Chapter Two

Industry Profile

Currently, there are approximately 260 licensed nursing facilities and 31,545 beds in Connecticut. The majority of homes are operated by for-profit organizations (76 percent), and about 25 percent are unionized. Geographically, nursing homes are located throughout the state - with facilities located in 105 of 169 towns in Connecticut. Most homes in Connecticut were built before 1980. Nursing homes vary tremendously in size, from 30 beds to well over 300, with approximately 120 beds being the average size.

There are two levels of licensed nursing home beds:

• rest home with nursing supervision (RHNS), the lower license level, which covers 1,970 or only 6 percent of the state's licensed beds;
• chronic and convalescent nursing homes (CCNH) the higher type, which covers the vast majority (29,575) of beds.

Financing

Nursing homes are supported by the following three major sources of revenue:

• Medicaid - the combined federal and state health care program that supports long-term care for poor elderly in nursing homes. Connecticut is reimbursed 50 percent by the federal government for its Medicaid expenditures.
• Medicare - the totally federal-funded health care program for elderly and disabled. Under some circumstances Medicare pays for nursing home care for relatively short-term, rehabilitative and sub-acute services.
• Private-pay - residents themselves, or their private insurance, pay for nursing home care.

In Connecticut, as in most states, the bulk of nursing home revenues come from Medicaid. Annually, each nursing facility must file its Medicaid cost report with the Department of Social Services. The reports, which cover the period from October 1 to September 30, provide information on revenues and expenses for the cost year.

For the cost year ending September 30, 2000, about 63 percent of nursing home revenue came from that program, as illustrated in Figure II-1. Almost 20 percent was generated from private pay patients and about 18 percent came from Medicare.

However, as Figure II-1 shows, Medicaid also pays for the largest portion of residents. Almost 70 percent of nursing home patients are on Medicaid while less than 20 percent are private pay residents, and about 10 percent are Medicare.

Facility revenues from all sources and facility expenses for cost years 1995 through 2000 are shown in Figure II-2. According to those reports, except for cost year 1995, expenses have exceeded revenues in each year shown. In cost year 2000, the reported gap between expenses and revenues was about $50 million.

Expenditures

Figure II-3 shows the growth in Medicaid expenditures annually and the number of Medicaid recipients in nursing homes since FY 89. In FY 89, Medicaid paid $452.7 million for slightly fewer than 16,000 clients; by FY 01, Medicaid spent $1.031 billion for 20,315 residents. Medicaid expenditures have more than doubled over the period, but the number of residents has increased by 27.8 percent, and has actually leveled off since FY 98.

Thus, Medicaid cost increases are due more to greater expenses than to increasing volume. Likely factors contributing to greater expenses are: more frail and sicker residents; conversion of facility beds from the lower license type - rest home with nursing supervision (RHNS) -- to the higher, more costly, license type - chronic and convalescent nursing home (CCNH); and increased labor and benefit costs.

Another large Medicaid expenditure for nursing home care, which is not covered under the per diem rate, is the cost of prescription drugs for Medicaid residents. In calendar year 2000, those totaled $60 million.

Rates and Rate Variation

Daily Rates

Medicaid is the largest source of revenue for nursing homes in Connecticut, but as discussed above, it also pays for the largest segment of the nursing home population.

On a daily basis, however, Medicaid pays less than the other two payer sources. Figure II-4 illustrates the latest per diem rates. Medicaid paid $158.51 a day in FY 01, while Medicare's per diem was about $100 more -- at $256. The average private pay rate was $223; $65 more than Medicaid.

Growth in Per Diem Rates in Connecticut

Table II-1 presents the growth in Medicaid rates for nursing homes compared to the other two payers - private residents and Medicare. The growth in the average daily Medicaid rate (including interim and special rate adjustments) was about 22 percent from FY 96 to FY 01, similar to the percentage growth in private pay. However, in actual dollar amounts, the $29 per-day increase in Medicaid was well behind the private-pay increase of more than $40.

Growth in Medicare daily payments for board and care (not including therapies) outpaced the other two rates, rising more than $70 (or 39 percent) between FY 96 and FY 00. Medicare changed its reimbursement system in FFY 98 to prospective payment rather than fee for service; since then, yearly increases have slowed considerably.

Variation in Medicaid Rates

In addition to variation in rates by payer source, the committee also found considerable disparity among Medicaid rates paid to facilities - there is more than a $100 per day difference in the lowest paid and the highest paid Medicaid rate. One explanation for the disparity is that Connecticut has always had a cost-based, facility-specific rate-setting system, rather than one based on price. Thus, costs differences, for many reasons, were recognized and built into the rates.

Table II-2 compares average Medicaid rates using several variables for comparison - county, union, and profit status. These are weighted Medicaid averages using cost-year 2000 Medicaid patient days. All data are based on cost-year reports for 2000, and are for the chronic and convalescent nursing homes (CCNH), which account for 95 percent of licensed nursing home beds.

Committee analysis of Medicaid per diem rates finds:

• 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;
• Fairfield County facilities were, on average, $15.52 higher than facilities in the rest of the state;
• 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;
• for facilities with lower occupancy (below 80 percent), the average rate was higher ($171) than facilities with high occupancy (95 percent or higher) at $159.21; and
• in general, the newer the facility the higher the rate - those built after 1990 had an average rate of $176.68, while those in operation before 1970 had an average rate of $151.89, almost $25 a day higher. Newer facilities that began operating after 1992 would likely have had interim rates, typically higher than those for existing facilities whose rates were established based on cost year 1992.

Rate increase variation. Part of the criticism of the rate-setting methodology adopted under P.A. 91-8 was that facilities with high costs at that time received high rates. The charge is also made that the system continues to short-change the lower-paid facilities and reward historically high-cost facilities with higher rate increases.

To examine this, the committee staff grouped facilities into three categories by current per diem rate levels - 1) those with FY 01 rates of $175 or higher; 2) those homes with rates between $150 and $175; and 3) homes with rates less than $150. Table II-3 compares the average increases - both in dollar amounts and percentages - for each category for the 10-year period. (There were 62 facilities with FY 01 rates that had no rate for FY 92; the vast majority because they became operational after FY 92).

Results of the rate increase analysis shows:

• 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; but
• 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.

Costs. To establish rates, facilities' costs are categorized into five major components:

direct care - salaries for nurses, nurse aides, and nursing pools, and related fringe benefits;

indirect care - professional fees, dietary and housekeeping staff and fringe benefits and supplies related to patient care;

administrative and general - maintenance and plant operations, including utilities, and administrative and maintenance personnel salaries and fringe;

capital - includes property taxes, insurance, equipment leases, etc.; and

property - fair rent calculated each year based on amortizing base value over remaining useful life and applying a rate of return.

Table II-4 provides a breakdown of the five cost components used in rate setting and shows the percentage of costs allocated to each of the five categories to all facilities and compares the allocation percentages by profit status and by unionized and non-unionized homes. (These are unweighted averages.)

One of the major questions concerning rates is the relationship between rates and staffing levels. As the table shows, overall, more than 50 percent of all facilities' costs in Connecticut pay for direct care staffing -- nurses and aides -- salaries and benefits. When indirect care (i.e., housekeeping and dietary) staff salaries and benefits are added, those two components account for more than 75 percent of facilities' costs.

Staffing. The committee examined staffing and rates and found the following:

• There is a positive relationship³ (.51) 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.
• Total direct care staffing is higher in non-unionized homes than unionized facilities - the average is 3.66 hours in non-unionized and 3.46 in unionized homes.

Salaries. Nursing home care is labor intensive, with direct and indirect care staffing accounting for 75 percent of facility costs in Connecticut. Thus, differences in salaries account for substantial variation in facility rates. The committee found the following concerning salaries:

• Table II-5 shows 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.
• The difference is greatest- $1.65 per hour-in the average salary for registered nurses.

• The difference in salaries is greater between union and non-unionized homes (Table II-6) than it is in the regional comparison (Table II-5).
• The differences in wages between unionized and non-unionized homes was greatest in the licensed practical nurse category - unionized homes paid an average of $2.49 more per hour than non-unionized facilities.

Connecticut and Northeast states. While considerable variation exists in Medicaid rates in Connecticut, the committee found that the average Medicaid rate in Connecticut is high compared to other states. Connecticut's Medicaid rates are the fifth highest in the nation and the second highest in the Northeast (as illustrated in Figure II-5). The committee concluded most of the variation can be explained by wage differences between Connecticut and the other Northeastern and Mid-Atlantic States.

Two recent studies⁴ indicate that wages paid to staff in the direct care area (i.e., nurses and aides) are higher in Connecticut than any other state in the Northeast. For example, nurse aide salaries are at least $1.00 an hour higher in Connecticut than Massachusetts (the next highest wage state) and New Jersey, and $2.00 to $3.00 per hour higher than New York, Maine and Vermont. Registered nurses annual salaries are at least $5,000 more per year than in Massachusetts, and licensed practical nurses earn more than $2.00 an hour more in Connecticut than Massachusetts.

Based on these wage differences, direct care salaries alone (not benefits) make Connecticut facilities $57 million a year more expensive than Massachusetts' homes. This does not compare the added costs of wages paid for indirect care, like housekeeping and dietary workers (which the AAHSA survey indicates are also higher in Connecticut).

The committee believes one reason New York rates are higher than Connecticut's (since their average wages are not) is because the daily rate in New York includes prescription costs, while Connecticut's rate does not. If Connecticut's $60 million in nursing home prescription costs were added to the rate, it would raise the per diem amount $8.21, almost closing the gap between Connecticut's and New York's rate.

³ The committee staff correlated rates and direct care staffing among facilities. Possible Correlation can range from -1.0 showing a strong negative correlation to +1.0 showing a strong positive correlation. A strong correlation, either negative or positive means there is a close relationship between the two measures analyzed, but the cause of the relationship is not identified. In this case, a .51 indicates a relatively strong positive relationship between rates and direct care staffing.

⁴ 1999 salary comparison from GAO report (May 2001) on nursing shortages; and survey of American Association of Homes and Services for the Aging (2001-2002).

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