Medicaid payment policies for nursing home care: a national survey

Health Care Financing Review, Fall, 1991 by Robert J. Buchanan, R. Peter Madel, Dan Persons

During 1990, an estimated $54.5 billion, or 8.4 percent of total national health expenditures, was spent on nursing home care in the United States (Division of National Cost Estimates, 1987). Dissecting this total expenditure of $54.5 billion, $28 billion (or 51.3 percent) came from the patients or their families as direct private payments, and $22.1 billion (or 40.6 percent) came from the State Medicaid programs. Private health insurance and the Medicare program combined paid less than 3 percent of the Nation's 1990 nursing home bill. Without question. Medicaid programs are the largest third-party payers of nursing home care in the United States. Although Medicaid programs provided over 40 percent of the Nation's nursing home expenditures in 1990, Medicaid payments can contribute a significantly larger percentage of revenues to individual nursing home providers. For example, during 1988, Medicaid payments amounted to 61 percent of the revenues of Beverly Enterprises, the largest nursing home chain in the United States (Standard and Poor's, 1989). Medicaid payment rates, policies, and coverage have a major impact on the nursing home care provided in this country.

Payment trends

Medicaid payment policy for nursing home care has continuously evolved since the program was initiated in 1965. The original Medicaid statute did not specify a payment methodology for the programs to use to pay for nursing home care. States were free to design and implement their own methodologies, within the Federal mandate that payments should not "exceed reasonable charges consistent with efficiency, economy, and quality of care" (Commerce Clearing House, 1981). Congress became concerned in the early 1970s that the lack of uniformity in Medicaid payment policies could result in some States paying too much for care and other States paying too little to allow the delivery of good quality care. In 1972, Congress amended the Social Security Act to require that effective July 1, 1976, all state Medicaid programs must pay nursing homes on a reasonable cost-related basis (Public Law 92-603. section 249).

This law, however, was viewed by many State programs not only as inflationary but also as restricting their ability to develop payment systems that would encourage provider efficiency (Buchanan, 1987). The Omnibus Reconciliation Act of 1980 (Public Law 96-499) eliminated the Federal mandate that required States to use reasonable cost-related payment for nursing home care. This legislation allowed the Medicaid programs to develop less costly methodologies, with the Federal requirement that these new plans must be "reasonable and adequate" to pay the costs of an efficiently administered nursing home complying with Federal and State quality and safety standards. In June 1990, the U.S. Supreme Court ruled that hospitals and nursing homes may sue States in Federal court to guarantee reasonable and adequate Medicaid payment (Greenhouse, 1990). Although a financial victory for the providers of care to Medicaid recipients, this ruling will enhance the fiscal strains facing most Medicaid programs.

Focusing on specific components of Medicaid payment methodologies for nursing home care, a number of trends have emerged since the program's inception. In an effort to contain program expenditures, one major trend has been towards the use of prospective ratesetting rather than cost-based, retrospective payment systems. At least 21 States used a form of retrospective payment for skilled care, and at least 17 used retrospective payments for intermediate care during 1975 (Buchanan, 1987). By 1988, as few as nine programs used a form of retrospective ratesetting.

An emerging trend in capital-cost payment has been the adoption of a fair-rental system by many Medicaid programs (Grimaldi and Jazwiecki, 1987). A fair-rental system pays an imputed rent to nursing homes for the residential-related services provided to Medicaid patients. These fair-rental systems are intended to overcome the inflationary incentives of cost-based payment of property-related expenses.

Another major trend in Medicaid payment for nursing home care that is currently emerging is case-mix payment discourage nursing homes from accepting Medicaid patients with heavy-care needs, because the level of Medicaid payment does not increase as care needs increase. A case-mix payment system adjusts the Medicaid payment to reflect the patients' care needs (Adams and Schlenker, 1986; Nyman, Levey, and Rohrer, 1987; Cameron, 1985). Preliminary results of a survey of the Medicaid programs indicate that as many as 19 States were using some form of case-mix payment during March 1990. (1)

Diversity of payment methodologies

Each State has flexibility in establishing its own payment methodologies and in calculating payment rates for nursing home care (U.S. General Accounting Office, 1983). Public Law 96-499, section 962, requires only that Medicaid payments for nursing home care must be "reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities" complying with Federal and State quality and safety standards. Within this broad "reasonable and adequate" Federal standard, each State sets its own payment rates and determines how these payments may be limited, which costs are allowable, how property-related expenses are paid, and if the payment system includes any incentives. As a result, each State has developed a unique payment system, with many payment-related variables, to pay for the nursing home care Medicaid recipients receive.