Special Report
Executive Summary
BDO Seidman, LLP (BDO) was engaged by the Wisconsin Health Care Association (WHCA) and the
Wisconsin Association of Homes and Services for the Aging (WAHSA) to conduct a study on the
financial condition of nursing home facilities in Wisconsin. Specifically, we were asked to
determine whether facilities are experiencing serious financial difficulties, identify the
major contributing factors, and estimate the fiscal impact of establishing a more reasonable
Medicaid reimbursement system. BDO has worked extensively in the redesign of Medicaid payment
systems throughout the country and a synopsis of their experience and expertise is included as
Appendix 1.
Wisconsin’s nursing facilities are in serious financial distress. We identified several
factors leading to their poor financial condition, including federal Medicare payment
reductions, declining nursing home occupancy levels and acute labor shortages. However, our
analysis indicates, without question, that the inadequacies of the Wisconsin Medicaid payment
system have had the greatest impact on the deterioration of the financial and operational
condition of Wisconsin’s nursing facilities.
Key Findings
Our key findings, summarized here, and more fully detailed elsewhere in this report, are as
follows:
Wisconsin’s Medicaid payment system establishes various cost centers (most notably direct
care, support services, and administrative services) and within these cost centers sets
payment ceilings based on a percentage of the median of nursing facilities’ costs. The median
is determined by arraying per patient day costs of facilities from high to low and identifying
the costs of the facility at the midpoint. By definition, payment ceilings established at the
median assures that only one-half of all homes within each cost center are fully paid their
Medicaid costs.
These payment ceilings have been substantially reduced over the past decade because budgeted
funding for the nursing facility Medicaid payment system has failed to keep pace with
increasing costs of care. These shortfalls have occasioned the collapse of the Medicaid
payment ceilings within the State’s reimbursement system. As a result, for the rate year
ended June 30, 2000, only 17% of all nursing facilities were reimbursed their Medicaid costs;
average Medicaid losses were almost $11 per patient day; and aggregate Medicaid losses for all
Wisconsin facilities exceeded $100 million.
The Wisconsin State Medicaid program recently announced that further reductions in Medicaid
payment ceilings will be imposed effective July 1, 2000. These reductions will make
Wisconsin’s Medicaid nursing home payment ceilings, expressed as a percentage of the median,
the lowest in the country. As a result, 20% of facilities will receive a rate decrease for
the 2001 fiscal year while another 46% will receive rate increases less than their actual cost
increases. Average Medicaid facility losses will increase by an additional $2-$3 per resident
day, or in excess of $300,000 per year for a 100 bed facility with a 70% Medicaid census.
Margins from other payors such as the federal Medicare program and private pay residents are
not enough to subsidize losses of this magnitude. Such subsidies are declining due to
Medicare payment reductions and growing competition and expanded housing and service options
for private pay residents. Indeed, when comparing total revenues from all sources to total
costs, the average margin for Wisconsin nursing homes in 1999 was a negative 4.79%.
Correcting the Problem
Increases in facility per diem care costs above the general rate of inflation are due to a
number of factors including dramatic increases in resident acuity, the unparalleled labor
shortage, record high levels in admissions and discharges, and higher vacancy rates. These
factors, coupled with the recent Medicare nursing facility payment reductions under PPS,
places facilities in a financially and operationally unstable situation. In short, facilities
cannot afford to lose $11 per day on each Medicaid resident and still remain financially
solvent. The Medicaid program, whose patients represent almost 70% of the nursing home
population, must better compensate facilities for the costs of Medicaid patients.
We modeled the impact of modifying Wisconsin’s Medicaid payment system for the rate year of
July 1, 1999 to June 30, 2000 to establish ceilings at levels comparable to what other states
have done that have recently redesigned their payment systems. Our analysis indicates that
doing so would have required an annual increase in 1999-2000 Medicaid funding of approximately
$57 million ($27/GPR, or state funds). This does not include the cost to eliminate the
payment cuts for the current rate year of July 1, 2000 to June 30, 2001. We project an
additional $22 million will be required to achieve that end.
Such a system would be reasonable, but not generous, reimbursing the Medicaid costs of
approximately 60% of facilities. This approach can best be viewed as maintaining the status
quo; it does not provide additional funding to remedy current staffing shortages or enhance
employee wage and benefit packages.
Introduction and Purpose
BDO Seidman, LLP (BDO) was engaged by the Wisconsin Health Care Association (WHCA) and the
Wisconsin Association of Homes and Services for the Aging (WAHSA) to conduct a study on the
financial condition of nursing home facilities in Wisconsin. Specifically, we were asked to
determine whether facilities are experiencing serious financial difficulties, identify the
major contributing factors, and estimate the fiscal impact of establishing a more reasonable
Medicaid reimbursement system. BDO has worked extensively in the redesign of Medicaid payment
systems throughout the country and a synopsis of their experience and expertise is included as
Appendix 1.
Wisconsin’s nursing facilities are in serious financial distress. We identified several
factors leading to their poor financial condition, including federal Medicare payment
reductions, declining nursing home occupancy levels and acute labor shortages. However, our
analysis indicates, without question, that the inadequacies of the Wisconsin Medicaid payment
system have had the greatest impact on the deterioration of the financial and operational
condition of Wisconsin’s nursing facilities.
Adequacy of Medicaid Payment in Wisconsin Rate Year Ending 6/30/00 Non-Profit Governmental Total 40 10 7 57 Percent
of total 25.8% 8.5% 12.7% 17.4% Number
of homes losing 115 108 48 271 Percent
of total 74.2% 91.5% 87.3% 82.6% $7.23 $10.56 $15.88 $10.90
Medicaid is the primary payor source for nursing home care. In Wisconsin, almost 70% of
nursing home residents have Medicaid as their payor source. Only 23% of the residents are
private pay, with Medicare and managed care making up the difference.1 As such, adequate
Medicaid payment is the most important element in the fiscal equation.
We examined the adequacy of Medicaid payment by identifying the number and percentage of
facilities being fully reimbursed their Medicaid allowable costs and analyzed the magnitude of
the losses being incurred by facilities on Medicaid patients. We also compared Wisconsin to
other states in relation to where they set their reimbursement ceilings or maximums. The
higher the ceilings, the greater the number of facilities being paid all their Medicaid
allowable costs in that cost center. Finally, we estimated the cost to develop a Medicaid
payment system comparable to what other states have recently done to ensure fair and adequate
payment for quality patient care.
Existing Medicaid Payment
In analyzing the adequacy of Medicaid payment, we utilized cost and rate data obtained from
the Department of Health and Family Services, Division of Health Care Financing for the rate
year of July 1, 1999 to June 30, 2000. Information was obtained in electronic format for 328
facilities whose rates had been set by the time we began this engagement. These 328
facilities represent approximately 75% of the nursing homes and Medicaid patient days
statewide. The cost data, from 1998 “desk or field audited” cost reports, was inflated
forward to the rate year using the Skilled Nursing Facility Market Basket Index, a nursing
home inflation estimator. The inflation estimate was conservative, in that historically,
nursing home inflation in Wisconsin exceeds this nursing home index by one to two percent
annually. In other words, the allowable Medicaid expenses that were compared to Medicaid
rates were likely understated.
The analysis revealed that only 17% of facilities in Wisconsin (57 out of 328) were fully
reimbursed their allowable Medicaid costs for the rate year of July 1, 1999 to June 30, 2000.
The average loss for 83% of Wisconsin facilities was almost $11 per patient day (ppd.). For a
100 bed facility, with a 70% Medicaid census, this represents an annual loss of approximately
$250,000. Total Medicaid losses for the 271 facilities losing money on Medicaid exceeded
$78 million. Extrapolating this loss to the universe of all Wisconsin nursing homes resulted
in Medicaid losses for all Wisconsin facilities exceeding $100 million in 1999-2000.
A breakdown, by type of ownership, is as follows:
For
Profit
Numbers
of homes paid 100%
of
Medicaid allowable costs
money
on Medicaid
Weighted
average Medicaid
loss
per patient day
Even the proprietary sector, traditionally representing the lowest cost homes in the state,
had only 26% of their facilities being fully reimbursed their Medicaid costs. Their losses
were also substantial with an average loss of over $7 ppd, or $160,000 annually, for a 100 bed
facility with a 70% Medicaid census.
Our analysis indicated that of the 271 homes (82.6%) experiencing Medicaid losses, over 70%
(191) lost $3 ppd. or more, with over half losing at least $6 ppd. To be fiscally sound,
facilities must not only be able to subsidize these losses which represent the costs that
Medicaid allows but does not pay for, but also subsidize other costs incurred that Medicaid
does not even recognize as allowable. Costs such as marketing, public relations,
contributions, income taxes, out of state travel for education and training, bad debts, and
certain legal and professional fees are simply not recognized by Medicaid in rate setting.
Others, such as central office costs, are subject to limitations before recognition for rate
setting.
BDO’s experience, in Wisconsin and in other states, is that, on average, such cost
disallowance’s represent $2-$3 ppd. or $40,000-$50,000, for a 100 bed facility with a 70%
Medicaid census. These losses have traditionally been subsidized by the Medicare program and
private pay residents. As explained later in this report, due to Medicare PPS, the Medicare
subsidy for most homes is gone, leaving the burden on private pay residents.
In Wisconsin, 23% of the residents are private pay. A 100 bed nursing facility incurring a
Medicaid loss of $11 ppd., plus $2 ppd. of disallowed expenses, must now charge private pay
residents $50 more per day than the rates paid by Medicaid just to cover costs; let
alone generate any margin. In 1998, rate differentials between Medicaid and private pay
residents were approximately $30-$35 per day.2 Facilities cannot simply raise private pay
rates another $15-$20 per day. The market for these residents is highly competitive, not only
among nursing facilities, but also because of the availability of other housing and service
options such as assisted living. In addition, for many private pay residents, increasing
rates simply means becoming Medicaid eligible that much sooner.
We examined the ability of facilities to subsidize Medicaid losses by determining whether
total revenues covered total costs incurred by facilities in 1999. Revenue and cost data for
404 facilities was derived from 1999 “as filed” cost reports obtained in an electronic format
from the Department of Health and Family Services, Division of Health Care Financing.
The average margin, expressed as net income or loss as a percentage of total revenue was a
negative 4.79%. The analysis indicates that margins on other payor types are no longer
adequate to fund Medicaid shortfalls.
As detailed further in both the Executive Summary and in subsequent sections of this report,
the situation is only projected to get worse. Due to insufficient budgetary funding for the
rate year of July 1, 2000 to June 30, 2001, 20% of facilities will receive a rate decrease for
this period while another 46% will receive rate increases that will not cover their cost
increases. The result for 2001 will be greater Medicaid losses and fewer facilities being
fully reimbursed their Medicaid costs than what is reflected in this report.
Medicaid Reimbursement - Wisconsin vs. Other States
Medicaid rate comparisons are often made among states, but higher rates are not necessarily an
indication of a better or more equitable payment system. What is relevant is whether Medicaid
reimbursement adequately covers the Medicaid costs incurred by nursing homes in that state.
For example, Medicaid rates in Mississippi are lower than in Wisconsin. The primary reason is
that salaries and benefits paid to Mississippi nursing home employees are much less than in
Wisconsin. However, more facilities in Mississippi are fully reimbursed their Medicaid costs
than in Wisconsin because Mississippi sets ceilings at a higher percentage above the median
cost of nursing home facilities. Thus, Mississippi’s Medicaid payment system is more
equitable in reimbursing Medicaid costs being incurred by facilities in their state.
There are no published comparisons among states of the percentage of homes being reimbursed
their total Medicaid costs. Historically, many state agencies and provider associations did
prepare such cost coverage analysis to insure compliance with the now repealed “Boren
Amendment,” a federal law which required that Medicaid rates be adequate to meet the costs
that must be incurred by economically and efficiently-operated facilities. The standard or
benchmark that evolved from that legislation was that adequate payment meant that at least
50% of facilities were fully reimbursed their Medicaid costs. Wisconsin, at 17.4%, fell
woefully short of that mark in fiscal year 2000, and will do even worse in fiscal year 2001.
Our experience, based upon having prepared cost coverage analyses in over 20% of the states,
and having worked in the development or application of Medicaid payment systems in numerous
others, is that Wisconsin ranks near the bottom in adequately reimbursing the Medicaid costs
of nursing homes. The reasons are twofold:
|
|
|||
|
COST CENTER |
1990 |
2000 |
ESTIMATED REDUCTION IN
CEILING AMOUNT P.P.D. |
|
DIRECT CARE |
13% |
2.3% |
$6.00 |
|
SUPPORT SERVICES |
9.5% |
2% |
|
|
AMINISTRATION |
12% |
2% |
$1.00 |
|
UTILITIES |
15% |
2% |
$.25 |
Additional Funding Needs
We estimated the additional Medicaid funding required to increase ceilings to levels
comparable with other states. We increased ceilings in direct care, support services, and
administration to 15%, 10%, and 10%, above the median, respectively. Doing so, would require
increased annual Medicaid funding of approximately $30 million ($14.3 GPR) for fiscal year
2000. However, doing so still results in only 26% of nursing home facilities receiving all of
their allowable Medicaid costs, which leads to the second major problem with the system: that
being too many cost centers.
The current Medicaid system has seven different cost centers, of which five have separate
ceilings. The other two (property taxes and over-the-counter drugs) are reimbursed based upon
actual costs incurred. Historically, many state agencies set multiple ceilings hoping to
insure efficiency in each cost center. However, doing so has proven to be administratively
burdensome, reduces facilities’ flexibility in managing overall costs, and ignores the reality
that expenditures in one cost center can impact those in another.
For example, a greater expenditure in Human Resources (an administrative cost) may lower
turnover, increase productivity, and reduce costs in another cost center. Overall costs are
reduced, but the provider may be penalized because of higher administrative costs.
Establishing multiple cost centers, each with their own ceilings, is simply designed to reduce
the number of facilities being reimbursed their Medicaid costs. It also often leads to gaming
as facilities try to cost shift due to exceeding ceilings in one cost center while being below
in another. States that have redesigned their payment systems in the past few years have
reduced the number of cost centers to three or four; typically direct care, support services,
and property.
We modeled the impact of modifying Wisconsin’s payment system for fiscal year 2000 to one with
three cost centers (direct care, support, and property) plus a pass-through of property
taxes. Ceilings for direct care and support services were set at 15% and 10% above the
median, respectively. The property payment was adjusted to be comparable to other states that
provide adequate capital payment to cover both reasonable mortgage debt and costs associated
with remodeling and renovation. This was accomplished by increasing the property payment
ceiling by 2% from its current level of 7.5% of facility value to 9.5%. At one time, the
ceiling was as high as 10.75% of facility value. Revising the payment system in this fashion
would require increased annual Medicaid funding of approximately $57 million ($27/GPR) for
1999-2000. This approach would result in approximately 60% of facilities being fully
reimbursed their Medicaid costs, with 40% still losing money on Medicaid.
Such a proposed system is not “generous” by any standard. It is equitable, given existing
nursing home expenditure patterns and payment parameters in other states. However, it does
not represent adequate funding for other initiatives such as rectifying staffing shortages,
meeting nurse aide staffing levels for optimum care as defined in the Health Care Financing
Administration’s (HCFA) recent report to Congress on minimum nurse staffing, providing more
competitive wage and benefit packages, or moving to a new classification and payment system
similar to the Medicare PPS concept.
Other Factors Contributing
to Facilities' Financial Difficulties
Medicare PPS
The financial condition of nursing home facilities has been adversely impacted by the Federal
Medicare Prospective Payment System which reduced Medicare payments to nursing homes by 10%,
or $1.3 billion, from 1998 to 1999. For major nursing home companies, Medicare per diem
payments fell by 20% from the second quarter of 1998 to the fourth quarter of 1999. Since July
1998, more than 1,800 skilled nursing facilities across the country have declared bankruptcy
including five of the seven largest nursing home companies.4 Over the past two and
one-half years, the equity market for major nursing home companies fell by nearly $12 billion
with the average share price falling by 77%.4 In Wisconsin, 43 facilities are in bankruptcy,
representing over 10% of the facilities in the state. This percentage is over double that of
surrounding states in the Midwest where the percentage of facilities in bankruptcy is 4.8%.5
Congressional Budget Office projections now show that Medicare nursing home spending between
1998 and 2004 will be $15.8 billion less than projected, which is twice the payment reduction
intended by Congress for nursing home facilities.6 Based upon these projections, the
reduction in Medicare payments to Wisconsin nursing homes is estimated at $772 million.7
The severe Medicare cuts have serious Medicaid rate implications. Historically, Medicaid
programs, like that in Wisconsin, paid only 90-95% of facilities’ Medicaid costs, knowing that
the difference could be subsidized by private pay patients and Medicare margins. With
Medicare margins substantially reduced, or in many cases, totally eliminated, Medicaid
programs must now pay a higher percentage of Medicaid costs for facilities to be financially
and operationally viable.
Occupancy
Occupancy in nursing homes has declined significantly. Based upon 1998 data, average
occupancy in Wisconsin nursing homes is down to 87%; a decline of almost five percent from
1993.8 Service delivery options such as assisted living and home and
community-based programs have greatly expanded, resulting in lower nursing home census.
That census, however, is a sicker, more frail population requiring more costly services. In
Wisconsin, the number of nursing home residents in need of skilled services or intensive
skilled nursing care at time of admission has increased from 79.4% in 1988 to 97% in 1998. In
addition, while average skilled nursing home census in Wisconsin has declined by some 3,300
residents since 1990, average admissions in that same time period have increased 93% from
26,451 to 51,005.9 As a result, lengths of stay are much shorter, indicating
treatment of patients with more complex medical and rehabilitative problems and an elderly
population entering nursing homes at much later stages in their lives. In addition, many
facilities have experienced a significant increase in the number of residents with significant
behavioral symptoms and problems requiring additional staff and treatment resources.10
The combination of greater vacancy rates and a more costly nursing home patient has increased
annual per diem costs in nursing homes greater than the general level of inflation.
Unfortunately, Medicaid budgetary increases over the years have not kept pace, forcing
reductions in Medicaid payment ceilings and increased Medicaid losses for most facilities.
Labor Shortage
Unemployment rates are at all time lows, making it extremely difficult to recruit and retain
employees in an industry that struggles to develop a positive image, and where the workload is
extremely demanding and difficult. A recent study by the University of Wisconsin-Milwaukee
places the position of certified nursing assistant at the top of the list of most difficult
positions to fill.
As such, nursing homes have had to increase salaries and benefits significantly beyond normal
price inflation simply to remain competitive. Even after doing so, most facilities still have
a significant number of unfilled positions. The May 1999 Report of the Workforce Development
Group indicates that 14% of available positions for long term care workers statewide are
vacant.
A 100 bed nursing facility, with 14% of its positions unfilled, is short approximately 70
hours per day of needed patient care services. These staffing shortages put an added burden
on existing employees often leading to increased turnover (which already stands at over 100%
for all long term care workers11) and forces facilities to utilize contracted temporary nursing
help at a much higher cost. Staffing shortages also increase the probability of serious
deficiencies. The HCFA’s recent report to Congress on “The Appropriateness of Minimum Nurse
Staffing Ratios in Nursing Homes” indicates strong associations between low staffing and the
likelihood of quality problems.
The recent Medicaid wage pass-through, targeted at certified nursing assistants, has helped,
but it has not made a serious dent in the ability of facilities to obtain a full complement of
needed staff. This is due to a number of factors including the availability of thousands of
other job opportunities for prospective employees, the high stress levels and physical
demands of nursing home work, a compensation package that is not competitive with other
industries, and a negative public image.
The labor problem has been exacerbated by inadequate Medicaid payment. Reductions in Medicaid
ceilings over the past decade have not allowed facilities to remain wage and benefit
competitive with other industries or even with other nursing homes whose compensation
packages are at the high-end of the compensation scales. The Medicaid payment system (with the
exception of the wage pass-through funding) also does not timely reimburse cost increases that
exceed the general level of inflation. A provider, under ceilings, that substantially
enhances their wage and benefit package beyond normal inflation is not reimbursed that cost
for at least 18 months, and then only prospectively. Most facilities do not have the cash
flow to absorb such shortfalls for eighteen months.
Conclusion
Nursing home facilities are in a well-documented financial crisis. The reduction of Medicaid
payment ceilings over the past decade, plus the reductions in fiscal year 2001, places the
Wisconsin Medicaid payment system among the worst in the country. The system has eroded to
the point where other payors can no longer compensate for the significant Medicaid shortfalls
in payment. The problem has been compounded by excessive cuts in Medicare payment, higher
vacancy rates, increasing patient acuity, an unparalleled shortage of labor, and greater
competition for private pay residents.
The elderly, their families and advocates, and nursing home regulators demand and expect a
high quality of care and improved patient outcomes. Such expectations come with a price tag.
For the system to work, nursing home facilities and the state must partner together;
facilities meeting quality of care expectations, and the state compensating them fairly and
equitably for high quality care.
In summary, the Wisconsin nursing home Medicaid payment system needs simplification and an
estimated increase in funding of nearly $80 million12 to:
Appendix 1 --
About BDO Seidman, LLP
BDO Seidman, LLP (BDO) is an accounting and consulting organization servicing clients through
more than 40 offices and 50 alliance firm locations across the United States. As a member
firm of BDO International, BDO leverages a global network of resources to serve clients abroad
through more than 490 members firm offices in over 80 countries.
The firm maintains a number of specialized service lines, one of which is healthcare. BDO
services hundreds of long-term care facilities, of all ownership types, throughout the United
States, providing accounting, auditing, tax, feasibility, and specialized consulting in areas
such as reimbursement, clinical operations, and corporate compliance.
The primary author of this report is Joseph M. Lubarsky, a partner and the firm’s National
Director of Long Term Care Services. He personally has provided consulting services to
nursing home associations in 20 states. His work includes conducting cost impact studies and
studies on the adequacy of payment systems, designing and developing new Medicaid payment
systems, and providing litigation support.
In the past two years, Mr. Lubarsky has served as lead consultant to associations on the
redesign of Medicaid payment systems in Kentucky, Idaho, and Colorado. He is currently
involved in the redesign of the Medicaid payment systems in Virginia, New Jersey, and
Arkansas.
Appendix 2 --
Wisconsin Nursing Home Medicaid Payment Ceilings:
1989-2000
Appendix 3 --
State Comparisons of Medicaid Ceilings
State
|
Direct Care (1) |
Indirect Care (1) |
Operating Cost (1) |
|
Connecticut |
135% |
115% |
100% |
|
Idaho |
128% |
123% |
|
|
Colorado |
125% |
120% |
|
|
Kansas |
125% |
130% |
115% |
|
Minnesota |
125% |
110% |
|
|
Nebraska |
125% |
115% |
115% |
|
South Dakota |
125% |
110% |
|
|
Wyoming |
125% |
105% |
|
|
Ohio |
124% |
113% |
|
|
Mississippi |
120% |
120% |
109% |
|
Missouri |
120% |
110% |
|
|
Pennsylvania |
117% |
112% |
104% |
|
Hawaii |
115% |
110% |
|
|
Vermont |
115% |
100% |
|
|
Maine |
112% |
110% |
108% |
|
Virginia |
112% |
108% |
|
|
Alabama |
110% |
110% |
105% |
|
Indiana |
110% |
100% |
|
|
New York |
110% |
108% |
|
|
Montana |
109% |
103% |
|
|
South Carolina |
105% |
105% |
105% |
|
Georgia |
90th (2) |
85th (2) |
70th (2) |
|
North Carolina |
80th (2) |
Flat Rate |
|
|
Maryland |
75th (2) |
119% |
114% |
|
Kentucky |
(3) |
(3) |
|
|
|
|
|
|
|
Wisconsin |
100% |
95% |
91.8% |
