The relationship of Medicaid payment rates, bed constraint policies, and risk-adjusted pressure ulcers

Health Services Research, August, 2004 by David C. Grabowski, Joseph J. Angelelli

Substandard nursing home quality has been a persistent policy issue over the past three decades (e.g., U.S. Senate 1974; U.S. General Accounting Office 1987; Institute of Medicine 2001). The relationship between poor quality and Medicaid payment rates is of particular concern in a system in which two-thirds of all nursing home bed days are covered by Medicaid (Rhoades and Sommers 2001). State Medicaid programs spent $175 billion in fiscal year 1998 with more than $44 billion directed toward nursing home care services (Health Care Financing Agency 2000).

There is currently a great deal of interest in limiting state Medicaid expenditures for nursing home care. States are forecasting record budgetary shortfalls in the current fiscal year due to declining tax revenues related to the economic recession that began in 2001. Simultaneously, more individuals are unemployed and qualifying for Medicaid services. Thus, there is a widening gap between revenues and expenditures with recent data from the National Association of State Budget Officers estimating the net state budget shortfalls at approximately $40 billion (National Association of State Budget Officers 2001). Medicaid accounts for about 20 percent of states' spending and Medicaid spending growth has outpaced national health spending since the late 1980s. Not surprisingly, states have identified nursing home spending cuts as a potential means toward addressing widening state budget shortfalls. A Kaiser Family Foundation survey of state Medicaid directors found that 49 states plan to reduce the rate of growth in Medicaid spending while 19 states plan actual cuts in their Medicaid spending for long-term care in fiscal year 2003 (Smith, Gifford, and Ramesh 2003).

Historically, the two primary approaches to reducing state nursing home expenditures involve reducing Medicaid payment rates and limiting the number of Medicaid recipients in homes via certificate-of-need (CON) laws and construction moratoria. Essentially, the first mechanism constrains the price of care and the second constrains the quantity of available beds. In theory, both of these policy measures may have negative implications toward the provision of quality. Low Medicaid payment rates may not provide nursing homes with adequate resources to provide sufficient quality, and CON laws and moratoria may impede quality competition for Medicaid recipients. Both of these issues may be particularly important for homes that care for a high proportion of Medicaid residents.

In the context of these concerns, this study addresses three primary questions:

(1.) How are Medicaid payment rates associated with risk-adjusted nursing home quality?

(2.) Does a restricted bed supply affect the relationship between Medicaid payment and risk-adjusted nursing home quality?

(3.) Are payment rates and bed constraint policies even more important for homes that care for a high proportion of Medicaid recipients?

CONCEPTUAL FRAMEWORK

The chronic care nursing home market has two primary payer types: Medicaid and private-pay. State Medicaid programs are responsible for approximately 50 percent of all nursing home expenditures and Medicaid recipients constitute 70 percent of all bed days (with the remainder of care financed primarily by out-of-pocket payments). The Medicaid rate is, on average, about 70 percent of the private-pay price. Despite the different rates charged Medicaid and private-pay residents, a home is required by law to provide the same level of quality to all residents within a home regardless of payer source.

Building on this uniform quality assumption, economists have generally considered two alternative models of the nursing home market: a free entry model and an excess demand model. The key distinction between these two models is the presence of a binding bed constraint policy such as a CON law or a construction moratorium. In the absence of such a binding policy, the market for nursing home care is thought to be in equilibrium where there is a sufficient supply of beds to meet the demand for nursing home care. Under this paradigm, the demand of Medicaid eligible individuals is assumed to be a function of quality because revenues will increase when an additional Medicaid resident is attracted to a facility by an increase in quality. Put alternatively, homes have an incentive to provide quality until the marginal cost of caring for an additional resident equals the marginal revenue associated with the predetermined Medicaid payment rate. Thus, our first hypothesis is that:

H1: Medicaid payment rates are positively associated with risk-adjusted nursing home quality in a model with free entry.

The excess demand model builds on the assumption that CON and moratorium policies impose a binding bed constraint within the market for nursing home care whereby certain individuals are unable to gain access to care (Scanlon 1980). In practice, a CON law constrains the growth of beds by employing a need-based evaluation of all applications for any new bed construction. A home must show a clinically legitimate rationale for additional beds to a state CON board. A construction moratorium is even more stringent in that it effectively prevents any expansion within the nursing home sector.