Skilled Nursing Operators, States Turn to Medicaid Supplements to Avert Disaster

When skilled nursing operator Daybreak Venture fell behind on its rent payments to Omega Healthcare Investors, Inc. (NYSE: OHI), the real estate investment trust touted a Texas supplemental payment program as one of the tools that would help the operator turn its fortunes around.

It’s a Medicaid program similar to others in various states, and though the specifics vary between each locale, they have one goal in common: to bolster Medicaid rates for SNFs through supplemental payments.

These mechanisms aren’t new to Medicaid; they’ve been around for several decades. But they’ve grown in importance for SNFs as the gap between Medicaid reimbursement and the cost of care widens.


Though Medicare looms large in the psyche of SNF operators as they get ready for the Patient-Driven Payment Model (PDPM) — which takes effect on October 1 of this year — Medicaid is still the largest payer of nursing facility services, covering roughly six in 10 nursing home residents, according to a Kaiser Family Foundation report from 2017.

But as nursing home closures rock several states, operators across the country have placed the blame on the fact that Medicaid’s reimbursement rates don’t cover the cost of caring for long-term care residents in a nursing facility. While operators and senators sounded the alarm about the potential damage from Medicaid cuts in a nursing home safety hearing held last month, providers in states with particularly low reimbursement rates are tackling the problem through their local legislatures, trying to bolster their rates through various means of supplemental payments.

“In the nation, the average Medicaid cost is about $200 to care for a nursing home patient, and those states that have Medicaid rates in the $140 to $150 range, they can’t meet quality needs. They just can’t,” Eddie Parades, senior vice president of Lewisville, Texas-based StoneGate Senior Living, told Skilled Nursing News. “So they’ve implemented this mechanism for inter-governmental transfers to fund the state share, and about 10 states have done it, because those are the ones with the lowest Medicaid rates.”


Texas is one of the states, though its program has undergone some significant changes over the years — changes that Parades has been on the front lines of implementing. In addition to serving on the board of the Texas Health Care Association and chairing it reimbursement committee, he was a member of the founding work group of the Texas Quality Incentive Payment Program (QIPP), which is one of the methods Texas has used to bolster low Medicaid reimbursements for nursing homes.

Under QIPP, providers can receive Medicaid payment boosts by embarking on certain quality-improvement initiatives, with the dual goal of properly compensating providers and encouraging continuous investment in resident care.

In fact, Omega COO Dan Booth pointed to Texas’ QIPP as one of the reasons Omega granted Daybreak rent deferrals in the first and second quarters of 2019.

“These deferrals were granted for a number of reasons,” Booth said on the company’s fourth-quarter earnings conference call. “First, to allow Daybreak to continue to embark on certain operational improvements, which are already starting to yield positive results in the form of improved operating performance. Second, to give Daybreak time to reap the benefits of a significant increase in participation in the Texas [Quality Incentive Payment] program, which is similar to what other states commonly refer to as a UPL [Upper Payment Limit] program.”

Texas focuses on quality

For the QIPP, the Texas legislature wanted to implement a rule making the supplemental payments entirely based on quality; that change eventually took effect in September 2017, Parades said. With that quality focus, the first iteration of QIPP was officially launched, falling under the Section 1115 demonstration waiver for the Texas managed Medicaid program, he explained.

Daybreak, which at the time had 16 facilities enrolled in the QIPP and planned to boost its enrollment by 31 facilities at the time of Omega’s fourth-quarter earnings call, is not the only provider in the Lone Star State that is bolstering its participation. In the first iteration of the program, QIPP 1, roughly 40% of nursing facilities in the state took part, Parades told SNN. In the second year, which began in September 2018, the number grew to about 50%.

In those versions of QIPP, providers could only earn the money through improving on specific quality metrics: pressure ulcers, use of physical restraints, percentage of residents receiving an antipsychotic medication, and residents experiencing one or more falls with major injury. SNFs had to complete a Quality Assurance Performance Improvement (QAPI) plan to the state on those metrics, earning the extra funds if they either improved by 5% per quarter — or matching or exceeding the national average on those metrics, Parades explained.

But in the third year, QIPP 3, the state called for some changes. In addition to the original metrics, the program now calls for facilities to track improvement on independent mobility and urinary tract infections (UTIs), to have a recruitment and retention program and an infection control program, to have a pneumococcal vaccine program, and then have four hours of registered nurse (RN) coverage above the minimum eight hours a day required by the federal government. So if a facility has 12 hours of RN coverage, it receives an additional payment; if it has 16 hours, it gets another payment, Parades said.

And the number of facilities participating has grown with the measures tracked, even though the deadline to enroll is on April 16.

“The expansion was about 300 more buildings in the state,” Parades told SNN. “Now we are up to about 800 of the 1,200 that are going to participate in QIPP 3.”

Supplemental payment success in Indiana

The Texas QIPP actually began life as a UPL program, Parades explained. Under that program, the state could raise Medicaid rates up to the level of the Medicare payment for the same services. But when Texas converted to managed Medicaid, it had to follow the rules for that program — which means that the QIPP falls under a Section 1115 waiver for the Texas managed Medicaid program.

These waivers essentially allow states flexibility with federal Medicaid rules regarding coverage and reimbursements, as long as they can demonstrate to the Department of Health and Human Services (HHS) that their plans can improve care and reduce costs.

But other states have opted for the UPL route, and Indiana has pulled it off with perhaps the most success, according to Jeff Davis, the founder and president of Chicago-based Cambridge Realty Capital. A UPL program, however, is somewhat different from the quality focus that marks Texas’s program, he noted.

“The basic theme of the program is taking government dollars — in the case of nursing homes, it’s Medicaid dollars — and transferring quasi-ownership of the asset to some third party,” Davis, who used to own two SNFs in Indiana, told SNN. “In the case of Indiana, it basically transferred ownership of nursing homes to local hospitals, and they have just the real estate.”

The operator of the SNF would keep managing the facility for the hospital under this arrangement; due to a quirk of the law, the hospital-based SNF would then receive higher Medicaid reimbursements than it had previously for the same services.

When Texas had a UPL program, a non-state government organization — essentially a county hospital — holding a nursing home license would put up the state’s share of the Medicaid payment through an intergovernmental transfer (IGT), Parades said.

“These county hospitals that owned the nursing homes put up an IGT and converted county funds to state funds,” he explained.

Put simply, because the federal government matches state Medicaid funding on a roughly 40%-60% basis, for every 40 cents converted by the IGT to state funds, the federal government would add 60 cents. The state would pay that dollar back to the county, Parades said, meaning the county got back the 40 cents it paid in, while netting 60 cents.

The shortfall between the base Medicaid reimbursement and the cost of care for Medicaid patients in Indiana is “huge,” making the program a significant help for SNFs in the state, Zachary Cattell, the president of the Indiana Health Care Association, told SNN.

The supplemental payment in Indiana represents the difference between what Medicaid pays for a service and what Medicare would have paid for it.

“Nursing facilities have been able to invest in facility upgrades and [electronic health records] and new equipment and staff,” he said. “And this has absolutely helped nursing facilities care for patients better … without the supplemental payments, it would be far, far more difficult to care for the state’s Medicaid population.”

Oklahoma Tries to Close the Gap

Oklahoma, which joins several other states in having a notable shortfall between Medicaid’s base reimbursement and the costs of caring for Medicaid payments, had less luck with the Upper Payment Limit program. When the state applied for the program last year, several small cities had taken over the licenses to operate dozens of nursing homes in the state in the hopes that they would be able to benefit from the additional supplemental payments.

But the Centers for Medicare & Medicaid Services (CMS) denied Oklahoma’s most recent state plan amendment in early January, and it specifically cited problems with the way the cities had taken over the licenses.

“The public-private partnerships created by the cities’ contracts with the private nursing home operators appear designed to allow the participants to qualify for Intergovernmental Transfers (lGTs), and split the resulting federal supplement payments without any significant net expenditures by the state or cities,” CMS Deputy Administrator and Director Mary Mayhew wrote in the January letter.

Oklahoma believed the plans were appropriate, Care Providers Oklahoma president and CEO Nico Gomez told SNN, but the state decided not to appeal CMS’ decision. It had been working on applying to the UPL program for more than four years, he said, and since that time there hasn’t been much improvement in the state’s Medicaid rates. Four years ago, the average per diem reimbursement for Medicaid was roughly $143.60; it was about $150 a day as of last October, he said.

But that is still approximately $23 below the audited cost of caring for Medicaid patients. As a result, the state is focusing on two bills in the Oklahoma House and Senate that would close the gap, collectively the Nursing Home Quality Assurance Initiative (NHQI). But it’s more than putting money into the system, Gomez stressed. The bills would establish a pay-for-performance component based on improving on pressure ulcers, UTIs, use of antipsychotics, and weight loss among nursing home residents — all of which the state ranks poorly on, he told SNN.

“We have to stabilize the system, and it’s going to take money to do it,” Gomez said. “And in return for that state’s investment, here are the things we want to focus on to prove that investment’s going to increase quality of care.”

The need for stabilization is particularly acute, as six nursing homes in the Sooner State have closed in the past 18 months and more than 100 have closed in the past 20 years. And if the NHQI doesn’t pass, Gomez expects to see an acceleration.

“Owners [in Oklahoma] almost have to be diversified into other businesses,” he said. “They can’t just be totally dependent on the nursing home; they have to be dependent on other lines of business to keep the nursing home open. And for smaller operators, that’s becoming nearly impossible. Oklahoma has been historically an independent owner state, but you’re starting to see the erosion of independent owners, for sure.”