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Nursing Home Reimbursement:

Social Accountability and

Standards of Care

August 2009

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An Open Letter from Aging Services of Michigan President and CEO,

David E. Herbel

Aging Services of Michigan, along with other stakeholders, has been asked to provide input

regarding a proposed change to the Medicaid Nursing Home Reimbursement System. As a

follow up to the last stakeholder meeting about these proposed changes, we were asked to

submit ideas regarding quality issues. After a close and detailed review of the issues, we remain

uncertain about the outcomes that this revision is really designed to achieve. In addition,

although we have requested provider level data about which some information has already

been presented, we have had no opportunity to review the model using actual data to analyze

the relationship between acuity and cost.

We strongly believe that it is part of our responsibility to the senior consumer and the Michigan

taxpayer to ensure that our reimbursement system supports a standard of care, rather than be a

simple payment mechanism for service regardless of outcome. We understand that the

proposed system changes may well only affect a very few providers in our state; however, we

believe that many Michigan providers are already disadvantaged by the unintended

consequences of our reimbursement system, and these changes could well affect some of them

and their residents more adversely.

Because of significant diversity in providers, practice patterns, resident outcomes, and overall

mission, we believe it imperative for all concerned that a full evaluation of current practice and

associated outcomes evoked by the reimbursement system be undertaken. Because we have

not had an opportunity to review the outcomes of the model based on individual facility data,

Aging Services of Michigan has spent considerable time and resources to date in evaluating

provider behaviors based on accessible public information. We also are concerned that this

proposed change has been characterized as a first step, when we do not have a vision of the

final product.

At the base of our concerns are several assumptions inherent in the proposed model:

That facilities who have below average acuity and whose costs are near the 80th

percentile have sufficient staff and resources going to the bedside.

That the RUGs system will adequately describe the resource needs of the Medicaid

beneficiary, particularly the person with cognitive concerns.

That there is waste in the current system that can be addressed by applying an acuity

adjustment.

In order to adequately evaluate the impact of any model change, we have undertaken a

review of the Not For Profit provider characteristics. Our review of data confirms our belief that

the wide variety in provider practice and outcome has been driven by the current

reimbursement system as used by differing service delivery models and the entire system must be

considered (including plant costs, tax issues, and the Quality Assurance Supplement) before any

thoughtful changes to the reimbursement model be made.

We have a responsibility to ensure that we are being accountable to the citizens of Michigan

and that adequate resources are going to the bedside to support a standard of care.

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Discussion of Findings

This report is written in response to a Michigan Department of Community Health

(MDCH) proposal to refine the Medicaid Nursing Home Reimbursement System based

on acuity and address any questions that have arisen regarding quality. After long

consideration of the many issues that the 2008-2009 proposed change has raised, we

believe we need to reframe the question about a quality component. The issue is not

really about incentivizing quality per se, but identifying a standard of care as a starting

point to discuss what adequate reimbursement looks like. In order to really understand

the issues confronting us as we look at the reimbursement system, we need to talk

about the Michigan providers and the immense variation in practice among them.

In order to help inform this discussion, Aging Services of Michigan has undertaken a

review of provider behaviors and outcomes. It is important to ensure that the Michigan

Medicaid Nursing Home reimbursement system supplies adequate resources for service

delivery and reinforces certain provider behaviors. Access, clinical performance,

equitable care, positive resident outcomes, and person centered environments are

among the critical effects that must be supported by a reimbursement system.

Understanding the entire system, its incentives and disincentives, as well as its overall

effects including unintended outcomes, is important in achieving these positive goals

and is essential for re-engineering.

After review of the documents issued by the Department, specifically the Guiding

Principles and the proposed model for an acuity-based Medicaid reimbursement

system for nursing homes in Michigan, we continue to have several concerns about the

current policy direction. We have summarized our concerns below and follow with a

discussion of issues raised by our review of provider information.

Continuing Issues

The proposed plan will not increase access to nursing homes for high need residents.

Changes to the current reimbursement system will not alter the fact that when

accepting residents with higher resource needs, providers still must cover costs for one

to two years before their payment rates will be affected. All providers under the 80th

percentile have the ability to move their rates up now when needed for high cost

residents. Increasing the variable rate cap based on slightly higher acuity levels will not

improve immediate access to care. In addition, review and refinement of the MDCH

MOU process would be more likely to more positively impact access to care.

The current variable cost component has very little relationship to acuity as measured

by the RUGs system.

We would like to see data concerning the actual case mix information by provider as

compared to a subset of Allowable Variable Costs that are truly driven by higher need

resident care. In reality there is a significant component of non-direct care related

costs within the Michigan Medicaid definition for Allowable Variable Cost that may

inappropriately be limited by adjusting the variable cost cap in the manner proposed.

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In addition, the average Case Mix Index for Michigan Medicaid providers, while useful

to some degree in understanding resident characteristics in a very large sense, has no

real meaning when compared to costs, since there is no defined standard for care and

provider variation is substantial. In other words, arbitrarily limiting a provider’s rate lower

than already incurred cost is problematic without ensuring that those costs actually

exceed resident’s need for quality and efficient care.

Aging Services of Michigan strongly believes a certain level of staffing is essential to

service delivery and performance; without understanding how an individual facility

level of reimbursement relates to a standard for staffing and care, further limiting of

funds to communities with lower acuity rates could well prove harmful to residents.

There are considerable concerns about the ability of the RUGs System to reflect actual

current practices.

CMS believes that the RUGs system is outdated and not reflective of current practice

patterns. Expectations for care and practice have changed since the RUGs system

was first introduced more than a decade ago. We would prefer to complete transition

to the MDS 3.0 and review the findings of the STRIVE study before considering any

reimbursement redesign. In particular we believe that resource needs for residents with

significant cognitive issues may be undervalued by RUGs.

There is far too much variation in cost and practice to use a simple average Case Mix

Index to adjust the variable cost cap.

Until there is some mechanism that ties a an evidence-based measure for resource

need with expectations for staffing and service delivery, altering the variable cost cap

based on an average case mix index alone is a simple arithmetic exercise that may

harm some providers and residents, and only improve payments for a small number of

persons who have high acuity and are over the cost cap.

There should be no movement to any new system until there are decisions about the

future of long term care in Michigan.

The possibility and timing of moving to a managed care model needs to be addressed

before contemplating changes to the reimbursement system. Because development

of incentives within a system is important for achieving outcomes, any plans to move to

new models of care should be outlined before looking at reimbursement. It is also

important to more clearly identify the ultimate model, goals, and type of

reimbursement system before taking first steps.

Not For Profit providers of care are already disadvantaged by several reimbursement

design issues and an arbitrary change to an acuity adjusted cost cap may further place

our mission-based, high-performing entities at risk.

Aging Services of Michigan has undertaken evaluation of provider behaviors and

outcomes to better understand the issues at the heart of performance and

reimbursement for the nursing home community.

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Because we believe that the ideal system must support a standard of care and

adequacy of resources going to direct bedside care, we strongly suggest that the

current system be reviewed in its entirety before a simple redistribution of resources is

undertaken. Proposed changes may well affect the Not For Profit provider, most of

whom are delivering services at costs higher than the current cap. These higher

performing providers are also currently disadvantaged by the capital component,

putting these communities at higher exposure to risk financially. Refinement of the

capital component issues could well assist alignment in resource needs for high-

performing but lower acuity providers.

The relatively low current asset value limit remains insufficient to maintain a suitable

environment for seniors. Many Not For Proft providers are significantly over this limit and

often self-fund improvements to their facilities. In addition, these providers are far less

leveraged, using their considerable equity to fund products. The Department needs to

look at all these issues prior to changing the reimbursement system. High performing

Not For Profit and some For Profit providers will be placed at higher risk.

There are also significant issues with the reversion of the tenure factor to 2.5% when a

facility is replaced. This has a large impact on the mission-based Not For Profit provider

who typically is allowed a tenure factor of 5.25% related to more stable ownership. This

tenure factor is meant to be a proxy for depreciation.

Finally, many Not For Profit providers often access financing at lower rates than other

entities. Currently such providers are often capped on the variable cost side, and still

underfunded on the plant side. It is imperative that all these issues be reviewed before

developing another potential variable cost limitation.

Performance and Cost

Our review confirmed that provider behaviors and outcomes are significantly varied

among nursing homes in Michigan. For much of our review, we divided the Michigan

Nursing Home Providers into five categories based only on variable cost. We used this

as a proxy to estimate the amount of monies actually going to the bedside, although

there are other fixed costs involved as well.

Staffing ratios and performance outcomes were directly related to the amount of

monies going to each resident bedside. Charts 1 and 2 identified below clearly identify

these relationships.

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Chart 1

Chart 2

2.5

2.75

3

3.25

3.5

3.75

4

First Second Third Fourth Fifth

Median Staffing Levels by Cost Quintile - First Quarter 2009

5

6

7

8

9

10

11

12

1st 2nd 3rd 4th 5th

Average Number of Survey Citations by Quintile

August 2009

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CMS has clearly identified the benchmarks for performance by publishing the criteria

needed to obtain a Five Star Ranking for performance. We need to ensure that these

benchmarks are achievable and not adversely affected by an arbitrary cap that may

lower the Variable Cost Limit for some providers who happen to have a lower than

average case mix number.

Of some concern is that as Michigan has become more and more dependent on the

Quality Assurance Supplement for reimbursement, that the annual average increase in

variable costs (most reflective of monies going to the bedside) has been decreasing

significantly in the lower cost categories for the past several years, to the point where

increases are not really keeping up with inflation. (See each quintile graph in

Attachment A.)

The most significant finding was that even at the highest levels of cost reimbursement,

the Not For Profit Class I provider has almost no financial margin to support their

community. It is this provider that we are most concerned about, and the potential

effects on them if their acuity should happen to fall below average, further limiting their

ability to deliver high performance. This is dramatically noted in Chart 3 below.

Chart 3

$100.00

$150.00

$200.00

$250.00

20032004

20052006

20072008

2009

Fifth Quintile Class I Not For Profit Average Payments and Cost

Fifth Quintile Not for Profit Average Cost Total Medicaid Payments including QAS

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Final Notes

Those with experience in Michigan Long Term Care understand the pressures and

politics that underlie many discussions concerning Medicaid policy. Unfortunately, we

have had many projects that have been tried and failed. We believe it our

responsibility to consider improvements and changes to the system very thoughtfully,

and have specific goals and identified expected outcomes transparently developed.

When looking at performance and cost, it is clear that the current reimbursement

system does not incentivize providers to maximize resources at the resident bedside.

Thus any change to the system that may hinder the provider, especially those with very

close financial margins, must be thoroughly considered. While the intentions behind

these proposed changes may be well meaning, we believe that the system is so

complex that care must be taken before implementing any reimbursement changes.

In addition, it is definitely not the right time for such changes in this current unstable

environment, with significant changes planned for measuring acuity and resident

characteristics and possible redesign of the Michigan long term care model of service

delivery,

It is our responsibility to consumers and citizens that we ensure that public monies are

supporting resident care at the bedside!

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Attachment A: Review of the Data

In order to prepare for a discussion for possible changes to the Michigan Medicaid

Nursing Home Reimbursement System, a review of provider individual and aggregate

information was undertaken. Data was primarily drawn from the 2002 – 2009 Michigan

Medicaid Nursing Home Variable Cost Reports, the September 2009 Nursing Home

Provider Rate Letters, the 2008-2009 HCFA 2567 Survey and Certification Findings, and

the CMS Nursing Home Compare Website.

All Class I and Class III Nursing Homes were evaluated in aggregate by separating

providers into five categories (quintiles) by allowable variable cost identified from

September 2008 Medicaid VCL Report (for FY 2009). Class I and Class III Nursing Homes

were evaluated together in order to compare cost and performance issues across the

entire industry. Only facilities with stable ownership (no changes in ownership across the

eight year period) were included in the review.

General Findings

Providers were rank ordered by Medicaid allowable variable cost and divided into

quintiles. The first quintile included those providers with the very lowest variable costs,

while the fifth quintile included those providers at the very highest cost levels. Four

hundred ten facilities identified from September 2008 Medicaid cost reports were

divided into five groups of 82 for analysis. Only those providers who had not changed

ownership since 2002 were then used for the review. Chart 1 below identifies the

percentage of facilities still existing in 2009 who had maintained a single owner since

2002 (by quintile).

Chart 1

87%

82%

90%

95%98%

70%

75%

80%

85%

90%

95%

100%

Ist 2nd 3rd 4th 5th

Percent of Facilities with Stable Ownership by Quintile

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Chart 2 clearly identifies the large proportion of Not For Profit providers whose costs are

within the highest two quintiles. These providers serve seniors at relatively high variable

cost, much of which is unreimbursed. Any decreases in their variable cost cap could

have negative implications for their ability to support care. In Chart 3, Class III providers

are exclusively identified in the top two quintiles, although they have a much higher

variable cost cap than the Class I facilities.

Chart 2

*Not For Profit Providers include Class I Not for Profits, Class III County Medical Care Facilities and

Class III Hospital Based Long Term Care Units

Chart 3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ist 2nd 3rd 4th 5th

Percentage of Providers in Each Cost Quintile by Profit Status FY 2009*

For Profit

Not for Profit

0%

50%

100%

1 2 3 4 5

Percentage of Providers in Each Cost Quintile by Class FY

2009

Class I

Class III

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Chart 4

Chart 4 above further demonstrates the significant number of Class I and Class III Not

For Profit providers who deliver more direct care resources to the bedside. The stacked

area graphic indicates the number of providers by resident cost per day categories

separated into $20 increments. The vertical line toward the middle of the chart

indicates the approximate placement of the current 80th percentile cap for Class I

facilities.

Chart 5

0

20

40

60

80

100

120

140

$80-$100 $100-$120 $120-$140 $140-$160 $160-$180 $180-$200 $200+

FY 2009 Medicaid Cost per Resident Day by Profit Status

Not for Profit

For Profit

2

2.2

2.4

2.6

2.8

3

3.2

3.4

Ist 2nd 3rd 4th 5th

Average CMS 5 Star Composite Score By Cost Quintile FY 2009

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Chart 5 indicates the positive relationship between the average number of CMS

Composite Star rankings and variable cost rates. The CMS Five Star System was

implemented in December 2008 and summarizes information in three major domains,

Health Inspections (Survey), Staffing, and Quality Measures. A composite score

representing all three of those domains was also generated. Note that as the variable

cost increases, indicated by quintiles arranged so that the first quintile describes

providers with lowest costs, there are improved performance outcomes in aggregate.

The average number of “stars” per cost category are noted for only the Composite

measure and is based on a five star scale.

Chart 6

The relationship between variable cost and survey citations is demonstrated in Chart 6.

Again, while we find it difficult to use health inspection data to compare providers

individually, we believe that there is value in looking at group or aggregate trends.

Since Aging Services of Michigan had begun tracking this information in 2006, there has

been a consistent relationship between both provider type and variable cost with total

number of citations.

Finally, we cannot leave the subject of performance without looking at staffing. There

are clear and obvious relationships among variable cost and daily staffing levels for

residents. We strongly believe that the number and type of staff are one of the most

important features of a strong performing provider. Chart 7 demonstrates the positive

relationship between staffing and variable cost.

5

6

7

8

9

10

11

12

1st 2nd 3rd 4th 5th

Average Number of Survey Citations by Quintile

13

Chart 7

2.5

2.75

3

3.25

3.5

3.75

4

First Second Third Fourth Fifth

Median Staffing Levels by Cost Quintile - First Quarter 2009

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Analysis of Each Cost Category (Quintile)

First Quintile (Lowest allowable provider costs)

The first quintile consisted solely of Class I facilities; 71 facilities were reviewed and of

those 4 were Not For Profit communities. Based on the 2009 Medicaid Variable Cost

Report, the average cost (weighted by Medicaid days) was $119.62 per resident day.

Chart 8 below identifies the rate of increase in average provider costs since 2003 for this

quintile.

Chart 8

*Quality Assurance Supplement Dollars are not represented here

Note that the range of cost increases for several years averages between 3-4% for this

lowest cost category, and has a distinctive downward trend. Considering the need to

adjust for inflation and cost of living increases, in general this group of providers has

limited the amount of dollars going to the bedside over time. It is important to

remember that QAS dollars are not included in the above graph but have been

provided to these facilities separately. Chart 9 below identifies the daily average rates

for first quintile providers when adjusted for average QAS payments. All these providers

are well below the variable cost cap.

0%

1%

2%

3%

4%

5%

6%

2004 2005 2006 2007 2008 2009

Percent of Average Cost Increase for First Quintile (2003-2009)*

15

Chart 9

2009 Average CMS 5 Star Rankings for the first quintile (lowest fifth of providers in terms

of daily rates) are noted below in Chart 10.

Chart 10

$60.00

$110.00

$160.00

$210.00

2003 2004 2005 2006 2007 2008

Average First Quintile Variable Costs compared to costs adjusted for QAS

Average Cost

Rate Adjusted with QAS payments

0

1

2

3

4

5

2009 Average First Quintile 5 Star Rankings

Average First Quintile CMS Rankings

Maximum CMS Ranking Possible

16

Second Quintile (Providers at the 20th -40th Percentile of Variable Cost)

The second quintile included 67 providers of which 10 were Not For Profit communities.

Based on the 2009 Medicaid Variable Cost Report, the average cost for the second

quintile (weighted by Medicaid days) was $139.62 per resident day. Chart 11 below

identifies the rate of increase in average provider costs since 2003 for this quintile. All

providers in the group were Class I facilities.

Chart 11


Note that the range of cost increases for several years was slightly higher than for

providers within the first quintile but continues to demonstrate a distinctive downward

trend. Again, since 2006 it appears that increases in monies going to resident care has

been limited to basic cost of living increases. QAS dollars are not included in the above

graph but have been provided to these facilities separately. Chart 12 below identifies

the daily average rates for second quintile providers when adjusted for average QAS

payments. All these providers are still well below the variable cost cap.

0%

1%

2%

3%

4%

5%

6%

7%

8%

2004 2005 2006 2007 2008 2009

Percent of Average Cost Increase for Second Quintile (2003-2009)*

17

Chart 12

2009 Average CMS 5 Star Rankings for the second quintile (20th to 40th percentile of

providers in terms of daily rates) are noted below in Chart 13. Average performance

rankings are not that dissimilar from the first quintile. It is important to note that while

CMS uses the Five Star System to compare providers, there are other variables included

in those measures that reflect resident characteristics and not necessarily performance.

Generally, however, in aggregate the findings may have some comparative meaning.

The Quality Measures are considered to be highly reflective of acuity issues rather than

pure performance.

Chart 13

$60.00

$110.00

$160.00

$210.00

2003 2004 2005 20062007

2008

Average Second Quintile Variable Costs Compared to Rates Adjusted for QAS

Average Cost

0

2

4

6

2009 Average Second Quintile 5 Star Rankings

Average Second Quintile CMS Rankings


18

Third Quintile (Providers at the 40th -60th Percentile of Variable Cost)

The third quintile included 74 providers of which 8 were Not For Profit communities.

Based on the 2009 Medicaid Variable Cost Report, the average cost for the third


identifies the rate of increase in average provider costs since 2003 for this quintile. All

providers in the group were Class I facilities, except for one county medical facility.

Chart 14


Again, note the distinctive downward trend in cost increases. Since 2005 cost increases

have hovered around the 4% mark. QAS dollars are not included in the above graph

but have been provided to these facilities separately. Chart 15 below identifies the

daily average rates for third quintile providers when adjusted for average QAS

payments. All these providers are still below the variable cost cap.

0%

2%

4%

6%

8%

10%

12%

14%

2003 2004 2005 2006 2007 2008

Percent of Average Cost Increase for Third Quintile (2003-2009)*

19

Chart 15

2009 Average CMS 5 Star Rankings for the third quintile (middle group of providers in

terms of daily rates) are noted below in Chart 16. Average performance rankings were

not that dissimilar from the first quintile. Improvements in all performance rankings were

noted within the quintile except for the CMS Quality Measures, which may be more

indicative of resident characteristics rather than performance.

Chart 16

$60.00

$110.00

$160.00

$210.00

2003 2004 2005 2006 2007 2008

Average Third Quintile Variable Costs Compared to Rates Adjusted for QAS

Average Cost

Rate Adjusted with QAS Payments

0

1

2

3

4

5

CompositeSurvey

StaffingQuality

Measures

2009 Average Third Quintile 5 Star Rankings

Average Third Quintile CMS Rankings


20

Fourth Quintile (Providers at the 60th -80th Percentile of Variable Cost)

The fourth quintile included 76 providers of which 40 were Not For Profit communities.

Based on the 2009 Medicaid Variable Cost Report, the average cost for the fourth


identifies the rate of increase in average provider costs since 2003 for this quintile. This is

the first quintile where Class III facilities are significantly represented, including four

hospital based long term care units and seven county medical care facilities. In

addition, the downward trend in cost increases has been reduced when trending over

time. Note also that costs within this quintile approach the variable cost cap for Class I

facilities ($160.94) but continue to be far less than the cap for Class III facilities which is

$226.79 for FY 2009.

Chart 17


Chart 18 below identifies the daily average rates for fourth quintile providers when

adjusted for average QAS payments. Average costs for this set of providers approach

the Class I variable cost limit because of the inclusion of higher cost Class III providers

within this review. Although the gap between cost and total payments (including QAS)

seems consistent with earlier quintile groups, there is large variation among provider

type.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2004 2005 2006 2007 2008 2009

Percent of Average Cost Increase for Fourth Quintile (2003-2009)*

21

Chart 18

Chart 19

$60.00

$110.00

$160.00

$210.00

2003 2004 2005 20062007

2008

Average Fourth Quintile Variable CostsCompared to Rates Adjusted for QAS

Average Cost Rate Adjusted with QAS Payments

0

1

2

3

4

5

CompositeSurvey

StaffingQuality

Measures

Average Fourth Quintile 5 Star Rankings

Average Fourth Quintile CMS Rankings Maximum CMS Ranking Possible

22

For the fourth quintile group, overall performance measures continue to increase in all

domains except for the CMS Quality Measures as identified in Chart 19. Aging Services

of Michigan strongly believes that staffing and performance is directed related to

resources directed to the bedside.

Fifth Quintile (Providers at the 80th -100th Percentile of Variable Cost)

The fifth quintile included 81 providers of which 74 were Not For Profit communities.

Based on the 2009 Medicaid Variable Cost Report, the average cost for the fifth quintile

(weighted by Medicaid days) was $202.39 per resident day. Chart 20 below identifies

the rate of increase in average provider costs since 2003 for this quintile. While the

overall trend in increases for the fifth quintile is rather flat over time, there is some

marked variation here. Included within this highest cost group are 25 Class I providers

and 49 Class III (20 hospital based long term care units and 29 county medical care

facilities). All Class I facilities in this group exceed the variable cost cap of $160.94 and

17 Class III facilities exceed their cost cap of $226.79.

Chart 20


Chart 21 below identifies the average costs and total Medicaid payments including

QAS for the entire fifth quintile group. Note again that in aggregate, there appears to

be a significant margin. However, Chart 22 demonstrates the negative margin for the

Class I not for profit provider.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2004 2005 2006 2007 2008 2009

Percent of Average Cost Increase for Fifth Quintile (2003-2009)*

23

Chart 21

Chart 22

$-

$50.00

$100.00

$150.00

$200.00

$250.00

2003 2004 2005 2006 20072008

Average Fifth Quintile Variable Costs Compared to Rates Adjusted for QAS

Average Cost Rate Adjusted with QAS Payments

$100.00

$150.00

$200.00

$250.00

20032004

20052006

20072008

2009

Fifth Quintile Class I Not For Profit Average Payments and Cost

Fifth Quintile Not for Profit Average Cost Total Medicaid Payments including QAS

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