Trends in Medicaid nursing home reimbursement: 1978-89

Health Care Financing Review, Summer, 1993 by James H. Swan, Charlene Harrington, Leslie Grant, John Luehrs, Steve Preston

Ratesetting Methods

Whatever the payment methods, States differ in how rates are set. Ratesetting is complex, reflecting many dimensions of State Medicaid discretion. A small number of ratesetting methods are considered here as the most important: inclusion of ancillary services in the per diem rate; case-mix methods; cost limits, overall or by cost center; and methods of valuing capital.

A variety of nursing home ancillary services may be separately reimbursed, covered in the daily rate, or disallowed entirely. For example, physical therapy may be paid separately where it is provided, claimed, and allowed, or may be considered to be included in a per diem rate paid to facilities. The inclusion of an ancillary in the rate makes an explicit or implicit assumption about the average provision of that ancillary and about average costs of providing that ancillary.

When patient characteristics and needs change, assumptions about volume of ancillaries may become outdated, with resulting risks falling disproportionately across facilities. Inclusion of ancillaries in rates provides different incentive structures (to reduce unnecessary provision but also to withhold needed care) than does separate payment. Where an ancillary is included, the rate should be higher, an allowed cost per assumed volume that may be less than actual costs. Where many or costly ancillaries are included in rates (prescription drugs are a prime example), the rates may appear particularly high; but such high rates may mask lower overall payment, with high risks to facilities that liberally provide included ancillaries.

Case-mix methods tie payment to patient characteristics, paying on the basis of patient care needs, accounting for differences in costs of providing for those needs. Such methods may improve access for heavy-care patients, enhance quality of care, increase facility efficiency, and more fairly treat facilities on the basis of patients admitted (Rosko, Broyles, and Aaronson, 1987). However, case-mix systems can create incentives to increase service delivery or patient dependence (Fries, 1990; Schneider et al., 1988; Cooney and Fries, 1985). Adequate patient tracking and quality assurance mechanisms, to implement case mix and reduce incentives to increase dependence, have high administrative costs (Swan, Harrington, and Grant, 1988). However, this may have become less of a factor following the fiscal year 1991 implementation of the Omnibus Budget Reconciliation Act (OBRA) requirements for patient assessment using approved instruments and reporting of the minimum data set information (Morris, Hawes, and Fries, 1987). Case-mix systems can be designed that explain resource use well (Schneider et al., 1988). However, even if they are generally adequate at predicting staffing costs, case-mix systems that are not adapted to identify high-care patients (outliers) may fail to give providers incentives to admit high-care patients (Fries, 1990). The 1986 survey found eight States to have case-mix reimbursement systems, but many other States reported they were studying future adoption of such systems (Swan, Harrington, and Grant, 1988). Conforming with the usage of the previous survey, case-mix systems are defined as those that use patient characteristics in setting rates for individual facilities or patients.