Cross-subsidization in nursing homes: Explaining rate differentials among payer types.

• Author: Troyer, Jennifer L.
• Position: Statistical Data Included

1. Introduction

   Nursing home owners have long insisted that the Medicaid program does not reimburse them enough to cover the costs of providing care to Medicaid patients, but it is not clear that nursing homes are actually losing money on Medicaid residents (Ettner 1993). Using standard profit-maximization models of firm behavior, Morrisey (1994) has critically considered the potential for cross-subsidization by health service providers and has concluded that such behavior is unlikely. Using empirical methods, several authors have explored the possibility of crosssubsidization in the hospital industry. For example, Dranove (1988) determined that Illinois hospitals cost shifted in response to substantial reductions in Medicaid payments in the early 1980s. In contrast, Hadley, Zuckerman, and Iezzoni (1996), Dor and Farley (1996), and Dranove and White (1998) found no evidence of hospital cost shifting. However, a lack of cross-subsidization in the hospital industry does not necessarily imply a lack of cross-subsidization in th e nursing home industry, where residents not funded by the government are unorganized and generally pay out-of-pocket for care.

   Despite the mounting evidence against cost shifting in hospitals, there are at least two possible explanations for findings of cross-subsidization in the nursing home industry that are consistent with economic theory. First, industry regulators may be granting favors to nursing home providers in exchange for the provision of unprofitable nursing home days for government-funded patients (Posner 1971). For example, Certificate-of-Need (CON) regulators may be doling out rewards in the form of scarce CON licenses to nursing homes that provide unremunerative care for Medicaid patients (Fournier and Campbell 1997). Alternatively, regulators may protect firms that take on additional Medicaid residents by restricting the bed supply in the market, providing market power for an existing firm. Applications for new beds in Florida may include a mix of beds set aside for Medicaid patients and beds open to any patient type. Thus, a CON approval would give the nursing home more beds overall, where the nursing home applying for the CON anticipates the ability to profit from the application if approved, while a CON denial for a competitor would enforce the market power of existing homes.

   Second, there may be considerable uncertainty with respect to whether a nursing home resident is going to convert to Medicaid. Thus, nursing homes may accept a self-pay or Medicare patient without certainty about how the individual's care will be funded for the duration of his/ her stay. Legally, nursing homes may face an explicit responsibility to continue to provide unremunerative services to a resident that converts to Medicaid after entering the nursing home. As a hedge against this obligation, the nursing home may impose a surcharge on all self-pay residents to compensate for the risk of conversion to Medicaid. Ex ante, nursing homes do not know with certainty which patients will spend-down to Medicaid. Thus, nursing homes may charge self-pay patients an actuarially fair high price to account for the risk of conversion in future periods. In other words, self-pay patients may be forced to pay an intertemporal conversion surcharge to compensate firms for the risk of conversion to Medicaid. Common knowledge about the risk of conversion would be factored into a determination of the full cost price.

   The possibility of a surcharge for intertemporal conversions coupled with the reality of relatively low Medicaid reimbursement rates in Florida nursing homes leads to two questions that will be addressed sequentially in this article. First, are Medicaid reimbursement rates in Florida adequate to cover the incremental cost of care provided to Medicaid residents? If not, is the risk of conversion substantial enough to explain the rate differential among payer types? If the price paid for Medicaid patients does not cover the costs of care for Medicaid patients, a case may be made for cross-subsidization in the cross-section examined. Given the transition of some individuals from self-pay or Medicare to Medicaid over time, an additional examination of the rate structure of apparently cross-subsidizing homes is warranted. If the average revenue for patients not on Medicaid upon admission offsets realized future postconversion losses on average in every nursing home, the intertemporal conversion surcharge explains differences in prices across payer types entirely. If instead the expected net revenue for patients not on Medicaid upon admission is nonzero, there remains a portion of the rate structure that could be construed as cross-subsidization.

   Investigation of these issues requires a carefully designed empirical cost analysis. While Little (1992) examined cost shifting in nursing homes using aggregate data, there have been no other studies of cross-subsidization in nursing homes and there have been no studies of cross-subsidization using facility- and resident-level data. Using firm-level and resident-level data from Florida, this article will present estimates of the incremental cost of treating different patient groups and will examine the risk of conversion. The article will begin in section 2 with a discussion of important characteristics of the Florida nursing home industry, followed by section 3 with a discussion of the hypotheses and methods used in the analysis. Section 4 contains the empirical estimates, followed by a concluding section that examines the public policy implications of the results.

2. The Case for Cross-Subsidization in Florida's Nursing Home Industry

   Payer Types and Reimbursement Rates in Florida

   In nursing homes today, there are three major payer types: private pay, Medicaid funded, and Medicare funded. Private-pay (i.e., self-pay) residents or their families pay for nursing home expenses without any government assistance. The Medicaid program covers long-term care for the poor, subject to the eligibility standards established by the state. Under the Medicaid program in Florida, for example, a nursing home is reimbursed at a prospective rate per day for each Medicaid-funded resident. Over the period examined in this study, in Florida, nursing homes are paid the same daily reimbursement rate for each Medicaid-funded resident per day, regardless of the disability level of the resident.

   The third major payer for nursing home care is the Medicare program, a federal program that funds medical care for the elderly and pays for convalescent or terminal, not long-term, nursing home care. Medicare nursing home coverage is currently limited to 100 days, and it requires prior hospitalization and a physician-established need for skilled nursing services. In the period before 1998 considered in this study, nursing homes submitted cost reports to the Medicare program and they were reimbursed for all covered costs. While Medicare pays for all care for the first 20 days of a qualifying nursing home stay, it requires a copayment, which is generally paid with private or Medicaid dollars. In 1996, the Medicare per diem copayment for days 21-100 of a nursing home stay was $78.50.

   In Florida, the proportion of 1996 nursing home revenues obtained from private-pay nursing home residents (25%) was approximately equal to the proportion of all nursing home days utilized by private-pay residents (22%). In contrast, the proportion of revenue from Medicaid residents (41%) was less than their proportionate presence in the nursing home (58%), and Medicare revenues (34%) exceeded Medicare's proportionate share of residents (20%).

   For the first half of 1997, the statewide average Medicaid reimbursement rate was $93.16. The highest rate paid to any facility during this period was $141.76, and the lowest rate paid to any facility was $66.83. In contrast, in 1996, the average reported daily rate paid by private-pay residents was $126.87 for a semiprivate room, and the mean revenue per patient day from Medicare-funded residents was $371.82. Since Medicare patient care is reimbursed on a cost basis per patient, a Medicare reimbursement rate is not available. Medicare revenue per patient per day, while not equivalent to such a rate, may arguably serve as a reasonable proxy.

   Risk of Conversion to Medicaid

   The rate differentials outlined in the previous discussion are likely to make Medicaid residents less desirable than other patients in markets with excess demand. State and federal laws have long existed to protect people from being evicted when they convert to Medicaid. The exception to this statement are nursing homes that refuse to participate in the Medicaid program entirely or fail to obey the law. In Florida in 1997, approximately 11% of all facilities were not certified to accept Medicaid patients. Regulations state that residents can only be forced to leave under specific circumstances: when the facility cannot meet the resident's needs, when the resident is in danger, when the resident poses a threat to other residents, when the resident is well enough to leave the home, or when the resident has failed to pay for nursing home services. In addition, residents facing a discharge must be given a written notice 30 days in advance of the discharge, where the notice must contain information about how to fi le an appeal.

   Thus, nursing homes have a long-term legally enforceable commitment to care for nursing home residents when they convert to Medicaid.

   However, dumping of Medicaid residents, whose care is reimbursed at a relatively low rate, has been documented. For example, in 1998, Vencor Inc. attempted to dump Medicaid patients at a Florida nursing home, and, in other states, the chain was getting rid of Medicaid residents by withdrawing from the Medicaid program entirely (Peterson and Soteropoulos 1999). Clearly, Medicaid residents are perceived as less lucrative and part of this reputation is...