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2-19-08
The Federal Budget and Long-Term Care
By Marc Zimmet
The $3 trillion budget unveiled by the Bush Administration last month takes direct aim at the Medicare and Medicaid programs. Combined, the two benefits accounted for nearly one-fourth of all federal spending last year at $627 billion, and the cost is expected to double over the next ten years.
The Administration proposes to reduce aggregate Medicare spending by $91 billion over the next five years. Most of these savings would be achieved by reducing the annual update in payments to healthcare providers, including skilled nursing facilities (“SNFs”). The impact would be felt first on October 1, 2008, as Medicare payment rates for nursing homes are frozen in 2009.
While all providers would suffer from the Medicare cuts, SNFs may be more vulnerable to the effects. From a myopic perspective, SNF Medicare cuts seem justified. According to the recent MedPAC Report to Congress, SNF Medicare Part A profit margins exceeded 11% in 2007, and our data shows margins will be at least as strong in 2008.
Medicare days constitute only 10% – 15% of the average SNF’s census, but represent a disproportionate share of revenue. The problem for SNFs is that the majority of the remaining days (approximately 70%) are paid by the Medicaid program. Medicaid rates generally do not cover the full cost of nursing home care, and many providers realize a loss on every resident served. A recent study by the American Healthcare Association estimates Medicaid underfunds the actual cost of providing nursing home care by at least $4.4 billion annually ($13.15 per patient day) and this shortfall has increased 45% from 1999 to 2007 with no signs of reversing.
Furthermore, the industry is increasingly suffering from the growth of Medicare managed care in many markets, where rates are often 25% lower than traditional, fee-for-service program reimbursement and collections are slow. Facilities are often forced to accept inadequate payment or risk exclusion from plans, in addition to the long-term prospect of empty beds if they fail to participate.
Therefore, the issue is that profitable Medicare business subsidizes the other payers. Unlike other providers such as hospitals, the nearly monopsonistic SNF market is defined by a majority customer (Medicaid) that pays bellow fair-market rates. Nursing homes cannot effectively “cost-shift” because there are no other payers to make up the shortfall. Even the once lucrative “private-pay” market has atrophied in recent years as the assisted-living option has gained traction.
While SNF Medicare utilization is relatively small compared to Medicaid and margins are robust, any reduction to Medicare rates severely threatens the financial well-being of the industry.
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