MedPAC Calls For 5% in Skilled Nursing Cuts

For an industry where slim profit margins are a widely discussed concern, a federal advisory board found 2020’s robust 25% margin in Medicare payments justification for a suggested cut to base payment rates in fiscal year 2023.

The Medicare Payment Advisory Commission (MedPAC) said “rebounded” industry transactions informed its recommended 5% cut as well, thanks to stable government funding throughout the pandemic.

The cut would bring the Medicare payment structure closer to a goal of budget neutrality.


MedPAC’s suggestion for Congress is consistent with commentary from the Centers for Medicare & Medicaid Services (CMS) – the agency faced backlash when its Patient-Driven Payment Model (PDPM) increased payments to nursing homes by 5%, or $1.7 billion.

MedPAC is an independent congressional agency that advises Congress on Medicare reimbursement policies each year.

MedPAC analysis considered four factors before making its recommendation: access to care, quality of care, access to capital and medicare payments as they relate to skilled nursing facility (SNF) costs.


There are three-plus SNFs available to 88% of Medicare beneficiaries, MedPAC reported; roughly 15,000 facilities exist across the country. Quality was difficult to assess during the pandemic, MedPAC said, since risk adjustment models didn’t factor in COVID-19 diagnosis information.

“Medicare makes up a small share of most facilities’ volume, but a larger share of revenue,” said Carol Carter, MedPAC policy analyst, adding that the 25% marginal profit provided an incentive to treat Medicare beneficiaries.

Carter presented the SNF data during Friday’s webinar.

Capital availability is expected to drive deals in 2022, if government funding continues to be stable, MedPAC said in its report. While there were fewer mergers and acquisitions (M&As) in 2020 compared to 2019, transactions picked back up this year – margins increased from 0.6% in 2019 to 3% in 2020, while HUD financing decreased 10%.

MedPAC analysis of Medicare payments and SNF costs found average costs per day increased 2.1%, while staffing decreased 9.6% between February and December of 2020. There were less costs associated with therapy as a result of PDPM.

“The cost increase would have been smaller, but weekly wages increased during the same period, capturing the higher use of more costly contract labor over time and pandemic premium pay,” noted Carter.

Medicare fee for service (FFS) payments per day were 27% higher than Medicare Advantage (MA) payments, MedPAC said.

Commission members agreed with the chairman on the suggested cut, but voiced concern that it would affect rural communities more harshly than other parts of the country.

“I’m not sure that we’re looking at this with a lens that would protect the underserved,” said Lynn Barr, MedPAC commission member and founder of Caravan Health.

“I don’t understand why we can’t make different payment recommendations for underserved populations. We have different payments for rural physicians and hospitals, but we don’t have different payments for rural post-acute care,” said Barr. “The quality in rural post-acute care is terrible – ask CMS, they know better than anyone. I don’t know what their margins are, I think they’re very low. They’re low volume, and obviously low quality.”

MedPAC Chairman Michael Chernew said data suggests Medicare payment margins in rural facilities are “not substantially worse” than what the organization is reporting overall.

The average Medicare margin was 16.5%, bumped up slightly higher to 19.2% if the organization factored in Provider Relief Funds (PRF). MedPAC expects the SNF Medicare margin to decline 14% in 2022, citing higher costs outpacing payment rate updates between this year and next year.

“We cannot set our payment updates such that the most vulnerable places are okay, but will involve overpaying a vast swath of providers,” said Chernew. “Equity issues, access issues … there are really important providers that we have to try and support but we don’t want to, for lack of a better word, create 25% margins for everybody else.”

Historically, MedPAC has asked for SNF payment freezes on a consistent basis, according to a note from investment banking firm Stifel. MedPAC considers SNF Medicare margins too high compared to other payers, the firm said.

Congress ended up choosing a 1.2% base payment increase for FY 2022.

“Congress has not acted on it. However, we see moderate risk of proposed FY23 cuts materializing,” Stifel analysts wrote. “If adopted, the reimbursement change would have significant impact on the financial health of the average SNF provider.”

Skilled nursing operators and real estate investment trusts (REIT) with large skilled nursing portfolios would feel financial stress if Congress takes up the recommendation, given thin margins in the industry and continuing pandemic disruptions, according to Stifel analysts.

In a subsequent MedPAC presentation, commission members suggested a 5% cut to inpatient rehabilitation facilities (IRFs) as well, citing $8 billion paid to 1,113 IRFs in 2020.

IRFs were viewed as a significant competitor to SNFs last year as hospitals sought to place higher acuity COVID-19 cases in this setting – along with long-term acute-care hospitals (LTACs) during the height of the pandemic. The trend was highlighted in an analysis conducted by health care consulting firm ATI Advisory in May.

Interestingly, MedPAC suggested Congress increase the LTAC Medicare base payment rate by 2%.

Members reasoned SNFs maintained financial performance thanks to Provider Relief Funds and Paycheck Protection Program (PPP) loans, even though IRF supply dropped 3.4% and bed count decreased 1.8%.

Some IRFs closed in 2020 due to “historically poor financial performance,” Stifel said in another analyst note. IRFs received a 1.9% payment update for FY 2022, according to MedPAC data.

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