Medicaid Overpays Nursing Homes by $1B Per Year, Study Suggests

Nursing home providers typically operate on razor-thin margins, but a new study suggests that the Medicaid program may be overpaying operators by billions of dollars per year.

A pair of economists from the University of California, Los Angeles and the University of Georgia this month published an extensive analysis of Medicaid spending in nursing homes, determining that longer stays in SNFs don’t lead to better outcomes for residents — and thus the government shouldn’t necessarily pay for as many patient days.

“Since we find no evidence that longer stays lead to health improvements, this difference points to Medicaid overspending of … $5,480 per Medicaid stay or about 18.6% of Medicaid spending per nursing home stay,” Martin Hackmann and R. Vincent Pohl wrote in their research, published as an issue brief by the National Bureau of Economic Research. “Multiplying this fraction with national Medicaid nursing home spending of $55 billion in 2015 suggests annual savings of up to $10.2 billion.”


The final study group included data from about 940,000 nursing home stays in California, Ohio, Pennsylvania, and New Jersey, spanning from 2000 to 2005; because those four states account for about 20% of all nationwide Medicaid spending, Hackmann and Pohl adjusted the nationwide over-spending estimate down to about $1 billion per year.

The researchers specifically looked at nursing home residents who started paying for services out of pocket; Medicaid covers nursing care for income-qualified residents, typically after they exhaust their personal resources. Despite its national reputation as a benefit for low-income Americans of all ages, Medicaid is the single largest payor for nursing services, covering about 62% of all nursing home residents according to a 2017 analysis by the Kaiser Family Foundation.

The pair found that nursing homes tend to retain residents longer in periods of low occupancy, but increase discharges of Medicaid beneficiaries once that figure hits around 89%, as they attempt to seek out the highest paying self-funding residents.


“At lower occupancies, nursing homes benefit from extended Medicaid stays, to the extent that Medicaid rates exceed the marginal cost of care. At higher occupancies, this incentive is muted because nursing homes prefer to occupy their scarce beds with more profitable private payers,” they wrote. “In contrast, private payers’ home discharge rates vary little (between 1.7% and 2.1%) and not systematically with occupancy.”

At the same time, the researchers didn’t find a solid connection between longer lengths of stay and health outcomes, noting that the one-year hospitalization rate was actually lower for Medicaid residents at high-occupancy nursing homes, when they were most likely to be discharged.

“Overall, we conclude that marginal Medicaid beneficiaries appear to be relatively healthy,” they wrote. “We also find no evidence that longer stays lead to improved health outcomes suggesting that longer nursing home stays (on this margin) likely constitute over-utilization of nursing home care.”

To solve the problem, the pair suggests a kind of episodic payment model in which the government withholds 1% of the daily Medicaid reimbursement rate and replaces it with a single upfront payment to providers. Under that model, operators would have less incentive to retain Medicaid patients, leading to a one-week reduction in the length of stay and government savings of about $25 million. Boosting the upfront payment to 10.5% of per-day reimbursements could result in $180 million in savings, the pair found.

Hackmann and Pohl acknowledge that the long-term care funding landscape has changed significantly since 2005, the last year of data they analyzed — but also noted that many of the new models encourage patients to choose home- and community-based services, and don’t necessarily focus on changing provider incentives and motives.

“While these programs largely affect patient incentives, our findings indicate that incentivizing providers may be more cost-effective in reducing nursing home utilization,” they conclude. “Specifically, our findings suggest that transitioning from per-diem to episode-based provider reimbursement is more effective than increasing resident cost-sharing in shortening Medicaid stays.”

Written by Alex Spanko

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