Analysis of nursing home capital reimbursement systems

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

At the same time, although actual cash outlays by the States are greater over time under the fair-rental approaches than under the traditional approaches, they are similar in present value terms. This reflects the likelihood that the higher cash outlays by the State in the later years of a fair-rental system are likely to be largely financed by the overall expected growth of the economy and therefore of tax revenues. The discount rate used in the present-value analysis is a reasonable estimation of future economic growth and inflation. In addition, a fair-rental approach is likely to discourage the frequent and destabilizing ownership and financing changes that have occurred under the traditional, with possible adverse consequences for patient care.

Although the analysis presented here suggests that the fair-rental approach has significant advantages over the traditional cost-based method, further research is needed in a number of areas. For example, additional investment analysis models should be utilized and compared. To illustrate, the net present-value approach could be used to examine the returns to the investor, rather than the internal rate-of-return approach presented here. (Some preliminary analyses along these lines were carried out, and the results tended to support the relative differences between systems presented earlier. Hence, the internal rate-of-return approach was presented in order to highlight the differences between systems more clearly.) In addition, themodel could be expanded to include, for example, abandonment options and various measures of efficiency of public expenditure. In addition, the same cash-flow streams may be viewed differently by the State and the private investor, based on their different discount rates, and such differences could be incorporated into the analysis.

An important additional research approach is to study the experiences of States that have implemented fair rental methodologies. Unfortunately, the long-time horizons associated with investment decisions and their consequences hamper such analyses. The ideal approach, therefore, should probably include both empirical examinations of actual operational systems and simulation modeling of the type used here.

Finally, it is important to note that the analysis presented in this article was designed to examine differences between broadly defined payment methodologies. In order to carry out the analyses, many simplifying assumptions were necessary. Thus, although the results favor the fair-rental methodology, detailed analysis is required in the consideration of any system for actual implementation. The entire reimbursement methodology, including the overall generosity or stringency of the total payment system, must be examined, as must general nursing home market conditions and State policy objectives and constraints. Careful analysis and debate, involving all parties (the State, providers, and consumers), are necessary before implementing major reimbursement system changes.