Doing Long Term Care RIght: Part Three

Does LTC Rebalancing Save Money?

Rhode Island’s “global Medicaid waiver” enables the state to offer more home care (people want) and less nursing home care (they don’t want) by loosening certain federal constraints in exchange for the state’s accepting a cap on federal matching funds.

But will it save money?

Saving money by “rebalancing” from institutional care, with its economy of scale, to home and community-based care, with its fragmented, labor-intensive services, is dubious. Most research has shown for decades that home care delays but does not replace nursing home care.

While individual lower-acuity patients may be cheaper to care for in the community than in a nursing home initially, across lifetimes and across populations, long-term savings are highly doubtful.

In fact, no state Medicaid program has yet reduced combined institutional and non-institutional LTC expenses over time. Nursing home expenditures flatten or even decline but home care costs skyrocket.

This is true already even though the long-anticipated baby-boom “Age Wave” in America and Rhode Island has barely begun and will soon explode. RI’s population of age 85 plus, the cohort most likely to need LTC is projected to increase by 46 percent, from 25,000 to 37,000 individuals between 2007 and 2030.

Nevertheless, making more home and community-based long-term care available to more people is unquestionably desirable. So, whether it costs less or not, we should focus on how to pay for it, either publicly, privately or both. But how to pay for home and community-based care deserves far more attention than it has received so far.

The Woodwork Effect

The practical problems of providing long-term care in the home and community are perhaps not the biggest risk of potential cost over-runs.

Public officials should also consider the possibility that offering services that people want more than nursing home care may increase demand. This is the familiar problem of the “woodwork” effect.

For every person in a nursing home, two or three are managing at home with equal or greater disability–half of whom are bedbound, incontinent or both–because of heroic efforts made by their loved ones, mostly women–wives, daughters and daughters-in-law–to keep them out of nursing homes.

The state of Rhode Island under its global Medicaid waiver is not only making more desirable Medicaid-financed services available, it is changing the clinical and financial eligibility rules to make home care services easier and nursing home care more difficult to obtain.

It is also important to remember that Medicaid eligibility often includes coverage of medical services seniors need that Medicare does not cover. The state’s Medicaid eligibility policy specialist told us: “Rhode Island covers almost every medical need known to man, including heart transplants. Everyone wants to move to this tiny state.”

In combination and over time as the public becomes aware of them, these benefits and initiatives are likely to increase the demand for Medicaid-financed long-term care, enhance the market for Medicaid planning (artificial impoverishment) to qualify for Medicaid, and reduce the public’s sense of urgency about responsible LTC planning through savings, investment or insurance.

Are these extra loads on already scarce public resources an added responsibility state officials are prepared to assume?

Is that wise during a recession, with state deficits rising, and under a program in which federal matching funds are already capped by the global waiver?

What if the recent massive infusion of supplemental federal Medicaid matching funds that has brought $300,000,000 to the state this year terminates as scheduled at the end of 2010?

How to Avoid the Pitfalls of Rebalancing

All of these problems are manageable if and only if Rhode Island Medicaid reconfigures LTC financial eligibility to target the program’s limited resources to people most in need.

It must also incentivize others, who remain young, healthy and affluent enough, to plan early for long-term care and save, invest or insure privately so they do not become a burden on the public program.

Currently, few Rhode Islanders purchase private long-term care insurance. Probably only one to five percent of eligible consumers have the coverage. The state’s Long-Term Care Partnership program remains in limbo with very few policies having been sold.

Agents we interviewed attributed the lagging LTC insurance market to consumer “denial,” ease of access to Medicaid-financed LTC, widely available Medicaid planning advice, and a shortage of insurance producers able to make a living while specializing in the product.

Even fewer Rhode Islanders use reverse mortgages to fund their own home and community-based care before they turn to public assistance. Why do so when Medicaid exempts the home and home equity is easy to divert from estate recovery liability?

Although federal law has mandated that state Medicaid programs recover the cost of their care from the estates of deceased recipients, Rhode Island has a very limited estate recovery program and recovers only a fraction of the non-tax revenue it could receive with more robust efforts.

This report’s recommendations will describe measures the state should take to target scarce Medicaid resources to people most in need and to encourage others to prepare to pay privately for long-term care with savings, home equity, other investments or long-term care insurance.

Rhode Island’s unique global Medicaid waiver may allow needed changes to be made that would be prohibited everywhere else in the country in the absence of such a waiver.

Impact of Rebalancing on Skilled Nursing Facilities

The second practical question we need to address is: How will nursing homes adapt to losing their lower acuity (i.e. more profitable) residents? The answer is: Nursing homes can adapt only with great difficulty.

Rhode Island Medicaid already reimburses nursing homes less than the cost of providing the care: $18.80 per bed day under allowable costs projected for 2009. At $173 per day, Rhode Island’s Medicaid nursing home reimbursement rate is only 70 percent of the private pay rate ($248).

At a meeting with members of the Rhode Island Association of Facilities & Services for the Aging, the provider trade association representing mostly non-profit members, we were told “Medicaid reimbursement doesn’t come close to covering our costs. We have to fund-raise, write grants, and depend on other payers. We try to get more private payers. We pay a ‘provider tax’ of 5.5 percent.”

Nevertheless, Rhode Island has managed to maintain a reputation for quality nursing home care. A recent Government Accountability Office (GAO) study found that RI was one of only eight states in the country with zero poor-performing nursing homes.

By changing to acuity-based reimbursement and tighter clinical eligibility standards, the state could place financial pressures on nursing homes that force staff reductions and impair quality of care for the highest-need patients who remain in skilled facilities.

“Take away dollars and you take away care,” said Angelo S. Rotella, Esq., a Rhode Island provider and Past Chair of the American Health Care Association, a national LTC provider trade association comprised mostly of for-profit facilities.

“When home and community-based services are not available, and nursing homes are not available, what is the solution? Waiting lists,” we were told at a meeting with members of the Rhode Island Health Care Association.

To avoid such an outcome, policy makers need to understand how it happened that people who don’t necessarily need 24-hour-a-day skilled nursing care came to receive long-term custodial care in nursing homes in the first place.

How Did Low-Acuity Medicaid Recipients End Up in Expensive Skilled Nursing Facilities?

It is a long, complicated story, but in a nutshell: Medicaid made nursing home care free or radically subsidized beginning in 1965. At first, there were not even restrictions on transferring assets to qualify. So virtually everyone qualified.

Families saw that placing their frail or infirm elder in a nursing home was free or very inexpensive while caring for the loved one at home was expensive and uncompensated by government.

As a result, there was little private financing to build and sustain a home and community-based services infrastructure. Long-term care became equated with nursing home care in the public’s mind. Few alternatives existed.

The nursing home industry accepted the new bonanza of Medicaid funding four decades ago and built new skilled facilities throughout the country. Early on, Medicaid’s LTC reimbursements were lucrative and highly profitable.

But as Medicaid LTC costs exploded, government officials took dramatic measures to control nursing home expenditures.

First, they capped the supply of nursing home beds with Certificate of Need (CON) programs. But restricting supply, predictably increased prices. Nursing homes responded by charging state Medicaid programs more.

So, Medicaid capped reimbursement rates. That was the origin of the differential between high private-pay rates and low Medicaid rates. In Rhode Island, to this day, Medicaid reimbursement is only 70 percent of the private pay rate.

As the public came to realize that paying privately for long-term care was expensive and unnecessary, given Medicaid’s generous and elastic LTC eligibility rules, more and more people converted from private pay to Medicaid.

As profitable private-pay revenue plummeted from half of nursing homes receipts in the beginning to only about ten percent today, nursing homes were forced to economize in order to remain financially viable.

They had only two ways to reduce expenses and neither method was well-received by government and consumers:

If they cut costs for staff or services, nursing homes were accused of providing poor quality care.

If they tried instead to attract higher-paying private residents, they were accused of discriminating against Medicaid recipients.

In time, low Medicaid reimbursements and reduced private-pay revenue created a serious quality of care problem in nursing homes.

In the Omnibus Budget Reconciliation Act of 1987 (OBRA ’87), the federal government insisted on higher staffing, more training and better care in Medicaid and Medicare financed nursing homes.

But higher public reimbursements to finance the desired improvements were not forthcoming. Despite valiant efforts by nursing home providers to ensure quality care, low Medicaid reimbursements continue to be a severe handicap.

The main way nursing homes have managed through these last four decades of changes is that while their residents were mostly Medicaid and reimbursed therefore at minimal levels, they at least were the dominant venue of care so they had a mix of low-acuity, higher-profit residents to balance the cost of caring for their higher-acuity, less profitable residents.

By changing the rules so that nursing homes must treat increasing numbers of more demanding, less profitable, higher-acuity residents while they lose more of their less demanding, more profitable, lower-acuity residents, the state runs the risk of further crippling nursing homes’ ability to provide quality care.

To make matters even worse, another key public funding source for nursing homes is also highly vulnerable. Nursing homes nationally receive 18 percent of their revenue from Medicare. Unlike Medicaid, Medicare pays very generously. Nursing homes make a profit on their limited Medicare business. They need that profit to counterbalance their losses on Medicaid residents.

But Medicare nursing home financing is highly vulnerable in the future. The program has an $89 trillion infinite-horizon unfunded liability. MedPAC, the Medicare Payment Advisory Commission, advises Congress annually to curtail nursing home reimbursements. So far, Congress has refused but the jaws of a fiscal vise are closing on Medicare inexorably. It may not sustain nursing homes much longer in the absence of higher Medicaid or private pay revenues.



  • The Capacity Issue
  • The Crowd-Out Effect
  • The Big Question

One response to “Doing Long Term Care RIght: Part Three

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