Proposed Medicare Funding Cuts ‘Exponentially Shocking’ to SNF Operators

Operators are feeling pressure from all sides as the proposed payment rule for the nursing home industry dropped on Monday, which unveiled a 4.6% cut to the Patient-Driven Payment Model (PDPM) and 3.9% increase to Medicare payments for the sector.

The news comes at a time when SNFs are facing a historic workforce shortage, rising costs of care, inflation and added federal pressure from the Biden administration, with its reforms proposed in February.

“It’s shocking on its face, and then in the overall context of everything else they’re talking about, it’s exponentially shocking,” said Steve LaForte, director of corporate affairs and general counsel for Cascadia Healthcare.

Idaho-based Cascadia operates 34 skilled nursing facilities across six states.

The federal agency’s initiatives and rhetoric surrounding the nursing home industry are inconsistent, LaForte said, with leadership saying reimbursement must match reforms while simultaneously calling for a cut to PDPM.

“It’s sort of mind boggling. You have [Centers for Medicare & Medicaid Services (CMS) Administrator Chiquita Brooks-LaSure] who said in the past week, regarding staffing minimums, of reimbursement that is going to have to mirror that, but they’re not front ending any of those discussions,” LaForte said.

The PDPM cut amounts to a total loss of $320 million in Medicare funding, according to the agency.

CMS – in its SNF Prospective Payment System proposed rule – recommended a 3.9%, or $1.4 billion, payment increase to the industry. The government agency arrived at that number by raising the market basket rate for skilled nursing facilities by 2.8%, a 1.5 percentage point forecast error adjustment and a 0.4-percentage-point multifactor productivity adjustment.

“From what I understand, the giveth and taketh away is equaling a taketh away,” said Allison Salopeck, president and CEO at the Jennings Center for Older Adults in Ohio. “While we appreciate the market basket increase, the adjustment overall, both combined, sounds like it will mean that we’ll all have reductions on the Medicare side … it’s really disheartening.”

Jennings is a not-for-profit operator with four campuses in northeast Ohio.

The proposed rule is “obviously a negative” for real estate investment trusts (REITs) in the sector as well, Stifel analysts said in a Monday note.

Earnings declines as a result of the proposed rule will not be smooth, but security deposits and guarantees may delay any impacts seen on financial statements, according to Stifel.

“The next few months will be a race to see if census can rebuild fast enough to offset higher expenses and help operators pay current rents,” Stifel analysts wrote.

Fellow analyst firm Jefferies added the proposed rule is “meaningfully negative” for the sector, if finalized.

“The PDPM recalibration came as a surprise since nursing home operations and financial performance have been clouded by COVID. Isolating the impact of PDPM on SNF spend is difficult and pointing to that reimbursement change as the sole driver of spending growth when COVID was impacting the space is tricky,” analysts wrote.

‘Flood CMS’ with feedback

Trade groups and operators alike have a primary focus in light of the proposed rule – bombard the agency with comments.

“What we’re going to have to do as an industry is flood CMS with comments during the next 60 days,” LaForte said. “There’s got to be sort of en masse pushback from the facility level, not just the corporate level coming up with one standard comment.”

The 3.9% bump was positive, but there has to be a “huge showing” from facility administrators while CMS is deliberating its final rule, LaForte said.

Cynthia Morton, executive vice president of the National Association for the Support of Long Term Care (NASL), said the market basket increase was “healthy” and “welcome,” and goes a long way to offset the PDPM cut.

“If you can take that 3.9% increase and offset it with the 4.6% decrease, you get a net of -0.7%. They don’t say the -0.7%, which I find interesting. That makes me hesitant that there’s something else there that we just don’t know yet,” Morton said.

What is more clear – CMS has changed its position on further delaying the cut to PDPM, Morton said, taking a harder stance on getting the model back to budget neutral this year.

The agency had found PDPM increased payments to nursing homes by 5% in 2020, for a total gain of $1.7 billion, although it’s unclear how much of that increase was tied to more acute care during pandemic surges.

“Last year, they spent a lot of time on the proposed rule, talking about delaying it, phasing it in, they wanted comments … they gave examples of one or the other or both,” said Morton. “This year, they’re saying, [the industry] already got a year delay, effectively, so [CMS] pretty much proposed to do it all in one year.”

CMS in July 2021 boosted provider pay by 1.2% and delayed an adjustment to PDPM pay rate changes for at least one year.

Morton summed up this change as an “abrupt departure” from last year’s decision to delay changes to PDPM.

Larger implications

As a fairly large nursing home chain, Cascadia has been able to maintain a solid foundation with decent Medicaid rates to offset Medicare cuts, LaForte said, but smaller operators may not be so lucky.

Members of nonprofit aging services organization LeadingAge have had to cut service lines or close their doors altogether as it is, according to Janine Finck-Boyle, LeadingAge’s vice president of health policy.

“Facilities are going into a year where they’re going to get less than they receive now, but many, many, many of their costs have gone up for food, for therapy, for the ancillary services, for their nursing staff, their custodial staff,” added Morton. “All prices have gone up in this country. So that’s putting them in a less desirable position and more challenging position to provide that quality care – regardless if the infection numbers have gone up or down, those challenges still exist.”

Finck-Boyle said some of its members in the Southeast part of the country have been consistently battling 10%-15% higher food prices throughout the pandemic.

CMS is more or less saying this doesn’t matter, Morton noted, and that their calculations point to less federal dollars provided for care.

Not only will the proposed rule shift ownership and company makeup, LaForte expects the difference in proposed rule increases will shift patient population further to value-based care models.

Medicare Advantage (MA) plan payments are expected to get an 8.5% revenue increase for 2023 from CMS, a stark contrast to 3.9% for Medicare Part A payments to SNFs or a 2.7% increase proposed for the hospice sector.

“I fully expect that the trend of pushing more and more into Medicare Advantage (MA) will continue and I think the number of new enrollees will continue to drive that figure,” LaForte said. “I hope that [this push] continues to inspire operators to look toward doing [Institutional Special Needs Plans (I-SNPs)]. Operators who are willing to take on that risk are going to be the operators who create sustainability for themselves.”