oversight

Medicaid Nursing Home Payments: States' Payment Rates Largely Unaffected by Recent Fiscal Pressures

Published by the Government Accountability Office on 2003-10-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to Congressional Requesters




October 2003
               MEDICAID NURSING
               HOME PAYMENTS

               States’ Payment Rates
               Largely Unaffected by
               Recent Fiscal
               Pressures




GAO-04-143
                                                October 2003


                                                MEDICAID NURSING HOME PAYMENTS

                                                States’ Payment Rates Largely
Highlights of GAO-04-143, a report to           Unaffected by Recent Fiscal Pressures
congressional requesters




Almost half of all Americans over               Recognizing the large share of Medicaid spending that is allocated to nursing
the age of 65 will rely on nursing              homes and the importance of spending their Medicaid dollars effectively, the
home care at some point in their                19 states GAO reviewed have designed multifaceted approaches to setting
lives, and two in three nursing                 nursing home payment rates. All of these states base payment rates on
home residents have their care                  homes’ actual costs and most develop rates specific to each home. These
covered at least in part by
Medicaid. Under Medicaid, states
                                                payment methods also generally incorporate incentives to achieve certain
set nursing home payment rates                  goals, such as promoting efficiency or encouraging homes to target spending
and the federal government                      toward resident care. States typically update payment rates regularly to
reimburses a share of state                     reflect changes in nursing homes’ costs due to factors such as inflation or
spending. According to the most                 residents’ changing care needs.
recently available data, Medicaid
nursing home expenditures exceed                Although each of the 19 states experienced recent fiscal pressure, states’
$43 billion, and total Medicaid                 nursing home payment rates have remained largely unaffected. Any future
spending for fiscal year 2003 is                changes, however, remain uncertain. During fiscal years 1998 through 2004,
expected to double by 2012. Such                only 4 of these states—Illinois, Massachusetts, Michigan, and Texas—cut the
projections of increased Medicaid               per diem rates paid to all nursing homes at some point, and in 2 of these
spending come as most states are
confronting their third consecutive
                                                states, the rate reduction was for less than 1 year. Two other states—
year of fiscal pressure. According              Connecticut and Oregon—also froze nursing home per diem rates for a
to the National Association of State            portion of this period. In addition, all 19 states modified the methods they
Budget Officers (NASBO), in fiscal              use to determine nursing home payment rates during this time, such as
year 2003, 30 states collected less             changing ceilings on payment rates; however, irrespective of shifting fiscal
revenue than they budgeted for,                 pressure, the extent to which states changed specific features of their
and 37 states reduced enacted                   payment methods generally remained constant, with varying effects on
budgets by almost $14.5 billion.                payment rates to individual homes within states. Further, in over three-
                                                quarters of these states, nursing home per diem rates grew, on average, by
In light of concerns about the                  an amount that exceeded the skilled nursing facility market basket index,
adequacy of nursing home                        the index used by the Centers for Medicare & Medicaid Services to measure
resources, GAO was asked to
examine how state Medicaid
                                                changes in the price of nursing home goods and services for Medicare, from
programs determine nursing home                 fiscal years 1998 through 2003. Many states were able to avoid making
payment rates and whether these                 significant changes to nursing home payment rates by relying on existing
payment methods or rates have                   resources, such as tobacco settlement and budget stabilization funds, and
changed given recent state fiscal               increasing revenue by imposing cigarette or nursing home provider taxes.
pressures. GAO interviewed state                Even with these alternative funding sources and recent temporary federal
and nursing home industry officials             fiscal relief, however, officials in some states suggest that nursing home
in 19 states and obtained                       payment reductions are possible in the future.
documentation about nursing home
payment rates and methods,                      GAO received comments on a draft of this report from Medicaid officials in
including state methods to                      the 19 states reviewed, who generally agreed with the characterization of
determine nursing home per diem
rates for fiscal years 1998 through
                                                their respective nursing home payment methods. GAO also received
2004.                                           technical comments from representatives of two organizations that
                                                represent the nursing home industry.
www.gao.gov/cgi-bin/getrpt?GAO-04-143.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Kathryn G.
Allen at (202) 512-7118.
Contents


Letter                                                                                           1
                       Results in Brief                                                          2
                       Background                                                                4
                       State Nursing Home Payment Methods Link Rates to Costs,
                         Encourage Efficiency, and Typically Target Funds to Direct
                         Resident Care                                                           9
                       State Fiscal Pressures Generally Have Not Affected Medicaid
                         Payment Rates to Nursing Homes, but Future Changes Remain
                         Uncertain                                                              17
                       External Comments                                                        26

Appendix I             Scope and Methodology                                                    28



Appendix II            Summary of Certain Payment Characteristics
                       Used in Selected States                                                  31



Appendix III           Changes to Nursing Home Payment Methods or
                       Rates in 19 States                                                       43



Appendix IV            GAO Contact and Staff Acknowledgments                                    51
                       GAO Contact                                                              51
                       Acknowledgments                                                          51


Related GAO Products                                                                            52



Tables
                       Table 1: Features Found in Medicaid Nursing Home Payment
                                Methods in 19 States, September 2003                            10
                       Table 2: Types of Cost Centers and Related Costs Commonly
                                Found in 19 States’ Medicaid Nursing Home Payment
                                Methods                                                         14
                       Table 3: Examples of Funding Sources States Reported Using to
                                Respond to Fiscal Pressures, 1998-2003                          23


                       Page i                            GAO-04-143 Medicaid Nursing Home Payments
         Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of
                  19 Reviewed States, September 2003                               25
         Table 5: Study States Categorized by Selection Factors                    28
         Table 6: Peer Grouping Techniques Used in Reviewed States, as of
                  June 2003                                                        32
         Table 7: Direct Resident Care, Indirect Care, and Administrative
                  Cost-Center Ceilings in Reviewed States with Individual
                  Home Rates, as of June 2003                                      34
         Table 8: Direct Resident Care, Indirect Care, and Administrative
                  Cost-Center Ceilings in Reviewed States with Flat Payment
                  Rates, as of June 2003                                           36
         Table 9: Efficiency Incentives Used in Reviewed States, as of
                  June 2003                                                        38
         Table 10: Case-Mix Classification Systems Used in Reviewed
                  States, as of June 2003                                          40
         Table 11: Occupancy Standards Used in Reviewed States, as of
                  June 2003                                                        42
         Table 12: State-Reported Changes to Existing Nursing Home
                  Payment Methods or Rates, State Fiscal Years 1998-2004           44


Figure
         Figure 1: Average Annual Percentage Change in Average Per Diem
                  Rates, by State, Compared to the SNF Market Basket
                  Index, State Fiscal Years 2001-2003                              21




         Page ii                            GAO-04-143 Medicaid Nursing Home Payments
Abbreviations

AAHSA                      American Association of Homes and Services for
                           the Aging
AHCA                       American Health Care Association
BBA                        Balanced Budget Act of 1997
CBO                        Congressional Budget Office
CPI                        Consumer Price Index
CMS                        Centers for Medicare & Medicaid Services
CNA                        certified nursing assistant
IOC                        Inspection of Care
NASBO                      National Association of State Budget Officers
NCSL                       National Conference of State Legislatures
NGA                        National Governors Association
OBRA                       Omnibus Budget Reconciliation Act
OSCAR                      Online Survey Certification and Reporting
RUG                        Resource Utilization Group
SCHIP                      State Children’s Health Insurance Program
SFY                        state fiscal year
SNF                        skilled nursing facility
TILE                       Texas Index for Level of Effort
UPL                        upper payment limit




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Page iii                                   GAO-04-143 Medicaid Nursing Home Payments
United States General Accounting Office
Washington, DC 20548




                                   October 17, 2003

                                   The Honorable Charles E. Grassley
                                   Chairman
                                   The Honorable Max Baucus
                                   Ranking Minority Member
                                   Committee on Finance
                                   United States Senate

                                   The Honorable W.J. “Billy” Tauzin
                                   Chairman
                                   Committee on Energy and Commerce
                                   House of Representatives

                                   The Honorable John Shimkus
                                   House of Representatives

                                   Almost half of all Americans over the age of 65 will rely on nursing home
                                   care at some point in their lives. Medicaid, a joint federal-state program
                                   that spent over $43 billion on nursing home services in fiscal year 2001,
                                   pays at least in part for the care provided to approximately two in three
                                   nursing home residents. Under Medicaid, states set their own nursing
                                   home payment rates and the federal government provides funds to match
                                   states’ share of spending as determined by a federal formula.1
                                   Expenditures for Medicaid nursing home services have grown over the
                                   past several years and are expected to continue to grow as the baby boom
                                   generation ages, with 2001 expenditures expected to more than double by
                                   2012. Projections of such increased Medicaid spending come as states
                                   faced their third consecutive year of fiscal pressure in 2003. According to
                                   the National Association of State Budget Officers (NASBO), 37 states
                                   reduced their fiscal year 2003 enacted budgets by almost $14.5 billion, the
                                   largest spending cut since 1979, in part due to lower than expected
                                   revenue collections.

                                   In view of your concerns about the adequacy of nursing home resources,
                                   you asked us to examine whether recent fiscal pressures have affected


                                   1
                                    The federal share of Medicaid funding varies by state and is based on a state’s per capita
                                   income in relation to the national per capita income. For fiscal year 2003, the federal share
                                   of individual states’ Medicaid expenditures ranged from 50 to 76.6 percent, averaging 57
                                   percent across states.



                                   Page 1                                       GAO-04-143 Medicaid Nursing Home Payments
                   how states determine nursing home payment rates or the rates they pay
                   homes. Specifically, you asked us to provide information on (1) state
                   Medicaid programs’ methods to determine nursing home payment rates for
                   services provided to Medicaid residents and (2) how these payment
                   methods and rates have changed given recent state fiscal pressures.

                   To answer these questions, we interviewed officials from the state
                   Medicaid and budget offices, as well as representatives from the local
                   affiliates of national nursing home associations, in 19 states.2 We selected
                   these states based on a number of criteria, including overall population,
                   Medicaid nursing home residents per capita, and largest decline or
                   smallest growth in state tax revenue from 2000 through 2002. From the
                   officials we interviewed we obtained documentation, including state laws
                   and regulations, on how states determined nursing home payment rates
                   (including changes) from state fiscal years 1998 through 2004, as well as
                   the average per diem rates states paid nursing homes from state fiscal
                   years 1998 through 2003.3 We conducted our work from September 2002
                   through September 2003 in accordance with generally accepted
                   government auditing standards. (For additional information on our scope
                   and methodology, see app. I.)


                   Recognizing the large share of Medicaid spending that is allocated to
Results in Brief   nursing homes and the importance of spending their Medicaid dollars
                   effectively, states have designed multifaceted approaches to pay nursing
                   homes for the care they provide to Medicaid-covered residents. All 19
                   states we reviewed base nursing home payment rates on homes’ costs, and
                   over three-quarters of these states develop rates that are specific to each
                   home. The 19 states also incorporate various incentives in their payment
                   methods to achieve certain goals, such as promoting efficient and
                   economical home operations or encouraging homes to target spending


                   2
                    We originally selected 20 states: Alabama, Arizona, Arkansas, California, Colorado,
                   Connecticut, Florida, Illinois, Iowa, Massachusetts, Michigan, New Jersey, New York,
                   North Dakota, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, and Vermont. We
                   subsequently excluded Arizona from our analysis because its payment method applies to
                   only 5 percent of Medicaid nursing home residents. Costs of care provided to the remaining
                   95 percent of the state’s nursing home residents are paid by the state’s managed-care
                   program.
                   3
                    We examined states’ methods for determining payment for nursing homes’ operating costs,
                   which include the costs of direct resident care, indirect care services (such as dietary,
                   laundry, and medical supplies), and administration. Per diem rates for fiscal year 2004 were
                   not available for all states.




                   Page 2                                      GAO-04-143 Medicaid Nursing Home Payments
toward direct resident care. For example, to promote efficiency, most of
these states impose ceilings on the payment homes can receive. States do
not, however, encourage efficiency to the same degree for all types of
costs; instead, their payment methods often impose a higher ceiling for
costs related to direct resident care than to other costs, thus encouraging
homes to spend more on resident care. In addition, to reflect changing
nursing home costs due to certain factors, such as inflation, almost all the
states we reviewed update payment rates annually, often using current
information on individual homes’ costs. Twelve of the 19 states also adjust
payment rates based on the care needs or case-mix of a home’s residents.
These adjustments are intended to further link payments to potential costs
while encouraging homes to accept residents who require more costly
care.

Despite each of the 19 states experiencing recent fiscal pressure, states’
nursing home payment rates have remained largely unaffected. Any future
changes, however, remain uncertain. During fiscal years 1998 through
2004, only 4 of these states—Illinois, Massachusetts, Michigan, and
Texas—cut the per diem rates paid to all nursing homes at some point, and
in 2 of these states the rate reduction was for less than 1 year. Two other
states—Connecticut and Oregon—also froze nursing home per diem rates
for a portion of this time period. In addition, all 19 states modified the
methods they use to determine nursing home payment rates during this
time, such as changing ceilings on payment rates; however, irrespective of
shifting fiscal pressure, the extent to which states changed specific
features of their payment methods generally remained constant, with
varying effects on payment rates to individual homes within states.
Further, in over three-quarters of these states, nursing home per diem
rates grew, on average, by an amount that exceeded the skilled nursing
facility (SNF) market basket index, which is used by the Centers for
Medicare & Medicaid Services (CMS) to measure changes in the price of
nursing home goods and services for Medicare, from fiscal years 1998
through 2003. More than three-quarters of the states indicated that they
have forestalled more significant changes to their payment rates by relying
on alternative funding sources to help balance their state budgets, such as
tobacco settlement or budget stabilization funds, and increasing revenue
by imposing cigarette or nursing home provider taxes. Even with these
alternative funding sources and recent temporary federal fiscal relief,
however, officials in some states suggest that nursing home payment
reductions are possible in the future.




Page 3                              GAO-04-143 Medicaid Nursing Home Payments
             We received comments on a draft of this report from Medicaid officials in
             the 19 states that were included in our review, who generally agreed with
             our characterization of their respective nursing home payment methods,
             as well as from representatives of two organizations that represent the
             nursing home industry. State and association officials provided clarifying
             and technical comments regarding nursing home payment methods and
             rates, which we incorporated as appropriate throughout the report.


             Medicaid operates as a joint federal-state program to finance health care
Background   coverage for certain categories of low-income individuals, over 11 million
             of whom are elderly or disabled.4 In total, Medicaid cost almost $258
             billion in fiscal year 2002, and the Congressional Budget Office (CBO)
             projects that fiscal year 2003 spending will double by 2012. Today,
             Medicaid ranks as the third largest mandatory spending program in the
             federal budget and represents the largest source of federal funds to the
             states, accounting for 41 percent of all federal outlays for grants to states
             and local governments in fiscal year 2001. In terms of overall state
             expenditures, outlays for Medicaid rank second only to elementary and
             secondary education, accounting for an estimated 15 percent of general
             fund expenditures in state fiscal year 2002.5

             Within broad federal guidelines, states have considerable flexibility in how
             they administer their Medicaid programs. The federal statute requires state
             programs to cover certain services and populations, such as nursing home
             services for qualifying elderly and for disabled individuals aged 21 and
             over.6 Each state determines what medical services to cover, establishes
             eligibility requirements, sets provider payment rates, and develops its own
             administrative structure. As a result, Medicaid essentially operates as 56
             separate programs: 1 in each of the 50 states, the District of Columbia,
             Puerto Rico, and each of the U.S. territories. Nursing homes care for
             people with a wide range of clinical conditions and provide a variety of



             4
              This figure represents 27 percent of total Medicaid enrollment in fiscal year 2000, the most
             recent year for which data are available by type of beneficiary.
             5
              National Governors Association and National Association of State Budget Officers, The
             Fiscal Survey of States (Washington D.C.: June 2003), http://www.nasbo.org (downloaded
             June 27, 2003).
             6
               In addition to the mandatory services states are required to include in their Medicaid
             programs, states may choose to cover certain optional services, including personal care
             services and physical and occupational therapies.




             Page 4                                      GAO-04-143 Medicaid Nursing Home Payments
services, including basic custodial care, medical social services, skilled
nursing care, and rehabilitative therapies. Medicaid is the single largest
funding source for nursing home services, providing about one-half of total
expenditures for these services in 2003.7 Medicaid supports the care of an
even larger share of nursing home residents, paying at least in part for the
services provided to approximately two in three residents nationwide.8

Federal requirements regarding states’ methods for reimbursing nursing
homes for the services they provide to Medicaid residents have changed
over time. A 1972 amendment to the Social Security Act required that
states reimburse nursing homes on a reasonable cost-related basis.9 Under
this requirement, states developed methods to identify nursing homes’
reasonable costs as well as set rates based on these costs, both of which
were subject to federal verification and approval. Nursing home providers
filed a number of federal lawsuits contesting the adequacy of states’
payment rates.

In 1980, Congress passed legislation, commonly referred to as the Boren
Amendment, which provided that Medicaid payment rates for nursing
homes had to be “reasonable and adequate to meet the costs which must
be incurred by efficiently and economically operated facilities.”10 The
Boren Amendment also transferred responsibility for verifying that rates
complied with these standards from the federal government to states;
however, it did not grant states unlimited discretion in developing
payment rates. The 1980 Conference Report that accompanied the Boren
Amendment stated that rates should not be developed “solely on the basis



7
 According to CMS’s actuarial estimates, national nursing home spending will total more
than $108 billion in 2003. Medicaid and Medicare will cover about 50 percent and 11
percent of these costs, respectively, and about 37 percent of these costs will be covered by
out-of-pocket payments, private health insurance, and other private funds. (These
percentages do not add to 100 because of rounding.)
8
 Certain Medicaid enrollees, including nursing home residents, are required to contribute
shares of their incomes to the costs of their care, which in part explains why the share of
nursing home residents supported in some measure by Medicaid is greater than Medicaid’s
share of total nursing home revenues.
9
 Social Security Amendments of 1972, Pub. L. No. 92-603, § 249, 1972 U.S.C.A.A.N. 1548,
1667. Prior to this amendment, there were no substantive federal standards governing state
payment for nursing home services.
10
 Ominbus Budget Reconciliation Act (OBRA) of 1980, Pub. L. No. 96-499, § 962(a), 94 Stat.
2599, 2650. The Boren Amendment was extended to payments for inpatient hospital
services as part of OBRA 1981 (Pub. L. No. 97-35 § 2173, 95 Stat. 808 (1981)).




Page 5                                      GAO-04-143 Medicaid Nursing Home Payments
of budgetary appropriations” and required states to submit annual
assurances to the Secretary of Health and Human Services that rates
complied with Boren regulations.11 The Conference Report also clarified
that while the Boren Amendment was intended to give states discretion to
develop the methods and standards on which payment rates would be
based, the federal government retained final authority in approving states’
rates.12

During the roughly 17 years following the enactment of the Boren
Amendment, providers in many states filed suits alleging that Medicaid
payment rates were not sufficient and therefore violated federal
requirements that rates be reasonable and adequate to cover the costs of
efficiently and economically operated nursing homes. In 1990, the
Supreme Court found that the amendment imposed a binding obligation
on states to adopt reasonable and adequate payment rates and held that
providers could sue to enforce this obligation and challenge Medicaid
payment rates in federal court.13 After this decision, nursing home
providers continued to rely on the courts to review payment rates they
considered insufficient and verify that these rates complied with federal
payment standards.

The Balanced Budget Act of 1997 (BBA) repealed the Boren Amendment,
providing states with increased flexibility to develop approaches to pay
nursing homes that participate in Medicaid.14 States are no longer required
to submit annual rate findings to the federal government but instead must
develop and implement a public process for determining rates, which
requires that states publish all proposed and final rates—including their
methodologies and justifications—and ensure that providers,
beneficiaries, and their representatives are given reasonable opportunity
to review and comment on rates.15 Additionally, states must continue to



11
     H.R. Conf. Rep. No. 96-1479 at 154 (1980), reprinted in 1980 U.S.C.A.A.N. 5903, 5945.
12
     H.R. Conf. Rep. No. 96-1479 at 154 (1980).
13
     Wilder v. Virginia Hospital Association, 496 U.S. 498 (1990).
14
     Pub. L. No. 105-33, § 4712, 111 Stat. 509 (1997).
15
 States may fulfill public process requirements in a number of ways, including holding
public hearings to disclose proposed rates and payment methods; using an open
commission or similar process to set rates; or publishing changes to payment methods in
newspapers of general circulation and making copies of proposed and final rates, payment
methods, and justifications underlying changes available to the public.




Page 6                                            GAO-04-143 Medicaid Nursing Home Payments
                         ensure that payments are consistent with efficiency, economy, and quality
                         of care standards.16


State Fiscal Pressures   In 2003, states faced their third consecutive year of fiscal pressure, with
                         revenue collections again falling short of planned expenditures. A June
                         2003 survey conducted by NASBO and the National Governors Association
                         (NGA) found that 30 states collected less revenue in fiscal year 2003 than
                         they planned for in their budgets, with sales tax collections 2.5 percent
                         lower than originally budgeted and personal and corporate income tax
                         collections 8.6 percent and 8.3 percent lower than expected, respectively.17
                         According to an April 2003 survey conducted by the National Conference
                         of State Legislatures (NCSL), 39 states and the District of Columbia faced
                         budget shortfalls at some point during fiscal year 2003, totaling over $29
                         billion.18

                         At the same time states have experienced shortfalls in their expected
                         revenue collections, they have also experienced significant growth in
                         Medicaid expenditures. According to CMS, the state and local share of
                         Medicaid spending grew almost 14 percent in fiscal year 2002 and is
                         projected to grow almost 10 percent in 2003.19 In their June 2003 survey,
                         NASBO and NGA reported that 25 states experienced Medicaid budget
                         shortfalls in state fiscal year 2002, and 28 states reported these shortfalls
                         in 2003.




                         16
                              42 U.S.C. §1396a(a).
                         17
                              NGA and NASBO.
                         18
                          National Conference of State Legislatures (NCSL), State Budget Update: April 2003
                         (Washington, D.C.: April 2003).
                         19
                           The 2002 spending growth is based on Medicaid expenditure data from CMS. Projections
                         of increased spending for 2003 are based on calendar year actuarial estimates published by
                         CMS staff in Health Affairs. See S. Heffler et al., “Health Spending Projections For 2002-
                         2012”, Health Affairs, vol. 22, no. 2 (Bethesda, Md.: Project Hope, 2003);
                         http://www.healthaffairs.org/WebExclusives/Heffler_Web_Excl_020703.htm (downloaded
                         June 13, 2003). The projected increase in states’ 2003 Medicaid spending includes spending
                         for the State Children’s Health Insurance Program (SCHIP), which was created under BBA
                         to provide health care coverage to children of low-income families with incomes that
                         exceed the eligibility limits for Medicaid.




                         Page 7                                     GAO-04-143 Medicaid Nursing Home Payments
Fiscal pressures have compelled states to confront difficult choices,
especially because 49 states and the District of Columbia are required to
balance their budgets.20 Recognizing that the Medicaid program represents
a large component of many states’ budgets, virtually all states have
implemented or planned new cost-containment measures in order to
control Medicaid spending growth in 2003, according to another recent
state survey.21 For example, 45 states reported that they planned to reduce
spending on prescription drugs, which is an optional benefit, during fiscal
year 2003. In addition, benefit reductions, such as limits for vision care and
dental services, and changes to eligibility requirements, such as a lowered
income threshold for Medicaid program eligibility, were additional cost-
containment measures used or proposed by states.

In May 2003, Congress passed the Jobs and Growth Tax Relief
Reconciliation Act, which included $20 billion in fiscal relief to state and
local governments.22 Of these funds, $10 billion is earmarked for Medicaid,
providing temporary enhancements to the federal share of Medicaid
funding through June 2004 to help states maintain Medicaid services and
eligibility.23 The remaining $10 billion in fiscal relief is divided among the
states based on population and can be used to assist states in providing
government services.




20
 Vermont is the only state that is not required to balance its budget each year. See Kaiser
Commission on Medicaid and the Uninsured, The Role of Medicaid in State Budgets
(Washington, D.C.: October 2001).
21
 See Victoria Wachino et al., Medicaid Spending Growth: a 50-State Update for Fiscal
Year 2003 (Washington, D.C.: Kaiser Commission on Medicaid and the Uninsured, January
2003).
22
     Pub. L. No. 108-27, 117 Stat. 752, 764 (2003).
23
  Temporary enhancements to the federal share of Medicaid funding involve both a “hold-
harmless” provision that prevents each state’s federal matching rate from decreasing below
certain levels and an across-the-board increase to federal matching rates for all states.
Under the hold-harmless provision, states receive the higher of their fiscal year 2002 or
fiscal year 2003 federal matching rates for the period April 1 through September 30, 2003,
and the higher of their fiscal year 2003 or fiscal year 2004 federal matching rates for the
period October 1, 2003, through June 30, 2004. In addition, an across-the-board increase of
2.95 percentage points is applied to each state’s matching rate as determined under the
hold-harmless provision for the period April 1, 2003, through June 30, 2004, provided the
state does not restrict Medicaid eligibility below the levels specified in its state plan as of
September 2, 2003.




Page 8                                           GAO-04-143 Medicaid Nursing Home Payments
                        Recognizing the importance of spending Medicaid dollars effectively, the
State Nursing Home      19 states we reviewed have designed methods to develop nursing home
Payment Methods         payment rates that include incentives for homes to deliver care efficiently,
                        operate economically, and concentrate resources on direct resident care.
Link Rates to Costs,    While nursing home payment rates in most of these states are related to
Encourage Efficiency,   individual homes’ costs of delivering needed services, most states also
                        limit payment for certain types of costs and many provide additional
and Typically Target    payments for direct resident care. Most of these states also regularly
Funds to Direct         adjust rates to reflect changes in homes’ costs or in the care needs of the
Resident Care           residents that homes serve.

                        Table 1 provides an overview of various payment features used by the 19
                        states we reviewed as of September 2003. These features will be discussed
                        below in greater detail. Because states pursue different strategies to meet
                        their various objectives, methods to determine rates differ considerably
                        among states. However, over half of the states we reviewed include at
                        least five such features in their payment methods, with states most
                        commonly using payment ceilings and annual rate updates.




                        Page 9                              GAO-04-143 Medicaid Nursing Home Payments
Table 1: Features Found in Medicaid Nursing Home Payment Methods in 19 States, September 2003

                                                                                              Add-on                Rate updates
                                                                                             payment                                   Rates
                                                                                            for direct        Rates             consistently
                                   Home-     Efficiency      Ceilings or        Peer         resident       rebased         inflated in non-       Case-mix
 State                      specific rates    incentive         flat rate     groups             care       annually           rebase years          system
 Alabama                                X                X             X              X               X              X
 Arkansas                               X                              X                                                                      X
 California                                                            X              X               X              X
 Colorado                               X                X             X                                             X                                       X
 Connecticut                            X                X             X              X                                                       X
 Florida                                X                              X              X               X              X
 Illinois                               X                X             X              X               X                                                      X
                                                                                                                      a
 Iowa                                   X                X             X              X               X                                                      X
 Massachusetts                                                         X                              X                                       X              X
 Michigan                               X                              X              X                              X
 New Jersey                             X                              X              X                              X                                       X
 New York                               X                              X              X               X                                       X              X
 North Dakota                           X                X             X                                             X                                       X
 Oregon                                                                X                                                                      X              X
 Pennsylvania                           X                X             X              X                              X                                       X
 Rhode Island                           X                              X                                                                      X
 South Dakota                           X                              X                              X              X                                       X
                                                                                                                                               b
 Texas                                                                 X                              X                                      X               X
                                                                                                       c
 Vermont                                X                              X                                                                      X              X
 Total                                 15                7            19            10                9               9                       8              12

Source: States’ Medicaid programs.
                                                     a
                                                      In Iowa, nursing home payment rates were rebased annually until July 1, 2001, when the state began
                                                     to phase in its new payment method.
                                                     b
                                                      Until September 1, 2001, Texas rebased rates annually. Since this time, the state rebases rates
                                                     biennially in conjunction with developing its budget and inflates rates to the midpoint of the 2-year
                                                     period.
                                                     c
                                                      Vermont provides an add-on payment to reimburse wages and other expenses for all nursing home
                                                     staff except the nursing home administrator.




                                                     Page 10                                           GAO-04-143 Medicaid Nursing Home Payments
States Typically Develop   All 19 states we reviewed base the per diem, or daily, rate they pay to
an Individual Rate for     nursing homes on costs, as reported in cost reports. While 4 states—
Each Home                  California, Massachusetts, Oregon, and Texas—use the average or median
                           costs of all homes to pay the same, flat rate, with some adjustments, to all
                           homes or homes within a specified group, the remaining 15 states compute
                           a rate for each home based on the individual home’s costs.24 States that pay
                           home-specific rates attempt to make more effective use of their resources
                           for nursing homes. They avoid paying lower-cost homes rates significantly
                           in excess of their costs, which can occur when rates are based on the
                           average or median costs across homes. In addition, by not making such
                           excess payments to lower-cost homes, states with home-specific rates can
                           use the same overall budget to pay more higher-cost homes rates that are
                           closer to their costs.


States Design Payment      States design their payment methods to encourage nursing homes to
Methods to Encourage       deliver care efficiently and economically. For example, all 19 states
Efficient Nursing Home     develop their payment rates prospectively, or prior to the time during
                           which the rates apply, using historical cost reports. Prospective rates
Operations                 encourage nursing homes to operate efficiently and incur only necessary
                           costs.25 Homes that deliver care for less than the payment amount profit;
                           conversely, providers experience losses if costs are higher than the
                           payment rate.

                           Seven of the states we reviewed use explicit efficiency incentives to
                           further encourage homes to minimize spending by providing them with
                           additional payment if they keep their spending below a certain amount.
                           For example, Connecticut nursing homes with indirect care or



                           24
                            In Massachusetts, Oregon, and Texas, payment rates to individual homes are adjusted to
                           reflect variation in resident care needs, while California pays groups of similar homes the
                           same rate. In addition, Massachusetts pays a small portion of capital costs on a home-
                           specific basis, and from state fiscal years 2000 through 2003, Texas imposed a staff
                           compensation accountability requirement for homes to spend 85 percent of their direct
                           resident care rate on staffing wages and benefits. Homes that did not spend this limit had to
                           pay the state the difference between what they spent and 85 percent of the flat, direct
                           resident care rate.
                           25
                             Under the alternative, retrospective payment systems, the actual costs incurred during the
                           year are paid after the submission and review of a home’s cost report at the end of the year.
                           Retrospective systems are recognized as inflationary; consequently, all states we reviewed
                           set rates prospectively. However, Michigan performs limited retrospective adjustments to
                           the payment rate for individual homes to cover changes in certain costs, such as qualifying
                           renovations.




                           Page 11                                     GAO-04-143 Medicaid Nursing Home Payments
administrative costs below the median of all homes’ costs in these
categories have up to 25 percent of this difference incorporated into their
per diem rates.26 (See app. II for more detail on how states develop nursing
home payment rates.)

To further encourage homes to operate efficiently, the 15 of the 19 states
that pay home-specific rates place ceilings, or limits, on the costs that are
                                                  ,
reflected in their nursing home payment rates.27 28 These ceilings encourage
homes to control spending as they will not be reimbursed for costs that
exceed these ceilings. Since the majority of homes have demonstrated that
they can provide care at costs below the ceiling, states may regard costs
above the ceiling as excessive.

In addition to imposing ceilings, many states use other mechanisms to
limit the costs that they recognize when determining homes’ per diem
rates. While in some cases these mechanisms may also encourage
efficiency, in other cases they may result in fewer homes receiving their
full costs than what the ceiling levels indicate. For example, regardless of
increasing nursing home costs, Colorado limits the annual increase in
administrative costs it recognizes to 6 percent, while South Dakota allows
no more than an 8 percent annual increase in overall payment rates. In
addition, although Rhode Island and North Dakota rebase their per diem
rates regularly, they do not rebase cost-center ceilings as frequently. For
example, Rhode Island inflates cost-center ceilings annually instead of
rebasing them, and North Dakota rebases ceilings every 3 years on
average, inflating them during the interim years. (See app. II for
descriptions of additional limits states place on nursing home payments.)

To avoid penalizing homes for costs beyond their control, 10 of the states
we reviewed categorize homes into peer groups and then set ceilings for
each peer group rather than having a single statewide ceiling for all homes.
States often establish peer groups for homes in the geographic areas that


26
 Seventeen of the 19 states we reviewed also incorporate occupancy standards, which
reduce the per diem rate for nursing homes with resident occupancy that is below an
established level. App. II addresses occupancy standards in more detail.
27
 The ceiling is typically based on a percentage of the median costs, or a certain percentile
of costs, for all homes in the state or within a category of homes. Individual homes’ rates
are typically determined by the lower of their own costs or the ceiling.
28
  In the four states that generally pay a flat rate to all homes or to all homes in a group, the
flat rate also promotes efficiency since homes with costs below the rate are able to retain
the difference.




Page 12                                       GAO-04-143 Medicaid Nursing Home Payments
have similar labor markets and associated wage costs or homes of
comparable size (i.e., homes with a large or small number of beds) that
should operate at similar levels of efficiency. For example, since costs per
day may vary by geographic location—such as urban versus rural areas—
establishing peer groups by location allows states to set higher ceilings for
homes in the more costly areas. Peer groups may be unnecessary in states
with ceilings that are set well above the median costs and where most
homes have costs below the ceilings or in states where wages vary little
across areas.

Despite the various ways states encourage nursing home efficiency,
industry representatives and industry-sponsored studies nonetheless raise
concerns that Medicaid payments do not cover the full costs of all nursing
homes. For example, a 2002 industry-sponsored study reported that
nursing home costs for Medicaid-covered residents in 2000 exceeded
Medicaid payment rates an average of $10 per resident day in the 37 states
included in the study.29 In addition, industry representatives in 7 of the
states we reviewed expressed concern that state payment methods do not
adequately account for increases in certain costs, such as liability
                                                              ,
insurance or direct resident care staff wages and benefits.30 31 However, by
incorporating certain features, such as ceilings, into their nursing home
payment methods, states have intentionally designed their payment
methods so that not all homes receive their full costs and so that lower-
cost homes, which are more likely to be efficient and economical, have
payment rates nearer to their costs.




29
 BDO Seidman, LLP, A Briefing Chartbook on Shortfalls in Medicaid Funding for
Nursing Home Care (July 2002).
30
  For example, Texas Medicaid officials examined Texas nursing home cost report data
from fiscal years 1998 through 2001 and found that average liability insurance costs per
nursing home bed increased almost threefold, from $207 to $592. Nonetheless, these costs
represented less than 1 percent of total costs for the typical Texas nursing home in 1998
and less than 2 percent of the typical home’s costs in 2001.
31
  Additionally, industry representatives in six states expressed concern regarding payment
methods for homes’ capital costs, noting that capital payment may be insufficient for a
variety of reasons, including states’ use of nursing homes’ historic values, which do not
reflect homes’ current capital values, when determining payment rates and low ceilings in
the capital cost center. A detailed analysis of payment methods for nursing homes’ capital
costs was beyond the scope of this report.




Page 13                                    GAO-04-143 Medicaid Nursing Home Payments
Nursing Home Payment      Through the design of their payment methods, states generally seek to
Methods Encourage         encourage nursing home spending on direct resident care. All 19 states we
Spending in Areas         reviewed divide nursing home costs into categories, or cost centers, with
                          common categories being direct resident care, indirect care,
Specifically Related to   administrative, and capital (see table 2). By varying their payment policies
Direct Resident Care      for each category, most states seek to target more of their funds to direct
                          resident care.32

                          Table 2: Types of Cost Centers and Related Costs Commonly Found in 19 States’
                          Medicaid Nursing Home Payment Methods

                           Cost center                       Type of included costs
                           Direct resident care              Nursing staff salaries, wages, and benefits
                           Indirect care                     Dietary, medical supplies, laundry, social services and activities,
                                                             and maintenance
                           Administrative                    Administrative salaries and expenses and office supplies
                           Capital                           Building and equipment expenses including depreciation, taxes,
                                                             interest, and rent

                          Source: State Medicaid programs.

                          Note: Indirect care and administrative costs are combined into a single cost center in 8 states and
                          separated into two centers in 11 states.


                          How states establish ceilings or efficiency incentives for each cost center
                          may encourage nursing homes to spend more money on direct resident
                          care than other areas. In nine of the states we reviewed that pay home-
                          specific rates, the direct resident care ceiling is higher than the
                          administrative ceiling, thus allowing a higher proportion of homes to have
                          their payments based on their total direct resident care costs than is the
                          case for their administrative costs. For example, for all homes within each
                          peer group in Connecticut, the direct resident care ceiling is set at 135
                          percent of the median direct resident care costs while the administrative
                          ceiling is set at 100 percent of the median administrative costs. In addition,
                          five of the seven states with efficiency incentives that reward homes for
                          spending less do not apply them to direct resident care costs, thereby
                          minimizing the incentive for homes to restrict spending in this area.33



                          32
                               The states we reviewed categorize nursing home costs into two to seven centers.
                          33
                            In addition, 9 of the 17 states with occupancy standards do not apply these standards to
                          the direct resident care cost center, and consequently payment for these costs is not
                          limited in homes with low occupancy (see app. II).




                          Page 14                                                 GAO-04-143 Medicaid Nursing Home Payments
                            Further, nine of the states we reviewed used add-on payments to
                            reimburse wages or other expenses for staff who provide direct resident
                            care or to promote the provision of high-quality direct resident care. For
                            example, in 2000, Massachusetts began providing an add-on payment to
                            nursing homes for certified nursing assistants (CNA), who assist residents
                            with activities such as bathing and eating. This add-on is based on CNA
                            salaries and Medicaid nursing home utilization. Because homes often use
                            add-on payments to increase their spending on direct resident care, these
                            payments may lead to higher costs on homes’ cost reports and therefore
                            could result in higher future per diem rates.34


States Update Payment       To reflect changes in nursing homes’ costs, 17 of the 19 states we reviewed
Rates to Reflect Changing   regularly calculate new payment rates or adjust existing rates for inflation.
Costs                       To rebase, or calculate new rates, states generally use costs as reported in
                            nursing homes’ most recent cost reports that reflect inflation or other cost
                            changes such as those due to more expensive technologies, a different
                            staff mix, or changing direct resident care needs.35 Nine of the 19 states we
                            reviewed rebase rates annually, and 8 states rebase homes’ rates every 2 to
                            4 years.36 The 2 remaining states, however, rebase infrequently, if ever;
                            Illinois has only rebased rates once in the past 9 years, and New York has
                            not fully rebased homes’ rates since 1986.37




                            34
                              Texas allows homes to qualify for additional direct resident care payments through its
                            staff enhancement program, in which 92 percent of nursing homes participate. The state’s
                            staff compensation accountability provision, which was in effect from fiscal years 2000
                            through 2003, provided homes with an incentive to target funds toward direct resident care.
                            This provision was eliminated in state fiscal year 2004, which began on September 1, 2003.
                            35
                              Frequent rebasing could have mixed effects on nursing homes’ spending. Since homes
                            that limit expenditures could receive a lower payment rate when states rebase rates,
                            frequent rebasing may reduce the incentive for homes that are paid prospective rates to
                            limit overall spending. However, frequent rebasing may also prevent homes from making
                            excessive cost reductions that could adversely affect resident care.
                            36
                             Arkansas rebases its payment rate using two different schedules: Costs related to direct
                            resident care staff and food are rebased every year, whereas costs associated with services
                            not directly related to residents, such as administrative costs, are rebased at least once
                            every 3 years.
                            37
                             New York does, however, rebase the payment for homes’ capital costs annually.
                            According to a state official, the effect of rebasing capital costs on nursing home rates
                            varies by home; however, in recent years, the capital portion of many homes’ rates has
                            declined.




                            Page 15                                      GAO-04-143 Medicaid Nursing Home Payments
                         Most states we reviewed also apply a standard inflation factor, such as the
                         Consumer Price Index (CPI) or the SNF market basket index, to adjust
                         rates during years they do not rebase or to reflect inflation between the
                         midpoint of the cost report year and the midpoint of the year when the
                         rates will be paid, a period that generally ranges from 18 to 36 months.38
                         However, Illinois has not consistently updated rates for inflation during
                         non-rebase years since 1994, and Iowa’s new nursing home payment
                         method, which was fully implemented on July 1, 2003, does not have a
                         provision for adjusting rates during non-rebase years.39 In addition, rather
                         than using a standard inflation factor, Connecticut and Illinois use
                         legislatively determined amounts to update rates when they do not
                         rebase.40 These amounts vary from year to year and are influenced by
                         budget availability.


By Adjusting Rates for   Instead of paying rates that are based on the costs required to care for a
Case-Mix, States Link    nursing home’s residents during the cost reporting period, 12 of the 19
Payment to Resident      states we reviewed use case-mix systems to tie payment to the costs
                         associated with a home’s current resident care needs. Using a variety of
Needs                    methods, states classify homes’ residents by the level of care they require
                         and adjust payment rates to reflect the costs associated with treating
                         current residents with different levels of need.41 While the rate adjustment
                         occurs with varying frequency, most states adjust rates for case-mix two to
                         four times a year.

                         Adjusting rates for case-mix may encourage homes to accept residents
                         who require more expensive care, and it also provides states with a tool to
                         compare more appropriately homes’ costs and to not penalize homes that
                         have higher costs due to a more costly mix of residents. In addition, case-


                         38
                           The SNF market basket index, which is the CMS index of prices for nursing home inputs
                         (e.g., wages, food, and drugs), is used to adjust nursing home payments for Medicare. Some
                         states use the CPI for a specific geographic area to adjust rates; for example, Vermont uses
                         the CPI for New England.
                         39
                          Nursing home payment rates in Iowa were rebased annually under the prior payment
                         system, which was in effect until July 1, 2001.
                         40
                              Connecticut uses its legislatively determined inflation factor to update rates annually.
                         41
                          Seven of the 12 states rely on a variation of the Resource Utilization Group (RUG) Patient
                         Classification System—the case-mix classification system used for Medicare—to classify
                         nursing home residents, while the remaining 5 states have developed their own
                         classification systems. The RUG system classifies nursing home residents into groups
                         depending on their therapy, nursing, and special care needs.




                         Page 16                                         GAO-04-143 Medicaid Nursing Home Payments
                            mix adjusted rates particularly help target payments in states that
                            otherwise pay the same, flat rate. Three of the four flat-rate states we
                            reviewed make case-mix adjustments to the rates so payments more
                            closely approximate the costs likely incurred by individual homes for
                            treating residents.


                            Recent state fiscal pressures have not resulted in widespread reductions in
State Fiscal Pressures      Medicaid payment rates to nursing homes in most states we reviewed,
Generally Have Not          although all of these states modified how they pay nursing homes from
                            fiscal years 1998 through 2004. While in some cases modifications to
Affected Medicaid           payment methods have clearly increased or decreased payment rates, in
Payment Rates to            other instances the effect of these modifications on payment rates for
                            individual homes is mixed. Further, in nearly three-quarters of the states
Nursing Homes, but          we reviewed, nursing home per diem rates grew, on average, by an amount
Future Changes              that exceeded the SNF market basket index for state fiscal years 2001
Remain Uncertain            through 2003, similar to the years immediately following the repeal of the
                            Boren Amendment. To avoid making significant changes to nursing homes’
                            payment rates, many states reported that they relied on existing resources,
                            such as budget stabilization funds and tax increases, to generate additional
                            funding. Other factors have also influenced the nature and extent of states’
                            changes to nursing home payment rates. Even with recent temporary
                            federal fiscal relief, however, officials in some states suggest that nursing
                            home payment reductions are possible in the future.


State Fiscal Pressure Has   Over the past several years, the states we reviewed have faced increasing
Not Led to Major Changes    budget pressures, and all reported experiencing fiscal pressure in fiscal
in Medicaid Nursing Home    year 2003. These budget pressures followed consecutive years of
                            significant economic growth in many states. For example, through state
Payment Methods or Rates    fiscal year 2000, Connecticut experienced 10 years of budget surpluses;
                            however, in state fiscal year 2001 the surpluses ended, and the state’s
                            deficit was over $800 million. Also, in 2001, Massachusetts began
                            experiencing increased fiscal pressures mainly because of decreased tax
                            revenues and lower capital gains.

                            Irrespective of shifting fiscal pressures experienced by these states, their
                            modifications to nursing home payment methods have not resulted in
                            widespread payment reductions to nursing homes from fiscal years 1998
                            through 2004. During this time, all 19 states we reviewed either modified




                            Page 17                              GAO-04-143 Medicaid Nursing Home Payments
components of their payment methods, such as changing cost-center
ceilings or implementing case-mix systems, or created new payment
methods, as was the case in Arkansas and Iowa.42 However, the extent to
which states changed specific features of their payment methods generally
remained constant during this time, with varying effects on payment rates
to individual homes within states. (See app. III for a list of selected state
changes.)

In addition, despite each of the 19 states experiencing recent fiscal
pressure, only 4 states—Illinois, Massachusetts, Michigan, and Texas—
explicitly cut the per diem rates paid to all nursing homes at some point
during state fiscal years 1998 through 2004, and the rate reduction was for
less than 1 year in 2 of these states. For example, for the 3-month period of
March through May 2003, Massachusetts reduced payment rates to nursing
homes by approximately 2.5 percent, but increased payment rates in June
2003 by about 6.3 percent.43 Similarly, Michigan reduced nursing home
rates from January through September 2002 by approximately 1 percent.44
With the start of Michigan’s fiscal year 2003 (October 1, 2002), this
reduction was lifted; however, facing budgetary constraints, the state
again reduced nursing home payment rates from March 2003 through
September 2003 by roughly 1.85 percent.45 While reductions in per diem
rates were temporary in these 2 states, the reduction in per diem rates in
Illinois and Texas were for longer periods of time. Illinois, for example,
implemented an across-the-board 5.9 percent cut to existing rates to all
Medicaid providers, including nursing homes, in July 2002, and froze


42
 Some states we reviewed also noted limited changes made to Medicaid services and
eligibility, such as Florida’s elimination of denture coverage for all adults in 2002, which
could affect nursing home residents.
43
 The June 2003 increase in per diem rates was due to provider tax revenues. In addition,
according to a state official, the state has proposed eliminating the March 2003 cut of 2.5
percent as part of a plan to increase per diem rates by an additional 3.1 percent. If
approved, the new per diem rates will be retroactive to September 1, 2003, and will be in
effect for the remainder of fiscal year 2004, which began on July 1, 2003. Increases in per
diem rates for the first 2 months of state fiscal year 2004—July and August 2003—will be
spread over the remaining months of the fiscal year.
44
  For Michigan nursing homes, this reduction applied to payment for direct resident care,
indirect care, and administrative costs, but was not applied to payment for capital costs.
While this reduction was in effect, the state implemented a provider tax on all nursing
home beds, and revenue from this tax was used to provide an increase to Medicaid per
diem rates beginning July 1, 2002.
45
 The reduction was only applied to payment for homes’ direct resident care, indirect care,
and administrative costs.




Page 18                                       GAO-04-143 Medicaid Nursing Home Payments
payment rates at this reduced level for fiscal year 2004, which began on
July 1, 2003. Similarly, in its 2004/2005 biennial budget, which began
September 1, 2003, Texas reduced payment rates to Medicaid providers,
with nursing home per diem rates being reduced by 1.75 percent from their
fiscal year 2003 levels.

In addition to these four states, Oregon froze Medicaid payment rates to
nursing homes in fiscal year 2003 at fiscal year 2002 rates and extended
this freeze at the beginning of fiscal year 2004. Beginning on July 1, 2003,
Connecticut froze Medicaid payment rates to nursing homes at January
2003 levels and also reduced the level of payment increases granted to
other Medicaid long-term care providers.46

The effect of states’ other modifications on payment methods varies. While
some changes have obvious positive or negative effects on payment rates,
the effect of other changes on payments to individual nursing homes is
mixed. For example, New Jersey’s decreased ceiling for administrative and
indirect care costs—from 105 to 100 percent of the median costs for all
homes—and Michigan’s elimination of add-on payments for quality
incentives and direct resident care staff wages likely lowered payment
rates to some extent for some nursing homes. Conversely, payment to
some nursing homes in New York and Vermont increased because of
recently implemented add-on payments for direct resident care staff
wages. Effects of other changes on nursing home payments, such as
Colorado’s implementation of a case-mix system in 2000 or the addition of
two counties to California’s Bay Area peer group in 2002, could either
increase or decrease payment rates depending on the home.

Although the effect that changes to payment methods have on rates for
individual nursing homes may be mixed, average per diem rates in the
states we reviewed generally have kept pace with increasing nursing home
costs as measured by the SNF market basket index from state fiscal years
1998 through 2003. As figure 1 shows, from state fiscal years 2001 through
2003—a period during which all 19 states we reviewed were experiencing
increased fiscal pressures—the average annual percentage change in
states’ average per diem rates in 14 of the 19 states exceeded the SNF




46
   Oregon’s rate freeze will continue, pending CMS approval of a waiver pertaining to the
state’s new provider tax legislation. Under Connecticut’s rate freeze, nursing homes will
continue to receive their January 2003 rates through the end of calendar year 2004.




Page 19                                     GAO-04-143 Medicaid Nursing Home Payments
market basket index.47 This trend is similar to what occurred to rates
during the years immediately following the repeal of the Boren
Amendment—1998 through 2000—when states’ fiscal conditions were
generally much more positive. In that earlier period, the average annual
percentage change in states’ average per diem rates met or exceeded the
SNF market basket index in 14 of these states, although the states that fell
below the SNF market basket index differed somewhat between the two
periods.48




47
  The SNF market basket index measures changes in the costs of the resources nursing
homes use, such as wages for staff or prices of supplies and equipment. It does not reflect
necessary changes in the quantities of resources nursing homes must use, such as
increased staff time when residents’ needs become more complex over time. However,
changes in residents’ needs from year to year, on average, are modest. The SNF market
basket index overstates the costs that Medicaid per diem nursing home rates are intended
to reimburse since it includes prescription drug costs, which Medicaid programs typically
pay separately. The index may not reflect certain cost changes in individual states. For
example, in recent years, significant increases in malpractice insurance costs, which likely
exceed the national average cost increase reflected in the index, have been reported in
several states. Also, some states have instituted or increased provider taxes nursing homes
must pay—a cost change not immediately reflected in the index. Four states we reviewed
—Arkansas, Massachusetts, Michigan, and New York—implemented such a tax during the
time period reflected in figure 1. For example, New York imposed a provider tax of 6
percent of nursing homes’ adjusted gross revenues in state fiscal year 2003; as a result, the
SNF market basket index understates cost increases experienced by the state’s nursing
homes during the time period of our analysis by 1.6 percentage points. Based on
discussions with payment experts, we believe that the SNF market basket index is the best
proxy measurement available to determine how Medicaid nursing home per diem rates
have kept pace with nursing homes’ changing costs. In addition, states capture changes in
costs not fully reflected in the SNF market basket index when they rebase rates, which 17
of the states we reviewed do regularly.
48
  The average annual percentage change in states’ average per diem rates fell below the
SNF market basket index from 1998 through 2000 in Arkansas and South Dakota; from 2001
through 2003 in Connecticut and Massachusetts; and for both periods in California, Illinois,
and New York.




Page 20                                     GAO-04-143 Medicaid Nursing Home Payments
Figure 1: Average Annual Percentage Change in Average Per Diem Rates, by State, Compared to the SNF Market Basket
Index, State Fiscal Years 2001-2003


16 Average annual percentage change


14


12


10


 8


 6


 4


 2


 0
      AL       AR        CA        CO   CT      FL         IL    IA     MA    MI      NJ     NY      ND      OR     PA      RI     SD      TX      VT
     State
                 Average percentage change in SNF market basket index
Source: State Medicaid programs.

                                                      Notes: Each bar represents the compounded average of the annual percentage change in statewide
                                                      average per diem rates from 2001 through 2003, and is based on GAO analyses of Medicaid nursing
                                                      home per diem rates from 2000 through 2003. For each of these fiscal years, states provided the
                                                      most readily available per diem rates, which were most commonly those rates in effect at the
                                                      beginning of the fiscal year. All states provided homes’ average rates weighted by resident days
                                                      except Arkansas and Pennsylvania, which provided projected rates for state fiscal year 2003. Per
                                                      diem rates were unavailable for 2003 in Michigan.


                                                      From state fiscal years 2001 through 2003, the average annual change in
                                                      per diem rates fell below the SNF market basket index in five states—
                                                      California, Connecticut, Illinois, Massachusetts, and New York. The
                                                      factors that contributed to per diem rates falling below this index varied
                                                      among these states.49 For example, Illinois’ rate reduction in fiscal year
                                                      2003 of almost 6 percent contributed to the average rate change falling
                                                      below the SNF market basket index. In addition, the lack of regular
                                                      rebasing likely contributed to lower per diem rates in Illinois and New



                                                      49
                                                        For other reasons, some states’ annual average percentage change in the per diem rates
                                                      fluctuated above or below the SNF market basket index. For example, Arkansas
                                                      implemented a new nursing home payment system in January 2001, and as a result rate
                                                      increases were significantly higher than the SNF market basket index.




                                                      Page 21                                       GAO-04-143 Medicaid Nursing Home Payments
                          York. Illinois rebased rates only once from fiscal years 1994 through 2001,
                          and as previously noted, New York has not fully rebased rates since 1986.

                          In addition, industry officials in some states told us that the inflation factor
                          used to update rates in non-rebase years is insufficient to meet nursing
                          homes’ changing costs. For example, industry officials in New York said
                          that the inflation factor the state uses to update homes’ rates annually, the
                          CPI, does not reflect increasing health care costs. In addition,
                          Connecticut—which rebases rates at least once every 2 to 4 years—uses a
                          legislatively set inflation factor to increase rates in non-rebase years,
                          which for the past several years has been limited to approximately 2
                          percent. Industry and Medicaid officials contend that this legislated
                          amount, which has consistently fallen below the SNF market basket index,
                          does not correspond with increases in actual nursing home costs.


States Averted More       To help balance their budgets, states we reviewed have relied on
Significant Payment and   alternative funding sources—including budget stabilization and tobacco
Programmatic Changes to   settlement funds— and have enhanced revenue by increasing taxes (see
                          table 3).50
Nursing Homes through
Several Means




                          50
                            Some states have also enhanced their revenue through the use of upper payment limit
                          (UPL) schemes in nursing homes. We have noted problems with some state UPL programs
                          in the past; however, independently reviewing the validity of these programs was beyond
                          the scope of this report. See U.S. General Accounting Office, Medicaid: HCFA Reversed Its
                          Position and Approved Additional State Financing Schemes, GAO-02-147 (Washington,
                          D.C.: Oct. 30, 2001), and Medicaid: State Financing Schemes Again Drive Up Federal
                          Payments, GAO/T-HEHS-00-193 (Washington, D.C.: Sept. 6, 2000). Also see related GAO
                          products at the end of this report.




                          Page 22                                   GAO-04-143 Medicaid Nursing Home Payments
Table 3: Examples of Funding Sources States Reported Using to Respond to Fiscal
Pressures, 1998-2003

                                     Tobacco         Budget
                                   settlement   stabilization   Cigarette tax    Medicaid
 State                                   fund           fund        increase    trust fund
 Alabama
 Arkansas
 California                                X
 Colorado                                  X
 Connecticut                                               X
 Florida                                   X
 Illinois                                  X                               X
 Iowa                                      X               X
 Massachusetts                             X               X
 Michigan                                  X               X               X            X
 New Jersey                                X               X               X
 New York                                  X               X               X
 North Dakota                                              X
 Oregon                                    X                               X
 Pennsylvania                              X               X
 Rhode Island                              X
 South Dakota                                                                           X
 Texas
 Vermont                                                   X               X
 Total                                    12               9               6            2

Source: State Medicaid programs.



Sixteen of the 19 states we reviewed reported using alternative funding
sources, such as tobacco settlement, budget stabilization, cigarette tax
increases, and Medicaid trust funds to deal with their states’ budgetary
pressures. Most commonly, states relied on tobacco settlement funds to
ease fiscal pressures. While many of the states we reviewed have
employed alternative funding sources or cigarette tax increases, not all the
states relied on these funds to cope with their budget situations. For




Page 23                                          GAO-04-143 Medicaid Nursing Home Payments
instance, all 19 states received tobacco settlement funds, yet only 12 used
these funds from 1998 through 2003 to respond to fiscal pressures.51

To help fund Medicaid nursing home payments in particular, several states
rely on nursing home provider taxes, and in light of recent fiscal pressures,
an increasing number of states have recently adopted or proposed these
taxes in an effort to fund nursing home payments or to avert service
reductions.52 Of the 19 states we reviewed, 8 currently have provider taxes
for nursing homes, with at least 4 of these states implementing the tax
since 2001, when fiscal pressures began increasing in many states. In
addition, 5 of the states reviewed currently have pending for CMS’s
approval a proposal to adopt a provider tax on nursing homes (see table
4). Of all types of providers, nursing homes were most commonly subject
to new provider taxes in state fiscal years 2003 and 2004, according to a
recent survey of all 50 states and the District of Columbia.53




51
  Tobacco settlement funds are received by all 50 states, the District of Columbia, and the 5
U.S. territories. Annually, tobacco companies pay 46 states for past health care costs
related to tobacco use as required by the Master Settlement Agreement of 1998. The
remaining 4 states—Florida, Minnesota, Mississippi, and Texas—receive payments from
tobacco companies per the requirements of individual settlement agreements. See U.S.
General Accounting Office, States’ Allocations of Fiscal Years 2002 and 2003 Master
Settlement Agreement Payments, GAO-03-407 (Washington, D.C.: Feb. 28, 2003).
52
 As a general rule, states may impose a health-care related nursing home provider tax for
up to 6 percent of nursing homes’ gross revenues if the tax is broad-based and uniformly
applied to all health care providers in a provider class—for example, to all nonpublic
nursing homes as either a dollar amount per bed or a percent of individual homes’
revenues. See 42 U.S.C. § 1396b (w)(3)(B) and (C); 42 C.F.R. § 433.68 (f). In a state with a
nursing home provider tax, a nursing home may claim, as an allowable Medicaid cost, the
portion of the provider tax paid that relates to providing services to Medicaid beneficiaries.
Upon paying the home’s claim for reimbursement, the state subsequently receives federal
matching funds for these paid claims, including the provider tax.
53
 See Vernon Smith, et al., States Respond to Fiscal Pressure: State Medicaid Spending
Growth and Cost Containment in Fiscal Years 2003 and 2004, Results from a 50-State
Survey (Washington, D.C.: Kaiser Commission on Medicaid and the Uninsured, September
2003).




Page 24                                      GAO-04-143 Medicaid Nursing Home Payments
Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of 19 Reviewed
States, September 2003

 Status                                  State
 Existing                                Alabama
                                         Arkansas
                                         Illinois
                                         Massachusetts
                                         Michigan
                                         New York
                                         Rhode Island
                                         Vermont
 Pending                                 Colorado
                                         Iowa
                                         New Jersey
                                         Oregon
                                         Pennsylvania

Source: State Medicaid programs.



Officials in some states told us that they have avoided making substantial
reductions to nursing home payment rates because of other factors. For
example, state legislative or regulatory action is typically required to
change nursing home payment methods, and garnering sufficient support
for such changes—especially for rate reductions—is often difficult. In
addition, the nursing home industry has actively worked to avoid
decreases in payment rates in several states. For example, industry
officials in Alabama, Iowa, and Texas cited campaigns that they
considered successful in various ways, such as preventing rate reductions
or encouraging rate increases. Specifically, nursing home industry officials
in Iowa said that two proposed nursing home rate cuts were defeated in
part because of their opposition. Also, industry officials in Texas said that
through their efforts, nursing homes were able to obtain rate increases for
fiscal year 2002.




Page 25                               GAO-04-143 Medicaid Nursing Home Payments
Future Options for Dealing   Although the extent of states’ continued fiscal pressure is unknown, states
with Fiscal Pressures May    expect their poor fiscal situations to continue through fiscal year 2004.
Be More Uncertain            According to an April 2003 NCSL study, 28 states and the District of
                             Columbia expected budget shortfalls totaling over $53 billion in fiscal year
                             2004.54 These budget gaps may be difficult to fill as many states reported
                             that they have depleted or nearly depleted their alternative funding
                             sources. Over half of the states we reviewed that used budget stabilization
                             funds, and 3 of the 12 states that used tobacco settlement funds, reported
                             having depleted or nearly depleted these sources.

                             Some states we reviewed reported their plans to confront continuing
                             budget pressures in fiscal year 2004. As previously noted, at least six of
                             these states reduced or froze their nursing home payment rates at some
                             point during the past 2 fiscal years. In addition, these and other states have
                             recently undertaken or are currently considering actions to reduce future
                             nursing home payment rates. For example, California rebased nursing
                             home rates for the 2004 rate year, which began on August 1, 2003, but has
                             already frozen 2005 payment rates at current levels. Similarly, in August
                             2003, Connecticut froze per diem rates at their January 2003 levels through
                             December 2004. Even with recent temporary federal fiscal relief, officials
                             in some states suggest that nursing home payment reductions are possible
                             in the future. For example, a Michigan state official indicated that
                             reductions in 2004 per diem rates are probable because the legislative
                             appropriation is likely insufficient to rebase rates.


                             We provided a draft of this report to the Medicaid Director in each of the
External Comments            19 study states for technical review. All states generally agreed with our
                             characterization of their respective nursing home payment methods and,
                             when necessary, provided clarifying or technical comments, which we
                             incorporated as appropriate. In addition, we obtained oral comments on a
                             draft of this report from representatives of two nursing home associations,
                             the American Health Care Association (AHCA) and the American
                             Association of Homes and Services for the Aging (AAHSA). We have
                             modified the report, as appropriate, in response to their technical
                             comments.




                             54
                              National Conference of State Legislatures (NCSL), State Budget Update: April 2003
                             (Washington, D.C.: April 2003).




                             Page 26                                   GAO-04-143 Medicaid Nursing Home Payments
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after its
issue date. At that time, we will send copies to the Administrator of CMS
and appropriate congressional committees. We will also make copies
available to others upon request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.

If you or your staffs have any questions, please contact me at (202) 512-
7118. An additional contact and other staff members who made
contributions to this report are listed in appendix IV.




Kathryn G. Allen
Director, Health Care—Medicaid
 and Private Health Insurance Issues




Page 27                               GAO-04-143 Medicaid Nursing Home Payments
                Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


                To examine Medicaid nursing home payment methods and rates, we
                selected 20 states for our review. The 20 states included the following:

            •    10 states (1 from each of the 10 Centers for Medicare & Medicaid Services
                (CMS) regions) with the largest decline or smallest growth in revenue
                from 2000 through 2002 within their regions, based on data in the
                November 2002 fiscal survey of states conducted by the National
                Association of State Budget Officers (NASBO) and the National Governors
                Association (NGA);
            •    5 states with the largest population based on 2000 Census data; and
            •    5 states with the highest number of Medicaid nursing home residents per
                capita, as indicated by the most recent data in CMS’s Online Survey
                Certification and Reporting (OSCAR) database (see table 5).

                Nationwide, these 20 states represented approximately 62 percent of
                Medicaid nursing home expenditures in fiscal year 2001 and 59 percent of
                Medicaid nursing home residents in fiscal year 2000, according to the most
                recently available CMS data.

                Table 5: Study States Categorized by Selection Factors

                                                             States selected for sample
                                                                                                                         Highest number
                                                                                                                         of Medicaid
                                                                                                                         nursing home
                 Largest decline or smallest growth in revenue                                 Largest                   residents per
                 from 2000 through 2002 (CMS region)                                           population                capita
                 Alabama (IV)                                                                  California                Connecticut
                 Arizona (IX)                                                                  Florida                   Massachusetts
                 Arkansas (VI)                                                                 Illinois                  Rhode Island
                 Colorado (VIII)                                                               New York                  North Dakota
                 Iowa (VII)                                                                    Texas                     South Dakota
                 Michigan (V)
                 New Jersey (II)
                 Oregon (X)
                 Pennsylvania (III)
                 Vermont (I)

                Source: National Governors Association and National Association of State Budget Officers, The Fiscal Survey of States (Washington,
                D.C.: November 2002), http://www.nasbo.org (downloaded Dec. 6, 2002); The U.S. Census Bureau; and CMS’s OSCAR.



                In each of the 20 states, we interviewed officials from the Medicaid and
                budget offices. From these officials, we obtained information about
                nursing home payment methods (including changes) for state fiscal years
                1998 through 2004 and per diem rates for state fiscal years 1998 through
                2003. In addition, to gain a broader understanding of Medicaid nursing



                Page 28                                                        GAO-04-143 Medicaid Nursing Home Payments
Appendix I: Scope and Methodology




home payments, we interviewed representatives from the offices of the
American Health Care Association (AHCA) and/or the American
Association of Homes and Services for the Aging (AAHSA) in each of the
20 states. We also interviewed national representatives of AHCA and
AAHSA and consultants and experts in the field of Medicaid nursing home
payment. Because Arizona’s Medicaid program is predominantly a
managed care system, the state determines payment rates for only 5
percent of the nursing home population. Therefore, this report excludes
Arizona and presents our findings from analyses of the other 19 states.

To examine the extent to which states base nursing home payment rates
on homes’ costs, we reviewed documentation, including some state laws
and regulations.1 Relying on these documents as well as our interviews
with state officials, we also identified key features of payment methods,
such as whether rates are home-specific and how frequently states update
or rebase the rates they pay nursing homes. In addition, we summarized
the extent to which states’ payment methods incorporate features such as
peer grouping, cost-center ceilings, and case-mix adjustment systems.

To determine how state fiscal pressures have affected Medicaid programs
with regard to nursing home payment rates and methods, we collected per
diem rates from state fiscal years 1998 through 2003, fiscal year 2003 being
the most current year for which per diem rates were available, and
information about changes made to nursing home payment methods from
state fiscal years 1998 through 2004. We used the per diem rate data to
compare the average annual percentage change in states’ average nursing
home payment rates from state fiscal years 1998 through 2003 to the
corresponding years’ change in the skilled nursing facility (SNF) market
basket index.2 The SNF market basket index, which is developed and
updated annually by Global Insights, Inc., is used by CMS to reflect
changes in the prices of goods and services included in the Medicare SNF




1
 We did not perform a comprehensive review of state laws and regulations related to
nursing home payment methods.
2
  To conduct this analysis, we obtained the most readily available data from the states.
Depending on the state, the data provided were typically for the respective state’s fiscal
year, although some states provided data by calendar year. We converted calendar year
rates provided by Iowa to fiscal year rates for the last 6 months of state fiscal year 1998 and
for state fiscal years 1999 through 2001. For state fiscal years 2002 and 2003, Iowa provided
per diem rates and resident days for each nursing home, which we used to calculate the
statewide average per diem rate.




Page 29                                      GAO-04-143 Medicaid Nursing Home Payments
Appendix I: Scope and Methodology




prospective payment system.3 States typically provided us with their
average Medicaid nursing home per diem rates weighted by resident days;
however, in a few instances we had to use a state’s home-specific rates
and resident days to calculate the weighted average per diem rate. For
2003, an average per diem rate was not available in Michigan, and
projected per diem rates were provided by Arkansas and Pennsylvania.

We encountered limitations with data provided by two other states. For
example, North Dakota law generally prohibits nursing homes from
charging private-pay residents more than the Medicaid rate;4 however,
rates provided to us by the state were based on total resident days, which
include payments for 3 to 5 percent of residents whose care is paid at
typically higher Medicare rates. Therefore, the rates provided to us may be
slightly higher than the average Medicaid rate. Conversely, the rates
provided by Pennsylvania may be slightly lower than the actual average
nursing home Medicaid rate because they include nursing homes
residents’ temporary hospital stays, which account for approximately 1
percent of total resident days and for which homes only receive one-third
of the per diem rate. Finally, we reviewed information compiled by
NASBO, NGA, and NCSL related to states’ fiscal outlook and possible
future reductions in the Medicaid program, including reductions affecting
nursing homes.




3
 Global Insights, Inc., is an economic and financial information company.
4
 N.D. Cent. Code § 50-24.4-19.1 (1999).




Page 30                                    GAO-04-143 Medicaid Nursing Home Payments
              Appendix II: Summary of Certain Payment
Appendix II: Summary of Certain Payment
              Characteristics Used in Selected States



Characteristics Used in Selected States

              States use many of the same features within their payment methods. We
              describe below certain features of the payment methods used in the states
              we reviewed: peer groups, cost-center ceilings, efficiency incentives, case-
              mix systems, and occupancy standards.


Peer Groups   Ten states we reviewed classify homes into peer groups, or categories
              based on characteristics such as size or location, and typically set separate
              cost-center ceilings for each peer group.1 The states we reviewed most
              commonly categorize nursing homes by geographic region or home type.2
              However, how states use peer groups varies (see table 6). For example,
              some states, such as New Jersey, use peer groups within all cost centers,
              while other states, such as Alabama, only group homes in one cost center.
              Further, states differ in the number and type of peer grouping categories
              they use. For example, Illinois’s peer grouping uses seven geographic
              regions in all cost centers; Connecticut bases its peer grouping on two
              geographic regions and two home types in the direct resident care cost
              center; and Florida’s peer grouping is based on three geographic regions
              and two home sizes in both the direct resident care and administrative
              cost centers.




              1
                The nine states reviewed that did not classify homes into peer groups were Arkansas,
              Colorado, Massachusetts, North Dakota, Oregon, Rhode Island, South Dakota, Texas, and
              Vermont.
              2
               Home type includes categories such as home ownership (e.g., proprietary, nonprofit, or
              governmental); resident care need (e.g., skilled nursing homes, low-intensity homes for
              those with mental retardation, or chronic convalescent nursing homes); and whether the
              home is hospital-based or freestanding.




              Page 31                                    GAO-04-143 Medicaid Nursing Home Payments
Appendix II: Summary of Certain Payment
Characteristics Used in Selected States




Table 6: Peer Grouping Techniques Used in Reviewed States, as of June 2003


 State                 Peer groups
 Alabama               Two home sizes in the administrative cost center
 California            Eight home types based on resident care need in all cost centers: five of
                       the eight home types further grouped by three geographic regions and/or
                       two home sizes; two of the eight home types further grouped by each
                       resident’s ventilator need; and one of the eight home types does not use
                       additional peer groups
 Connecticut           Two geographic regions and two home types based on resident care
                       need in the direct resident care cost center
 Florida               Three geographic regions and two home sizes in the direct resident care
                       and administrative cost centers
 Illinois              Seven geographic regions in all cost centers
 Iowa                  Two home types based on whether the home is Medicare-certified and
                       hospital-based or freestanding
 Michigan              Two home types based on ownership or whether the home is hospital-
                       based or freestanding
 New Jersey            Three home types based on ownership or resident care need in all cost
                       centers
 New York              Two home sizes, two levels of care, and whether home is hospital-based
                       or freestanding in the indirect care cost center; 16 geographic regions for
                       wage adjustment in the indirect care and direct resident care cost
                       centers; two home types based on ownership and further grouped by
                       lease type and date or financing method in the capital cost center
 Pennsylvania          Four geographic regions and three home sizes in the direct resident
                       care, indirect care, and administrative cost centers

Source: State Medicaid programs.




Page 32                                           GAO-04-143 Medicaid Nursing Home Payments
                       Appendix II: Summary of Certain Payment
                       Characteristics Used in Selected States




Cost-Center Ceilings   To limit the maximum amount states pay for costs within a given cost
                       center, ceilings are typically set at a percentage of median costs, or a
                       certain percentile of costs, for all nursing homes in a state or a subset of
                       nursing homes with similar characteristics in states that pay home-specific
                       rates.3 Homes in these states generally receive rates based on the lower of
                       their actual costs or the ceiling.4 While most states we reviewed divide
                       their operating costs into three centers—direct resident care, indirect
                       care, and administration—plus a center for capital costs—the number of
                       cost centers in the states we reviewed ranges from two in Oregon to seven
                       in Rhode Island. In addition, states differ in how they categorize costs. For
                       example, 8 states combine indirect care and administrative costs into a
                       single cost center. Similarly, states may differ in how they categorize
                       certain costs. For instance, Pennsylvania’s direct resident care center
                       includes medical supplies, which are considered indirect costs in
                       Connecticut and Rhode Island. Table 7 describes ceilings for operating
                       costs in the 15 states that pay individual/home-specific rates, and table 8
                       describes how the remaining 4 states—California, Massachusetts, Oregon,
                       and Texas—develop their flat rates, which serve as a type of ceiling, to pay
                       for all nursing homes in the state.




                       3
                       In addition to imposing ceilings, many states use other mechanisms to limit the costs they
                       will recognize when determining homes’ rates.
                       4
                        In states that use efficiency incentives, homes are also eligible to receive an additional
                       payment included in their per diem rate.




                       Page 33                                       GAO-04-143 Medicaid Nursing Home Payments
                                                      Appendix II: Summary of Certain Payment
                                                      Characteristics Used in Selected States




Table 7: Direct Resident Care, Indirect Care, and Administrative Cost-Center Ceilings in Reviewed States with Individual
Home Rates, as of June 2003

                                                                             Cost-center ceilings
 State                  Direct resident care                         Indirect care                           Administrative
 Alabama                110 percent of median costs for all          110 percent of median costs for all     105 percent of median costs for all
                              a
                        homes                                        homes                                   homes within each peer group
 Arkansas               105 percent of 90th percentile for all       Flat rate set at 110 percent of median costs for all homesc
                              b
                        homes
 Colorado               125 percent of average costs weighted 120 percent of average costs            120 percent of average costs
                        by total resident days for all homes  weighted by total resident days for all weighted by total resident days for all
                                                                                                                                    d
                        within each peer group                homes within each peer group for        homes within each peer group
                                                              room and board costs; 125 percent of
                                                              weighted average costs for all homes
                                                              within each peer group for other
                                                              indirect costs
 Connecticut            135 percent of median costs for all          115 percent of median costs for all     100 percent of median costs for all
                        homes within each peer group                 homes                                   homes
 Florida                1.75 standard deviations above median 1.75 standard deviations above                 One standard deviation above median
                        costs for all homes within each peer  median costs for all homes within              costs for all homes within each peer
                                                                              e
                        group                                 each peer group                                groupe
 Illinois               None                                         75th percentile of costs for all homes within each peer group
 Iowa                   120 percent of median costs for all          110 percent of median costs for all homes
                        homesf
 Michigan               80th percentile of costs for all homes       80th percentile of costs for all homes within each peer groupg
                        within each peer group
 New Jersey             120 percent of median costs for all          110 percent through 150 percent of      100 percent of median costs for all
                        homes within each peer group                 median costs, depending on specific     homes within each peer group
                                                                     type of costs, for all homes within
                                                                     each peer group
 New Yorkh              Ceiling based on updated 1983 prices         105 percent of average costs for all homes within each peer group
                        for each level of resident care need
 North Dakota           99th percentile of costs for all homesi, j   85th percentile of costs for all homesi 75th percentile of costs for all homes
 Pennsylvania           117 percent of median costs for all          112 percent of median costs for all     104 percent of median costs for all
                        homes within each peer group                 homes within each peer group            homes within each peer groupk
 Rhode Island           80th percentile of costs for all homes       80th percentile of costs for all homes 80th percentile of costs for all homes
                    l                                  m
 South Dakota           115 percent of median costs for all          105 percent of median costsm for all    105 percent of median costsn for all
                        homes, and 80 percent of costs that fall     homes, and 80 percent of costs that     homes, and 80 percent of costs that
                        from 115 percent through 125 percent         fall from 105 percent through 110       fall from 105 percent through 110
                        of the median                                percent of the median                   percent of the median
 Vermont                115 percent of median costs for all          105 percent of median costs for all     Median costs for all homes except
                        homes                                        homes                                   special hospital-based homes, which
                                                                                                             are capped at 137 percent of the
                                                                                                             median for all homeso
Source: State Medicaid programs.




                                                      Page 34                                       GAO-04-143 Medicaid Nursing Home Payments
Appendix II: Summary of Certain Payment
Characteristics Used in Selected States




Note: While the table identifies standard names for cost centers, states use a variety of names, such
as nursing instead of direct resident care or operations instead of administration.
a
In Alabama, nursing homes receive the lower of 110 percent of their direct resident care costs or 110
percent of the direct resident care ceiling.
b
 Through June 30, 2004, Arkansas imposes a floor of 90 percent of the median costs for all homes in
the direct resident care center. Homes with costs below the floor retain the difference between their
costs and the floor.
c
According to an Arkansas official, the state considers its rates to be home-specific since the majority
of the rate is paid on a home-specific basis through the direct resident care cost center.
d
In Colorado, nursing homes are limited to a maximum increase in payments for administrative costs
of 6 percent annually.
e
In Florida, two additional ceilings may be applied to the indirect care and administrative cost centers.
The nursing home’s payment is limited to the lowest of all ceilings.
f
 In Iowa, the direct resident care ceiling for urban nursing homes is adjusted by a geographic wage
index, which generally increases the ceiling for these homes by approximately 10 percent.
g
 Indirect care/administrative payment to each Michigan nursing home is limited to a percentage of the
amount reimbursed in the direct resident care cost center. The exact percentage for each home
depends on its size, and as of June 2003, ranged from 32.6 percent for homes with at least 150 beds
to about 33.6 percent for homes with 50 or fewer beds.
h
 In the direct resident care, indirect care, and administrative cost centers, New York imposes a floor of
92.5 percent of the average costs for all nursing homes within each peer group. Homes with costs
below the floor retain the difference between their costs and the floor.
i
In North Dakota, a 3 percent operating margin is added to the payment for all nursing homes in the
direct resident care and indirect care cost centers.
j
    North Dakota’s direct resident care ceiling was changed to $85 at the start of state fiscal year 2004.
k
In Pennsylvania, payment for nursing homes’ administrative costs is limited to 12 percent of total
payment for direct resident care, indirect care, and administrative costs.
l
South Dakota nursing homes are limited to no more than an 8 percent annual increase in their overall
payment rates.
m
 South Dakota determines median costs after excluding nursing homes in which residents have low
care needs, as these homes generally have lower direct resident care and indirect care costs.
n
 When calculating the administrative cost center median, South Dakota excludes the costs of nursing
homes that are part of large national chains, because according to state Medicaid officials, these
homes generally operate with administrative costs that are significantly higher than independent
homes.
o
 Vermont’s special hospital-based homes must meet the following criteria as of June 16, 2001. They
must be (1) within a hospital building, (2) part of the same corporation that governs the hospital, and
(3) file Medicare cost reports jointly with the hospital.




Page 35                                              GAO-04-143 Medicaid Nursing Home Payments
Appendix II: Summary of Certain Payment
Characteristics Used in Selected States




Table 8: Direct Resident Care, Indirect Care, and Administrative Cost-Center
Ceilings in Reviewed States with Flat Payment Rates, as of June 2003

                                                   Cost-center ceilings
State                    Direct resident care      Indirect care               Administrative
California               Flat rate set at the      Flat rate set at the median costs for all homes
                         median costs for all      within certain peer groups
                         homes within certain
                         peer groups
Massachusetts            Flat rate set at median   Flat rate determined by adding 85 percent of
                                             a
                         costs for all homes       median for administrative costs to median of
                                                   indirect costs for all homes
Oregon                   Flat rate set at          Flat rate set at approximately 90 percent of
                         approximately 90          statewide average costs for all homes
                         percent of statewide
                         average costs for all
                         homesb
Texas                    Flat rate set at 107      Flat rate set at 107       Flat rate set at 107
                         percent of weighted       percent of weighted        percent of median
                         average for all homes’    average costs for all      costs for all homes
                         updated 1998 costsc       homesc

Source: State Medicaid programs.

Note: While the table identifies standard names for cost centers, states use a variety of names, such
as nursing instead of direct resident care or operations instead of administration.
a
    In Massachusetts, rates paid to all nursing homes are also adjusted based on resident care need.
b
    In Oregon, nursing homes with residents who require complex care can receive additional payments.
c
    In Texas, rates paid to all nursing homes are also adjusted based on resident care need.




Page 36                                            GAO-04-143 Medicaid Nursing Home Payments
                        Appendix II: Summary of Certain Payment
                        Characteristics Used in Selected States




Efficiency Incentives   Seven states we reviewed include efficiency incentives in their payment
                        methods, which typically allow nursing homes with costs below a
                        predetermined amount (generally the cost-center ceiling or the median
                        costs) in one or more cost centers to have a portion of the difference
                        incorporated into their per diem rates (see table 9).5 For example,
                        Connecticut uses efficiency incentives in both its indirect care and
                        administrative cost centers. In the indirect care center, nursing homes
                        with costs below the median have 25 percent of the difference between
                        their costs and the median costs added to their per diem rates. The
                        following hypothetical example demonstrates how this efficiency
                        incentive generally would work. If a home’s costs were $20 per day in the
                        indirect care cost center, and the median indirect care costs for all homes
                        were $24 per day, then the home has costs that are $4 below the median
                        and would have 25 percent of the difference between its costs and the
                        median, or $1, added to its rate. Each of the seven states applies efficiency
                        incentives differently.




                        5
                          The 12 states reviewed that did not use efficiency incentives in their payment methods are
                        Arkansas, California, Florida, Massachusetts, Michigan, New Jersey, New York, Oregon,
                        Rhode Island, South Dakota, Texas, and Vermont.




                        Page 37                                     GAO-04-143 Medicaid Nursing Home Payments
                                                     Appendix II: Summary of Certain Payment
                                                     Characteristics Used in Selected States




Table 9: Efficiency Incentives Used in Reviewed States, as of June 2003

 State                     Direct resident care cost center        Indirect care cost center                   Administrative cost center
 Alabama                                                           If a home’s costs are below the
                                                                   ceiling, it receives 50 percent of the
                                                                   difference between its costs and the
                                                                   ceiling
 Colorado                                                                                                      If a home’s costs are below the
                                                                                                               ceiling, it receives 12.5 percent of
                                                                                                               the difference between its costs and
                                                                                                               the ceiling
 Connecticut                                                       If a home’s costs are below the             If a home’s costs are below the
                                                                   median, it receives 25 percent of the       median, it receives 25 percent of the
                                                                   difference between its costs and            difference between its costs and
                                                                   median costs                                median costs
 Illinois                                                          If a home’s costs are below the
                                                                   ceiling, it receives 50 percent of the
                                                                   difference between the 35th and 75th
                                                                   percentiles of its peer group’s costs
 Iowa                      If a home’s costs are below 95         If a home’s costs are below 96 percent of the median, it receives 65 percent
                           percent of the median, it receives 100 of the difference between its costs and the median, up to 8 percent of the
                           percent of the difference between its mediana
                           costs and the median, up to 10
                           percent of the median
 North Dakota                                                                                                  If a home’s costs are below the
                                                                                                               ceiling, it receives 70 percent of the
                                                                                                               difference between its costs and the
                                                                                                               ceiling, up to $2.60 per resident day
 Pennsylvania              If a home’s costs are below the         If a home’s costs are below the
                           ceiling, it receives 3 percent of the   ceiling, it receives 3 percent of the
                           difference between its costs and the    difference between its costs and the
                           ceiling, and up to 30 percent of the    ceiling, and up to 30 percent of the
                           remaining difference up to ceiling      remaining difference up to ceiling

Source: State Medicaid programs.
                                                     a
                                                     Iowa combines nursing homes’ indirect care and administrative costs into a single cost center.




                                                     Page 38                                         GAO-04-143 Medicaid Nursing Home Payments
                   Appendix II: Summary of Certain Payment
                   Characteristics Used in Selected States




Case-Mix Systems   Case-mix systems categorize residents into groups based on the level of
                   care they need and adjust payment rates to homes accordingly. Twelve of
                   the 19 states we reviewed use case-mix systems, although the type of
                   system and the number of case-mix categories vary widely.6 While 5 states
                   have designed their own systems to measure case-mix, the remaining 7
                   states rely on some variation of the Resource Utilization Group (RUG)
                   Patient Classification System, which is also used to determine the acuity
                   level of nursing home residents in the Medicare program.7 The 7 states that
                   use various versions of the RUG Patient Classification System place
                   residents in 16 to 44 resident classification groups. In contrast, Oregon
                   places residents into one of two groups, basic or complex care.8 The case-
                   mix classification system used by each state is shown in table 10.




                   6
                   The seven states reviewed that did not use case-mix systems to categorize residents were
                   Alabama, Arkansas, California, Connecticut, Florida, Michigan, and Rhode Island.
                   7
                    CMS uses the RUG-III 44-group model to determine the case-mix of Medicare-covered
                   nursing home residents.
                   8
                    In Oregon, approximately 95 percent of nursing home residents are grouped in the basic
                   care category.




                   Page 39                                    GAO-04-143 Medicaid Nursing Home Payments
Appendix II: Summary of Certain Payment
Characteristics Used in Selected States




Table 10: Case-Mix Classification Systems Used in Reviewed States, as of
June 2003


    State                                    Case-mix classification system
    Colorado                                 RUG-III, 34 groups
    Illinois                                 State-specific system, 36 groupsa, b
    Iowa                                     RUG-III, 34 groups
                                                                        c
    Massachusetts                            State-specific system, 10 groups
    New Jersey                               State-specific system,d 7 groups
    New York                                 RUG-II, 16 groups
    North Dakota                             RUG-III, 34 groups
    Oregon                                   State-specific system,e 2 groups
    Pennsylvania                             RUG-III, 44 groups
    South Dakota                             RUG-III, 34 groups
    Texas                                    State-specific system,f 11 groups
    Vermont                                  RUG-III, 44 groups

Source: State Medicaid programs.
a
 Illinois’s case-mix system is based on its Inspection of Care (IOC) report. The IOC measures
resident needs and services using 36 direct care pricing criteria to determine an average case-mix
score for each nursing home. In 1994, the state stopped routinely administering comprehensive IOC
reports. From 1994 through 2002, a nursing home could request an update to its IOC report if its
resident turnover was at least 25 percent. However, in October 2002 the state stopped using the
entire IOC system altogether and no longer prepares IOC reports. The last report for each nursing
home is used to adjust payment rates for case-mix.
b
 Illinois implemented a new case-mix system based on the Minimum Data Set, also used by CMS, in
state fiscal year 2004, which began on July 1, 2003. A 2-year hold harmless provision protects
nursing homes from experiencing decreased rates as a result of this new system. However, since per
diem rates were frozen at the beginning of state fiscal year 2004, the new case-mix system did not
immediately increase payment rates to nursing homes.
c
 Massachusetts’s case-mix system is based on its Management Minutes Questionnaire. Residents
are grouped into 1 of 10 categories based on the level of care they require in activities of daily living
and skilled nursing. On the basis of this classification, nursing homes are paid one of six different
rates.
d
 New Jersey’s case-mix system provides payment for additional hours of nursing for residents
needing seven different services.
e
Oregon’s case-mix system provides an additional payment to nursing homes’ basic rate for residents
with complex care needs, for example, residents who need intravenous injections or who have open
wounds requiring aggressive treatment.
f
Texas’s case-mix system is the Texas Index for Level of Effort (TILE). TILE is a state-designed, 11-
group system modeled on a version of the RUG Patient Classification System. Nursing home
residents are placed in 1 of the 11 groups depending on their need for various resources.




Page 40                                            GAO-04-143 Medicaid Nursing Home Payments
                      Appendix II: Summary of Certain Payment
                      Characteristics Used in Selected States




Occupancy Standards   By applying an occupancy standard, states reduce the per diem rates paid
                      to nursing homes with occupancy below the state-established minimum
                      levels. Of the 19 states reviewed, 17 use occupancy standards, which vary
                      from 75 percent in Arkansas to 98 percent in Rhode Island, to determine
                      nursing home payment rates.9 The following hypothetical example
                      demonstrates how a state may apply an occupancy standard. A state
                      applies an occupancy standard of 85 percent in the indirect care cost
                      center, but a nursing home has a 75 percent occupancy level (along with
                      annual costs of $200,000 in the indirect care cost center and 36 beds).
                      Using the home’s actual occupancy, its payment rate for the indirect care
                      cost center would be $20.29 (or $200,000/[.75 x 36 beds x 365 days]),
                      whereas adjusting the home’s payment in the indirect care cost center for
                      the state’s occupancy standard results in a lower rate of $17.91
                      ($200,000/[.85 x 36 beds x 365 days]). The extent to which states apply
                      occupancy standards varies. Three of the states we reviewed—Alabama,
                      Arkansas, and Iowa—apply the occupancy standard to only one cost
                      center, and 7 others—Connecticut, Florida, Massachusetts, Michigan, New
                      York, Rhode Island, and South Dakota—apply the occupancy standard to
                      all cost centers (see table 11).




                      9
                       The two states reviewed that did not incorporate occupancy standards into their nursing
                      home payment methods were California and Oregon.




                      Page 41                                    GAO-04-143 Medicaid Nursing Home Payments
                                                   Appendix II: Summary of Certain Payment
                                                   Characteristics Used in Selected States




Table 11: Occupancy Standards Used in Reviewed States, as of June 2003


 State                             Standard                                                               Applicable cost center(s)
 Alabama                           85 percent occupancy                                                   Capital
 Arkansas                          75 percent occupancy                                                   Capital
 Colorado                          85 percent occupancy                                                   Administrative (rural facilities exempted)
                                   90 percent occupancy                                                   Capital
 Connecticut                       95 percent occupancy                                                   All
                                                                                                                b
 Florida                           Home’s total occupancy must be below the statewide average             All
                                   occupancy less one standard deviation and home’s Medicaid
                                   occupancy must be below the statewide average Medicaid
                                   occupancy less one standard deviationa
 Illinois                          93 percent occupancy                                                   Indirect care/administrative and capital
                                                            c
 Iowa                              80 percent occupancy                                                   Indirect cared
 Massachusetts                     96 percent occupancy                                                   All
 Michigan                          85 percent occupancy                                                   All
 New Jersey                        95 percent occupancy                                                   Capital
                                   90 percent occupancy                                                   Direct resident care, indirect care, and
                                                                                                          administrative
 New York                          90 percent occupancy                                                   All
 North Dakota                      90 percent occupancy                                                   Administrative and capital
 Pennsylvania                      90 percent occupancy                                                   Administrative and capital
 Rhode Island                      98 percent of statewide average occupancy                              All
 South Dakota                      3 percent below the statewide average occupancy                        All
 Texas                             Lower of 85 percent occupancy or statewide average                     Administrative and capital
                                   occupancy
 Vermont                           90 percent occupancy                                                   All except direct resident care

Source: State Medicaid programs.

                                                   Note: Unless otherwise noted, the state’s occupancy standard is expressed as a minimum
                                                   percentage of the number of beds occupied each day in a nursing home over a given year.
                                                   a
                                                    In Florida, these figures are revised semiannually, based on updated census data provided by the
                                                   nursing homes. The amount that a home’s per diem rate is reduced depends on its actual occupancy.
                                                   b
                                                    Florida does not apply the occupancy standard to the property component of capital in the
                                                   approximately 90 percent of nursing homes that are reimbursed for capital using a fair rental value
                                                   system.
                                                   c
                                                       Iowa’s occupancy standard increased to 85 percent on July 1, 2003.
                                                   d
                                                    Within the indirect care cost center, Iowa only applies its occupancy standard to administrative and
                                                   capital costs.




                                                   Page 42                                           GAO-04-143 Medicaid Nursing Home Payments
              Appendix III: Changes to Nursing Home
Appendix III: Changes to Nursing Home
              Payment Methods or Rates in 19 States



Payment Methods or Rates in 19 States

              Officials in the states we reviewed identified changes to payment rates or
              to the methods their respective Medicaid programs use to determine
              nursing home payment rates from state fiscal years 1998 through 2004 (see
              table 12). While some changes have obvious positive or negative effects on
              payment rates, the effect of other changes can be mixed. For example,
              while Colorado’s elimination of its quality incentive add-on payment likely
              lowers payment to some nursing homes, payment to some nursing homes
              in Vermont increased because of recently implemented add-on payments
              for direct resident care staff wages. The effect of other changes, such as
              California adding two counties to the Bay Area peer group in 2002, are
              likely to affect rates in both directions for different homes.

              In addition to changes to how they paid nursing homes, two states—
              Arkansas and Iowa—designed and implemented completely new payment
              methodologies during this time. For example, Iowa’s prior payment
              method did not classify homes into peer groups, did not adjust rates for
              the costs related to homes’ resident care needs, and limited payment to the
              70th percentile of all homes’ total costs. Under the state’s new payment
              method, which was phased in completely in July 2003, homes are
              classified into peer groups, rates are adjusted for resident care costs using
              the RUG-III classification system, and a ceiling of 120 percent of median
              costs for all homes is imposed on payment for direct resident care costs.




              Page 43                                 GAO-04-143 Medicaid Nursing Home Payments
                                            Appendix III: Changes to Nursing Home
                                            Payment Methods or Rates in 19 States




Table 12: State-Reported Changes to Existing Nursing Home Payment Methods or Rates, State Fiscal Years 1998-2004

                       Cost-center
                       ceilings or                         Case-mix
              Peer     efficiency           Calculation of classification Occupancy Inflation          Add-on            Payment
State         grouping incentives           costs          system         standard  factor             payments          rate
Alabama                                     Moved liability
                                            insurance
                                            costs to
                                            administrative
                                            cost center
                                            instead of
                                            pass-through
                                            in 2002
California    Added                                                                                    Implemented       Froze per
              two                                                                                      a wage add-       diem rates
              counties                                                                                 on for some       from August
              to Bay                                                                                   direct            2003
              Area peer                                                                                resident care     through
              group in                                                                                 staff in 1999     July 2005 at
              2002                                                                                     and for other     August 2003
                                                                                                       staff in 2000;a   levels
                                                                                                       delayed
                                                                                                       implementa-
                                                                                                       tion of
                                                                                                       another direct
                                                                                                       resident care
                                                                                                       wage add-on,
                                                                                                       which will
                                                                                                       apply to
                                                                                                       payments
                                                                                                       from
                                                                                                       February
                                                                                                       2002 through
                                                                                                       July 2004,
                                                                                                       until
                                                                                                       December
                                                                                                       2004
Colorado                  Suspended         Eliminated limit   Implemented   Eliminated                Eliminated        Increased
                          efficiency        on annual          case-mix      occupancy                 quality           lag time
                          incentive in      increase in        system in     standard in               incentive add-    between
                          administrative    payment for        2000          direct                    on in 2002        cost report
                          cost center for   combined                         resident                                    submission
                          3 months in       direct and                       care and                                    and rate
                          2003              indirect care                    indirect care                               implementa-
                                            costs in 2000                    cost centers                                tion from 2
                                                                             in 2000                                     to10 months
                                                                                                                         for most
                                                                                                                         homes in
                                                                                                                         2002




                                            Page 44                                     GAO-04-143 Medicaid Nursing Home Payments
                                        Appendix III: Changes to Nursing Home
                                        Payment Methods or Rates in 19 States




                       Cost-center
                       ceilings or                     Case-mix
              Peer     efficiency       Calculation of classification Occupancy Inflation      Add-on          Payment
State         grouping incentives       costs          system         standard  factor         payments        rate
Connecticut                                                                                    Implemented     Delayed rate
                                                                                               direct          increase from
                                                                                               resident care   July 2002
                                                                                               and indirect    until January
                                                                                               care staffing   2003; froze
                                                                                               wage add-on     rates at
                                                                                               in 1999;        January 2003
                                                                                               eliminated in   levels through
                                                                                               2001            December
                                                                                                               2004
Florida                Eliminated       Partially         Implemented                          Implemented
                       peer group       rebased           case-mix                             direct
                       and home-        administrative    system in                            resident care
                       specific         cost center for   1999;                                staffing
                       ceilings for     state fiscal      eliminated in                        minimum
                       indirect care    year (SFY)        2001                                 add-on in
                       from January     2003                                                   2002;
                       to June 2002                                                            delayed
                       and for direct                                                          increase in
                       resident care                                                           direct
                       beginning                                                               resident care
                       January 2002                                                            staffing
                                                                                               minimum
                                                                                               from January
                                                                                               until May
                                                                                               2004
Illinois                                                  Eliminated                                           Froze rates
                                                          routine                                              for SFY 1998
                                                          updates to                                           through
                                                                                                                     b
                                                          case-mix data                                        2001; cut
                                                          from 1998                                            rate by 5.9
                                                          through 2001                                         percent in
                                                          and                                                  SFY 2003;
                                                          eliminated                                           froze rates at
                                                          case-mix                                             SFY 2003
                                                          updates                                              levels in SFY
                                                          altogether in                                        2004
                                                          2002;b
                                                          implemented
                                                          new case-mix
                                                          system based
                                                          on the CMS’s
                                                          Minimum
                                                          Data Set in
                                                          SFY 2004




                                        Page 45                                 GAO-04-143 Medicaid Nursing Home Payments
                                           Appendix III: Changes to Nursing Home
                                           Payment Methods or Rates in 19 States




                         Cost-center
                         ceilings or                      Case-mix
                Peer     efficiency        Calculation of classification Occupancy Inflation             Add-on           Payment
State           grouping incentives        costs          system         standard  factor                payments         rate
Iowac                                                                    Increased       Reduced         Implemented
                                                                         from 80 to      cost report     add-on
                                                                         85 percent      inflation       payment for
                                                                         in indirect     factor by 3.4   quality in
                                                                         care cost       percentage      July 2002
                                                                         center in       points in
                                                                         SFY 2004        SFY 2004
Massachusetts            Decreased                                                                       Implemented      Reduced per
                         ceilings for                                                                    certified        diem rates by
                         direct resident                                                                 nursing          roughly 2.6
                         care, indirect                                                                  assistant        percent from
                         care, and                                                                       wage add-on      March
                         administrative                                                                  in 2000;         through June
                         cost centers in                                                                 implemented      2003d
                         1998                                                                            two one-time
                                                                                                         add-on
                                                                                                         payments for
                                                                                                         nursing home
                                                                                                         performance
                                                                                                         and for
                                                                                                         nursing
                                                                                                         homes to
                                                                                                         meet
                                                                                                         Department
                                                                                                         of Mental
                                                                                                         Retardation
                                                                                                         requirements
                                                                                                         in SFY 2004
Michigan                                                                                 Changed         Eliminated       Reduced per
                                                                                         inflation       quality          diem rates by
                                                                                         factor used     incentive add-   approximately
                                                                                         to adjust for   on in 1999;      1 percent for
                                                                                         time            eliminated       9 months in
                                                                                         between         direct           2002;e
                                                                                         cost report     resident care    reduced per
                                                                                         submission      staffing wage    diem rates by
                                                                                         and rate        pass-through     approximately
                                                                                         implemen-       in 2000          1.85 percent
                                                                                         tation from                      for 7 months
                                                                                         SNF market                       in 2003;e
                                                                                         basket index                     changed
                                                                                         to                               beginning of
                                                                                         legislatively                    rate year from
                                                                                         determined                       start of each
                                                                                         factor in                        home’s fiscal
                                                                                         1999                             year to start
                                                                                                                          of state fiscal
                                                                                                                          year in SFY
                                                                                                                          2004




                                           Page 46                                     GAO-04-143 Medicaid Nursing Home Payments
                                          Appendix III: Changes to Nursing Home
                                          Payment Methods or Rates in 19 States




                        Cost-center
                        ceilings or                      Case-mix
               Peer     efficiency        Calculation of classification Occupancy Inflation           Add-on           Payment
State          grouping incentives        costs          system         standard  factor              payments         rate
New Jersey              Increased         Recategorized                      Increased
                        direct resident   costs included                     from 85 to
                        care cost-        in certain cost                    90 percent
                        center ceiling    centers in 1999                    in direct
                        in SFY 2002;                                         resident
                        decreased                                            care,
                        indirect and                                         indirect
                        administrative                                       care, and
                        cost-center                                          administra-
                        ceilings in                                          tive cost
                        1999                                                 centers in
                                                                             2000;f
                                                                             decreased
                                                                             from 90 to
                                                                             85 percent
                                                                             in direct
                                                                             resident
                                                                             care,
                                                                             indirect
                                                                             care, and
                                                                             administra-
                                                                             tive cost
                                                                             centers in
                                                                             2003
New York                                                                                              Added direct
                                                                                                      resident care
                                                                                                      staffing wage
                                                                                                      add-on in
                                                                                                      2002
North Dakota            Decreased                           Changed the                               Provided staff
                        direct resident                     version of the                            wage and
                        care cost-                          RUG system                                benefit add-
                        center ceiling                      used in 1999                              on from 2001
                        in SFY 2004                                                                   through 2003g
Oregon                                                                                                                 Froze rates at
                                                                                                                       SFY 2002
                                                                                                                       level for
                                                                                                                       SFY 2003;
                                                                                                                       extended
                                                                                                                       freeze in
                                                                                                                       SFY 2004h




                                          Page 47                                      GAO-04-143 Medicaid Nursing Home Payments
                                             Appendix III: Changes to Nursing Home
                                             Payment Methods or Rates in 19 States




                        Cost-center
                        ceilings or                         Case-mix
               Peer     efficiency           Calculation of classification Occupancy Inflation      Add-on          Payment
State          grouping incentives           costs          system         standard  factor         payments        rate
Pennsylvania                                 Changed                                                                Delayed rate
                                             payment of                                                             adjustments
                                             major movable                                                          pending
                                             property costsi                                                        legislative
                                             to a pass-                                                             action in
                                             through                                                                SFY 2004
                                             instead of
                                             including in the
                                             indirect care
                                             cost center in
                                             2001
Rhode Island                                                                                        Implemented
                                                                                                    pass-through
                                                                                                    for direct
                                                                                                    resident care
                                                                                                    costs in
                                                                                                    SFY 2002
South Dakota   Eliminated   Decreased                                                               Implemented     Inflated rates
               peer         payments for                                                            nurse’s aide    instead of
               groups in    certain homes                                                           wage pass-      rebasing in
               SFY 2000     in the direct                                                           through in      SFY 1999;
                            resident care,                                                          SFY 2003        limited annual
                            indirect care,                                                                          increase in
                            and                                                                                     overall
                            administrative                                                                          payment rate
                            cost centers                                                                            to 8 percent
                            from                                                                                    in SFY 2000;
                            SFY 2000                                                                                inflated rates
                            through 2002j                                                                           instead of
                                                                                                                    rebasing in
                                                                                                                    SFY 2004




                                             Page 48                                 GAO-04-143 Medicaid Nursing Home Payments
                                              Appendix III: Changes to Nursing Home
                                              Payment Methods or Rates in 19 States




                                Cost-center
                                ceilings or                  Case-mix
                       Peer     efficiency    Calculation of classification Occupancy Inflation                  Add-on            Payment
 State                 grouping incentives    costs          system         standard  factor                     payments          rate
 Texas                                                                                                           Incorporated     Implemented
                                                                                                                 payment for      a requirement
                                                                                                                 enhanced         that homes
                                                                                                                 staffing         spending less
                                                                                                                 program in       than 85
                                                                                                                 direct           percent of the
                                                                                                                 resident care    direct resident
                                                                                                                 cost center      care rate on
                                                                                                                 for              staffing
                                                                                                                 participating    wages and
                                                                                                                 facilities in    benefits
                                                                                                                 2000             refund the
                                                                                                                                  difference
                                                                                                                                  between this
                                                                                                                                  amount and
                                                                                                                                  their costs in
                                                                                                                                  SFY 2000;
                                                                                                                                  eliminated in
                                                                                                                                  SFY 2004;
                                                                                                                                  rebased
                                                                                                                                  biennially and
                                                                                                                                  inflated rates
                                                                                                                                  to the mid-
                                                                                                                                  point of the 2-
                                                                                                                                  year period
                                                                                                                                  instead of
                                                                                                                                  rebasing
                                                                                                                                  annually in
                                                                                                                                  SFY 2002;
                                                                                                                                  cut rates by
                                                                                                                                  1.75 percent
                                                                                                                                  and
                                                                                                                                  eliminated
                                                                                                                                  rate rebasing
                                                                                                                                  and inflation
                                                                                                                                  update in
                                                                                                                                  SFY 2004
 Vermont                                                       Changed case- Eliminated
                                                               mix system to 90 percent
                                                               include acuity occupancy
                                                               of Medicaid    standard
                                                               residents only from direct
                                                               in 1998        resident care
                                                                              cost center
                                                                              in SFY 2003

Source: State Medicaid programs.

                                              Note: Information provided by states is current as of September 2003. Unless noted as SFY, years
                                              indicated in the table refer to the calendar years that specific changes were made or implemented.




                                              Page 49                                         GAO-04-143 Medicaid Nursing Home Payments
Appendix III: Changes to Nursing Home
Payment Methods or Rates in 19 States




a
 These California add-on payments are integrated into nursing home cost reports and eventually
become part of the regular per diem rate calculation. The add-on payments are phased out after all
homes have the add-on included in their rates.
b
Illinois did not routinely adjust for case-mix or consistently update rates from 1994 through 2001.
However, the state did adjust rates periodically for inflation based on budget availability.
c
 Iowa completed the phase-in of a new payment methodology, which included a case-mix adjustment
system and peer groups, in July 2003.
d
 This reduction was implemented as a 6.5 percent cut to Massachusetts’ payments for nursing
homes’ indirect care and administrative costs.
e
 These reductions applied to Michigan’s payments for nursing homes’ direct resident care, indirect
care, and administrative costs but not to payments for capital costs, so the overall reduction to
homes’ per diem rates was somewhat less than 1 percent in 2002 and somewhat less than 1.85
percent in 2003.
f
New Jersey did not apply the occupancy standard to nursing homes with occupancy from 85 through
90 percent if their previous year’s occupancy was 90 percent or greater.
g
 North Dakota eliminated this add-on payment in 2003, when the costs of the increased staff salaries
and benefits funded by the add-on became part of the regular per diem rate calculation.
h
 Oregon’s rate freeze will remain in effect, pending CMS approval of a waiver proposal pertaining to
the state’s new provider tax.
i
In Pennsylvania, major movable property costs include tangible items costing $500 or more that are
used to provide services to nursing home residents and could include beds and office equipment.
j
Decreased payments affect South Dakota nursing homes that have costs above 115 percent of the
median in the direct resident care cost center or above 105 percent of the median in the indirect care
or administrative cost centers.




Page 50                                          GAO-04-143 Medicaid Nursing Home Payments
                  Appendix IV: GAO Contact and Staff
Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Susan Anthony, (312) 220-7666
GAO Contact
                  Christine DeMars, Behn M. Kelly, Sari B. Shuman, Margaret Smith, and
Acknowledgments   Christi Turner made key contributions to this report.




                  Page 51                              GAO-04-143 Medicaid Nursing Home Payments
             Related GAO Products
Related GAO Products


             Nursing Home Quality: Prevalence of Serious Problems, While
             Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561.
             Washington, D.C.: July 15, 2003.

             Medicaid Formula: Differences in Funding Ability among States Often
             Are Widened. GAO-03-620. Washington, D.C.: July 10, 2003.

             Nursing Homes: Quality of Care More Related to Staffing than Spending.
             GAO-02-431R. Washington, D.C.: June 13, 2002.

             Medicaid: HCFA Reversed Its Position and Approved Additional State
             Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.

             Nursing Workforce: Multiple Factors Create Nurse Recruitment and
             Retention Problems. GAO-01-912T. Washington, D.C.: June 27, 2001.

             Nursing Workforce: Recruitment and Retention of Nurses and Nurse
             Aides Is a Growing Concern. GAO-01-750T. Washington, D.C.: May 17,
             2001.

             Long-Term Care: Baby Boom Generation Increases Challenge of
             Financing Needed Services. GAO-01-563T. Washington, D.C.: March 27,
             2001.

             Medicaid: State Financing Schemes Again Drive Up Federal Payments.
             GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.

             Medicaid Formula: Effects of Proposed Formula on Federal Shares of
             State Spending. GAO/HEHS-99-29R. Washington, D.C.: February 19, 1999.

             Long-Term Care: Baby Boom Generation Presents Financing Challenges.
             GAO/T-HEHS-98-107. Washington, D.C.: March 9, 1998.




(290201)
             Page 52                          GAO-04-143 Medicaid Nursing Home Payments
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