‘Big Trouble’: Medicare Advantage Rates Strain SNF Margins, Deepen Sector’s Pain

As Medicare Advantage continues to penetrate the nursing home market, leaders say that MA plans are depressing margins amid higher costs to run operations. This might lead some operators to contemplate closing, while others will be wiser to hire staff in designated roles to help them negotiate better rates – and exclusions – for managed care contracts.

Data confirms that managed care rates are bringing down margins in the space, with MA plans paying one-quarter to one-third less to SNFs than traditional Fee-for-Service (FFS) Medicare, according to statistics put out by the National Investment Center for Seniors Housing & Care (NIC) and published in a Forbes piece by Howard Gleckman, also a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, where he edits the fiscal policy blog TaxVox.

Traditional Medicare amounts to nearly $600 per resident day in revenue, while managed Medicare is paying out only $468 per day, NIC data shows.


“It takes your breath away a bit, and it has consistently happened … it definitely hits the bottom line,” said Susie Mix, CEO of California-based Mix Solutions, Managed Care & Contract Consulting.

Zimmet Healthcare Services Group collected its own data on the FFS Medicare attrition rate – or MA payment shortfall relative to FFS – finding a staggering 40% shortfall, while per admission revenue trails FFS by up to 70%.

The Centers for Medicare & Medicaid Services (CMS) surprisingly doesn’t collect data on Medicare Advantage, according to Marc Zimmet, CEO of Zimmet. The data analytics group collected claims data for at least 1,500 admissions between July 1, 2021 and June 30, 2022 for this particular study.


“Medicare Advantage is cannibalizing Medicare Fee-for-Service,” said Zimmet. “I think it’s really important to say that Medicare is what subsidizes Medicaid, and as facilities have less and less [FFS] and more and more Medicare Advantage, that puts more pressure on the Medicaid program.”

As revenue makeup continues to shift, states must get involved with some provider protections, Zimmet added.

These protections would help alleviate the rising cost of care and operating expenses from such initiatives as wage increases and safety protocols that have been in place since the pandemic, among other factors.

Significant cost increases include salary bumps of sometimes $15 to $20 more per hour and promised increases based on rising cost of living, said Mix. This goes for nurses, as well as physical and occupational therapists.

“A lot of the isolation precautions, those types of things cost [operators] a lot of money. Costs are going up, and reimbursement not so much,” added Mix.

Shifting payer mix

MA is expected to cover 52.9% of all Medicare beneficiaries by 2031, ATI Advisory Managing Director Fred Bentley said last October. Some states have already seen more than 50% penetration of MA plans, Mix said.

“It’s taken over. It’s the majority now in a lot of the states that I work in, and I see the drain consistently on the margins,” said Mix.

Not only are operators dealing with consistently lower reimbursement, but MA beneficiaries need to be managed on a daily basis – meaning their stay is constantly questioned and nursing home staff must justify the need to keep residents longer. This detracts from bedside care, as outlined in previous stories on MA.

Given that less than 10% of nursing home residents make up private pay, the increase in the share of residents on MA plans is going to be of concern for nursing homes’ bottom line, Gleckman said.

“This is going to become an increasingly important part of the revenue story for skilled nursing, and they’re going to have to figure out how to manage it,” said Gleckman. “The nursing home is such a weird business because you are relying almost entirely on government payers.”

Moreover, with fewer and fewer people wanting to complete their post-acute care rehabilitation in a nursing home – people want to have it done at home – the trend will only build the influence of MA plans, Gleckman said.

“That’s going to increase the pressure on skilled nursing facilities to contract with MA plans, which will generate more customers, but the trade off is they’re going to have to accept lower payments,” said Gleckman.

Also, MA plans are pushing more business with home health agencies compared to nursing homes, driving volume away from the space, he said. It’s a trend CMS has taken note of in recent years, with the agency proposing action to focus on choice among providers when it comes to post-acute and long-term care placement.

“Again, that’s going to drive volume away from the nursing homes to the home health agencies, and increase the financial pressure on the facilities,” said Gleckman. “And when the Medicaid payments are so much lower – they’re only $270 a day – if you can’t fill your SNF beds you’re in big trouble,” Gleckman said.

A drag on margins

Stephen Taylor, principal within the health care group at CliftonLarsonAllen (CLA), has not seen increased costs shift to the payer either, when considering exposure to government payers and the increase in MA plans among SNFs. This has resulted in increased pressure on net operating margins and debt service.

A previous CLA report found that more than half of skilled nursing facilities have negative operating margins.

The Medicare Payment Advisory Commission (MedPAC) reasoned that SNFs’ willingness to accept lower MA rates justifies reducing FFS payment, Zimmet said. And the commission has suggested this for years.

“The problem with their logic is that lowering FFS rates would further destabilize

the SNF economic model that CMS created, even as MA plans increasingly deny SNF covered benefits,” Zimmet said in the study.

Something to consider is the ability to shift money to affiliates, Gleckman said, with laundry service, nursing services, physical therapy affiliates, and pharmacy among them. Operators can make money through ancillary services.

“What that does is it drives down the reported margins of the facility, but the operator is still making a bunch of money,” said Gleckman. “You’ve got to be really careful about those margins, particularly for the for-profits.”

Still, there’s “no doubt” there are a substantial number of facilities operating at negative margins without or without the aid of their ancillary businesses, especially within the not-for-profit SNF space, he said.

Lower payments for greater volume

There’s “no question” that SNFs must make this tradeoff of accepting more MA beneficiaries with lower reimbursements as operators continue on the long road toward occupancy recovery, said Gleckman.

But, this tradeoff will be especially challenging considering the ongoing staffing shortage, and many operators might be mulling closures.

“Do you actually want that additional volume if your per bed payments are lower than traditional Medicare? Are you better off closing a wing than accepting managed care patients? It’s a question that I suspect a lot of operators are asking themselves,” said Gleckman.

Then there’s the upcoming minimum staffing rule from CMS to consider, along with President Joe Biden’s executive order last month calling for Medicare payments to be tied to staff retention.

It’s encouraging to see a 3.7% increase in Medicare as part of the SNF final rule, he said, as an additional bit of revenue from a significant payer, but until Medicaid is addressed SNF providers are going to have a “terrible financial time” with the long-term care side of the business.

Some states have taken steps to permanently rebase Medicaid rates, but it remains to be seen if these changes will keep up with increased costs of care or make up for years of stagnant Medicaid reimbursement.

“States right now are really flush. States have a lot of excess revenue, their budgets are in surplus, they’re cutting taxes and they still got all that money from the Feds. That makes their revenues look really good,” said Gleckman.

If the economy falls into a recession, however, those state revenues are going to get squeezed again like they were a few years ago. That translates to a small window of opportunity for SNF operators, he said. If states don’t “walk through that window” and increase Medicaid payments, operators shouldn’t be holding their breath for more money in future years, Gleckman noted.

Fighting for a favorable MA contract

Mix believes SNF operators need the right negotiator when drawing up managed care contracts to help with an increasingly troubling bottom line.

A lot of health plans come out with the lowest possible rates, and facilities need someone with the knowledge of market rates to negotiate on their behalf.

“Or if you have the time, and you know that information to go head to head with these health plans, I’ve seen some contracts out there that are bearable,” said Mix. “It’s just taking the time to get that contract negotiated the right way, the first time around. I do think it makes a big difference.”

Besides rates, operators want to look at exclusions in their managed care contract too – such exclusions could include paying for wound vacuum devices or low air loss mattresses used in wound care recovery.

Negotiations could also involve definitions of care levels, which then dictates how much reimbursement a facility gets for certain services. It really comes down to any way to make the contract even a little more favorable to the provider, Mix said.

“If you negotiate them as exclusions in your contract, that won’t take from your bottom line anymore; you will get reimbursed for those things,” Mix said of exclusions. “I can’t say that every contract is unfavorable with managed care, it just requires a little bit of fight to get these exclusions added.”

After a contract is finalized, the fight isn’t over, Mix said. Providers need to make sure they’re using the contract to its full potential.

“If we forget to bill for all those exclusions we worked so hard to get, we’re back at square one,” said Mix.

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