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. 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. Nursing home providers  filed a number of federal lawsuits contesting the adequacy of states’  payment rates. 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. This add-on is based on CNA  salaries and Medicaid nursing home utilization. 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. 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. 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. Even with recent temporary  federal fiscal relief, however, officials in some states suggest that nursing  home payment reductions are possible in the future. 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. 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. 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. 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. 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 also interviewed national representatives of AHCA and  AAHSA and consultants and experts in the field of Medicaid nursing home  payment. 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. 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). Nursing Workforce: Recruitment and Retention of Nurses and Nurse  Aides Is a Growing Concern.
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.