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entitled 'Medicaid Nursing Home Payments: States' Payment Rates Largely 
Unaffected by Recent Fiscal Pressures' which was released on November 
26, 2003.

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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

October 2003:

Medicaid Nursing Home Payments:

States' Payment Rates Largely Unaffected by Recent Fiscal Pressures:

Medicaid Nursing Home Payments:

GAO-04-143:

GAO Highlights:

Highlights of GAO-04-143, a report to congressional requesters 

Why GAO Did This Study:

Almost half of all Americans over the age of 65 will rely on nursing 
home care at some point in their lives, and two in three nursing home 
residents have their care covered at least in part by Medicaid. Under 
Medicaid, states set nursing home payment rates and the federal 
government reimburses a share of state spending. According to the most 
recently available data, Medicaid nursing home expenditures exceed $43 
billion, and total Medicaid spending for fiscal year 2003 is expected 
to double by 2012. Such projections of increased Medicaid spending 
come as most states are confronting their third consecutive year of 
fiscal pressure. According to the National Association of State Budget 
Officers (NASBO), in fiscal year 2003, 30 states collected less 
revenue than they budgeted for, and 37 states reduced enacted budgets 
by almost $14.5 billion.

In light of concerns about the adequacy of nursing home resources, GAO 
was asked to examine how state Medicaid programs determine nursing 
home payment rates and whether these payment methods or rates have 
changed given recent state fiscal pressures. GAO interviewed state and 
nursing home industry officials in 19 states and obtained 
documentation about nursing home payment rates and methods, including 
state methods to determine nursing home per diem rates for fiscal 
years 1998 through 2004.

What GAO Found:

Recognizing the large share of Medicaid spending that is allocated to 
nursing homes and the importance of spending their Medicaid dollars 
effectively, the 19 states GAO reviewed have designed multifaceted 
approaches to setting nursing home payment rates. All of these states 
base payment rates on homes’ actual costs and most develop rates 
specific to each home. These payment methods also generally 
incorporate incentives to achieve certain goals, such as promoting 
efficiency or encouraging homes to target spending toward resident 
care. States typically update payment rates regularly to reflect 
changes in nursing homes’ costs due to factors such as inflation or 
residents’ changing care needs.

Although each of the 19 states experienced 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 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 market basket index, 
the index used by the Centers for Medicare & Medicaid Services to 
measure changes in the price of nursing home goods and services for 
Medicare, from fiscal years 1998 through 2003. Many states were able 
to avoid making significant changes to nursing home payment rates by 
relying on existing resources, such as tobacco settlement and 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.

GAO received comments on a draft of this report from Medicaid 
officials in the 19 states reviewed, who generally agreed with the 
characterization of their respective nursing home payment methods. GAO 
also received 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.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

State Nursing Home Payment Methods Link Rates to Costs, Encourage 
Efficiency, and Typically Target Funds to Direct Resident Care:

State Fiscal Pressures Generally Have Not Affected Medicaid Payment 
Rates to Nursing Homes, but Future Changes Remain Uncertain:

External Comments:

Appendix I: Scope and Methodology:

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

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

Appendix IV: GAO Contact and Staff Acknowledgments:

GAO Contact:

Acknowledgments:

Related GAO Products:

Tables:

Table 1: Features Found in Medicaid Nursing Home Payment Methods in 19 
States, September 2003:

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

Table 3: Examples of Funding Sources States Reported Using to Respond 
to Fiscal Pressures, 1998-2003:

Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of 19 
Reviewed States, September 2003:

Table 5: Study States Categorized by Selection Factors:

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

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

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

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

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

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

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

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:

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:

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.[Footnote 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 
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.[Footnote 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.[Footnote 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.):

Results in Brief:

Recognizing the large share of Medicaid spending that is allocated to 
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 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.

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.

Background:

Medicaid operates as a joint federal-state program to finance health 
care coverage for certain categories of low-income individuals, over 11 
million of whom are elderly or disabled.[Footnote 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.[Footnote 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.[Footnote 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 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.[Footnote 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.[Footnote 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.[Footnote 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."[Footnote 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 of budgetary appropriations" and 
required states to submit annual assurances to the Secretary of Health 
and Human Services that rates complied with Boren regulations.[Footnote 
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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 
15] Additionally, states must continue to ensure that payments are 
consistent with efficiency, economy, and quality of care 
standards.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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.

Fiscal pressures have compelled states to confront difficult choices, 
especially because 49 states and the District of Columbia are required 
to balance their budgets.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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.

State Nursing Home Payment Methods Link Rates to Costs, Encourage 
Efficiency, and Typically Target Funds to Direct Resident Care:

Recognizing the importance of spending Medicaid dollars effectively, 
the 19 states we reviewed have designed methods to develop nursing home 
payment rates that include incentives for homes to deliver care 
efficiently, operate economically, and concentrate resources on direct 
resident care. While nursing home payment rates in most of these states 
are related to individual homes' costs of delivering needed services, 
most states also limit payment for certain types of costs and many 
provide additional payments for direct resident care. Most of these 
states also regularly adjust rates to reflect changes in homes' costs 
or in the care needs of the 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.

Table 1: Features Found in Medicaid Nursing Home Payment Methods in 19 
States, September 2003:

State: Alabama; Home-specific rates: Yes; Efficiency incentive: Yes; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for direct 
resident care: Yes; Rate updates: Rates rebased annually: Yes; Rate 
updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: No.

State: Arkansas; Home-specific rates: Yes; Efficiency incentive: No; 
Ceilings or flat rate: Yes; Peer groups: No; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: 
No; Rate updates: Rates consistently inflated in non-rebase years: 
Yes; Case-mix system: No.

State: California; Home-specific rates: No; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for 
direct resident care: Yes; Rate updates: Rates rebased annually: Yes; 
Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: No.

State: Colorado; Home-specific rates: Yes; Efficiency incentive: Yes; 
Ceilings or flat rate: Yes; Peer groups: No; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: Yes; 
Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: Connecticut; Home-specific rates: Yes; Efficiency incentive: 
Yes; Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: No; 
Rate updates: Rates consistently inflated in non-rebase years: Yes; 
Case-mix system: No.

State: Florida; Home-specific rates: Yes; Efficiency incentive: No; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for direct 
resident care: Yes; Rate updates: Rates rebased annually: Yes; Rate 
updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: No.

State: Illinois; Home-specific rates: Yes; Efficiency incentive: Yes; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for direct 
resident care: Yes; Rate updates: Rates rebased annually: No; Rate 
updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: Iowa; Home-specific rates: Yes; Efficiency incentive: Yes; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for 
direct resident 
care: Yes; Rate updates: Rates rebased annually: [A]; Rate updates: 
Rates consistently inflated in non-rebase years: No; Case-mix system: 
Yes.

State: Massachusetts; Home-specific rates: No; Efficiency 
incentive: No; Ceilings or flat rate: Yes; Peer groups: No; 
Add-on payment for direct resident care: Yes; Rate updates: Rates 
rebased annually: No; Rate updates: Rates consistently inflated in non-
rebase years: Yes; Case-mix system: Yes.

State: Michigan; Home-specific rates: Yes; Efficiency incentive: No; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for direct 
resident care: No; Rate updates: Rates rebased annually: Yes; Rate 
updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: No.

State: New Jersey; Home-specific rates: Yes; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: Yes; 
Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: New York; Home-specific rates: Yes; Efficiency incentive: No; 
Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for direct 
resident care: Yes; Rate updates: Rates rebased annually: No; Rate 
updates: Rates consistently inflated in non-rebase years: Yes; Case-mix 
system: Yes.

State: North Dakota; Home-specific rates: Yes; Efficiency incentive: 
Yes; Ceilings or flat rate: Yes; Peer groups: No; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: Yes; 
Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: Oregon; Home-specific rates: No; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: No; Add-on payment 
for direct resident care: No; Rate updates: Rates rebased 
annually: No; Rate updates: Rates consistently inflated in non-
rebase years: Yes; Case-mix system: Yes.

State: Pennsylvania; Home-specific rates: Yes; Efficiency incentive: 
Yes; Ceilings or flat rate: Yes; Peer groups: Yes; Add-on payment for 
direct resident care: No; Rate updates: Rates rebased annually: Yes; 
Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: Rhode Island; Home-specific rates: Yes; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: No; Add-on payment 
for direct resident care: No; Rate updates: Rates rebased 
annually: No; Rate updates: Rates consistently inflated in non-
rebase years: Yes; Case-mix system: No.

State: South Dakota; Home-specific rates: Yes; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: No; Add-on payment 
for direct resident care: Yes; Rate updates: Rates rebased annually: 
Yes; Rate updates: Rates consistently inflated in non-rebase years: No; 
Case-mix system: Yes.

State: Texas; Home-specific rates: No; Efficiency incentive: 
No; Ceilings or flat rate: Yes; Peer groups: No; Add-on payment 
for direct resident care: Yes; Rate updates: Rates rebased annually: 
No; Rate updates: Rates consistently inflated in non-rebase years: 
X[B]; Case-mix system: Yes.

State: Vermont; Home-specific rates: Yes; Efficiency incentive: No; 
Ceilings or flat rate: Yes; Peer groups: No; Add-on payment for 
direct resident care: [C]; Rate updates: Rates rebased annually: 
No; Rate updates: Rates consistently inflated in non-rebase years: 
Yes; Case-mix system: Yes.

State: Total; Home-specific rates: 15; Efficiency incentive: 7; 
Ceilings or flat rate: 19; Peer groups: 10; Add-on payment for direct 
resident care: 9; Rate updates: Rates rebased annually: 9; Rate 
updates: Rates consistently inflated in non-rebase years: 8; Case-mix 
system: 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.

[End of table]

States Typically Develop an Individual Rate for Each Home:

All 19 states we reviewed base the per diem, or daily, rate they pay to 
nursing homes on costs, as reported in cost reports. While 4 states--
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.[Footnote 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 Methods to Encourage Efficient Nursing Home 
Operations:

States design their payment methods to encourage nursing homes to 
deliver care efficiently and economically. For example, all 19 states 
develop their payment rates prospectively, or prior to the time during 
which the rates apply, using historical cost reports. Prospective rates 
encourage nursing homes to operate efficiently and incur only necessary 
costs.[Footnote 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 
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.[Footnote 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[Footnote 
27].[Footnote 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 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.[Footnote 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.[Footnote 30],[Footnote 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.

Nursing Home Payment Methods Encourage Spending in Areas Specifically 
Related to Direct Resident Care:

Through the design of their payment methods, states generally seek to 
encourage nursing home spending on direct resident care. All 19 states 
we reviewed divide nursing home costs into categories, or cost centers, 
with common categories being direct resident care, indirect care, 
administrative, and capital (see table 2). By varying their payment 
policies for each category, most states seek to target more of their 
funds to direct resident care.[Footnote 32]

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

Cost center: Direct resident care; Type of included costs: Nursing 
staff salaries, wages, and benefits.

Cost center: Indirect care; Type of included costs: Dietary, medical 
supplies, laundry, social services and activities, and maintenance.

Cost center: Administrative; Type of included costs: Administrative 
salaries and expenses and office supplies.

Cost center: Capital; Type of included costs: 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.

[End of table]

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[Footnote 33]. 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 rate[Footnote 34]s.:

States Update Payment Rates to Reflect Changing Costs:

To reflect changes in nursing homes' costs, 17 of the 19 states we 
reviewed regularly calculate new payment rates or adjust existing rates 
for inflation. 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.[Footnote 35] Nine of the 19 states we reviewed 
rebase rates annually, and 8 states rebase homes' rates every 2 to 4 
years.[Footnote 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.[Footnote 37]

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.[Footnote 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.[Footnote 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.[Footnote 40] These 
amounts vary from year to year and are influenced by budget 
availability.

By Adjusting Rates for Case-Mix, States Link Payment to Resident Needs:

Instead of paying rates that are based on the costs required to care 
for a nursing home's residents during the cost reporting period, 12 of 
the 19 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 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.[Footnote 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-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.

State Fiscal Pressures Generally Have Not Affected Medicaid Payment 
Rates to Nursing Homes, but Future Changes Remain Uncertain:

Recent state fiscal pressures have not resulted in widespread 
reductions in Medicaid payment rates to nursing homes in most states we 
reviewed, although all of these states modified how they pay nursing 
homes from fiscal years 1998 through 2004. While in some cases 
modifications to payment methods have clearly increased or decreased 
payment rates, in other instances the effect of these modifications on 
payment rates for individual homes is mixed. Further, in nearly three-
quarters of the states we reviewed, nursing home per diem rates grew, 
on average, by an amount that exceeded the SNF market basket index for 
state fiscal years 2001 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 Not Led to Major Changes in Medicaid Nursing 
Home Payment Methods or Rates:

Over the past several years, the states we reviewed have faced 
increasing budget pressures, and all reported experiencing fiscal 
pressure in fiscal year 2003. These budget pressures followed 
consecutive years of significant economic growth in many states. For 
example, through state 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 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.[Footnote 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.[Footnote 43] 
Similarly, Michigan reduced nursing home rates from January through 
September 2002 by approximately 1 percent.[Footnote 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.[Footnote 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 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.[Footnote 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 market basket index.[Footnote 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.[Footnote 48]

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:

[See PDF for image]

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.

[End of figure]

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.[Footnote 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 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 Significant Payment and Programmatic Changes to 
Nursing Homes through Several Means:

To help balance their budgets, states we reviewed have relied on 
alternative funding sources--including budget stabilization and 
tobacco settlement funds--and have enhanced revenue by increasing taxes 
(see table 3).[Footnote 50]

Table 3: Examples of Funding Sources States Reported Using to Respond 
to Fiscal Pressures, 1998-2003:

State: Alabama; Tobacco settlement fund: No; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: 
No.

State: Arkansas; Tobacco settlement fund: No; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: 
No.

State: California; Tobacco settlement fund: Yes; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: 
No.

State: Colorado; Tobacco settlement fund: Yes; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: No.

State: Connecticut; Tobacco settlement fund: No; Budget 
stabilization fund: Yes; Cigarette tax increase: No; Medicaid trust 
fund: No.

State: Florida; Tobacco settlement fund: Yes; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: No.

State: Illinois; Tobacco settlement fund: Yes; Budget stabilization 
fund: No; Cigarette tax increase: Yes; Medicaid trust fund: No.

State: Iowa; Tobacco settlement fund: Yes; Budget stabilization fund: 
Yes; Cigarette tax increase: No; Medicaid trust fund: No.

State: Massachusetts; Tobacco settlement fund: Yes; Budget 
stabilization fund: Yes; Cigarette tax increase: No; Medicaid trust 
fund: No.

State: Michigan; Tobacco settlement fund: Yes; Budget stabilization 
fund: Yes; Cigarette tax increase: Yes; Medicaid trust fund: Yes.

State: New Jersey; Tobacco settlement fund: Yes; Budget stabilization 
fund: Yes; Cigarette tax increase: Yes; Medicaid trust fund: No.

State: New York; Tobacco settlement fund: Yes; Budget stabilization 
fund: Yes; Cigarette tax increase: Yes; Medicaid trust fund: No.

State: North Dakota; Tobacco settlement fund: ; Budget stabilization 
fund: Yes; Cigarette tax increase: No; Medicaid trust fund: No.

State: Oregon; Tobacco settlement fund: Yes; Budget stabilization fund: 
No; Cigarette tax increase: Yes; Medicaid trust fund: No.

State: Pennsylvania; Tobacco settlement fund: Yes; Budget stabilization 
fund: Yes; Cigarette tax increase: No; Medicaid trust fund: No.

State: Rhode Island; Tobacco settlement fund: Yes; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: 
No.

State: South Dakota; Tobacco settlement fund: No; Budget 
stabilization fund: No; Cigarette tax increase: No; Medicaid 
trust fund: Yes.

State: Texas; Tobacco settlement fund: No; Budget stabilization 
fund: No; Cigarette tax increase: No; Medicaid trust fund: 
No.

State: Vermont; Tobacco settlement fund: No; Budget stabilization 
fund: Yes; Cigarette tax increase: Yes; Medicaid trust fund: No.

State: Total; Tobacco settlement fund: 12; Budget stabilization fund: 
9; Cigarette tax increase: 6; Medicaid trust fund: 2.

Source: State Medicaid programs.

[End of table]

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 instance, all 19 states received tobacco settlement 
funds, yet only 12 used these funds from 1998 through 2003 to respond 
to fiscal pressures.[Footnote 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.[Footnote 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.[Footnote 53]

Table 4: Existing or Pending Nursing Home Provider Taxes in 13 of 19 
Reviewed States, September 2003:

Status: Existing; State: Alabama.

Status: Existing; State: Arkansas.

Status: Existing; State: Illinois.

Status: Existing; State: Massachusetts.

Status: Existing; State: Michigan.

Status: Existing; State: New York.

Status: Existing; State: Rhode Island.

Status: Existing; State: Vermont.

Status: Pending; State: Colorado.

Status: Pending; State: Iowa.

Status: Pending; State: New Jersey.

Status: Pending; State: Oregon.

Status: Pending; State: Pennsylvania.

Source: State Medicaid programs.

[End of table]

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.

Future Options for Dealing with Fiscal Pressures May Be More Uncertain:

Although the extent of states' continued fiscal pressure is unknown, 
states expect their poor fiscal situations to continue through fiscal 
year 2004. 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.[Footnote 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.

External Comments:

We provided a draft of this report to the Medicaid Director in each of 
the 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.

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:

Signed by Kathryn G. Allen: 

[End of section]

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: Largest decline or smallest growth in 
revenue from 2000 through 2002 (CMS region): Alabama (IV); Arizona 
(IX); Arkansas (VI); Colorado (VIII); Iowa (VII); Michigan (V); New 
Jersey (II); Oregon (X); Pennsylvania (III); Vermont (I); 

States selected for sample: 
Largest population: California; Florida; Illinois; New York; Texas; 

States selected for sample: Highest number of Medicaid nursing home 
residents per capita: 
Connecticut; Massachusetts; Rhode Island; North Dakota; South Dakota.

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.

[End of table]

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 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.[Footnote 55] 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.[Footnote 56] 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 prospective payment system.[Footnote 57] 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;[Footnote 
58] 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.

[End of section]

Appendix II: Summary of Certain Payment 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.[Footnote 59] The 
states we reviewed most commonly categorize nursing homes by geographic 
region or home type.[Footnote 60] 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.

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

State: Alabama; Peer groups: Two home sizes in the administrative cost 
center.

State: California; Peer groups: 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.

State: Connecticut; Peer groups: Two geographic regions and two home 
types based on resident care need in the direct resident care cost 
center.

State: Florida; Peer groups: Three geographic regions and two home 
sizes in the direct resident care and administrative cost centers.

State: Illinois; Peer groups: Seven geographic regions in all cost 
centers.

State: Iowa; Peer groups: Two home types based on whether the home is 
Medicare-certified and hospital-based or freestanding.

State: Michigan; Peer groups: Two home types based on ownership or 
whether the home is hospital-based or freestanding.

State: New Jersey; Peer groups: Three home types based on ownership or 
resident care need in all cost centers.

State: New York; Peer groups: 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.

State: Pennsylvania; Peer groups: Four geographic regions and three 
home sizes in the direct resident care, indirect care, and 
administrative cost centers.

Source: State Medicaid programs.

[End of table]

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.[Footnote 61] Homes in these states generally 
receive rates based on the lower of their actual costs or the 
ceiling.[Footnote 62] 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.

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

State: Alabama; Cost-center ceilings: Direct resident care: 110 percent 
of median costs for all homes[A]; Cost-center ceilings: Indirect care: 
110 percent of median costs for all homes; Cost-center ceilings: 
Administrative: 105 percent of median costs for all homes within each 
peer group.

State: Arkansas; Cost-center ceilings: Direct resident care: 105 
percent of 90th percentile for all homes[B]; Cost-center ceilings: 
Indirect care: Flat rate set at 110 percent of median costs for all 
homes[C].

State: Colorado; Cost-center ceilings: Direct resident care: 125 
percent of average costs weighted by total resident days for all homes 
within each peer group; Cost-center ceilings: Indirect care: 120 
percent of average costs weighted by total resident days for all homes 
within each peer group for room and board costs; 125 percent of 
weighted average costs for all homes within each peer group for other 
indirect costs; Cost-center ceilings: Administrative: 120 percent of 
average costs weighted by total resident days for all homes within each 
peer group[D].

State: Connecticut; Cost-center ceilings: Direct resident care: 135 
percent of median costs for all homes within each peer group; Cost-
center ceilings: Indirect care: 115 percent of median costs for all 
homes; Cost-center ceilings: Administrative: 100 percent of median 
costs for all homes.

State: Florida; Cost-center ceilings: Direct resident care: 1.75 
standard deviations above median costs for all homes within each peer 
group; Cost-center ceilings: Indirect care: 1.75 standard deviations 
above median costs for all homes within each peer group[E]; Cost-center 
ceilings: Administrative: One standard deviation above median costs for 
all homes within each peer group[E].

State: Illinois; Cost-center ceilings: Direct resident care: None; 
Cost-center ceilings: Indirect care: 75th percentile of costs for all 
homes within each peer group.

State: Iowa; Cost-center ceilings: Direct resident care: 120 percent of 
median costs for all homes[F]; Cost-center ceilings: Indirect care: 110 
percent of median costs for all homes.

State: Michigan; Cost-center ceilings: Direct resident care: 80th 
percentile of costs for all homes within each peer group; Cost-center 
ceilings: Indirect care: 80th percentile of costs for all homes within 
each peer group[G].

State: New Jersey; Cost-center ceilings: Direct resident care: 120 
percent of median costs for all homes within each peer group; Cost-
center ceilings: Indirect care: 110 percent through 150 percent of 
median costs, depending on specific type of costs, for all homes within 
each peer group; Cost-center ceilings: Administrative: 100 percent of 
median costs for all homes within each peer group.

State: New York[H]; Cost-center ceilings: Direct resident care: Ceiling 
based on updated 1983 prices for each level of resident care need; 
Cost-center ceilings: Indirect care: 105 percent of average costs for 
all homes within each peer group.

State: North Dakota; Cost-center ceilings: Direct resident care: 99th 
percentile of costs for all homes[I, J]; Cost-center ceilings: Indirect 
care: 85th percentile of costs for all homes[I]; Cost-center ceilings: 
Administrative: 75th percentile of costs for all homes.

State: Pennsylvania; Cost-center ceilings: Direct resident care: 117 
percent of median costs for all homes within each peer group; Cost-
center ceilings: Indirect care: 112 percent of median costs for all 
homes within each peer group; Cost-center ceilings: Administrative: 104 
percent of median costs for all homes within each peer group[K].

State: Rhode Island; Cost-center ceilings: Direct resident care: 80th 
percentile of costs for all homes; Cost-center ceilings: Indirect care: 
80th percentile of costs for all homes; Cost-center ceilings: 
Administrative: 80th percentile of costs for all homes.

State: South Dakota[L]; Cost-center ceilings: Direct resident care: 115 
percent of median costs[M] for all homes, and 80 percent of costs that 
fall from 115 percent through 125 percent of the median; Cost-center 
ceilings: Indirect care: 105 percent of median costs[M] for all homes, 
and 80 percent of costs that fall from 105 percent through 110 percent 
of the median; Cost-center ceilings: Administrative: 105 percent of 
median costs[N] for all homes, and 80 percent of costs that fall from 
105 percent through 110 percent of the median.

State: Vermont; Cost-center ceilings: Direct resident care: 115 percent 
of median costs for all homes; Cost-center ceilings: Indirect care: 105 
percent of median costs for all homes; Cost-center ceilings: 
Administrative: Median costs for all homes except special hospital-
based homes, which are capped at 137 percent of the median for all 
homes[O].

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 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.

[End of table]

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



State: California; Cost-center ceilings: Direct resident care: Flat 
rate set at the median costs for all homes within certain peer groups; 
Cost-center ceilings: Indirect care: Flat rate set at the median costs 
for all homes within certain peer groups.

State: Massachusetts; Cost-center ceilings: Direct resident care: Flat 
rate set at median costs for all homes[A]; Cost-center ceilings: 
Indirect care: Flat rate determined by adding 85 percent of median for 
administrative costs to median of indirect costs for all homes.

State: Oregon; Cost-center ceilings: Direct resident care: Flat rate 
set at approximately 90 percent of statewide average costs for all 
homes[B]; Cost-center ceilings: Indirect care: Flat rate set at 
approximately 90 percent of statewide average costs for all homes.

State: Texas; Cost-center ceilings: Direct resident care: Flat rate 
set at 107 percent of weighted average for all homes' updated 1998 
costs[C]; Cost-center ceilings: Indirect care: Flat rate set at 107 
percent of weighted average costs for all homes[C]; Cost-center 
ceilings: Administrative: Flat rate set at 107 percent of median costs 
for all homes.

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.

[End of table]

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).[Footnote 63] 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.

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

State: Alabama; Direct resident care cost center: [Empty]; Indirect 
care cost center: If a home's costs are below the ceiling, it receives 
50 percent of the difference between its costs and the ceiling; 
Administrative cost center: [Empty].

State: Colorado; Direct resident care cost center: [Empty]; Indirect 
care cost center: [Empty]; Administrative cost center: If a home's 
costs are below the ceiling, it receives 12.5 percent of the difference 
between its costs and the ceiling.

State: Connecticut; Direct resident care cost center: [Empty]; Indirect 
care cost center: If a home's costs are below the median, it receives 
25 percent of the difference between its costs and median costs; 
Administrative cost center: If a home's costs are below the median, it 
receives 25 percent of the difference between its costs and median 
costs.

State: Illinois; Direct resident care cost center: [Empty]; Indirect 
care cost center: 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; Administrative cost center: [Empty].

State: Iowa; Direct resident care cost center: If a home's costs are 
below 95 percent of the median, it receives 100 percent of the 
difference between its costs and the median, up to 10 percent of the 
median; Indirect care cost center: If a home's costs are below 96 
percent of the median, it receives 65 percent of the difference between 
its costs and the median, up to 8 percent of the median[A].

State: North Dakota; Direct resident care cost center: [Empty]; 
Indirect care cost center: [Empty]; Administrative cost center: 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.

State: Pennsylvania; Direct resident care cost center: If a home's 
costs are below the ceiling, it receives 3 percent of the difference 
between its costs and the ceiling, and up to 30 percent of the 
remaining difference up to ceiling; Indirect care cost center: If a 
home's costs are below the ceiling, it receives 3 percent of the 
difference between its costs and the ceiling, and up to 30 percent of 
the remaining difference up to ceiling; Administrative cost center: 
No.

Source: State Medicaid programs.

[A] Iowa combines nursing homes' indirect care and administrative costs 
into a single cost center.

[End of table]

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.[Footnote 64] 
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.[Footnote 65] 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.[Footnote 66] The case-mix 
classification system used by each state is shown in table 10.

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

State: Colorado; Case-mix classification system: RUG-III, 34 groups.

State: Illinois; Case-mix classification system: State-specific 
system, 36 groups[A, B].

State: Iowa; Case-mix classification system: RUG-III, 34 groups.

State: Massachusetts; Case-mix classification system: State-specific 
system,[C] 10 groups.

State: New Jersey; Case-mix classification system: State-specific 
system,[D] 7 groups.

State: New York; Case-mix classification system: RUG-II, 16 groups.

State: North Dakota; Case-mix classification system: RUG-III, 34 
groups.

State: Oregon; Case-mix classification system: State-specific 
system,[E] 2 groups.

State: Pennsylvania; Case-mix classification system: RUG-III, 44 
groups.

State: South Dakota; Case-mix classification system: RUG-III, 34 
groups.

State: Texas; Case-mix classification system: State-specific 
system,[F] 11 groups.

State: Vermont; Case-mix classification system: 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.

[End of table]

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.[Footnote 67] 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).

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

State: Alabama; Standard: 85 percent occupancy; Applicable cost 
center(s): Capital.

State: Arkansas; Standard: 75 percent occupancy; Applicable cost 
center(s): Capital.

State: Colorado; Standard: 85 percent occupancy; Applicable cost 
center(s): Administrative (rural facilities exempted).

Standard: StateConnecticut: 90 percent occupancy; Applicable cost 
center(s): StateConnecticut: Capital.

State: Connecticut; Standard: 95 percent occupancy; Applicable cost 
center(s): All.

State: Florida; Standard: Home's total occupancy must be below the 
statewide average occupancy less one standard deviation and home's 
Medicaid occupancy must be below the statewide average Medicaid 
occupancy less one standard deviation[A]; Applicable cost center(s): 
All[B].

State: Illinois; Standard: 93 percent occupancy; Applicable cost 
center(s): Indirect care/administrative and capital.

State: Iowa; Standard: 80 percent occupancy[C]; Applicable cost 
center(s): Indirect care[D].

State: Massachusetts; Standard: 96 percent occupancy; Applicable cost 
center(s): All.

State: Michigan; Standard: 85 percent occupancy; Applicable cost 
center(s): All.

State: New Jersey; Standard: 95 percent occupancy; Applicable cost 
center(s): Capital.

Standard: New Jersey: 90 percent occupancy; Applicable cost 
center(s): New Jersey: Direct resident care, indirect care, and 
administrative.

State: New York; Standard: 90 percent occupancy; Applicable cost 
center(s): All.

State: North Dakota; Standard: 90 percent occupancy; Applicable cost 
center(s): Administrative and capital.

State: Pennsylvania; Standard: 90 percent occupancy; Applicable cost 
center(s): Administrative and capital.

State: Rhode Island; Standard: 98 percent of statewide average 
occupancy; Applicable cost center(s): All.

State: South Dakota; Standard: 3 percent below the statewide average 
occupancy; Applicable cost center(s): All.

State: Texas; Standard: Lower of 85 percent occupancy or statewide 
average occupancy; Applicable cost center(s): Administrative and 
capital.

State: Vermont; Standard: 90 percent occupancy; Applicable cost 
center(s): 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.

[End of table]

[End of section]

Appendix III: Changes to Nursing Home 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.

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

State: Alabama; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: Moved liability 
insurance costs to administrative cost center instead of pass-through 
in 2002; Case-mix classification system: [Empty]; Occupancy standard: 
No; Inflation factor: [Empty]; Add-on payments: [Empty]; Payment 
rate: [Empty].

State: California; Peer grouping: Added two counties to Bay Area peer 
group in 2002; Cost-center ceilings or efficiency incentives: [Empty]; 
Calculation of costs: [Empty]; Case-mix classification system: [Empty]; 
Occupancy standard: [Empty]; Inflation factor: [Empty]; Add-on 
payments: Implemented a wage add-on for some direct resident care staff 
in 1999 and for other staff in 2000;[A] 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; Payment 
rate: Froze per diem rates from August 2003 through July 2005 at August 
2003 levels.

State: Colorado; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: Suspended efficiency incentive in 
administrative cost center for 3 months in 2003; Calculation of costs: 
Eliminated limit on annual increase in payment for combined direct and 
indirect care costs in 2000; Case-mix classification system: 
Implemented case-mix system in 2000; Occupancy standard: Eliminated 
occupancy standard in direct resident care and indirect care cost 
centers in 2000; Inflation factor: [Empty]; Add-on payments: Eliminated 
quality incentive add-on in 2002; Payment rate: Increased lag time 
between cost report submission and rate implementa-tion from 2 to10 
months for most homes in 2002.

State: Connecticut; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: Implemented direct resident care and 
indirect care staffing wage add-on in 1999; eliminated in 2001; Payment 
rate: Delayed rate increase from July 2002 until January 2003; froze 
rates at January 2003 levels through December 2004.

State: Florida; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: Eliminated peer group and home-specific ceilings 
for indirect care from January to June 2002 and for direct resident 
care beginning January 2002; Calculation of costs: Partially rebased 
administrative cost center for state fiscal year (SFY) 2003; Case-mix 
classification system: Implemented case-mix system in 1999; eliminated 
in 2001; Occupancy standard: [Empty]; Inflation factor: [Empty]; Add-on 
payments: Implemented direct resident care staffing minimum add-on in 
2002; delayed increase in direct resident care staffing minimum from 
January until May 2004; Payment rate: [Empty].

State: Illinois; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: Eliminated routine updates to case-mix data from 
1998 through 2001 and eliminated case-mix updates altogether in 
2002;[B] implemented new case-mix system based on the CMS's Minimum 
Data Set in SFY 2004; Occupancy standard: [Empty]; Inflation factor: 
No; Add-on payments: [Empty]; Payment rate: Froze rates for SFY 
1998 through 2001;[B] cut rate by 5.9 percent in SFY 2003; froze rates 
at SFY 2003 levels in SFY 2004.

State: Iowa[C]; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: Increased from 80 
to 85 percent in indirect care cost center in SFY 2004; Inflation 
factor: Reduced cost report inflation factor by 3.4 percentage points 
in SFY 2004; Add-on payments: Implemented add-on payment for quality in 
July 2002; Payment rate: [Empty].

State: Massachusetts; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: Decreased ceilings for direct resident care, 
indirect care, and administrative cost centers in 1998; Calculation of 
costs: [Empty]; Case-mix classification system: [Empty]; Occupancy 
standard: [Empty]; Inflation factor: [Empty]; Add-on payments: 
Implemented certified nursing assistant wage add-on in 2000; 
implemented two one-time add-on payments for nursing home performance 
and for nursing homes to meet Department of Mental Retardation 
requirements in SFY 2004; Payment rate: Reduced per diem rates by 
roughly 2.6 percent from March through June 2003[D].

State: Michigan; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: Changed inflation factor used to adjust for time between cost 
report submission and rate implemen-tation from SNF market basket index 
to legislatively determined factor in 1999; Add-on payments: Eliminated 
quality incentive add-on in 1999; eliminated direct resident care 
staffing wage pass-through in 2000; Payment rate: Reduced per diem 
rates by approximately 1 percent for 9 months in 2002;[E] reduced per 
diem rates by approximately 1.85 percent for 7 months in 2003;e changed 
beginning of rate year from start of each home's fiscal year to start 
of state fiscal year in SFY 2004.

State: New Jersey; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: Increased direct resident care cost-center 
ceiling in SFY 2002; decreased indirect and administrative cost-center 
ceilings in 1999; Calculation of costs: Recategorized costs included in 
certain cost centers in 1999; Case-mix classification system: [Empty]; 
Occupancy standard: Increased from 85 to 90 percent in direct resident 
care, indirect care, and administra-tive cost centers in 2000;[F] 
decreased from 90 to 85 percent in direct resident care, indirect care, 
and administra-tive cost centers in 2003; Inflation factor: [Empty]; 
Add-on payments: [Empty]; Payment rate: [Empty].

State: New York; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: Added direct resident care staffing 
wage add-on in 2002; Payment rate: [Empty].

State: North Dakota; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: Decreased direct resident care cost-center 
ceiling in SFY 2004; Calculation of costs: [Empty]; Case-mix 
classification system: Changed the version of the RUG system used in 
1999; Occupancy standard: [Empty]; Inflation factor: [Empty]; Add-on 
payments: Provided staff wage and benefit add-on from 2001 through 
2003[G]; Payment rate: [Empty].

State: Oregon; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: [Empty]; Payment rate: Froze rates at 
SFY 2002 level for SFY 2003; extended freeze in SFY 2004[H].

State: Pennsylvania; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: Changed payment 
of major movable property costs[I] to a pass-through instead of 
including in the indirect care cost center in 2001; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: [Empty]; Payment rate: Delayed rate 
adjustments pending legislative action in SFY 2004.

State: Rhode Island; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: Implemented pass-through for direct 
resident care costs in SFY 2002; Payment rate: [Empty].

State: South Dakota; Peer grouping: Eliminated peer groups in SFY 2000; 
Cost-center ceilings or efficiency incentives: Decreased payments for 
certain homes in the direct resident care, indirect care, and 
administrative cost centers from SFY 2000 through 2002[J]; Calculation 
of costs: [Empty]; Case-mix classification system: [Empty]; Occupancy 
standard: [Empty]; Inflation factor: [Empty]; Add-on payments: 
Implemented nurse's aide wage pass-through in SFY 2003; Payment rate: 
Inflated rates instead of rebasing in SFY 1999; limited annual increase 
in overall payment rate to 8 percent in SFY 2000; inflated rates 
instead of rebasing in SFY 2004.

State: Texas; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: [Empty]; Occupancy standard: [Empty]; Inflation 
factor: [Empty]; Add-on payments: Incorporated payment for enhanced 
staffing program in direct resident care cost center for participating 
facilities in 2000; Payment rate: Implemented a requirement that homes 
spending less than 85 percent of the direct resident care rate on 
staffing wages and benefits 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.

State: Vermont; Peer grouping: [Empty]; Cost-center ceilings or 
efficiency incentives: [Empty]; Calculation of costs: [Empty]; Case-mix 
classification system: Changed case-mix system to include acuity of 
Medicaid residents only in 1998; Occupancy standard: Eliminated 90 
percent occupancy standard from direct resident care cost center in SFY 
2003; Inflation factor: [Empty]; Add-on payments: [Empty]; Payment 
rate: [Empty].

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.

[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.

[End of table]

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments:

GAO Contact:

Susan Anthony, (312) 220-7666:

Acknowledgments:

Christine DeMars, Behn M. Kelly, Sari B. Shuman, Margaret Smith, and 
Christi Turner made key contributions to this report.

[End of section]

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.


FOOTNOTES

[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.

[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.

[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.

[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)).

[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.

[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.

[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. 

[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. 

[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.

[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.

[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).

[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.

[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.

[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. 

[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.

[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.

[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. 

[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.

[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). 

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

[55] We did not perform a comprehensive review of state laws and 
regulations related to nursing home payment methods.

[56] 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.

[57] Global Insights, Inc., is an economic and financial information 
company.

[58] N.D. Cent. Code § 50-24.4-19.1 (1999).

[59] 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.

[60] 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.

[61] In addition to imposing ceilings, many states use other mechanisms 
to limit the costs they will recognize when determining homes' rates. 

[62] In states that use efficiency incentives, homes are also eligible 
to receive an additional payment included in their per diem rate.

[63] 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.

[64] The seven states reviewed that did not use case-mix systems to 
categorize residents were Alabama, Arkansas, California, Connecticut, 
Florida, Michigan, and Rhode Island. 

[65] CMS uses the RUG-III 44-group model to determine the case-mix of 
Medicare-covered nursing home residents.

[66] In Oregon, approximately 95 percent of nursing home residents are 
grouped in the basic care category. 

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

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