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Source: DMA Nursing Facility Utilization Surveys, January 1,2003; prepared by MECF

In an effort to remain financially stable, many nursing homes subsidize the inadequate Medicaid reimbursement rate using higher private pay and Medicare rates.[5]  A home receives an average annual income of more than $80,000 for a private-paying consumer[6] versus approximately $50,000 for a Medicaid consumer.[7]  In order to generate additional privately insured consumers, 25 other states currently provide tax incentives to encourage the purchase of long-term care insurance.  In addition, many states offer their employees access to long-term care insurance, which does not affect states’ budgets.[8]  In 2002, the federal government established the Federal Long-Term Care Insurance Program (FLTCIP), which helps people pay for the cost of care when they need assistance with daily activities or have a serious cognitive impairment, such as Alzheimer’s Disease.[9]  As the largest employer-sponsored long-term care insurance program,[10] FLTCIP has been designed to be a “tax-qualified plan” so that benefit claims will not be taxable and purchasers can deduct a certain amount of their premiums as medical expenses.[11]  These reforms to increase the number of privately insured residents have helped other states’ nursing homes offset inadequate Medicaid reimbursement.  Since Massachusetts does not offer many incentives to purchase long-term care insurance, there is a lack of awareness about such plans, resulting in low enrollment.  Therefore, nursing homes are unable to benefit from these higher rates.

 

Medicaid Reimbursement

 

Compared to other states, Massachusetts nursing homes rely more heavily on Medicaid reimbursement[12] and are reimbursed less as an overall percentage of patient costs.  In fact, a nationwide analysis of the Medicaid program found that Massachusetts had the eighth largest gap between the cost of providing care and Medicaid reimbursement among the 37 states reporting data.  In 2000, this gap created a funding deficit of more than $211 million.[13] 

 

Since 1998, Medicaid reimbursement has not adequately compensated nursing homes,[14] whose median cost of patient care has increased by over 17%.[15]  To a large extent, patient costs have increased due to escalating operating costs, including higher insurance premiums and mortgage payments.[16]  In fact, in 2001 the state reimbursed nursing homes a median daily rate of $132.60 for a Medicaid resident, yet the median cost of those beds was $151.18,[17] creating a daily funding deficit of nearly $20 per patient.  The Massachusetts Division of Health Care Finance and Policy (DHCFP) data shows that between 1995 and 2001, the daily deficit amounted to a cumulative loss of $288.6 million to nursing homes across the state.[18]

 

Sources: HCF-1 Nursing Facility Cost Reports & DHCFP Rate Files (adjusted)

Changing Demographics

     

Another key reason for nursing homes’ financial loss is the changing profile of nursing home residents.  Nursing home costs are rising since they are serving a growing  “high-demand” patient profile, including acutely ill patients requiring more expensive short-term services and seniors requiring end of life care.  With an aging baby boomer population and greater life expectancies, the issue of long-term care funding is becoming increasingly urgent.  In fact, by 2025, the over-85 population, which uses nursing homes the most, is estimated to grow by approximately 40% in Massachusetts, from 114,000 to 158,000.[19]

 

In Massachusetts, there are approximately 50,000 residents utilizing nursing home services,[20] but recent trends show that privately paying, higher income seniors are choosing other long-term care alternatives such as assisted living or home health care.[21]  Since 1986, the percentage of nursing home residents paying privately for their care, through either private insurance or personal savings, fell from 25% to merely 15% as of September 2002.[22]  This change has left mostly lower-paying Medicaid recipients utilizing nursing home services.  The transition of privately paying consumers to other long-term care options reduces homes’ overall revenue since they receive higher rates from these residents.  However, in 2002 the Massachusetts Health Care Task force wrote, “private payers in Massachusetts have paid less in relation to costs than in any other state in recent years.” [23]

 

There is a perception that other long-term care options, such as home and community-based care, are less expensive to both the government and consumers.  In many cases, this is true.  However, these services can be more expensive than nursing homes, particularly for higher acuity patients requiring more intensive care.[24]  For example, the typical nursing home resident receives approximately 3.5 hours of care per day,[25] of which at least one hour is nursing care.  Taking into account rates paid to visiting nurses (which range from $76-125 per visit in the Boston area[26]) in addition to the cost of food, medication, housing and utilities, receiving care at one’s home can easily exceed the cost of equivalent nursing home care.  While home and community-based care provide nursing home alternatives for higher income seniors with less acute medical needs, they may not be viable choices for many of Massachusetts’ elders.  By providing appropriate settings and levels of care for different groups of seniors, both nursing facilities and home and community-based care are vital to the long-term care continuum.

 

Other Factors

 

In addition to Medicaid reimbursement rates and the changing consumer profile, there are many other factors that adversely impact nursing home finances.  For example, labor costs account for an average of 70% of homes’ expenses.  Despite a standardized Medicaid rate reimbursement to homes, the cost of labor varies significantly across the state, which disproportionately affects areas with higher labor costs, including urban and geographically isolated areas.  As a result, many facilities are being forced to compete for employees in a very competitive healthcare labor market.[27]  In addition, liability, property, and health insurance premiums, mortgages, and other operating costs have escalated in recent years, which are not sufficiently reflected in the Medicaid reimbursement rate.[28]  Furthermore, the high price of prescription medications is driving up the state’s Medicaid budget, which affects reimbursement for other programs funded by Medicaid, including nursing home care.  Although Massachusetts has a medication return initiative, only a limited number of prescription drugs are mandated by the program.[29] 

Another factor that continues to impact nursing home finances is the significant reduction in Medicare payments that resulted from the Federal Balanced Budget Act of 1997.[30]  This reduction was compounded by the termination of the add-on payment provisions for nursing homes that became effective October 1, 2002.  Congress originally created these payments to help nursing facilities convert from a cost-based to a prospective payment system.[31]  This change resulted in an average funding cut of more than $35 per Medicare patient day.[32]  Since nursing homes often rely on higher Medicare rates to subsidize inadequate Medicaid reimbursement, homes were seriously impacted by this funding reduction.  Industry experts believe the not-for-profit and smaller homes may be less able to withstand the effect of this change due to narrower operating profit margins and declines in investment income.[33]  The Medicare reduction alone was estimated to cost nursing facilities in the Commonwealth $63.6 million in 2003.[34]

 

 

 

Source: HCF-1 Nursing Facility Cost Reports, In Massachusetts Health Care Task Force Final Report

 

The Massachusetts Health Care Task Force reported that in 2001, approximately 13% of the state’s nursing home beds were owned by companies that filed for bankruptcy.[36]  During this time, more than 51% of freestanding nursing homes reported financial losses.[37]  The chart above demonstrates the severity of the nursing home crisis, as evidenced in particular by the industry-wide losses for all nursing homes in the state.   An analysis of DHCFP data reveals that the small, independently owned nursing homes have been hardest hit by financial losses to the industry, and many more will be forced to close unless funding improves. [38]  As indicated above, for the last seven years displayed, the nursing home industry as a whole has not been profitable.  Despite the fact that both Massachusetts and the long-term care industry have utilized a variety of cost-saving approaches intended to operate nursing facilities more efficiently, homes continue their fight to remain in operation.

 

· Nursing Home Closures ·

 

 

 

 

As a result of constant financial losses, many nursing homes in Massachusetts have been forced to close.  From 1990 to 1998, approximately eight nursing homes closed each year.[40]  Since 1999, with inadequate Medicaid rates compounded by the adoption of an all-inclusive, prospective payment system for Medicare,[41] this figure has soared to 20 to 30 closings annually.  Since 1998, 103 nursing homes have closed.[42]  A large number of facilities that are ultimately forced to close are the small, independently owned nursing homes as opposed to the larger national chains.[43]  In 2002 alone, 25 nursing facilities had to shut their doors.  According to the Massachusetts Department of Public Health (DPH), homes in Lynn, Manchester-by-the Sea and Wayland have already closed this year and another facility in Worcester is scheduled to close in the near future.[44]  Additionally, in June of this year, six more nursing homes in Massachusetts had to file for bankruptcy.[45]  Currently, only two municipally owned nursing homes remain in all of Essex County.[46] 

 

 

Sources: DPH, In Massachusetts Health Care Task Force Final Report;

2002 Data from DPH as reported by the Massachusetts Extended Care Federation

 

 

According to the Massachusetts Extended Care Federation (MECF), the state’s largest long-term care provider association, only five of the state’s 490 nursing homes are publicly operated.[47]  These facilities are critical in the public health continuum, providing essential services to residents who have limited financial assets.  If these nursing homes are forced to close, many elders will be transferred to other facilities that could be farther away from their families and friends.

 

The Massachusetts Health Care Task Force, convened in 2000 by Governor Celucci and leaders of both Legislative branches, determined that a nursing home is in financial jeopardy if it has a total profit margin below -5% and a vacancy rate over 15%.[49]  Based on this criteria, approximately 10% of Massachusetts nursing homes are in serious financial jeopardy and face possible closure in the future.[50]  In addition to disrupting the continuity of care, nursing home closures have an extremely negative socioeconomic impact on communities across the state.  Massachusetts homes collectively employ approximately 50,000 full-time equivalent workers and many part-time workers.[51]  For some communities, particularly in rural and geographically isolated areas, nursing homes are the largest employer.  When a nursing home closes, employees are often displaced to other regions to look for jobs in an already struggling industry.  Furthermore, closures greatly affect local businesses, which are often dependent on the population of nursing home residents and employees as consumers.

 

In order to protect the health and safety of nursing home residents, DHCFP and DPH monitor nursing homes’ financial and quality of care standards.  Certain financial indicators can reveal a nursing home’s overall health, and tracking these indicators helps predict which homes are at risk of closure.  Without adequate and coordinated oversight, the state agencies may not be aware of a home’s condition until it is too late.  For example, the Attorney General was recently forced to place several financially unstable homes under receivership to ensure both residents’ continuity of care and stability for employees.[52]  State agencies play a critical role in evaluating nursing homes and preventing closures.

 

 

Nursing home closures are limiting consumer access to facilities.  According to AARP, it is critical to take into account the importance of having family and friends close by to visit and provide much-needed support to residents. [53]  If additional nursing homes are forced to close, seniors will have to relocate to other facilities, possibly farther away from their families and friends.  Closures also disrupt the continuity of care, which is extremely difficult for residents who have developed supportive relationships with their caregivers over time.  Having to leave a facility whose staff members are familiar with their specific needs is often an anxiety-provoking experience for residents.[54]

 

Numerous regions of the Commonwealth have nursing homes that will reach full capacity in the event of additional closures.  In fact, recent data from the Division of Medical Assistance indicate that nursing homes in 50% of all health service sub-areas in the state will be at full capacity even if one home in those areas has to close.[55]  At-risk areas across Massachusetts include:

 

 

 

 

· Current Proposals ·

                                                               

In response to nursing homes’ financial instability and closures, many proposals have been offered to alleviate the industry’s predicament.   In the Fiscal Year 2003 Budget, the Legislature adopted MECF’s proposal to stabilize the nursing home industry by assessing a daily “user fee” on all non-Medicare patient days in order to leverage additional funding from the federal government.  This plan, estimated to generate $290 million annually, was scheduled to begin in October 2002 but was not implemented until May 2003.[57]  Half of this revenue would be collected from nursing homes through the user fee and the remaining half would be garnered in matching federal Medicaid funds.[58] 

 

The user fee program was also included in the FY04 Conference Committee Budget Report.  The majority of the funds collected by this program would be returned to the nursing home industry as reimbursement for Medicaid patients.  This includes a $50 million appropriation for direct care employees, enabling facilities to maintain their quality of care.  Additionally, $17 million of these funds would be utilized for capital rate enhancements to maintain facilities’ physical structures.[59]  The Romney Administration proposed to divert some of these revenues to other programs in Massachusetts.  While there are many valuable programs that serve residents of the Commonwealth, the user fee was proposed by MECF to offset inadequate Medicaid reimbursement, thereby protecting the state’s nursing homes and some of its most vulnerable citizens.   

 

During this economic recession, additional proposals have been offered to save Medicaid funds by restricting both nursing home eligibility and admission policies.  One proposal in Massachusetts is to tighten the clinical eligibility requirement for nursing home residents.  Tightening clinical eligibility from its current “Score 3” to a “Score 4” requirement would only enable seniors who are considered to have one skilled nursing need and three additional nursing needs or activity of daily living (ADL) dependencies to become eligible for Medicaid funding.[60]  Another subject of proposed reform is the “Bed Hold” policy, which reserves a resident’s bed and provides partial reimbursement to nursing homes during medical or non-medical leaves of absence.  While there was a proposal to eliminate this policy entirely,[61] the Fiscal Year 2004 Conference Committee Report preserves the “Bed Hold” for medical reasons.

 

These are some of the primary proposals offered to mitigate nursing homes’ financial crisis.  The Senate Post Audit and Oversight Committee focused on the user fee, Medicaid clinical eligibility and the bed hold policy, as they affect nursing home finances as well as residents’ access to homes and quality of care.

 

· Findings ·

 

Throughout its investigation of nursing home closures, the Senate Post Audit and Oversight Committee interviewed long-term care industry leaders, advocacy groups, nursing home owners, administrators, residents, and family members.  The following findings demonstrate the severity of nursing homes’ financial crisis and its impact on Massachusetts residents:

 

 

 

·        In 2001, 13% of the state’s nursing home beds were owned by companies that filed for bankruptcy and 51% of nursing homes reported financial losses.

 

 

 

 

 

 

 

· Recommendations ·

 

It is critical that Massachusetts explore and implement reforms that will stabilize the nursing home industry, prevent additional closures, and maintain the quality of patient care.  Various approaches to financing long-term care have been considered in Massachusetts, especially in light of the current budget constraints.  In addition to providing sufficient Medicaid reimbursement to nursing homes, Massachusetts must consider reforms to appropriately subsidize these rates with higher private pay rates.  Massachusetts must also preserve policies that maintain the quality of care provided to consumers.  Many such policies, including Medicaid clinical eligibility and “Bed Hold”, are outlined in the Fiscal Year 2004 Conference Committee Report.  Access to nursing facilities is also fundamental to ensure that Massachusetts’ residents are able to live in appropriate settings that meet their specific medical and psychosocial needs.   It is imperative that Massachusetts adopt comprehensive reforms that provide long-term solutions to the nursing home financial crisis while maintaining the quality of patient care.  In order to achieve this, the Senate Post Audit and Oversight Committee recommends that Massachusetts should:

 

 

 

 

 

 

 

 

 

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