In 2000, Medicare SNF expenditures were $13 billion for services provided  to 1.4 million Medicare patients. SNFs' Medicare margins were sufficiently high that,  while Medicare's share of most SNFs' total patient days was relatively  small, SNFs with higher Medicare margins generally had higher total  margins, which reflect all SNF revenues and costs. Medicare Margins Generally High, Particularly in 2000 and for SNFs in Large For-Profit Chains and Those with High Occupancy

For their first 2 years under PPS, most freestanding SNFs reported positive  Medicare margins, meaning that their payments more than covered their  costs. In 1999, the median facility had a Medicare margin exceeding 8  percent, and over one-tenth had margins of 30 percent or more. By 2000,  the median Medicare margin for freestanding SNFs had risen to nearly 19  percent, and almost one-quarter of SNFs had Medicare margins of 30  percent or more. At the same  time, payments increased, as the temporary increases authorized by the  Congress began to be implemented. Despite the expiration of two temporary Medicare payment increases and  the completed transition from payments based on a facility's own costs to  PPS rates, SNFs' positive Medicare margins are likely to continue. By  contrast, the care for about two-thirds of patients was paid for by  Medicaid with the remainder generally paid for by the patients themselves. With Medicare, the actual median total margin was 1.8 percent. The larger Medicaid's share of a SNF's patient days,  the smaller its total margin. Reported Medicare Costs of Hospital- Based SNFs Substantially Exceeded Medicare Payments

In contrast to freestanding SNFs, hospital-based SNFs reported very  negative Medicare margins after the introduction of the PPS. Unlike Freestanding SNFs, Most Hospital-Based SNFs Had Very Negative Medicare Margins

In 1999, about 90 percent of all hospital-based SNFs reported Medicare  costs exceeding Medicare payments, and the median hospital-based SNF  posted Medicare margins of –53 percent. Prior to  the PPS, Medicare's payments to SNFs were based on each facility's own  costs. In the first year of the PPS, hospital-based SNFs, unlike their freestanding  counterparts, did not respond to the incentives in the PPS by reducing  costs: compared to 1997, hospital-based SNFs' costs in 1999 were higher  by $29 per day. Differences in Services and Accounting Practices May Contribute to Cost Differences between Hospital-Based and Freestanding SNFs

Some differences in costs between hospital-based and freestanding SNFs  may also reflect differences in services in the two settings. In light of these  accounting issues, reported costs of hospital-based SNFs, as well as  margins calculated from these costs, should be treated cautiously. Freestanding SNFs, which treat  most Medicare SNF patients, generally received Medicare payments that  exceeded their costs, often by considerable amounts. The AHA representatives objected to our statement that the higher per  diem costs of hospital-based SNFs could be partly due to the historical  patterns of allocating overhead and other costs to the SNF. A  Medicare margin for a SNF is based on the difference between its  Medicare payments and its reported costs of serving Medicare patients. Skilled Nursing Facilities: Providers Have Responded to Medicare  Payment System by Changing Practices.
Why GAO Did This Study

This report addresses (1) the relationship between Medicare skilled nursing facility (SNF) payments and the costs of treating Medicare patients in freestanding SNFs, as well as the effect of Medicare SNF payments on the financial condition of these facilities, and (2) the relationship between Medicare SNF payments and the costs of treating patients in hospital-based SNFs, as well as the factors that may account for cost differences between hospital-based and freestanding SNFs.

What GAO Found

Under the prospective payment system (PPS), most freestanding SNFs Medicare payments substantially exceeded the costs of caring for Medicare patients, contributing to facilities' overall positive financial condition. In 1999, the first full year under the PPS, the median freestanding SNF Medicare margin--a measure that compares Medicare payments with Medicare costs--was slightly over 8 percent. By 2000, when the temporary payment increases authorized by the Congress started to take effect, the median Medicare margin had risen to almost 19 percent. However, nearly one-quarter of SNFs in 2000 had Medicare margins exceeding 30 percent, while about one-fifth had negative Medicare margins; that is, the payments they received from Medicare did not cover their costs of providing care. Medicare margins were higher for freestanding SNFs affiliated with large, for-profit nursing home chains and for those with high occupancy. The median SNF total margin--which reflects total revenues and costs across all patients--was 1.3 percent in 1999 and 1.8 percent in 2000. A SNF's total margin tended to be higher when its Medicare margin was higher despite the fact that, in most SNFs, Medicare's share of patient days was small. The total margins for freestanding SNFs tended to be lower when a higher proportion of a SNF's patients had their care paid for by Medicaid. Unlike freestanding SNFs, about 90 percent of hospital-based SNFs reported significantly negative Medicare margins after Medicare's new SNF payment system was launched. The median hospital-based SNF Medicare margin was --53 percent in 1999. Under the PPS, per diem payments to hospital-based SNFs dropped considerably, reflecting the change from payments based on a facility's own costs to fixed payments based on average costs for all facilities. At the same time, hospital-based SNFs reported per diem costs rose from 1997 through 1999. This is in contrast to the experience of freestanding SNFs, which had lower per diem Medicare costs than hospital-based SNFs prior to the PPS and reduced their costs further after the shift to the PPS. The higher Medicare costs reported by hospital-based SNFs may stem in part from differences in services provided to patients. The higher costs may also reflect the historical allocation of overhead costs to the SNF from the hospital, an accounting practice that, while consistent with the payment incentives under the prior cost-based reimbursement system, means that hospital-based SNFs reported costs should be treated cautiously.