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Why MedPAC is so stingy

February 1, 2008
by BOB GATTY
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It appears that skilled nursing facilities (SNFs) face the likelihood of entering 2009 with the same Medicare reimbursement rates that exist today, as policymakers in Washington take the approach that Medicare payments are more than adequate and do not need to be increased.

In March, the Centers for Medicare & Medicaid Services (CMS) is due to present its annual report to Congress, a document that will reflect the advice of the Medicare Payment Advisory Commission (MedPAC) regarding payment rates for physicians, hospitals, and other healthcare providers, including SNFs. In December 2007, the MedPAC staff presented a draft resolution to the full commission recommending a “zero update” for SNFs—a recommendation that was approved by the commission on January 10.

“We believe this is again a reasonable recommendation, given that margins are higher in 2006 than they were in 2005 and are more than adequate to accommodate cost growth,” said MedPAC consultant Carol Carter, PhD, as she presented the draft ruling at the December meeting.

Dr. Carter told MedPAC commissioners that aggregate Medicare margins for freestanding SNFs in 2006 were 13.1%, the sixth consecutive year that these facilities have had aggregate margins exceeding 10%. She noted a variation in financial performance, however, with nonprofit SNFs averaging 3.1% and for-profit firms generating an average 16% margin.

The trend is continuing, Dr. Carter said, predicting that freestanding SNFs will record Medicare margins averaging 11.4% in 2008. “We think this is a conservative estimate,” she added.

The action, which amounts to a two-year Medicare rate freeze, was sharply criticized by the Alliance for Quality Nursing Home Care (AQNHC), the national organization of large for-profit chains, which said MedPAC is doing Congress a disservice by not presenting facts reflecting overall economic conditions—including losses most SNFs suffer from treating Medicaid patients.

“MedPAC's position does not reflect reality on the ground,” declared Alan G. Rosenbloom, president of the Alliance, who said that while Medicare margins are healthy, only 12% of SNF patients are covered by Medicare. Facilities are losing from 6 to 7% on Medicaid patients, he said, and they account for about 66% of those served by SNFs, with the balance of patients either self-payers or covered by private insurance. Margins for these facilities, he said, are about 2%.

“When that is all added up, it translates into very slender margins for skilled nursing facilities,” Rosenbloom contended, “so there is tremendous reliance on Medicare to subsidize coverage for Medicaid. By not considering Medicaid in its recommendation, MedPAC does a disservice to Congress and Congress is then likely to make a decision that does a disservice to patients.”

In a press release issued after the draft recommendation was presented in December, Rosenbloom said that with as much as 70% of nursing home operating costs driven by labor, inadequate overall funding may force facilities “to make difficult decisions that could affect the hundreds of thousands of direct care workers in nursing homes—86% of whom are women, and 30% of whom are minorities.

“If the direct care workforce becomes destabilized because nursing homes don't have the resources to make ends meet,” Rosenbloom said, “it is the patient who may suffer the most.”

However, MedPAC Chairman Glenn M. Hackbarth, during the December meeting, said that if there is a “Medicaid payment problem,” increasing Medicare rates would only serve to boost funding to those institutions with the largest Medicare shares instead of those with larger numbers of Medicaid patients. “So the rich would get richer and the poorest would not be helped as much,” he said.

The solution, Hackbarth suggested, is to address Medicaid specifically instead of manipulating Medicare rates.

Dr. Carter pointed out that increasing Medicare rates to compensate for low Medicaid payments would also provide an incentive to states to lower their rates even further.

Hackbarth agreed. “If the message becomes, ‘Well, the federal government has assumed responsibility for the total margin and the overall financial stability and well-being of the SNF industry,’ this is a veritable invitation to the states to say, ‘Oh, since the federal government is going to cover it all, if we face a budgetary squeeze this is a place where we can cut and it will be made up elsewhere’—which is not the right policy incentive.”

Another MedPAC member, Dr. Nancy M. Kane, Harvard School of Public Health, Boston, said there is another factor to consider as well. “If the person in the long-term bed is on Medicaid or even self-pay, if they can get them back in the hospital for three days, they get to start the clock over on Medicare for however long it lasts. So, the better the Medicare payment, the more the incentive to not treat something in the nursing home, if you can move them back into the hospital and start over again.” Such practices of “churning” patients are increasingly attracting the attention of MedPAC staff, Dr. Carter said.

Assuming that CMS accepts MedPAC's recommendation and does not provide for a 2009 Medicare increase for SNFs in its report to Congress, the next step for the industry will be to seek support on Capitol Hill.

Rosenbloom worries that states that face fiscal difficulties often turn to Medicaid—“and payments to nursing homes in particular”—to find savings. He pointed out that the National Governors Association (NGA) recently issued a report stating that many states are facing budgetary shortfalls due to rising healthcare costs and the housing crisis, suggesting that Medicaid payments could worsen.

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