Skilled Nursing Medicare Margins “High” at 14%, MedPAC Says to Freeze Payment Updates

Higher Medicare margins in certain types of skilled nursing facilities has prompted the Medicare Payment Advisory Commission (MedPAC) in its March 2012 report to Congress to freeze payment updates in 2013 and rebases the prospective payment system (PPS) to more closely match facilities’ costs of care.

Based on estimates of the changes in revenues and costs between 2010 and 2012, the projected aggregate 2012 Medicare SNF margin is 14.6%, compared to estimated margins in FY 2011 of 24.2%. Despite the 11% reductions to Medicare payments that went into effect in October of 2011, MedPAC says payment rates in FY 2012 are 3.7% higher than they were in FY 2010.

“The evidence indicates that Medicare beneficiaries continue to have access to SNF services, and Medicare payments far exceed Medicare costs,” says the Commission. “Our analyses found that SNFs can have relatively low costs and provide good quality care while maintaining high margins.”

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Medicare Margins Among Various Types of Skilled Nursing Facilities

Medicare margins have become less variable, says MedPAC, and there’s been a large decline in the number of SNFs with negative Medicare margins and the size of their losses.

While 51% of freestanding SNFs had negative Medicare margins in 1999, this number dramatically decreased to 13% in 2010.

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“The widely varying financial performance of freestanding SNFs indicates that the PPS needs to be revised to more closely match payments to patient characteristics and not to the services furnished,” says the Commission. “Facilities with high shares of intensive rehabilitation therapy had considerably higher Medicare margins than facilities with low shares. Facilities with high shares of medically complex days and dual eligible days had somewhat lower margins than facilities with low shares of these days.”

For-profit SNFs are shown to have higher aggregate Medicare margins compared to nonprofit facilities, at 20.7% vs. 9.5%.

Rural facilities used to have higher margins than urban facilities, until 2010, when MedPAC says they became comparable.

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Hospital-based facilities, which only account for 6% of SNFs, continue to have negative Medicare margins (-67%), which largely reflects higher daily costs (higher staffing levels with more professional staff, and inflated ancillary costs) and shorter stays (typically half the length of stay in freestanding facilities).

Based on this, MedPAC recommends changing the SNF PPS and increasing payments to hospital-based facilities by an estimated 27%.

Changing the Payment System Based on Patient Mix

High-margin SNFs had average Medicare payments that were 10% higher than low-margin SNFs, reflecting larger shares of “ultra high and very high rehabilitation case-mix groups.”

The low-margin SNFs either didn’t treat patients with extensive rehab needs, or provided fewer services to them. MedPAC found that differences in patient characteristics, meaning beneficiaries who are dual eligible, minority, or very old, don’t explain cost differences across facilities.

The Commission is working with the Urban Institute to identify changes to the SNF PPS that would produce “greater equity” in payments across types of patients and thus redistribute payments from SNFs that focus on rehab, to those that focus on medically complex patients.

“The revised design would have the effect of moving payments from SNFs with high Medicare margins to SNFs with lower Medicare margins. A revised PPS would increase payments for nonprofit, rural, and hospital-based facilities and facilities that treat high shares of dual-eligible beneficiaries and minority beneficiaries.”

MedPAC Outlook on Margins Account for Revised Payments

The recommendation, then, is for Congress to eliminate the market basket update and to rebase payments beginning in 2014, with an initial reduction of 4%, and subsequent reductions over an appropriate transition until Medicare’s payments are better aligned with providers’ costs.

With a revised PPS and payments lowered by 4%, the Commission estimates 2014 Medicare margins to be roughly 7% industry-wide.

“Facilities with high shares of medically complex, dual-eligible, minority, or very old patients would have positive margins,” says the Commission. “Although differences would be narrower, nonprofit SNFs are expected to continue to have lower margins than for-profit facilities because nonprofit facilities have higher costs.”

View the full report here. Chapter 7 deals with skilled nursing facility services and begins on page 171.

Written by Alyssa Gerace

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