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

Given this diversity among the States, and the range of payment and cost-related factors to be studied, there is a large body of literature on issues relating to nursing home costs and Medicaid payment of these costs. Many studies, particularly in the early 1980s, focused on analyses of variances in nursing home costs among facilities. For example, a 1980 study reviewed previous research focusing on nursing home costs, concluding that provider and service characteristics are associated with differences in the average cost of care (Bishop, 1980). A 1981 study analyzed the determinants of nursing home operating costs and concluded that facility characteristics, particularly facility type and ownership, were important variables explaining cost variation. Non-profit nursing homes had higher costs than profit-seeking facilities (Birnbaum et al., 1981a). This same reasearch concluded that private-pay patients subsidize the cost of care received by Medicaid patients. In a 1983 study of nursing home operating costs in New York State, the authors concluded that type of ownership was among the most significant and important variable in explaining operating cost variation (Lee and Birnbaum, 1983).

A 1982 study analyzed nursing home costs using data from the 1973-1974 National Nursing Home Survey (Meiners, 1982). This study concluded that economies of scale exist in the delivery of nursing home care and that the profit motive is an important incentive for cost containment. In addition, this study expanded on these cost analyses to look at the impact Medicare and Medicaid payment policies had on the cost of care. The major conclusion was that flat-rate and prospective-rate systems were associated with significantly lower costs of care compared with cost-based systems and to the incentives of private financing.

Other studies moved away from general analyses of factors affecting variations in operating cost among nursing homes to focus on the impact specific Medicaid policies have on nursing home payment. A 1988 study analyzed the impact forms of prospective and retropective payment had on Medicaid payment rates between 1987 and 1986, concluding that States using prospective-class payment had significantly lower payments for 1982 through 1986 (Swan, Harrington, and Grant, 1988). Other studies have confirmed this association of prospective-payment methods with lower Medicaid payments for nursing home care (Buchanan, 1983; Buchanan, 1987). Additional studies evaluated approaches to the payment of the capital-related costs of providing nursing home care (Cohen and Holahan, 1986; Baldwin and Bishop, 1984). Other studies have addressed a broader range of issues relating to Medicaid payment for nursing home care, but a limited number of States for case studies were used (Holahan and Cohen, 1987; Holahan, 1985). The purpose of this article is to address a broad range of issues relating to nursing home payments, giving a comprehensive overview of the payment systems used by each State.