct care costs for each group shall be equal to:

• 115 percent of median costs for the low case mix peer group;
• 120 percent of median for the mid acuity peer group; and
• 125 percent of median for the high case mix peer group.

Planning and Financial Oversight

Long-Term Care Planning: Findings

Decisions that drive the nursing home system and its financing, such as approving interim rates, allowing beds to be converted from one licensure level to a higher, more expensive level, transferring beds from one facility to another and closing facilities are being made on a case-by-case basis, rather than within the context of broader policy goals.

Currently, except for the State Health Plan developed by the Department of Public Health, there is no single source of data that projects nursing home bed need.

The intent of the program review committee's 1996 recommendation -- to establish a long-term care planning committee to act as a decision-making body with authority to set long-term care direction and policies -- has not been fulfilled.

Recommendation

7. The Office of Policy and Management (OPM), building on the Long-Term Care Planning Committee efforts, and with input from implementing agencies, shall undertake a comprehensive needs assessment of long-term care services. The plan shall assess the three major components of the long-term care system - home and community-based services, assisted living, and nursing home care -- to evaluate need for services, as well as costs of providing them. The plan shall:

• develop a nursing home bed need methodology, based on demand and alternatives available, as well as demographics;
• consider the expected impact of changes in nursing home bed supply;
• develop a comprehensive strategy to match supply and need by area of the state;
• estimate the costs of the three-component system, and how it will be financed.

To develop the plan, the Office of Policy and Management must access the data that measures the level of care (resident acuity) of persons currently living in nursing homes to gauge whether Connecticut's nursing home population is being served in the most appropriate, least-restrictive setting. Therefore, the Office of Policy and Management shall seek authorization from Centers for Medicare and Medicaid Services to access and conduct analysis on the Minimum Data Set (MDS). Data from this source shall be integrated with data resulting from facility inspections conducted by the Department of Public Health and nursing home cost data from the Department of Social Services.

The Office of Policy and Management shall analyze the data to track and evaluate:

• resident acuity by facility;
• relationship between facility and costs;
• acuity and staffing patterns;
• changes in acuity over time; and
• adequacy of the admissions assessment tool.

The requirement that the state Department of Public Health publish a report listing all nursing homes (C.G.S., Sec 19a-538) be repealed.

Financial Stability: Findings

Financial stability in the nursing home industry has worsened; since 1999, 20 percent of facilities have been placed in receivership or bankruptcy.

Current CON-Rate-setting staff is responsible for overseeing more than $2 billion in Medicaid reimbursement and more than 1,100 residential providers; staff is consumed by day-to-day financial crisis in the industry.

Recommendation

8. To improve financial stability oversight:

• add six staff persons to DSS CON/Rate-Setting unit as proposed in the governor's FY 2001-2003 budget;
• change the emphasis of the auditing staff to one of examining for financial stability (see recommendation 10);
• assign new staff to:
  • rate-setting, including maintaining, analyzing, and calculating the - case mix indices by facility to adjust its rate in rebasing years;
  • assist certificate of need functions;
  • overseeing audits; and
  • developing information for the interim rate panel to base decisions.
• require the Director of CON/Rate Setting to craft a plan addressing the issue of financial stability within the industry. The director shall use, as a guide, the long-term care plan including nursing home bed need, as proposed (see recommendation 7).

Interim Rates: Findings

The number of facilities receiving interim rate requests and special adjustments has been increasing gradually over the last 10 years.

With more than 60 facilities (or 25 percent) on interim rates or special adjustments - the interim rate process has become an alternative system for rate setting.

Several significant problems identified with the current interim rate-setting process include:

• a lack of criteria for requesting, or granting these rates;
• the inequities in reimbursement that interim rates create - in FY 00, interim rates were more than $7.50 a day higher than rates set through the regular system; and
• an administratively burdensome and costly system for DSS staff since decisions are made case by case rather than establishing rates for the entire industry.

Recommendation

9. A rate review panel shall be established by July 1, 2002, comprised of five members - one from the Office of Policy and Management; one from the Department of Social Services; one from the Department of Public Health; a health care economist or similar health care expert; and a financial management expert. The panel shall meet quarterly to act upon requests from nursing facilities for interim rates or special adjustments. A request for a facility should be acted on within a six-month period.

The panel shall establish its criteria in writing including standards for request. Criteria shall be based solely on financial hardship, and change of ownership would no longer be a criterion on its own. A facility shall provide supporting documentation of financial hardship, including the results of an independent audit.

The panel shall establish criteria to limit the number of interim rates or special adjustments granted to one facility. Decisions shall be made on established criteria, based on the comprehensive plan for long-term care (see recommendation 7) including need for beds in nursing facilities. The panel in the granting of interim rates or special adjustments may impose conditions on the facility's operation.

Change of Ownership: Findings

All but one of the 53 facilities in receivership or bankruptcy is owned by a chain, and all changed ownership at least once between 1994 and 1999.

Recommendation

10. Require a CON approval for change of ownership for a nursing facility before the purchase is transacted. DSS should apply the same financial criteria it would on an initial facility CON. Further, DSS must inform the potential purchaser of the current rate-setting system, including limits on property reimbursement, and that change in ownership alone will not be a criterion for establishing interim rates.

Audit: Findings

Low percentage of audit recoupments, and the amounts of facility costs not reimbursable through rate-setting lessen the need for purely financial auditing.

Elements that measure quality of care and financial stability need to receive greater emphasis in audits.

Recommendation

11. Audits shall include a verification of nurse and nurse aide hours worked, as submitted by the facility on their cost reports. Secondly, audits shall require a substantiation of any change in case-mix peer grouping tied to rate increases. If necessary, auditors may request a nurse consultation to examine documentation in order to determine whether the change in resident acuity, and case-mix grouping, is justified. Thirdly, audits should be conducted for other than last cost year report, with a focus on early warning signs concerning financial stability.

Return to Year 2001 studies