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Testimony on Nursing Home Bankruptcies by Steven Pelovitz,
Director, Survey and Certification Group, Health Care Financing
Administration, U.S. Department of Health and Human Services
Before the Senate Special Committee on Aging
September 5, 2000
Chairman Grassley, Senator Breaux, distinguished Committee
members, thank you for inviting me to discuss the financial
difficulties of some nursing homes and our efforts to ensure
that residents continue to receive the high quality care they
deserve. This has been a top priority for us, and I know it
is a priority for you as well. We appreciate your interest
in this area, and look forward to continuing our work together
to ensure beneficiary access to critical nursing home services.
We have monitored closely the effects on nursing homes of
the Balanced Budget Act of 1997 (BBA), the Balanced Budget
Refinement Act of 1999 (BBRA), and our Nursing Home Initiative
to improve oversight and quality. These efforts were essential
to control unsustainable growth in nursing home spending,
establish proper payment rates, and protect vulnerable nursing
home residents. Overall, beneficiary access and quality of
care have not been adversely impacted, but significant concerns
remain.
As you know, the owners and operators of a number of facilities,
including five of the 10 largest nursing home chains, have
faced financial difficulties in the past few years. Approximately
1,600 nursing homes across the country now operate under Chapter
11 bankruptcy protection. This means that the organizations
in their entirety are continuing to operate nursing homes,
as well as other lines of business, while restructuring financial
components of the company.
Financial news reports indicate that most of the troubled
businesses share a number of common features, and their financial
difficulties appear to stem largely from specific business
decisions.
These chains generally had aggressively acquired new facilities
and expanded rapidly for several years prior to our Nursing
Home Initiative and changes in payment structures. They leveraged
themselves heavily, paying top dollar for their acquisitions
and allowing their debt-to-equity ratios to spiral precipitously.
Meanwhile, other chains have adjusted successfully to the
different payment structure and the increased oversight stemming
from our Nursing Home Initiative. Additionally, in a December
1999 report, ASkilled
Nursing Facilities: Medicare Payment Changes Require Provider
Adjustments but Maintain Access,@
the GAO indicated that nursing homes continue to enjoy adequate
profit margins, and that Medicare payment levels are appropriate
for the services they provide. Working with the State agencies,
we have monitored this situation very closely and have had
to relocate only a very small number of residents. To date,
there has generally been minimal impact on beneficiary access
to care and the quality of care in financially troubled institutions.
Nonetheless, we are concerned about the potential for financial
difficulties to impact access and quality. And we appreciate
the challenge providers face in adapting to new payment systems.
Under our latest baseline, FY 2001 payments to nursing homes
will increase by $2.6 billion, nearly 20 percent above the
FY 2000 level. In addition, the President is proposing to
increase Medicare nursing home payments by about $1 billion
over the next five years, and we look forward to working with
you to enact these changes.
BACKGROUND
Protecting nursing home residents is a priority for this
Administration and our Agency. Some 1.6 million elderly and
disabled Americans receive care in approximately 17,000 nursing
homes across the United States. The Medicaid program, in which
States set reimbursement levels, pays for the care of about
two-thirds of nursing home residents and is responsible for
about half of nursing home revenues. The Medicare program
pays for care of about 10 percent of residents, accounting
for 12 percent of nursing home revenues.
Medicaid, which is administered by the States, covers close
to two-thirds of nursing home residents and accounts for about
half of nursing home revenues. The federal government also
provides funding to the States to conduct on-site inspections
of nursing homes participating in Medicare and Medicaid and
to recommend sanctions against those homes that violate health
and safety rules.
In July 1995, the Clinton Administration implemented the
toughest nursing home regulations ever. However, both we and
the GAO found that many nursing homes were not meeting the
requirements, and that State enforcement efforts were uneven
and often inadequate. Therefore, in July 1998, President Clinton
announced a broad and aggressive initiative to improve State
inspections and enforcement, and crack down on problem providers.
To strengthen enforcement, we have:
- instructed States that they have the ability to look at
an entire corporation=s
performance when serious problems are identified in any
facility in that corporate chain, worked with States in
developing more detailed guidelines for chains with performance
problems, and required States to develop and submit State
contingency plans for chains with financial problems. Furthermore,
we are working to refine our instructions in the State Operations
Manual, a draft of which is currently available for public
comment;
- expanded the definition of facilities subject to immediate
enforcement action without an opportunity to correct problems
before sanctions are imposed;
- identified facilities with the worst compliance records
in each State, and each State has chosen two of these as
Aspecial focus
facilities@ for
closer scrutiny;
- provided comprehensive training and guidance to States
on enforcement, use of quality indicators in surveys, medication
review during surveys, and prevention of pressure sores,
dehydration, weight loss, and abuse;
- instructed States to stagger surveys and conduct a set
amount on weekends, early mornings and evenings, when quality
and safety and staffing problems often occur, so facilities
can no longer predict inspections;
- required State surveyors to revisit facilities to confirm
in person that violations have been corrected before lifting
sanctions;
- instructed State surveyors to investigate consumer complaints
within 10 days;
- developed new regulations to enable States to impose civil
money penalties for each serious incident;
- met with the Department=s
Departmental Appeals Board to discuss increased workload
due to the Nursing Home Initiative;
- established a set of State Survey Agency performance standards
to ensure that the Agencies are executing their duties in
accordance with our contract terms. These standards are
scheduled for implementation on October 1, 2000; and
- issued a prioritized list of tasks to State Survey Agencies,
laying out which duties should be completed with the highest
level of urgency.
We also are now using quality indicators in conjunction with
the Minimum Data Set that facilities maintain for each resident.
These quality indicators furnish continuous data about the
quality of care in each facility. They allow State surveyors
to focus on possible problems during inspections, and will
help nursing homes identify areas that need improvement.
In addition, we have been working to help facilities improve
quality, including:
- posting best practice guidelines at cms.hhs.gov/medicaid/siq/siqhmpg.htm
on how to care for residents at risk of weight loss and
dehydration;
- testing a wide range of initiatives to detect and prevent
dehydration and malnutrition;
- working with the American Dietetic Association, clinicians,
consumers and nursing homes to share best practices for
preventing these dehydration and malnutrition; and
- beginning a national campaign to educate consumers and
nursing home staff about the risks of malnutrition and dehydration
and nursing home residents=
rights to quality care.
We also are continuing to develop and expand our consumer
information efforts to increase awareness regarding nursing
home issues. We now are conducting a national consumer education
campaign on preventing and detecting abuse.
And we are working to educate residents, families, nursing
homes, and the public at large about the risks of malnutrition
and dehydration, nursing home residents=
rights to quality care, and the prevention of resident abuse
and neglect. These efforts include our Nursing Home Compare
Internet site at medicare.gov, which allows consumers
to search by zip code or by name for information on each of
the 17,000 nursing homes participating in Medicare and Medicaid.
The site is recording 500,000 page views each month and is
by far the most popular section of our website.
Nursing Home Payments
As mentioned above, the Medicare program pays for the care
of only about 10 percent of the nursing home residents. Approximately
two-thirds of residents are covered by State-administered
Medicaid programs, to which the federal government adds matching
dollars. The remaining residents pay out-of-pocket or are
covered by long term care or other private insurance. In 1997,
the BBA required a new process for States to determine Medicaid
payment rates for nursing home services, one that eliminates
Federal review of State rates, thus giving States greater
flexibility; but which requires public comment on the adequacy
of payment levels.
The BBA also acted to address unsustainable growth in Medicare
nursing home spending. Since 1986, Medicare payments for nursing
home services had been surging upward at an average rate of
30 percent each year, climbing from $578 million to over $13
billion. And the Medicare Payment Advisory Commission has
reported that, although routine costs were paid on a set per
diem rate, payments for ancillary services were growing at
a pace five times that of service usage.
By reimbursing based on whatever nursing homes reported as
costs, Medicare had little control over potential over-utilization
of services. In fact, according to the GAO and Health and
Human Services Inspector General (IG), under cost-based reimbursement
beneficiaries often were subjected to unnecessary or excessive
therapy.
Medicare SNF Payment
Growth
The BBA therefore required Medicare to implement a new prospective
payment system (PPS) for nursing homes, similar to the payment
system used for hospitals since the early 1980s. Prospective
payment systems are based on patient need and episodes of
care, and create incentives to provide care efficiently.
The PPS is designed to Apay
right,@ allowing
Medicare to pay for care provided based on national data,
weighted by case mix and geographic area for individual facilities.
The PPS rates were developed using actual cost data representing
the cost level necessary for the efficient delivery of health
services. Using this actual cost data, payment rates are established
under the PPS which provide appropriate payments for nursing
home services. These payment rates are updated to reflect
changes in the acuity level of the Medicare beneficiaries
served by the facility, geographic wage variation, inflation,
and Metropolitan Statistical Area.
The Medicare nursing home PPS established more appropriate
payment levels for Medicare nursing home services. This and
other BBA fiscal discipline, along with our success in fighting
fraud, waste, and abuse have helped to greatly improved the
status of the Medicare Trust Fund. It is now projected to
remain solvent until 2025, 26 years beyond where it was just
8 years ago. The prospective payment systems mandated by the
BBA are particularly important because they create incentives
to provide care efficiently. However, these new payment systems
mark a substantial departure from cost- and charge-based reimbursement,
and the transition can be challenging for providers.
The new PPS for nursing homes went into effect in 1998. This
new system contributed to changes in the nursing home market.
Recent GAO and HHS Inspector General (IG) studies have found
that some nursing homes have been more cautious about admitting
high-cost cases. One study found that 58 percent of hospital
discharge planners reported that Medicare patients requiring
extensive services such as intravenous medications have become
more difficult to place in nursing homes. The IG is today
reporting that 80 percent of hospital discharge planners report
no problems in placing beneficiaries in skilled nursing facilities.
Additionally, several large private nursing home chains have
experienced financial problems. Approximately 1,600 nursing
homes now operate under Chapter 11 bankruptcy protection.
Financial news reports conclude that most of the troubled
facilities are in chains that generally had aggressively acquired
new facilities and expanded rapidly for several years prior
to our Nursing Home Initiative and changes in payment structures.
They leveraged themselves heavily, paying top dollar for their
acquisitions and allowing their debt-to-equity ratios to spiral
precipitously.
More for-profit organizations that operate nursing homes
currently are operating under Chapter 11 bankruptcy protection
than non-profits. This is consistent with the fact that approximately
65 percent of nursing homes are owned by for-profit companies
nationally. Publicly held, for-profit companies that are operating
in bankruptcy own about nine percent of nursing homes nationally,
constituting the bulk of nursing homes operating in bankruptcy.
In part, for-profit companies, particularly publicly held
companies, had broader access to greater amounts of capital
than non-profit companies. This provided the basis for the
aggressive acquisition strategies and accumulation of high
levels of debt that, in turn, have been cited as reasons for
the financial difficulties some of these companies are experiencing.
While these difficulties are due primarily to business practices
unrelated to Medicare, changes in Medicare payment systems
and improved oversight may have exacerbated the impact of
some businesses=
aggressive growth strategies.
The BBRA made a number of changes to the PPS to facilitate
nursing homes= transition
to the new payment methodology. These included a temporary
increase of 20 percent for 15 categories of residents, as
well as a four percent increase for all beneficiaries in fiscal
years 2000 and 2001. For the most part, our implementation
of these increases has gone smoothly. Although computer system
changes prevented us from implementing the temporary 20 percent
increase for certain beneficiaries immediately, nursing homes
now are receiving the increased payments, and we are paying
these retroactively to April 1, 2000, the intended start date.
Additionally, the BBRA allowed certain high cost items, such
as certain prosthetics and some chemotherapy-related codes,
to be paid outside of the PPS, increasing payment for some
medically complex care. Today, the Medicare baseline for nursing
homes shows about eight percent growth.
Protecting Beneficiaries
Although Medicaid programs pay for the majority of nursing
home services, we have a responsibility to ensure adequate
access to care for both Medicaid and Medicare beneficiaries.
In light of public reports of financial troubles at some nursing
home chains, we have been working with the States since early
1999 to ensure that residents continue to get the kind of
care that they deserve and that federal and State regulations
require. We have taken steps to ensure that States develop
and refine contingency plans for safeguarding residents.
We also instructed States to monitor conditions in financially
troubled nursing homes. Within four weeks after a nursing
home chain has filed for bankruptcy, the State Survey Agency
conducts onsite monitoring to the affected facilities in their
State. The State Survey Agencies use a protocol specifically
designed for monitoring these facilities, and we maintain
contact with State Agencies regarding these situations. Following
the initial visit, the State Survey Agencies exercise their
discretion to determine whether or not a facility requires
additional monitoring.
Generally, the State Survey Agencies have not reported any
significant disruptions in these financially troubled facilities;
and we work with the facilities to avoid patient relocation
whenever possible. The State Survey Agencies monitor the residents
in these troubled facilities on an ongoing basis, and provide
the HCFA Regional Offices with updates. While there have been
isolated cases where residents have been impacted, we have
had to relocate only a small number of these residents. For
example, in one case in Texas, three homes were closed and
the residents were forced to move. In each case, representatives
of the State Survey Agency and our Regional Office were on-hand
to assist with the resident transfers, and all were relocated
successfully to other facilities. Such individual cases illustrate
how we have made every effort to minimize disruptions to the
nursing home residents when relocation was the only reasonable
alternative.
In addition to meeting with States, we have had regular monthly
meetings with the Department of Justice and the IG to discuss
nursing home issues and the bankruptcy proceedings. We also
have met repeatedly with the management of major chains, both
before and after they filed for Chapter 11 bankruptcy protection.
Furthermore, the IG has developed corporate integrity agreements
with several large nursing home chains in order to focus on
ensuring quality care for residents even while the chains
face financial difficulties.
President=s
Proposals
Under our latest baseline, payments to nursing homes will
increase by $2.6 billion for next year, exceeding the FY 2000
level by almost 20 percent. In addition, the President=s
FY 2001 budget proposes changes that would increase Medicare
nursing home payments by about $1 billion over the next five
years.
The President=s
plan would:
- delay for an additional year (until FY 2002) the application
of the therapy caps providing additional time for development
of policies;
- replace the BBA=s
nursing home update of market basket minus 1 percentage
point with a full market basket update for FY 2001; and
- eliminate the proposed reduction in Medicare reimbursement
for bad debt.
The President proposed delaying the application of the therapy
caps because we are concerned about the yearly payments for
Part B physical/speech therapy and occupational therapy, which
the BBA limited to $1,500 each per beneficiary. Under this
provision, some therapy patients exceeded the payment limits
and either had to pay for the care out-of-pocket or discontinue
the medically necessary service. The BBRA put a two-year moratorium
on the limits while a study is conducted to determine appropriate
payment methodologies that reflect the differing therapy needs
of patients. However, the moratorium may not be long enough
to complete this complicated work, and so the President proposed
another delay in the application of the therapy caps.
We are continuing to work to refine the payment classification
system in a budget neutral way to ensure adequate payment
for medically complex residents, and particularly to account
more specifically for the cost of drugs and other Anon-therapy
ancillary@ services.
Using the best data available at the time we initiated the
research, we developed two payment classification models we
believed would ensure adequate payment for complex residents.
The data was limited to the experience of facilities in six
States in the years immediately before the PPS was implemented.
We issued a proposed rule in April 2000 which included refinements
based on these models and solicited public comments. In addition,
we contracted with outside experts to validate the models
using more recent data. When we tested the models with nationwide
data following the implementation of the PPS, we found that
the models were no longer statistically significant in identifying
high-cost beneficiaries with complex care needs and the ancillary
services they use.
Proceeding with implementation of the proposed refinements
based on these models could have changed payment levels without
any assurance that we were distributing funds more equitably,
creating incentives for efficient care, or minimizing the
risk of negative financial consequences. We therefore are
deferring the implementation of the refinements.
Shortly, we will begin consulting with outside researchers
and experts to begin further analysis using the 1999 national
data aimed at determining the feasibility of developing case-mix
refinements that reflect current practice. Our goal is to
propose such refinements as soon as possible. However, until
a feasibility study is completed, we will be unable to accurately
forecast the potential and timing of such refinements.
In the meantime, the temporary 20 percent increase in payments
included in the BBRA will remain in place until refinements
of the system can be implemented, which will be in fiscal
2002 at the earliest. And as I noted, in addition to the temporary
20 percent increase, the BBRA also provided a 4 percent increase
in payments for all nursing home beneficiaries.
Ongoing research to quantify the staffing ratios necessary
for quality care is another essential step in our efforts
to improve the quality of life and care for nursing home residents.
The research was mandated by Congress in 1990, with a report
due in 1992. This proved to be much more challenging than
anticipated. Our report on the initial phase of this research
establishes for the first time in a statistically valid way
that there is, in fact, a strong association between staffing
levels and quality of care. Many had long suspected as much,
but this had never before been documented. The findings from
the three States examined demonstrate that there are significantly
more problems in facilities with less than 12 minutes of registered
nursing care, less than 45 minutes of total licensed staff
care, and less than 2 hours of nursing aide care per resident
per day. Numerous facilities in the study do not meet these
levels of care, and the results suggest that many facilities
may need to increase staffing levels. While these findings
are troubling, and represent a major step forward in understanding
the relationship between staffing levels and quality of care,
they are preliminary. We now are working to address remaining
issues.
The second phase of this research initiative involves:
- evaluating staff levels and quality of care in additional
States with more current data;
- validating the findings through case studies and examining
other issues that may affect quality, such as turnover rates,
staff training, and management of staff resources;
- refining case mix adjustment methods to ensure that any
minimum staffing requirements properly account for the specific
care needs of residents in a given facility;
- determining the costs and feasibility of implementing
minimum staffing requirements and the impact on providers
and payers, including Medicare and Medicaid.
In the meantime, we want to work with Congress, States, industry,
labor, and consumer advocates to evaluate ways to ensure that
all nursing home residents receive the quality care they deserve.
These strategies include improving staffing levels, improving
training, increasing dissemination of performance data, strengthening
enforcement, and enhancing intensity of survey and certification
practices.
CONCLUSION
It is essential that we ensure Medicare and Medicaid beneficiaries
continue to have access to the high quality care they deserve.
Chairman Grassley, you and this Committee have made great
contributions to these efforts, and we greatly appreciate
the work you have done. Over the past few years, we have worked
hard and made progress in ensuring that nursing home residents
receive quality care and that we pay appropriately for this
care. We continue to work on a number of fronts to protect
nursing home residents and ensure beneficiary access to nursing
home services as some businesses reorganize under Chapter
11 protection. We greatly appreciate your interest in this
matter. And we look forward to continuing our work with you
to make sure beneficiaries receive the care and quality they
deserve. I thank you for holding this hearing, and I am happy
to answer your questions.
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