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

In efforts to contain nursing home expenditures, the trend among the Medicaid programs has been towards decreased use of the retrospective payment system. During 1975, at least 21 States used a form of retrospective payments to pay SNFs and at least 17 States used retrospective payments to pay ICFs (Buchanan, 1987). As Table 2 illustrates, the number of Medicaid programs using retrospective payment dropped sharply by 1988.

Operating cost increases

States can select from a number of methods to adjust nursing home payments to reflect increases in operating expenses. General inflation indexes can be used such as the Consumer Price Index (CPI) or the gross national product price deflator. In contrast, inflationary indexes reflecting only nursing-home-related cost increases (such as the Data Resources, Inc., SNF market basket index) can be used.

General inflation indexes contain different components, with differing weights, from the cost items associated with the delivery of nursing home care and may not reflect the inflationary trends confronting SNFs and ICFs. The use of these general inflation indexes may lead to inappropriate Medicaid payments. On one hand, if general price increases exceed the rates of increase in nursing home costs, then the Medicaid rates will increase at rates greater than necessary. On the other hand, if general price increases are below the rates of increase in nursing home costs, then the Medicaid increase will be less than necessary (Holahan, 1985). With health-related costs increasing at a more rapid rate than general prices, this latter scenario is a present danger. These lower payment increases can decrease the quality of care provided to Medicaid patients and make it more difficult to place Medicaid recipients in nursing homes, particularly those with heavy-care needs.

The States were asked in the 1988 survey how the operating cost components of the Medicaid payment were increased. The questionnaire offered the following options: CPI, market basket index, Medicare method, facility requested, and others. In addition, the States were asked to report the most recent percent change used for both care-related costs and other operating costs, as well as the effective dates of each increase.

Table 2 summarizes the responses on the method used to increase the payment of operating costs and the actual percent increase (with effective dates) for care-related and other operating costs. The States providing responses used either the increase in the CPI (14 States), a market basket index (16 States), or some other method (18 States) to increase Medicaid payments. (The Iowa Medicaid program used a market basket index to increase payments to SNFs and Iowa-specific rate to increase payments to ICFs). The rates of increase varied from State to State. Although the effective dates for the increase and the periods covered are not identical for all States, the percent increases reported by Medicaid programs were averaged. The average increases in Medicaid payments to SNFs and ICFs for care-related expenses were 4.86 percent for States reporting these data. The average increases in Medicaid payments for other operating expenses were 4.55 percent for SNFs and 4.19 percent for ICFs for States supplying these data. (These averages excluded Massachusetts, which reported a 2-year inflation rate.)