Chapter Five

Planning and Financial Oversight

Connecticut spends more than $1.2 billion on long-term care services, with over $1 billion for funding nursing home facilities. Yet, the committee finds no guiding document exists to make informed policy decisions on a number of long-term care issues, including nursing home bed adequacy, or reductions and transfers of nursing home beds. The absence of a plan, coupled with budget pressures in the state, have contributed to a nursing home industry that is expensive yet financially unstable.

Long-Term Care Planning and Bed Need

During the 2001 legislative session, the General Assembly extended the moratorium on new nursing home beds until 2007. The purpose of the moratorium, established in 1991, was to lower overall costs of long-term care and to encourage creation of less costly alternatives. The committee believes the moratorium extension is appropriate given that: nursing home reimbursement comprises about half the state's entire Medicaid budget; reimbursement rates in Connecticut are among the highest in the nation; current occupancy rates are slightly less than 95 percent; and Connecticut has a higher nursing home bed supply than most other states and the national average (see Table V-1).

However, since the 1991 passage of the state's moratorium on nursing home beds, the state has stymied the moratorium's impact in several ways. First, 1,500 additional nursing home beds were added to the system after the moratorium went into effect because the certificates of need (CON) were approved prior to the moratorium. Second, Connecticut has been slower than other states to eliminate beds from the system because of the state's bed transfer law. That law, passed in 1995, allows a facility that is closing or reducing beds to sell a number of those beds to other facilities. The transfer transactions, which must be approved by DSS, have resulted in a transfer of 814 beds, and a reduction of 312. There are another 1,042 beds available for transfer or closure, and DSS indicated 220 of those beds would be reduced; the other 812 will be available for transfer. Maine and Connecticut are the only states in the Northeast that offset moratorium laws by allowing the sale and purchase of beds when one facility closes or reduces beds, although, according to agency staff in Maine, only about 200 to 300 beds have been transferred in that state.

Third, Connecticut has been later than other states in developing alternatives to nursing home care. An analysis by the program review committee shows states with a low ratio of beds per elderly have funded community-based alternatives to a much greater level than Connecticut, as shown in Table V-2. For example, 33 percent of long-term care expenditures in Maine are for community-based care, while only 5 percent of Connecticut's expenditures were for community-based services. Maine's greater expenditures may be one reason why there are only 56.1 nursing home beds for its elderly population while Connecticut had 68.8. The states with lower bed ratios have more developed bed-need methodologies to determine adequate supply as part of broader long-term care planning efforts, and to promote the provision of care in the least-restrictive, often less-costly, setting.

The committee also compared nursing home bed supply by Connecticut counties, and the results are shown in Table V-3. The table shows there is wide variability in the number of beds per 1,000 elderly, with Hartford County having the greatest supply at 74.2 beds per 1,000 elderly and Tolland County having only 44.5 beds. A possible reason for the variation may be that other long-term care alternatives are available in counties with lower bed supplies, but no analysis at the state level is being done to determine why such variation exists.

Further, generally the fewer nursing home beds by population in a state, the higher the dependence level of residents with their daily living activities. Table V-1, presented earlier in the chapter, shows the Activities of Daily Living (ADL) rating for each of the states compared. The rating measures the level of assistance needed with the five ADLs -- eating, toileting, transferring (i.e., mobility), dressing and bathing. These are measured by the state surveys (i.e., inspections) conducted of all 15,000 nursing facilities nationwide; the higher the ADL rating the more assistance the resident population needs.

Connecticut's rating of 3.55 was the second lowest of the states compared, and considerably lower than the national average of 3.75. Only Rhode Island's rating of 3.49 was lower than Connecticut's, and it has a higher number of nursing home beds. These ratings suggest that with alternatives to nursing home care, it is possible that some of Connecticut's current nursing home population could be served in less restrictive settings. In fact, Medicaid policy in Virginia requires that all community-based care alternatives have been exhausted before a Medicaid recipient can be admitted to a nursing home.

The committee finds 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. In order to allocate resources, there needs to be better information on the needs of the entire long-term care system, the demands of consumers, and resulting funding implications.

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. Program review the committee believes the State Health Plan is an inappropriate place for these projections for the following reasons.

• The focus of the plan is on public health and need projections are merely looking at current bed use and developing bed need projections based on increases in the elderly population, not on consideration of health improvements among the elderly, nor on fast-expanding long-term care choices.
• The plan does not analyze long-term care services in the context of the continuum of care available, including the availability of home-care and assisted living, as well as consider both cost and quality-of-life factors among those settings.
• Neither the Department of Public Health nor the Department of Social Services has the resources or the authority to set statewide policy for bed need, nor prioritize funding for other alternatives.
• A broad long-term care plan recognizing the least-restrictive setting for elderly and people with disabilities will need to be developed for the state to comply with the U.S. Supreme Court's Olmstead decision.

In its 1996 report, Services for the Elderly to Support Daily Living, the program review committee found

• fragmented governmental structure responsible for planning, funding, and overseeing home and community-based care, supportive housing arrangements, and care provided in nursing homes. Long-term care options have often been developed with separate and distinct policies established [for each alternative] with no agency overseeing the entire long-term care system and integrating the various components. The allocation of resources for one component in turn impacts the availability and funding of each of the other components.

The committee recommended a long-term care planning committee be established to develop a plan to be used in policy formulation. A committee was created and has provided a forum for public input into the range of long-term care issues but it lacks staff resources to conduct program analysis and the authority to develop long-term care policies. As a consequence, the committee finds the intent of the program review committee's previous recommendation -- to establish a decision-making body with authority to set long-term care direction and policies -- has not been fulfilled. Therefore, the program review committee recommends:

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; and
• 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.

The logical place for such long-term care planning is the Office of Policy and Management. With OPM as the lead, the plan should have the commitment of the Governor's Office behind it, and the authority to link the plan and its implementation to the budget development process, and signal to implementing agencies (DSS and DPH) the direction in which the state wants to move. The governor's 2001-2003 budget already has made policy decisions and funding alternatives, including assisted living projects, that will impact nursing facilities and beds. A planning document that identifies the variety, availability, and costs of various long-term care options needs, and establishes the policy direction the state will take over the next several years will provide a more reasoned foundation for financing and overseeing services for the state's most frail populations. With this comprehensive plan in place, the committee believes there will no longer be a need for DPH to develop a nursing homes registry. That listing is limited, not often current, and offers no guide to planners or regulators in overseeing the system.

Financial Oversight

Financial stability of the nursing home industry has been a concern in Connecticut for some time. In 1998, the General Assembly passed P.A. 98-239, which dealt with a broad range of issues concerning DSS expenditures. One provision in the act was creation of the Nursing Home Financial Advisory Committee to examine nursing homes' financial solvency on a continuing basis, and to support DSS's and DPH's mission to provide oversight to the nursing home industry in a way that promotes financial solvency and quality of care.

The advisory committee convened and proposed legislation for the 2000 session, but it did not pass. Subsequently, because committee membership could not agree on how to proceed, and lacked staff to develop information for the full committee, the advisory group has not met in over 18 months.

As indicated in the Introduction, the precarious financial situation of nursing homes is not unique to Connecticut. Changes in Medicare reimbursement, a decreasing private-pay population, unrealistic financial prospects established for the industry in the early and mid-1990s, expanding alternatives to nursing home care, concomitant labor shortages and high wage increases, and low Medicaid reimbursement have all contributed to nursing homes' financial problems.

Since the passage of P.A. 98-239 the financial stability in the nursing home industry in Connecticut has worsened. Table V-4 shows the number of facilities that have been placed in receivership or become bankrupt since 1999, and the number of beds impacted. Currently, 37 of these facilities are in bankruptcy court proceedings, 12 have been sold or transferred, and four have closed.

The 53 nursing homes account for 20 percent of nursing homes in Connecticut. Yet decisions on bed transfers, closures, and hardship rate approvals all continue to be made without a plan or strategy on industry financial stability. While the state is the largest payer source for nursing home residents, because of the frailty of that population, it cannot allow inefficient facilities to close without a well laid out plan. The committee believes the DSS CON/Rate Setting Unit currently has insufficient staff to adequately oversee the nursing home industry or to develop a financial stability plan.

The governor's proposed budget for FY 01-03 called for six additional people in the Department of Social Services, at a cost of $695,000, to review the financial condition of certain facilities and to ensure the nursing home industry will remain fiscally stable. The proposal was not included in the budget adopted by the General Assembly.

Financial stability, with a well-crafted plan to return the industry to financial viability, must be a priority. The committee believes the additional staff is necessary in the DSS CON/Rate-Setting Unit. The current staff of the unit -- the director, an assistant and five professional staff - oversee not only nursing homes, but more than 1,100 residential providers, with Medicaid expenditures of more than $2 billion in FY 01. While a subcontractor supplements the DSS staff's functions, assisting with rate setting and auditing, the committee believes the current staff are consumed by day-to-day financial crises in the industry.

To address this, the committee recommends:

• adding six staff persons to DSS CON/Rate-Setting unit as proposed in the governor's FY 2001-2003 budget;
• changing the emphasis of the auditing staff to one of examining for financial stability (as recommended in the Auditing section of this chapter);
• assigning 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; and
• requiring 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 in the recommendation discussed earlier in this chapter.

The plan, as earlier recommended, must include a number of nursing home beds needed by area of the state, and form the basis for crafting a strategy dealing with the industry's financial weakness, including whether bed closures are warranted, and if the bed transfer law is necessary.

Interim Rates

In addition to setting rates for all facilities, the statutes (C.G.S., Sec. 17b-340(a)(2) and Sec. 17b-340f(8)) allow the commissioner broad authority to adjust an individual facility's rates if:

• the facility incurs extraordinary or anticipated costs necessary to avoid a negative impact on public health and safety of its residents;
• licensed beds increase or decrease by 10 or more;
• there is a conversion from one type of licensed bed to another; or
• there is new ownership.

Beyond the statutes, DSS regulations are somewhat more specific, allowing the granting of 1) interim rates for a two-year duration for newly established or newly acquired homes or 2) based on hardship (regulations specify death or disability of owner or inability to pay employee pension plan).

The committee finds neither the statutory nor regulatory criteria give clear guidance on: reasons a facility may apply for rate adjustments; how frequently adjustments may be requested; or the time frame or the basis for rendering such decisions. The committee also considers the regulatory provision allowing change of ownership as a criterion for establishing interim rates - permitting rate increases solely because a new owner purchases a facility -- to conflict with approaches to both cost containment and industry stability.

The committee considers change of ownership cases to be very different from new facilities where there is no cost experience. With ownership changes, cost reports filed by the previous owner to establish Medicaid rates are in existence. If a facility's rate were inadequate to operate under one proprietor, an increase cannot be justified solely because the facility changes owners. A system that provides the incentive of higher interim rates for new owners promotes instability in the industry, with more selling, purchasing, and frequent interim rates.

Conversely, the financial hardship standards on death or disability of a facility's owner or inability to pay employees' pension funds appear to the committee to be much too restrictive, and, in practice, not recognized in actual hardships cases.

Process. The manner for approving interim rates is a negotiated process. According to DSS staff, until January 2001, facilities always received some increase, although less than requested. However, in January 2001, the governor's proposed budget summary indicated no monies would be available for interim rate increases associated with low census and other financial hardship issues. Although interim rate increases had been funded through Medicaid deficit spending, the budget statement indicates that funding will be terminated or at least slowed. At the same time, (early 2001) the process for approving requests was expanded to include the Deputy Commissioner and the Secretary of Office and Policy and Management. Because of the indicated changes in funding and the interim rate decision-making process, the number of facilities with decisions pending has increased, but it is unclear to date whether more denials will ultimately result, and what the overall financial impact will be.

Activity. The committee found that 45 percent of facilities either received or requested an interim rate or special adjustment during the four-year period from FY 98 to FY 01. During that time period, an average of 50 facilities (20 percent) a year was on an interim rate or special adjustment. During interviews, staff were told the frequency of interim rate requests and approvals increased considerably. To verify, the committee examined the trend of interim rates and special adjustments for an 11-year period, (FY 91-- FY 01) and the results are shown in Table V-5. This shows the number of facilities receiving adjustment each year (not the number of unique facilities) receiving interim rates and adjustments.

As Table V-5 shows, the number of facilities receiving interim rate requests and special adjustments has been increasing gradually over the last 11 years. Further, in each of the last two fiscal years - 00 and 01 -- more than 60 facilities were receiving a special adjustment or an interim rate.

Analysis conducted on interim rates also shows they add costs to the system. As Table V-6 shows, the difference between the average rate set through the regular system and the average interim rate was $7.56 in FY 00 and about $3.00 in FY 01. One plausible reason for the reduced difference in FY 01 is that there were a high number of facilities with interim requests pending for which rate data were not entered in the system. Thus, if a higher interim rate was granted it was not part of the average interim rate calculation for FY 01 and likely reduced the gap between the two rate categories.

The program review committee finds that - 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. There are several significant problems with this process including:

• a lack of criteria for requesting or granting these rates;
• interim rates are higher than rates set through the regular system, therefore creating and perpetuating reimbursement inequities in the system; and
• it is an administratively burdensome and costly system for DSS staff since decisions are made case by case rather than establishing rates for the entire industry.

The committee concludes that, since the interim and special rate process has become so important in establishing operating rates for facilities, adding millions of dollars to the state's Medicaid expenditures, the process needs to be formalized. Clear standards on requests need to be developed, including a decision-making process that is timely, and approvals or denials should be made by a panel of experts both from state agencies and outside state government.

Therefore, the committee recommends a rate review panel 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 on pages 44-45) 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.

The program review committee believes this recommendation will clarify the process for interim rates and special adjustments; update the criteria to establish reasonable grounds for accepting requests and granting such adjustments; and put facilities on notice that interim rates and special adjustment will be strictly examined. Further, adoption of the long-term care plan with appropriate bed-need numbers will give the panel a foundation for ensuring Medicaid dollars are not funding inefficient facilities. In addition, resident acuity information collected under the case-mix recommendation will allow the panel to evaluate a facility's adjustment request in light of the costs of providing care to its residents' needs.

Change of Ownership

As discussed above, the program review committee believes change of nursing facility ownership should not be an automatic criterion for interim rate adjustment. Given that all facilities currently in bankruptcy or receivership changed ownership at least once between 1994 and 1999, the committee also believes change of facility ownership should be submitted for CON approval to the Department of Social Services.

Bankruptcies in Connecticut have become a major problem with more than 20 percent of facilities bankrupt or in receivership since 1999. All but one of the 53 facilities was owned by a chain. These chains bought the facilities in the 1990s, when financial prospects for nursing homes seemed more promising, with high Medicare revenues based on fee for service. However, Medicare changed its reimbursement to a price-based system, severely impacting much of the revenues to nursing homes.

A more rigorous CON review prior to change of ownership may have avoided some of these bankruptcies. For this, and for the following several reasons, the committee believes CON approval for change of ownership should be employed.

1) Nursing facilities do not operate in an open market, where only the interests of the buyers and the sellers are of concern. Most of the revenue to nursing facilities comes from government payers - 80 percent of nursing facilities revenues comes from Medicare or Medicaid. Government oversight is needed to ensure patients' interests are addressed and that rates and the rate system are clearly understood by the purchasing party before the transaction occurs.

2) CON is needed for other transactions: upgrades or equipment purchases of more than $2 million; conversion of beds, bed transfers, and even facility closure. It stands to reason a facility purchase of more than $2 million should go through the same process.

3) Of the states in the Northeast, all except New York and Connecticut require change of ownership to undergo the CON process. While New York does not require CON approval, it prohibits publicly owned chains from operating nursing facilities.

4) Given Connecticut's moratorium on new nursing homes and nursing home beds, without the original facility's CON, the new facility would not be granted an initial CON. In effect the new purchaser is buying the license to operate, thus, it makes sense to require purchase of facilities to go through CON.

5) A CON review would bring more financial stability to the nursing home industry by adding an extra review to ensure the new operators could meet the financial requirements to operate the facility under current rates. This, coupled with the recommendation to eliminate change of ownership as an automatic interim rate criterion, should add stability to the financing of the industry.

Therefore, the committee recommends that change of ownership of nursing facilities require a CON approval before the facility 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 a change in ownership will not be a criterion for establishing interim rates.

Audits

Requirement. There is no state statutory requirement for auditing the financial records of nursing facilities. However, federal Centers for Medicare and Medicaid Services regulations (42 CFR 447.253) require the state Medicaid agency to provide for the filing of uniform cost reports from each participating provider and periodic audits of the financial and statistical records of participating providers. Each state indicates generally in its Medicaid state plan how it intends to audit providers.

Connecticut state regulations (Sec. 17-311-53) that per diem rates will be based on desk review of the submitted annual cost reports, "which shall be subsequently verified and authenticated by field audit procedures approved by the U.S. Department of Health and Human Services" (approval of the state plan). Regulations further specify that facilities shall generally be audited on a biennial basis although the audit cycle may be changed based upon the audit experience.

If a recomputation of the rate is necessary based on field audit adjustments, this is made retroactive to the applicable period, and replaces the originally determined Medicaid rate for that facility only. When an audit determines funds are owed to DSS, the department usually collects the amount by reducing future Medicaid payments to the facility. A copy of each audit report is sent to the Medicaid fraud unit within the department.

Activity. Audit responsibility is split between DSS, Office of Quality Assurance, and a consulting firm under contract with DSS for rate setting and auditing. Both entities audit other residential and health care providers as well as nursing homes. Auditing activity of nursing facilities performed by each entity appears in Table V-7. As indicated, 85 facilities were audited over the past two years and about $24 million was recouped.

As discussed in Chapter Three, the DSS regulations governing Medicaid rate setting for nursing homes were promulgated in 1983 and are outdated. The requirements for auditing outlined in those regulations apply to an old rate-setting system and do not reflect any of the major changes made to the system in 1991 (P.A. 91-8). Beginning with Cost Year 1992, annual rebasing was replaced with readjusting rates using actual costs only every two to four years. The last year for rebasing actual costs in order to set current rates was 1996; thus, 1996 is generally the last fully audited cost year. For more recent cost years, more limited audits of property costs are also being conducted, since property expenses are annually considered to adjust rates. In addition, full audits may be conducted of facilities on interim rates, where a more recent cost year than 1996 has been used to set rates.

Detecting expenses that should have been disallowed is the focus of the nursing home audit. But, the committee concludes that, because of more infrequent rebasing (i.e., setting rates based on actual costs), the financial auditing function and resulting findings have become less important in determining or adjusting rates. For the last two fiscal years, recoupments have been about $24 million of a total of $588 million audited, or less than 5 percent.

According to the subcontractor, audits do not include auditing of time records or hours worked. The committee believes there should be at least a verification of direct care staff hours worked, since, on average, direct care staffing accounts for 50 percent of facility costs. Since most studies found a link between direct care staffing and quality of patient care, the committee believes there should be as much verification of hours worked as there would be for equipment purchase invoices and the like.

Further, with an adjustment to the rate-setting system to include peer groupings based on facility case mix, auditors will also have to ensure patient acuity assessments can be reproduced by the facility. Further, where there has been a change in a facility's case-mix category impacting its rate, assessment documentation supporting the change will have to be verified.

Currently requirements call for desk and field audits to occur, but federal regulatory requirements, the State Medicaid Plan, and state regulations all appear to be flexible on what the audits may include. The committee believes a change in focus from conducting strictly financial audits is necessary, especially given that annual cost reports are no longer used to establish rates each year.

The committee recommends audits include a verification of nurse and nurse aide hours worked, as submitted by the facility on its cost report. 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 the last cost-year report, with a focus on early warning signs concerning financial stability.

The low percentage of audit recoupments, and the number of facilities incurring great costs that are not reimbursed, indicate that purely financial audits for setting or readjusting rates has lessened. While it is clear financial audits -- with detection of unallowable expenditures, and more significantly abuse and fraud -- are still crucial, the committee believes a change in auditing emphasis is necessary. Audits need to address the concerns of the system as it currently exists, not as the nearly 20-year-old regulations describe. For example, issues of quality of care and financial stability are a high priority with resident advocates, public health surveyors, and regulators. With a change in focus, auditors could provide valuable information that would assist regulators in overseeing the industry and advocates and families with audited information that measures quality.

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