Medicare Advantage Eats Into Margin Gains for Skilled Nursing Facilities

Skilled nursing providers actually saw across-the-board gains in Medicare margins between 2016 and 2017, but the effects were mitigated by a familiar foe: Medicare Advantage plans.

The average provider saw a profit of $102 per patient day for residents covered under Medicare Part A in 2017, according to a new analysis from accounting and advisory firm Plante Moran, for a net margin of 20%. That figure represents a gain of $8 per patient day from 2016, or a boost of 9%.

When extrapolated over the entire cost of care, the average Part A profit clocked in at $3,900, the difference between revenue of $19,500 and costs of $15,600.

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Those numbers might sound promising in an era defined by tight budgets, but Plante Moran partner Betsy Rust told SNN that the Medicare gains mask the ongoing negative effects of Medicare Advantage.

“What you can’t tell from this data is the impact on the other payer sources, and that Medicare fee-for-service continues to decline as Medicare Advantage grows, and as volumes decline on post-acute utilization from the pressure of those managed care payers,” Rust said.

For instance, while the exact proportions of Medicare, Medicaid, and private-pay revenues vary significantly by region, Medicare dollars formed the smallest cash source in 2016 and 2017, Plante Moran found.

The company’s 2019 skilled nursing facility benchmarking report only focused on Medicare margins under the current Resource Utilization Group (RUG) system, with Rust noting that detailed information about Medicare Advantage reimbursement patterns is difficult to come by given their private status.

“There really is no access to public information on Medicare Advantage data, so anecdotally … we know from our experience serving clients that profitability under Medicare Advantage plans is flat or decreasing, and often Medicare Advantage plans pay less than Medicare fee-for-service RUG rates,” Rust said.

It’s not just anecdotal, either: Multiple analyses have found nationwide skilled nursing margins falling to zero or even lower, with a 2019 benchmarking report from advisory firm Marcum LLP determining that the average nursing home loses about four cents per day on each resident. Another accounting outfit, CliftonLarsonAllen, determined that the average overall operating margin at nursing homes was a goose egg in 2017, down 60 basis points from the previous year.

“It is particularly alarming that the median operating ratio is now at 0 percent,” CLA noted in its analysis.

In the third quarter of 2018, the average skilled nursing facility brought in $515 per Medicare patient day according to the National Investment Center for Seniors Housing & Care (NIC), compared to $427 for managed Medicare and $209 for Medicaid.

Those trends come at a time when many other metrics are working against skilled nursing operators across the country, with a 4% gain in per-patient-day routine salary costs and continued declines in average length of stay; even when only looking at Medicare LOS data, the figure dropped from 41 days in 2016 to 38 days in 2017.

Still, Plante Moran acknowledged that lengths of stay under Medicare Advantage routinely work out to less than 20 days, a significant source of stress on operators accustomed to longer-term stays from their highest-paying Medicare residents.

The conflation between Medicare margins and overall margins has also affected the discourse on nursing home reimbursements on Capitol Hill, with the Medicare Payment Advisory Commission (MedPAC) frequently calling on Congress to cut or freeze rate increases due to relatively healthy Medicare margins.

Just last month, MedPAC asked Congress to slash nursing home reimbursements by up to $2 billion for fiscal 2020, which begins in October.

“For efficient providers, those with relatively low cost and high quality, the average Medicare margin was 18%, further evidence that Medicare overpays for SNF care,” MedPAC principal policy analyst Carol Carter said during the commission’s January public meeting. “We project the 2019 margin to be 10%.”

PDPM headaches coming?

Another key caveat to Plante Moran’s data is that the RUG system will soon give way to the Patient-Driven Payment Model (PDPM), fundamentally changing the way that skilled nursing facilities receive reimbursements for therapy under Medicare. Many industry voices have praised the coming shift, touting the closer relationship between patient complexity — and, by extension, costs — and eventual reimbursement dollars.

But Rust noted that under current Medicare Advantage rules, insurers do not have to reimburse based on the existing RUG system; after October 1, they will also not have to consider the PDPM structure when determining how much money to pay SNFs for therapy.

“I think it’s very likely that a lot of the key payers for Medicare Advantage will opt not to piggyback on PDPM, and instead will create their own methodology, which could very well drive down Medicare Advantage further,” Rust said. “So while the news looks good on Medicare fee-for-service, it’s really a shrinking amount of patients that are served.”

Many of the top Medicare Advantage payers don’t pay providers based on RUG rates, Rust noted, and she expects them to continue using the tools that have brought reimbursement pressure under the current system, including basing rates based on a fixed percentage of the standard Medicare amount.

That said, Rust also pointed out that uncertainty around PDPM has brought temporary relief for providers on the cost side, as third-party therapy firms and other vendors look to keep proving their worth to SNFs amid the transition.

“A lot of the providers have said to vendors: Look, we can’t take any cost increases right now,” Rust said. “We have to see how all of this shakes out, and I think in many instances, the major vendors — therapy, pharmacy, diagnostic — they’re still trying to figure out how they’re going to retool their business proposition and their value proposition to SNFs now that therapy isn’t as important in this new PDPM world.”

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