Should Medicare Payments Subsidize Medicaid Residents?

Roughly two-thirds of nursing home residents rely on Medicaid to fund their stays, according to the Centers for Medicare & Medicaid Services (CMS), but oftentimes Medicaid reimbursements to nursing homes don’t fully cover costs of care, and many operators seek to bridge the gap with Medicare reimbursements.

While many industry representatives believe Medicare payments should subsidize payments from other payors, such as Medicaid, the Medicare Payment Advisory Commission (MedPAC) disagrees in its March 2012 report to Congress.

“The Commission believes such cross-subsidization is not advisable for several reasons,” it says, going on to list them:

  • “Using Medicare rates to supplement low Medicaid payments results in poorly targeted subsidies. Facilities with high shares of Medicare payments—presumably the facilities that need revenues the least—would receive the most in subsidies from the higher Medicare payments, while facilities with low Medicare shares—presumably the facilities with the greatest need—would receive the smallest subsidies.
  • Medicare’s subsidy does not discriminate between states with relatively high and low payments. In 2009, Medicaid payments to nursing homes varied twofold, yet Medicare’s high payments subsidize facilities even in states with relatively high Medicaid rates. If Medicare raises or maintains its high payment levels, states could be encouraged to further reduce their Medicaid payments and, in turn, create pressure to raise Medicare rates.
  • Higher Medicare payments could further encourage providers to select patients based on payer source or to rehospitalize dual-eligible patients to qualify them for a Medicare-covered, higher payment stay.
  • Medicare’s current overpayments represent a subsidy of trust fund dollars (and its taxpayer support) to the low payments made by states and private payers. If the Congress wishes to help certain nursing facilities (such as those with high Medicaid shares), it would be more efficient to do so through a separate targeted policy.”

Although the Commission said the skilled nursing industry’s Medicare margins in 2012 are “high,” at 14.6%, actual margins are generally significantly below MedPAC estimates, according to the American Health Care Association (AHCA)making other sources of revenue necessary.

Consulting firm The Moran Company has presented research to AHCA on the financial implications of certain reimbursement policies for nursing facilities, with varying margin estimates depending on proposed and planned policy changes. These estimates in many cases fall short of those published by MedPAC, notes Greg Crist, vice president of public affairs at AHCA.

“While we’d like to see adequate funding through Medicaid, the reality is the program underfunds the services our centers offer to the tune of $5 billion a year,” says Crist. “Unless and until that changes, the reality is our facilities will continue to rely on Medicare subsidizing care for Medicaid patients.”


For years, the skilled nursing industry has asked Congress for more adequate Medicaid funding, and it’s not enough to just acknowledge that there’s shortfall—there needs to be a substantive solution born out into funding, says Crist.

So-called “excess” Medicare funding isn’t being used to increase providers’ margins solely for profit, he says; it’s being taken to help balance Medicaid shortfall and keep facilities afloat.

View The Moran Company’s December 2011 report, or check out MedPAC’s recommendations to Congress.

Written by Alyssa Gerace

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