Introduction
Medicaid Rate Setting for Nursing Homes
In March 2001, the Legislative Program Review and Investigations committee authorized the study of Connecticut's Medicaid rate-setting system for nursing homes, with a focus on examining the efficacy and equity of the current system. The study also explores whether other rate-setting methods, such as a case-mix system, might provide a better approach.
Nursing homes, nursing home care, and nursing home funding have been issues of recent study and debate here and nationwide. The call for this study came as legislation resulting from the committee's December 2000 study on Staffing in Nursing Homes was being discussed, as the effects of the legislative Wage Enhancement Act of 1999 were being evaluated, and as a highly publicized nursing home strike occurred here in Connecticut.
Industry experience nationwide. Nationally, the nursing home industry is facing difficult financial times. A study sponsored by the American Health Care Association1 -- a national organization operating in 50 states, representing more than 10,000 for-profit and nonprofit facilities involved in providing long-term care - found that nationwide (36 states) the average shortfall between reimbursement and expenses allowed under the Medicaid program for its nursing home residents exceeded $9.00 a day for each Medicaid resident.
The study indicates nursing homes have historically been able to shift their costs to other payers (Medicare and private pay) to subsidize low Medicaid per diems, but this is becoming increasingly difficult as:
At the same time as revenue sources - in addition to Medicaid - tightened, other financial problems have affected nursing home operations. First, most states are facing budget problems causing them to reduce growth in their long-term care Medicaid expenditures.
Second, no laws or regulations mandate that nursing home reimbursement be based on costs. In 1997, the federal Balanced Budget Act (BBA) repealed a federal law known as the Boren amendment, which had been in existence since 1980 and required states to set rates that were "reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities." The BBA replaced the "reasonable and adequate" requirement with an opportunity for public comment on rates and methodologies. Thus, in Connecticut and many states, budget pressures are driving nursing home reimbursement rather than facilities' costs to provide the service.
Third, while revenues have slowed or experienced actual declines, nursing home costs have been increasing for a number of reasons:
Also, most states use cost-containment features to limit nursing home rate increases such as: using cost inflators that are not reflective of nursing home cost increases; subtracting a percentage from the inflation index; using outdated cost data; or capping rate increases from year to year. These cost containment features appear to be paramount, and are impacting states reimbursement systems regardless of whether they are based on price or costs or whether they use a case-mix approach (consider patient acuity) or not.
Connecticut experience. Since 1991, Connecticut has employed several cost-containment measures to limit nursing home reimbursement. Like other states, these features have driven Connecticut's rate-setting system. For example, just one component of cost containment alone -- the use of caps on rates - reduced state nursing homes payments for FY 02 by about $27.5 million over what they otherwise would have been. Further, because actual costs exceeded inflation, nursing homes were not reimbursed for $51 million for cost year 2000, a gap of $7.65 a day for every Medicaid resident. The Seidman study noted above estimates Connecticut's Medicaid reimbursement gap at $8.94 per day. Nursing facilities report a gap of total expenses over revenues (from all sources) of about $50 million in their cost reports for 2000.
The situation has worsened since FY 00, when flat rate increases were begun as the sole factor in adjusting facilities' rates. Once the stop gain provision -- adopted in FY 93 -- and its replacement, across-the-board, flat percentage increases (FY 00) are applied year after year, the cumulative loss effect becomes greater, and the relationship between costs and rates is weakened. This resulted in more facilities requesting special adjustments or interim rates, increasing numbers of homes being granted such adjustments, and, since 1999, a considerable percentage (20 percent) of nursing facilities facing bankruptcy.
The committee finds that cost containment in Connecticut, and more recently the flat rate increases, have contributed to Connecticut nursing facilities' financial problems. The committee believes a periodic adjustment in rates using actual facility costs, with cost ceilings in place, is crucial. In the interim years, when costs are not rebased, the committee recommends applying the skilled nursing facility inflation factor, the index developed for the Centers for Medicare and Medicaid Services2 (CMS), and used to inflate Medicare nursing home rates. The committee also recommends a simple case-mix system be adopted that would adjust direct care costs based on a facility's case-mix index of its Medicaid residents' acuity or needs level.
Adjusting the rate-system alone will not return all facilities to financial health. The committee believes a process must be developed that considers all long-term care needs, including nursing home bed requirements, to serve as a guide to fund nursing home facilities in the future. Bed closures may be necessary, including the elimination of bed transfers, as long-term care consumers experience more choices.
The committee recommends Department of Social Services (DSS) Certificate of Need (CON)/Rate Review regulators use the comprehensive plan on long-term care to develop a strategy to deal with financial stability in the nursing home industry in Connecticut. The committee recommends an additional six staff members be added to the DSS unit, as proposed in the governor's FY 01-03 budget. Auditors under contract with DSS should change their auditing focus to include verification of direct care staff hours in nursing homes and examination of a facility's cost reports and financial documents for financial stability concerns.
The committee found current regulations governing rate-setting are almost 20 years old, so outdated they do not even describe aspects of the present system. These should be replaced with new ones that accurately reflect the current approach. A panel consisting of state agency representatives and two persons outside state government with expertise in nursing home economics and financial management should make interim rate and special adjustments decisions. Criteria for requesting and determinations of such adjustments need to be developed and, again, the long-term care plan should be used for establishing these criteria.
Report organization. The report is comprised of five chapters. The first provides an overview of why rates are set for nursing home care, the types of reimbursement systems used, as well as a chronology of Connecticut's rate-setting system. Chapter Two contains an industry profile, trends in Medicaid expenditures, and an analysis of rates, including factors contributing to Medicaid rate variation. Chapter Three describes Connecticut's rate-setting process, analyzes the system's impact on reimbursement rates to Connecticut facilities, and recommends system modifications that more closely tie reimbursement to facility costs. The fourth chapter measures case mix among facilities based on resident acuity or care-need level, using the federal Resource Utilization Groups (RUGs III), and recommends a simplified case-mix component to setting rates. Chapter Five discusses the need for a long-term care plan in order to set policy for delivering and funding services at the most appropriate level, and for providing the foundation for overseeing financial stability of the nursing home industry.
The report includes four appendices. Appendices A and B contain the responses from the Department of Social Services and the Office of Policy and Management, respectively. Appendix C provides a glossary of rate-setting terms, and Appendix D describes the major resource utilization groups and lists the case-mix indices for the 34 RUGs categories.
Agency Response
It is the policy of the Legislative Program Review and Investigations Committee to provide state agencies subject to a study with an opportunity to review and comment on the recommendations prior to the publication of the final report. The response from the Department of Social Services is in Appendix A and the one from the Office of Policy and Management is in Appendix B.
1 "A Briefing Chartbook on Shortfalls in Medicaid Funding for Nursing Home Care", Prepared by BDO Seidman, LLP, for the American Health Care Association, August 2001.
2 CMS was formerly known as the Health Care Financing Administration (HCFA). Its name was changed in June 2001.