Financing Facility-based Long-term Care
Medicare does not typically cover residential care like nursing homes or assisted living facilities, and a recent survey suggests roughly 10% of Americans rely on private long-term care insurance. Medicaid is the primary payer of nursing facility care, and nursing facility services are the second largest category of Medicaid spending. Medicaid is funded through public dollars and lawmakers are highly attuned to both the needs of their older constituents and to the financial impact of long-term care on state budgets.
The State Role
States consider various payment strategies to sustain access to facility-based long-term care.
States have considerable flexibility in establishing Medicaid provider payments within broad federal requirements that Medicaid provider payments be consistent with the principles of efficiency and economy, and sufficient to provide access to care. However, it’s important to note that state flexibilities in establishing provider payments (including nursing home payment methodologies) vary based on the Medicaid delivery system, e.g., if they operate a fee-for-service (FFS) or managed care delivery system.
States have more flexibility and discretion in state-operated Medicaid FFS delivery systems because the state agency establishes payment rates for providers directly through the state Medicaid agency. When states delegate some or all functions of the Medicaid program to private commercial insurers, known as managed care organizations (MCOs), the MCOs are responsible for establishing provider payment rates and methodologies in the contracts between the MCO and providers. MCOs often link payment rates to the fee schedule and methodologies used by the state, either voluntarily or through a legislative or regulatory requirement. While the states may require certain conditions in the MCO's contract with the nursing facility or the use of specific payment methodologies, the state is working through the MCO and not directly contracting with the provider.
Establishing Nursing Facility Payments
Federal Medicaid statutes require states to cover nursing facility care as a mandatory benefit. All 50 states have processes for establishing payment methodologies for Medicaid nursing homes.
In FFS payment systems, state Medicaid programs typically pay nursing facilities a daily rate, called a per diem. States often apply a variety of adjustments and incentives to the base payment and considerable variation exists in rates both within and across states.
Generally, there are five primary components to nursing facility payment methodologies:
- Base Rates establish the underlying basis for determining facility rates. All states pay nursing facilities a “per diem” or per day fee. Most states base the daily per diem on facility costs, a specific allowable price, or a combination of those things.
- Primary Cost Centers are the cost and rate components used in calculating the payments to nursing facilities. These can include costs associated with staffing salaries and benefits, medical supplies, social services and patient activities, administrative expenses, capital costs associated with the physical building, depreciation and property taxes, and more.
- Adjustments are changes to the base payments to account for unique facility characteristics, like rural location, public ownership, the level of care needed for higher acuity patients, like those with dementia or Alzheimer’s disease, and more.
- Supplemental payments are additional payments made to nursing facilities to increase the overall payment rate or make up for the difference between Medicaid rates and equivalent Medicare rates. These may be funded through provider taxes or funding from local governments instead of through the state general fund.
- Incentive Payments account for payments to address quality and efficiency and may include value-based payments, pay for performance, or other payment models.
Under FFS models,
- 22 states re-base costs annually whereas 12 states re-base costs every two to four years. The remaining state Medicaid programs either do not specify a re-basing frequency or re-base less often.
- 23 states made lump-sum supplemental payments to nursing facilities, approximating a total of $3.4 billion in supplemental payments to nursing facilities, which accounted for approximately 5% of total nursing facility payments.
- 20 states and Washington, D.C., made quality incentive payments to nursing facilities through pay-for-performance methodologies.
Last year, 24 states paid for some or all nursing facility care through managed long-term care, and two states used managed long-term care to pay for and deliver care to individuals dually eligible for Medicaid and Medicare.
Payments for services delivered through managed care are capitated, meaning they are paid by the state to the managed care organization on a per member per month basis—to cover the costs of services (including provider payments). The rates are set in advance and must be actuarially sound. Importantly, capitated rates paid by states to managed care organizations (MCOs) are blended rates that account for the costs of both home- and community-based care and facility services coordinated through the MCO.
Payment rates are also risk-adjusted to account for the health status of the enrollee. States may use directed payments as a way to make supplemental payments to providers through managed care.
Under managed long-term care models,
- 14 states established minimum fee schedules for nursing facility services in managed care (typically no less than the Medicaid FFS rate).
- 6 states required directed payments for nursing facilities, requiring managed care plans to increase payments to nursing facilities by a fixed amount above base payment rates.
State legislative and executive branches play an important role in establishing payment methodologies and payment rate review for nursing facilities, with various state activities highlighted below.
Colorado pays nursing facilities through a fee-for-service delivery system. Colorado statute outlines nursing facility rate review processes and specifies the frequency with which the state agency is required to review and update nursing facility rates. For example, facilities are required to submit cost reports to the state annually which are used to redetermine the per diem rate paid to providers. Recent legislation adjusts supplemental payment rates, requiring that the payment must not be less than 12% of the total provider payment, and increasing this percentage to 15% in 2026. This legislation also requires the state agency to annually adjust rates to ensure access to care for residents with severe mental health conditions.
Iowa pays nursing facilities through a managed long-term care delivery system. The state re-bases rates every two years and MCOs reconcile rates accordingly. Rates are, in part, determined by an annual cost reports, which is based on a case mix of current residents in the facility. Appropriations Bill House File 891 (2021) directed the Medicaid agency to evaluate nursing facility case-mix reimbursement and re-basing processes. The most recent study includes pros and cons as well as recommendations for the legislature.
Missouri pays nursing facilities through a fee-for-service delivery system. Missouri publishes annual reports in the state’s Access and Monitoring Review Plan, which reviews the state’s Medicaid fee-for-service payments to determine whether rates support access to care for a wide range of primary care services, behavioral health services, home health agencies, and nursing facilities. Nursing facility payments were recently re-based in 2022 based on 2019 cost report data among other changes to the nursing facility methodology (changes to case mix adjustments for patient care, updating fair rental value, etc.). Prior to that, nursing facility payments were last re-based pursuant to state legislation in 2005 based on 2001 cost report data as outlined in Rev. Stat. Mo. § 208.225.
Nevada pays nursing facilities through a fee-for-service delivery system. Nevada statute (enacted via 2017 legislation) requires that the Rate Analysis and Development (RAD) Unit conduct rate reviews and analyze the fiscal impact of rate changes for both Medicaid fee-for-service and Medicaid managed care capitated rates. This requires the state to conduct a rate review every four years for each service or item covered under the Medicaid state plan. Updated statewide nursing facility rates are publicly available here.
This brief is the second in a series of three briefs on ensuring quality of care and access to services in long-term care facilities.