Nursing Homes Squeezed by Medicare Cuts

Homes complain, but agency says past overpayments justify 11 percent cut in year beginning this October.

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The nation's nursing homes are facing a $4 billion drop in annual payments from Medicare. The cuts affect reimbursement fees for what's known as "post-acute care" for seniors at skilled nursing facilities. Such services are needed by seniors who have been hospitalized and require rehabilitative services before returning to their own homes. Medicare does not cover long-term nursing home stays.

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The extensive wrangling and possible impact of these relatively small cuts provides a preview of the brutal fights that would take place in any efforts to reduce the nation's huge federal deficits. They are projected at more than $1.3 trillion this year and $1.1 trillion for the year beginning this October—several hundred times the size of the nursing home reimbursement cuts.

The Centers for Medicare & Medicaid Services (CMS) finalized the nursing home action in late July. They take effect October 1. The stock prices of several publicly traded nursing home chains plunged immediately and the industry reacted with strong protests. Some home operators said they would need to cut expenses because of the 11 percent payment reduction.

CMS estimates that nursing homes receive about 20 percent of their total revenues for such post-acute care, meaning their total revenues would drop by a bit more than 2 percent. While that may not seem to be a large cut, some homes say it will have far-reaching impacts on their business.

Ironically, the prospective cuts were caused by an improvement in payments for skilled nursing services that was introduced last October, explains Larry Minnix, CEO of LeadingAge, a major trade association in Washington representing senior care and housing providers.

In a simplified explanation of a very complex topic, Minnix said nursing homes are paid different reimbursement rates for different types of post-acute care. A simple case, for example, could involve a woman who broke her hip, had a pin placed in it at the hospital, and then spent a few weeks doing rehab in a nursing home before returning to her own residence. At the other end of the care continuum are much more complex cases. Such a case, he explained, might involve a senior with multiple chronic physical problems and dementia. When that person breaks her hip, post-acute care can be more complex and expensive.

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Until last October, Minnix said, reimbursement rates for simple cases were attractive but less so for complex cases. A lot of those more expensive cases are handled by non-profit nursing homes (a big component of LeadingAge membership) as opposed to for-profit facilities that often focus on more profitable rehabilitation opportunities.

Medicare changed its reimbursement rules to more fairly balance payments for different types of care, Minnix said. "Medicare thought the post-acute care sector was properly compensated overall," he said, "but they wanted to shift costs from less complex to more complex cases. This was a good thing."

However, some providers of care services figured out how to game the new reimbursement system, Minnix said. They took advantage of loopholes that increased their payments for certain group and other therapy situations that did not require corresponding increases in their actual work loads. Reimbursements for these billings were more than $4 billion above CMS expectations, the agency said, and led to the comparable reduction in reimbursements for the coming year.

The problem with the agency's remedy, Minnix said, is that all homes will see their reimbursements cut, not just those that took advantage of the loopholes. "There's not a whole lot of sympathy for people who have been overcharging," he said. But cutting reimbursement rates for homes providing complex post-acute care will inflict real hardship on them. "Some members [of LeadingAge] are finding they will be hugely affected," Minnix said.

CMS was advised in advance by industry and government experts to close the loopholes, but chose not to do so. The Medicare Payment Advisory Commission is the independent Congressional agency that provides Medicare advice to Congress. It sent letters to CMS about the loopholes. However, it supports the CMS solution, which is consistent with the types of across-the-board adjustments it favors.

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Staffing accounts for more than two-thirds of a typical nursing facility's expenses, so employment cutbacks would be a likely place for expense reductions. Such cutbacks could adversely affect the quality that seniors receive at such homes, Minnix said. Access to facilities themselves could be harder to find when seniors are discharged from hospitals in need of rehabilitative care. That's because some homes may decide to not accept expensive cases on which they could lose money due to the reduced Medicare reimbursement rates.

Further, he explained, the cuts are coming at the same time that many states have been forced to cut Medicaid payments for nursing care. Many of these homes were already losing money on Medicaid patients, Minnix said, but have been compensating with the profits they earn from Medicare reimbursements.

The CMS decision leaves nursing homes "so overregulated and underreimbursed" that some LeadingAge homes may leave the industry, Minnix said. "CMS believes that's just a lot of rhetoric but we will be trying to quantify that" after the cuts take effect.

"We do not believe that nursing homes will respond to the payment changes by decreasing the quality of care furnished to patients," CMS said in a written reply to U.S. News's questions about the reimbursement reductions. "We plan to monitor Medicare and Medicaid nursing facility activities closely during the upcoming program year (when these payment changes go into effect) so that we can quickly identify and correct any quality problems that may occur."

Twitter: @PhilMoeller