Analysis of nursing home capital reimbursement systems

Health Care Financing Review, Spring, 1991 by Heidi Boerstler, Tom Carlough, Robert E. Schlenker

Cash flow

Table 1 presents results of the cash-flow analysis. Over 30 years, the fair-rental systems provided more years of higher cash flow than the traditional system. Highest cash flow in the traditional systems ($1,120) occurred in year 1, with cash flows decreasing each year thereafter. By contrast, lowest cash flows occurred inyear 1 in both fair-rental approaches ($559 for FRG, $608 for FRN), with cash flows increasing each year. In year 1, cash flow in the traditional system is approximately double that of the fair-rental approaches. However, by year 7, cash flow in the traditional system is less than both the FRG and the FRN; and by year 30, it is approximately 4 percent that of the fair-rental approaches.

Within the two fair-rental approaches, FRG had higher cash flows than FRN after year 4 (over 30 years, FRG ranged from $559 to $3,983, whereas FRN ranged from $608 to $3,324).

In supplemental analyses, FRG, the fair-rental system with fixed debt-to-equity assumptions, was found to be more sensitive to change in interest rate than FRN. This is a function of the constant 75-percent debt assumption and the relationship of the interest and rental rates (that is, interest rate is typically greater than rental rate). FRN, in a manner similar to the traditional model, will provide greater cash flow in later years if the rental rate is greater than the interest rate, FRG, however, provides less cash flow when the rental rate is greater than the interest rate, because a larger portion of the appraised value is assumed to be debt.

Ceiling--Although the traditional systems modeled in this study assume that interest and depreciation are passed through and fully reimbursed, a number of States utilize ceilings on reimbursement for such costs of ownership. Cash flows in the traditional system were therefore examined assuming a per patient day ceiling for cost of ownership of $7.50 (similar to ceilings actually in use, such as in Ohio); the 12-percent rate of interest on debt, the 85:15 debt-to-equity ratio and the 10-percent payment on equity were held constant. Traditional system cash flows utilizing a $7.50 ceiling were considerably lower than when ownership costs were fully reimbursed. Cash flow was -$95 in year 1 and remained negative for 9 years, although increasing for the first 24 years, after which it equalled the version without ceiling (full pass through) and, correspondingly, decreased thereafter. Within a $10 ceiling, cash flow was positive from year 1 and increased for 18 years until equalling cash flow without ceiling and then declined through year 30.

Cash flow summary--All three modeled capital-reimbursement systems are capable of providing positive cash flows. It is important to note, however, that under the systems examined, only the fair-rental systems

[TABULAR DATA OMITTED] provide annually increasing cash flows that both recognize the generally appreciating value of real property and match the probable increased need for funds as the property ages and requires repair, renovation, etc.