RUG-II impacts on long-term care facilities in New York - Resource Utilization Group, Version 2 - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Barry M. Schultz, David Ward, James R. Knickman

INTRODUCTION

RUG-II, a case-mix-based resident classification system designed to be used with the New York State Medicaid Reimbursement System for Long Term Care (hereafter "payment system"), was implemented by NYDOH on January 1, 1986, in order to match payment with intensity of care, ensure placement of residents in appropriate levels of care, and encourage restorative care (Schneider et al., 1988). This marked a major change in reimbursement methodology for the Medicaid program in New York, which previously reimbursed LTC facilities a uniform per diem amount based on facility-specific historical costs. RUG-II created an entirely new set of financial and management incentives for LTC facilities.

As the single largest third-party payer in New York, Medicaid accounts for approximately 80 percent of nursing home reimbursement in the State. Based on the influence of Medicaid LTC reimbursement, the implementation of RUG-II was expected to result in significant changes in the New York LTC industry. The incentives created by RUG-II were considered likely to impact several aspects of the LTC industry, including the demographics of the resident population and the types of services offered, financial performance, and management practices of LTC facilities.

RUG-II was inspired by concerns about perceived inequities of earlier Medicaid LTC reimbursement systems based on a single unadjusted daily rate (Weissert et al., 1983). Being based on historical costs, these systems did not adjust reimbursement according to differences in resource use. Without this distinction, these reimbursement systems created disincentives for facilities to admit residents requiring higher intensity care. Moreover, cost-based reimbursement contained no provisions for LTC facilities to consider issues of cost effectiveness or efficiency in providing care. As a result, the lack of incentives to control expenditures frequently forced costs up to an imposed ceiling. According to NYDOH (1986a), the goals of RUG-II were to match payment with intensity of care, to ensure placement of residents in the appropriate level of care, and to encourage restorative care.

The first goal was specifically designed to recognize the reality of differential costs associated with variations in the intensity of care by utilizing a resident classification hierarchy (Table 1). The second goal provides incentives for admission of high-intensity care residents to LTC facilities. Prior to the implementation of RUG-II, individuals requiring intensive levels of nursing care often had difficulty gaining admission to nursing homes. Consequently, these individuals often remained in hospitals for lengthy time periods while waiting for admission to LTC facilities. The third goal provides higher levels of reimbursement for individuals requiring restorative rehabilitation. The additional resources provided by the introduction of resource-based reimbursement are intended both to meet the costs of providing higher level services to residents requiring special types of care and to be used in the development of restorative-care programs for residents who may benefit by intensive physical therapy. Thus, a major theme of the RUG-II system was to promote functional improvement and discharge of residents back into the community.

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We report here the findings of an evaluation study designed to measure the impacts of RUG-II over its first 5 years (1986-90) on several aspects of the LTC industry in New York. One major focus of this evaluation was to determine whether the implementation of RUG-II resulted in the reversal of a key disincentive against admission of individuals with heavy-care needs to nursing homes. Initial evaluations of the first year of RUG-II revealed a significant increase in the case mix of LTC facilities in New York (New York State Department of Health, 1986a, 1986b, 1986c, 1987). Our evaluation determined the degree to which this trend continued. We examined a measure of staffing levels to determine whether facilities utilized increased payments to hire additional staff and increase expenditures for rehabilitation therapies. We also attempted to evaluate the empirical impact of RUG-II on the financial performance of LTC facilities. Lastly, we attempted to evaluate the role of the RUG-II payment system in the context of its use as a cost-containment mechanism during a time of weakening fiscal condition for the State of New York.

Other States have implemented or are planning to implement resource-based resident classification systems for use with Medicaid LTC payment systems. In addition, the Health Care Financing Administration is currently evaluating a version of RUG-II for Medicare LTC reimbursement. Our findings may provide a valuable policy resource to those interested in prospective resource-based LTC reimbursement.

METHODS

The analyses done for this study were based on financial and other data derived from NYDOH LTC facility Cost Report data for the years 1983 and 1986-90. We originally intended to analyze data from 1983-90, so as to include 3 preimplementation years of data, but keypunched data for the years 1984-85 were not available. Analyses were based on data culled from two computerized NYDOH datasets: the Data Collection Masterfile and the Rate Collection Masterfile. The Data Collection Masterfile dataset contains the Residential Health Care Facility 4 (RHCF-4) reports that are filed annually by every LTC facility in New York. The RHCF-4 contains a financial profile of each facility, including balance sheet, income statement, change in fund balance, and statement of cash flow, as well as a collection of demographic data. The Rate Collection Masterfile contains the Medicaid rate and case-mix index (CMI [a global reflection of resident care intensity and resource use!) data for each facility. The evaluations performed for this study are based on a sample of 169 LTC facilities, out of a total of approximately 650 in New York. The selection of the study sample was based on the availability of a complete dataset for each facility for the years 1983 and 1986-90. The demographic characteristics of the study sample were compared with those for the entire New York LTC facility population to assess the validity of our sample (Table 2).