Nursing Homes Ch 1

Chapter One

Reimbursement Systems

Both federal and state government heavily regulate nursing homes. Facilities are required to be licensed before they are allowed to operate, and in Connecticut, as with most states, homes must first obtain approval that a need exists for the services (i.e., beds) it will provide. This creates a market that is based on factors other than supply and demand, with costs most often paid by a government payer like Medicare or Medicaid, and not the consumer of the service. Thus, rate-setting systems become necessary for the following reasons:

as a payment method for a third party like insurance or government payer-when other than consumers are paying;
as a way of controlling costs-especially with rates set for the future, rather than reimbursement for expenses;
to establish a price or maximum payment for a certain facility or type of facility or a certain category of patient; and
to ensure a minimum level of service is provided.

Rate-Setting Approaches

There are a number of methods used to establish rates for nursing home costs. These are summarized below:

1. RETROSPECTIVE: Facilities are reimbursed based on a facility's reasonable costs (similar to being paid a fee for service) and after-the-fact reporting on costs is used. Under this system, there is no incentive to operate efficiently, and there could be tremendous variation in costs among facilities. Medicare used this system until 1998.

2. PROSPECTIVE PRICE-BASED: Rates are set prospectively based on a set price -- usually a per-diem-for a particular type of facility or more commonly, a particular category of patient. The rate is typically increased annually using some type of inflation index. Medicare sets its rates this way, varied geographically using a wage index, for 44 different categories of patients. Rates are increased annually, using the skilled nursing facility inflation index, established by the federal Centers for Medicare and Medicaid Services (CMS) - formerly the Health Care Financing Administration.

3. PROSPECTIVE COST-BASED: Rates are established in advance but are based on reported costs. New rates can be set each year using actual costs from the prior year, known as annual rebasing (adjusting for inflation because of the lag time between costs and new rates); or rates may be set each year based on a certain cost year and inflated forward annually. Cost-based systems usually establish costs components, and ceilings or caps for some or all of the categories, to arrive at a per diem rate. There are two sub-categories to the prospective cost-based approach:

A. One system accounts for case mix or patient acuity in some way, often by adjusting the direct care cost component by multiplying one or more weighting factors -- depending on the levels of care needed by the patients in that facility. To determine resident acuity, a uniform assessment tool is used, and payment levels are assigned using the results.

B. The other prospective cost-based approach does not consider the acuity of the resident in setting rates. The cost of running facilities is the basis for rates, although such factors as: percent of facility's resident population on Medicaid; peer groupings; and occupancy rates can impact what a facility is paid.

Medicaid Rate-Setting Systems Used By States

All states set rates for Medicaid nursing home services. The vast majority of states employ a prospective approach to setting rates, which as outlined above, is a more successful way of containing costs. In addition, a slight majority of states use some type of case-mix or acuity-adjusted system to set rates, as Table I-1 indicates. Four of the six New England states use a case-mix approach to rate setting; as the table indicates, Connecticut does not use a case-mix approach to establish rates.


Table I-1. Types of Reimbursement Systems Used in Which States.
*Type of System*	*Number of States*	*States That Use*
Prospective - Cost-based (no case-mix)	22	AL, AK, CA, CO, CT, DE, GA, HI, ID, IA, LA, MI, MO, NM, NC, OK, OR, RI, TN, UT, WA, WY
Retrospective	1	NE (with a case -mix adjustment)
Prospective - Case-Mix or Acuity Adjusted	27	AR, AZ, FL, IL, IN, KS, KY, ME, MA, MD, MN, MS, MT, NV, NH, NJ, NY, ND, OH, PA, SC, SD, TX, VT, VA, WV, WI
Source: 1998 State Data Book On Long-Term Care Program and Market Characteristics, US Health Care Financing Administration, January 2000

Connecticut's Rate-Setting System -- A Chronological Summary

Connecticut began setting rates for nursing homes in the 1950s. Over the decades, changes have occurred in the administering agency responsible for setting the rates as well in the rate-setting process itself. Table I-2 provides a summary of rate-setting history in Connecticut.


*Table I-2. Summary Overview of Nursing Home Rate Setting in Connecticut.*
1950s and early 1960s Licensure and rate setting begun for nursing homes in Connecticut; Rates set by Hospital Cost Commission - rates set each July 1^st, based on costs for cost year ending previous September 30.	1970s and 1980s Federal legislation requiring state Medicaid plans set nursing home rates reasonable for efficiently and economically run facilities. In CT, state social services agency given nursing home rate-setting authority; Growth in industry continues; Great impact on state and federal Medicaid budgets.
1965 - Medicare//Medicaid begun - nursing facilities reimbursed on a retrospective, reasonable cost basis. Late 1960s - Federal monies promote growth in nursing home industry. CT's number of nursing homes grows from 35 in 1965 to 121 by 1975.	1990s - Cost containment measures are priority in state budget, Connecticut introduces (P.A. 91-8) key cost control features for Medicaid (see table I-3); Medicare imposes price-based rates tied to acuity of patients; federal Balanced Budget Act of 1997 eliminates requirements that states set rates that are "reasonable and adequate for efficiently and economically operated facilities"; CT Legislature passes Wage Enhancement Act (1999) which targets $75 million to increased staffing, wages and benefits, curtails other rate increases.

Milestone legislation occurred in the early 1990s that shaped Connecticut's current rate-setting system. In 1991, the state was experiencing a financial crisis, facing large budget deficits. The state initiated an income tax, but other budget-cutting solutions were also employed. Because Medicaid was a large part of the state's budget, the entire program's funding was reduced. Medicaid nursing home costs, which had been growing at about 15 percent a year, were especially targeted for cuts. Public Act 91-8 initiated a number of cost containment features - outlined in Table I-3 -- to the nursing home rate-setting system in order to implement the cost reductions.

Table I-3. Key Changes To Connecticut's Rate-Setting System Resulting from P.A. 91-8

Pre P.A. 91-8:

Rates set prospectively beginning July 1^st each year;
Annual rebasing of costs --- costs are evaluated and adjusted annually;
Occupancy level for rate-setting at 90%; and
Inflation index was Gross National Product Price Deflator.

P.A. 91-8
Limited rebasing costs to every two to four years to establish rates, beginning with 1994 rates;
Adopted the Consumer Price Index (CPI) in health care costs for Northeast, developed by Data Resources Incorporated, as inflation index to adjust costs from last year of rebased costs to current rate year;
Developed five cost components and developed ceilings on allowable costs;
Established two peer groupings - Fairfield County and rest of the state for two types of licensure: 1) chronic and convalescent nursing homes (CCNH); and 2) rest homes with nursing supervision - to set ceilings for direct care cost ceilings;
Set the occupancy level for rate-setting at 95%;
Imposed a moratorium on new nursing home beds, except under certain circumstances;
Imposed a stop gain/stop loss provision margin against a facility's prior year rate; and
Abolished rate setting for private-pay patients and established rules for admitting residents from waiting lists.

Return to Table of Contents