Proposed Medicaid Rule Would Mean Billions in Cuts, Waves of Nursing Home Closures

With skilled nursing facilities in multiple states facing significant shortfalls in their Medicaid reimbursement, supplemental payment programs used to bolster rates have become a lifeline.

This is especially true for Texas and Indiana, both of which employ programs designed to get SNFs a higher rate for Medicaid services through varying mechanisms. Both states are motivated by the same impulse: the fact that the state Medicaid rates don’t allow SNFs to recoup the cost of caring for Medicaid patients.

But under a rule proposed by the Centers for Medicare & Medicaid Services (CMS) in November 2019, those supplemental payments — a lifeline for SNFs in multiple states with inadequate Medicaid reimbursement — could be in jeopardy. And the amount at stake could run into the billions.


“It would result in closures,” Eddie Parades, senior vice president of Lewisville, Texas-based StoneGate Senior Living, told Skilled Nursing News. “If this was realized, in the rule, it would be the largest Medicaid change across the nation — I’ve been in this profession 34 years — in my professional career. … This new interpretation could be devastating.”

There are two very specific definitions and mandates in the proposed Medicaid Fiscal Accountability Regulation (MFAR) that could wreak havoc in the SNF world: the funds eligible for intergovernmental transfers (IGTs), and the provider assessments, or taxes on providers that finance part of their state share of Medicaid expenses.

This story, the first in a series about supplemental Medicaid payments, deals with the impact of the changes around IGT funds, which in Indiana and Texas could significantly affect federal Medicaid matches. SNN’s dive into the effects of the changes on provider assessments can be read here.


Restricting Medicaid-eligible funds

About 25 states offer some kind of supplemental payment to nursing facilities, according to a December 2019 policy briefing from the Medicaid and Children’s Health Insurance Program (CHIP) Payment and Access Commission (MACPAC). These funds — also called upper payment limit (UPL) payments — are defined as payments intended to make up the difference between base fee-for-service payments and the amount that Medicare would have paid for the same service.

This area of payments has long been under federal scrutiny, and not just for SNF providers. In 2012 and in 2015, the U.S. Government Accountability Office issued reports zeroing in on the need for transparency and better oversight of such payments to hospitals.

But more recently, the use of these payments for SNFs came under the microscope. At the American Health Care Association’s (AHCA) annual convention and expo in Florida last year, Andrea Maresca, senior vice president at the consulting firm Thorn Run Partners, told providers that CMS was concerned about the evolution of special payment programs to long-term care providers.

Specifically, there were concerns about oversight and the need to establish more parameters for the programs, she explained. One state, Oklahoma, saw several cities scoop up nursing home licenses as part of a bid to secure UPL payments, only to be rejected by CMS. While there were other reasons the agency was concerned about these payments, Maresca told SNN that the move by Oklahoma was one of the factors.

“The way that situation played out is one of the reasons CMS feels like it needs to update its regulations, to have the standing to push back on states,” she told SNN in October 2019.

Providers knew that this rule was coming, in some form or another, Parades told SNN in January. The expectation was that it would be a “fill-in-the-gaps rule,” he said, given the breadth of the supplemental payment program. But some of the definitions and restrictions CMS is calling for go beyond transparency and rise to the level of major changes to the program, according to Parades.

Medicaid was originally designed as a local, state, and federal partnership, with nursing home patients serviced by county hospitals and nursing homes. The federal supplemental payment program for frail, disabled, and older patients was set up so that the local government could use publicly controlled funds, Parades told SNN. These funds would then be used for the Medicaid program via an intergovernmental transfer (IGT).

The IGT would work as follows: The local county would give those publicly controlled funds to the state, and the state would then tap the Federal Medical Assistance Percentage match for Medicaid, he explained.

In a hypothetical example, a town that owns a nursing home can use all publicly controlled funds — such as funds from the local school’s football concession stand, proceeds from police tickets, and so on — for an intergovernmental transfer to a state, which can then draw down matching federal funds and give those funds back to the town.

“It was a local-state-federal partnership,” Parades said. “That was the whole design. So that’s really what the federal supplemental payments do. It is, instead of the state putting up the non-federal share, it’s either the local government or a provider, one of those two.”

But with MFAR, CMS is proposing to change the definition of the funds that would qualify for the transfer. In the proposed rule, state and local funds could be considered as the state’s share for claiming federal financial participation only in three specific cases: if they are appropriated to the state or local Medicaid agency, if they are certified public expenditures — or if they are an IGT derived from state or local taxes.

This last provision is the one that will particularly hammer Medicaid rates in states that use IGTs. In the case of the hypothetical town Parades used, it will only be able to use funds generated from a tax. That means the town will now have to create a new tax to keep its Medicaid rates the same, since the amount of money it can use for the IGT will be decreased down to only tax-generated funds, Parades explained.

“The real question to providers is: Is CMS’s proposed rule intended to cut federal spending, or is the intent to regulate better use of those funds?” he explained. “That’s what we’re struggling with. We thought it was the latter … but it appears as though they’re structuring the language as an administrative measure to reduce federal spending.”

$1 billion in cuts in Indiana

Every single nursing facility in the Hoosier State would be affected by MFAR, according to Indiana Health Care Association (IHCA) president Zach Cattell. And if the change related to IGT-eligible funds is finalized, the financial impact from that alone would be about $1 billion, he told SNN via e-mail.

“There is both a direct impact due to the provisions on supplemental payments and health care related taxes, and an indirect impact as other Medicaid health care programs are negatively impacted and the overall Medicaid budget is altered,” he wrote.

In Indiana, SNFs have seen considerable benefits through the Hoosier State’s supplemental payment program, with nursing facilities receiving $1.02 billion in supplemental payments in fiscal 2018, according to the December 2019 MACPAC data book.

The program in Indiana is open to any SNF “owned or operated by a non-state governmental entity” and that has an agreement to participate in the program, according to that state’s nursing facility payment policies as gathered by MACPAC.

What that looks like, according to Kevin Pahud, a partner in the health care group of consulting firm BKD, is this: For Medicare regulatory and statutory purposes, non-state government entities— often county hospitals, though this isn’t always the case — become the license holder of SNFs.

The legal arrangements by which they do so vary from buying to leasing, but regardless of the mechanism, the non-state government entity takes over the SNF license and becomes eligible for the supplemental payment program — with the facility designated as a non-state government-owned or operated SNF, Pahud said.

What’s important about this arrangement, though, is the fact that the entity taking over the SNF does so completely, he emphasized to SNN. All of the SNF’s revenue — and expenses — are recorded on the books of the non-state government entity. In other words, that entity becomes the owner not just from the standpoint of assets, but from the standpoint of operations. It will be first in line if the SNF is sued, for instance, Pahud noted.

CMS indicated in the rule that it would give specific definitions for several terms used in the supplemental payments program, including the definition of non-state government provider. In MFAR, some of the factors that would be used to determine whether a provider qualifies include:

  • Whether the entity has the immediate authority to make operational decisions
  • Bears legal responsibility for risk of losses from operations and for the payment of taxes on provider revenue and property
  • Has authority on hiring and disposition of revenue

CMS would also look at how the provider is described in its communications with other entities, and how it is is characterized by the state itself when it comes to Medicaid.

IHCA is still trying to determine how this might play out for its nursing facilities, Cattell told SNN.

“We are still analyzing the exact impact related to the non-state government provider definition, which is the controlling definition concerning Indiana’s county operated nursing facilities,” he wrote. “Due to the extreme discretion CMS proposes for itself, there may not be a solid answer until CMS makes a decision on a case-by-case basis given the ‘totality of the circumstances’ as stated in the proposed rule.”

When announcing the rule, CMS made it clear that it was trying to crack down on “questionable transactions to change ownership on paper,” according to a fact sheet about the proposed rule. CMS is proposing to keep facilities that enter such arrangements from qualifying for additional Medicaid payments because of that transfer, the fact sheet indicated.

But that isn’t what’s going on in Indiana, according to Pahud.

“Where CMS and [Verma] have talked about sham paper transactions — those have occurred, we’ve seen them,” he said. “Not in Indiana, but we’ve seen them elsewhere. That’s not what’s occurring here.”

Texas payments in the crosshairs

Because Texas’s program falls under the auspices of the state’s managed Medicaid program, the exact amount in supplements potentially in the crosshairs isn’t as easy to pin down as it is in Indiana. But because the full health care continuum would be affected, the estimated supplemental payment loss — inclusive of state and federal dollars — could be as high as $8 billion to $9 billion, Parades said.

This is because of a matching system under which the government provides 60% of the share of Medicaid funds and the Lone Star State 40%. For Texas to receive $5 billion in matching federal funds, it will have to generate $4 billion. Right now, local government entities in Texas generate and raise $4 billion, which is then converted to state funds through the IGT process. Those state funds, in turn, pull down $5 billion in matching federal funds.

But if the rules related to the funds eligible for IGT go through, the state of Texas will have to generate that $4 billion in its budget in order to continue drawing down $5 billion from the federal government, Parades told SNN.

“It’s impossible for the state budget to absorb,” he said.

While the hospital districts and other non-state government entities in Texas do receive and collect tax revenue, it’s not clear whether they generate enough to support Texas’s IGT program as it stands today, Kevin Warren, the president and CEO of the Texas Health Care Association (THCA), told SNN.

And when it comes to how CMS is looking at ownership, the effects are also murky.

“It’s still not clear, within the rule, how CMS is going to determine what that relationship is,” Warren said. “It’s a traditional management relationship with delegating operational responsibility. However, the license holders are still ultimately responsible for the facility. So when they talk about, ‘They will look at these in totality,’ what exactly does that mean?”

For SNFs in Texas, MFAR would also strike at the state’s Quality Incentive Payment Program (QIPP), which began life as a UPL program and now currently falls under a Section 1115 waiver for the Texas Medicaid program.

It has gone through several iterations, but all of them involved SNFs earning extra funds by showing improvement on key quality metrics, such as reducing pressure ulcers, the use of physical restraints, and the incidence of urinary tract infections, to name just a few.

Almost 800 skilled nursing facilities in the state of Texas participate in the program, Warren noted — and because of the program’s focus on quality, care at SNFs in the state has improved, he emphasized.

“From a quality perspective, when you look at the performance of those QIPP-participating facilities on the measures that the program uses, overall, they’re outperforming state and national averages on those measures,” Warren said. “So it’s working. The carrot is working. And we don’t want to see that diminish.”

Unknown effects

It’s not unreasonable for CMS to want to make the financing mechanisms of supplemental payments more transparent, both Parades and Warren told SNN. But the effects of the changes proposed in MFAR could go far beyond shining in some sunlight, according to Parades.

“These federal supplemental payment programs have been designed over 50 years; they’re deeply interwoven into the health care fabric of the entire Medicaid system, from Alaska to Florida,” he said. “If this thread is pulled, it would be the single largest devastating Medicaid step since the inception, and really kind of unravel health care.”

For SNFs in Texas and Indiana, the numbers alone are telling; according to the Kaiser Family Foundation, Texas had 1,227 nursing facilities as of calendar year 2017. Indiana had 552.

But in its proposed rule, CMS was blunt in its prediction of MFAR’s financial effects.

“The fiscal impact on the Medicaid program from the implementation of the policies in the proposed rule is unknown,” the rule states.

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