Issue Brief

June 2002

Is Medicare Paying Too Much 

for Nursing Homes?    

by Eileen Baumgartner

 "One of the myths about growing old in America is that retiree health insurance from your old job, or the government's Medicare program, will pay the bill for nursing home care, which can run $50,000 a year. Forget about it."  
Bob Rosenblatt in the Los Angeles Times, June 3, 2002

Introduction

Today there is a great deal of confusion within the public about who pays for nursing home care. There is also a certain amount of controversy among policy makers, nursing home administrators, health care professionals, financial advisors, and intellectuals about how nursing homes should be financed. The purpose of this issue brief is to look at the role of Medicare in financing nursing home care and how that role fits into the larger picture of long-term care in America.

Background

When Medicare was passed into law 37 years ago, it was designed to ensure that senior citizens could get the health care they needed as they left the labor force and were no longer covered by their employer's insurance. Medicare was focused, as is much of the American health care system, on acute illnesses and episodes of ill health. It was not designed to pay for the long-term care often required by chronic and disabling conditions. 

One of the major criticisms of Medicare today is that it has not kept up with the private sector in adapting to the changing nature of health care. Many argue that to adapt to today's reality, Medicare needs to add a prescription drug benefit to the program. This was a compelling issue in the last presidential campaign and continues to be a high-profile political issue when people talk about Medicare. There are, however, other issues that are of equal importance to the health care of the elderly, and these issues will emerge with growing force as the baby boom generation ages. 

Today Medicare covers more than 40 million people, including almost all the 35 million senior citizens in the country. For many of these people, the level of health insurance is adequate, especially if they have another policy that takes care of their prescription drug needs. But for the twelve million people who need some help with the basic activities of daily living, there are special problems. An estimated one and a half million of these people are living in nursing homes. (For purposes of this brief, the term nursing homes will be used to mean skilled nursing facilities). Private health insurance does not cover these needs and neither does Medicare. The number of people who need this help is expected to double by 2030 when the youngest of the baby boom generation hits 65. What is being done today, what can be done in the future, and where does Medicare fit in this picture?

Long-term Care and Nursing Homes

Long-term care services are those services that help people cope with disabilities or frailties that prevent them from performing activities of daily living. Some basic services include bathing, feeding, or transporting people who can no longer drive; other services involve skilled nursing or rehabilitative care delivered in an institutional setting such as a nursing home or in an individual's own home or assisted living residence through home health services. Approximately 72% of long-term care spending for the elderly is for institutional care.

While there is a great push for alternatives to nursing homes, most people who live a long life will spend some time in a skilled nursing facility—even if only for a short period while recovering from knee or hip surgery. Because nursing homes are such an important part of the mix of care options needed for older people, their financing becomes more important as the baby boom generation ages. And that is where confusion reigns.

Data published in 2000 by the National Health Statistics Group in the HCFA (now CMS)/Office of the Actuary illustrates the changes in payment sources for nursing home care in the last twenty years. As the following table illustrates, in thirty years the combined support for nursing homes from the two government programs, Medicare and Medicaid, grew from 32% to 58% of total costs. That trend has continued in the last few years. Clearly, the cost of care in nursing homes has become an important element in both the Medicaid and Medicare programs.  

Note: Medicaid spending includes the state and federal shares. Total U.S. spending on nursing home care was $87.8 billion in 1998 compared to $2.9 billion in 1968. The 1998 “other expenditures” primarily consists of private health insurance and Veteran’s Administration spending. The 1968 “other” consisted largely of non-Medicaid general funds from state/local and federal governments.

Source: Figure 4.4, Nursing Home Expenditures, A Profile of Medicaid—Chart Book 2000, Health Care Financing Administration, Department of Health and Human Services,  http://www.hcfa.gov/stats/2Tchartbk.pdf

Medicaid was designed as one of the "safety net" programs for low-income people—from babies to seniors—to ensure that they had basic health care. Most people think that when seniors have used up their private resources paying for nursing home care, they will qualify for Medicaid and Medicaid will pay the nursing home bills they can no longer afford. However, Medicaid is a combined federal-state program, and states administer it differently according to their own needs and pressures. As such, Medicaid often pays very low reimbursement rates to nursing homes and has become more dependent on other sources of revenue. One of these sources is Medicare.

The Role of Medicare in Financing Nursing Home Care

According to the Medicare Payment Advisory Commission, Medicare's 40 million beneficiaries use thousands of different health care products and services furnished by more than 1 million providers in hundreds of markets nationwide. 

Seniors who need skilled care on an inpatient basis after a three-day hospital stay are eligible for Medicare in a nursing home. The first 20 days of care are paid for entirely by Medicare, and the next 80 days are financed in part by Medicare with a copayment from the beneficiary. After 100 days, Medicare no longer covers care in a nursing home. In spite of these limitations, Medicare paid for almost 12% of nursing home care in 1998 and is estimated to have paid 15% of the cost of nursing home care in 2000.

Prior to 1988 there were serious inconsistencies in how Medicare handled nursing home expenses. Because of this, many nursing homes were reluctant to accept Medicare patients for fear their reimbursement claims would be denied. Since Medicare is supposed to be a national program with uniform benefits throughout the country, there was much disapproval and concern over this problem. In 1988, the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid—CMS) implemented new coverage guidelines clarifying coverage criteria in writing. 

There are studies suggesting that the coverage guidelines, along with some other changes that have since been repealed, resulted in a long-run shift toward Medicare patients by the nursing home industry. Whatever the cause, Medicare spending for care in nursing homes grew rapidly in the early 1990s—23 % a year from 1990 to 1996. Believing that kind of growth rate could not be sustained, Congress reacted strongly against it.

In the Balanced Budget Act of 1997 Congress tried to put the brakes on Medicare spending for nursing home care. In order to control growth, Congress instructed CMS to implement a prospective payment system (PPS) for care in skilled nursing facilities. On July 1,1998, Medicare adopted a new PPS for nursing home care.  Unfortunately, that system suffered from a lack of adequate data and ran into serious problems generating payments that accurately reflected the cost of providing good care efficiently.  

In response to the problems with the new PPS for nursing homes, Congress temporarily increased payments to nursing homes in the Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000.

These laws provided three temporary payment increases for nursing homes. They comprised:

•       A 4% increase for all rates for care furnished from April 2000 through September 2002,

•       A16.66% increase in the base rate for the nursing component for care furnished from April 2001 through September 2001; and

•       A 20% increase for 12 case-mix groups of medically complex patients and 6.7% increase for 14 groups of patients receiving rehabilitation. This third "add-on" was designed to give CMS time to improve its payment system and is set to expire when CMS says it has accomplished its goal.    

Obviously, if all these payments were to disappear at once, nursing home financing would fall off a cliff.

Earlier this year CMS appeared to be moving forward with a new payment system and indicated plans to implement the system at the beginning of the next fiscal year on October 1, 2002, but the deep concerns expressed by many nursing home providers and others has caused it to pull back. 

The Administration announced in April that it will not implement a new payment system this year, so the third set of increases will not expire October 1, and nursing home administrators can breathe a little easier for the time being. Retaining the other two increases will require an act of Congress. Although there is some action on extending one of these add-ons for three more years, the provision is contained in extremely controversial legislation. It is not yet clear whether any version of that bill will pass.

It becomes apparent from reviewing these recent changes in law that Medicare's payment policy for skilled nursing facility services has been caught in an action-reaction cycle for the past several years.

Possibilities for Change

In spite of the fact that Medicare was designed as a basic health insurance program, it has become an increasingly important part of the financing of skilled nursing homes. It pays at higher rates than Medicaid and is increasingly used to subsidize Medicaid.

A recent news report describes a nursing home in Connecticut where Medicare pays $300 a day for each Medicare patient while Medicaid pays only $128 a day, which is $9 below the cost in the facility. Obviously if $128 a day is nine dollars below costs, $300 a day is a very high reimbursement. While this example may be extreme, industry representatives say $9 a day below costs is typical for Medicaid reimbursements. And some places report greater losses such as the Lincoln Lutheran Care Center in Wisconsin which recently announced it would close one of its facilities in Racine because it was experiencing shortfalls of $11 a day per patient and could not cover its losses.

There clearly are political risks for nursing homes in acknowledging that Medicare is "overpaying" them and until recently they never wanted to come out and admit that. Nursing home lobbyists would like to get Medicaid rates raised, but they believe maintaining Medicare rates is a more practical short-term goal. Given the serious money constraints most state governments are under and the growing budget deficits at the federal level, those lobbyists are probably right. 

At the same time, pressures within the Medicare budget are also increasing, and they will only get worse as the baby boom generation ages. President Bush has insisted that increases for one group of Medicare providers must be paid for within confines of the Medicare program. While there are some increased funds budgeted for the program, most proposals to increase payments to one provider will have to come from other providers. Since there is already a multi-billion dollar problem in the Medicare physician payment system and great pressure to add a new prescription drug benefit, it is unlikely that increases for nursing home payments will be available over the long term.

Conclusion

The answer to the question in the title of this brief—Is Medicare Paying Too Much for Nursing Home Care?—is probably “yes." But as Robert Kane, a gerontologist at the Minnesota School of Public Health, recently noted, "Long-term care needs a long-term solution. Right now we are keeping the bus rolling with spit and bailing wire."  For the time being, some of that "spit and bailing wire" has to come from Medicare.

This situation will probably continue a while longer as it is highly unlikely that this session of Congress will even come close to addressing the potential crisis that awaits the nation as baby boomers approach the need for these services. There is, however, the beginning of a private insurance market for these needs. The government at both the state and federal levels will continue to have a role in financing long-term care, so the issue will not go away.

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Sources

2000 Green Book, Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means, Committee on Ways and Means, United States House of Representatives, Washington, D.C., October 6.

Alexander, Neil. 2002. “Long-Term Care Insurance.” Journal of Accountancy. May.

Daniel, Anne R. 2002. “Strict Rules Govern Nursing Home Costs.” Greensboro News Record, June 12.

 Dodge, Robert. 2002. “Medicaid Costs Gobbling up State Budgets.” Knight Ridder Tribune News Service. May 14.

 Duff, Susanna. 2002. “Good, Bad News for Nursing Homes.” Modern Healthcare. April 29.

“HHS to Extend $1 Billion in Medicare Payments to Nursing Homes.” HHS News. Department of Health and Human Services, Washington, D.C., April 23, 2002.

Mulvey, Janemarie and Li, Annelise. 2002. “Long-Term Financing: Options for the Future.” Benefits Quarterly. Second Quarter.

 Piotrowski, Julie. 2002. “A Post-Acute Turnaround; Survey Shows Improvement by Many Providers, but Outlook Still Looks Stormy.” Modern Healthcare. May 6.

A Profile of Medicaid—Chart Book 2000. Health Care Financing Administration, Department of Health and Human Services, Washington, D.C., September.

Report to the Congress: Medicare Payment Policy, March 2002. Medicare Payment Advisory Commission, Washington, D.C.

Rosenblatt, Bob. 2002. “Dollars and Sense: Seniors, You’re on Your Own.” The Los Angeles Times. June 3.

Sherrid, Pamela. 2002. “Long-Term Blues. Nursing Homes to Congress: We Really Need Medicare.” U.S. News and World Report. May 27.

Sloane, Todd. 2002. “What a Fix We’re (Not) In: Medicare Should be Reformed Before Adding a Much-Needed Drug Benefit.” Modern Healthcare. May 27.

Statistical Abstract of the United States, 1996. U.S. Department of Commerce, Economics, and Statistics, Administration Bureau of the Census, Washington, D.C., October.

“When Medicare Falls Short.” 2002. Advisor Today. April.

The July NIHP issue brief will examine the role of Medicaid and the private insurance system in financing care today and some ideas that are being proposed for the future.