In adjusting to new case-mix systems under the Patient Driven Payment Model (PDPM), the changes to reimbursement rates might be more widespread and large-scale than anticipated, posing financing threats to the nursing home sector because lenders are basing loans on rate projections that are expected to be scaled back.
The goal of budget neutrality – in which reimbursements should cancel out costs associated with care – especially when it comes to Medicaid rates, may come back to bite providers and investors in the nursing home space who are currently securing deals based on higher reimbursement projections.
That’s according to Marc Zimmet, CEO of Zimmet Healthcare Services Group. While budget adjustment factors are not a new phenomenon, what will be new is the scale to which states may be clawing back money after adjusting to new case-mix systems under PDPM.
This is the reality when budget neutrality is intended, or if aggregate increases drive rates beyond additional funding for the sector.
What’s more, expectations of Medicaid rate increases are driving transaction volume, with banks underwriting loans based on a formula for state Medicaid reimbursement under PDPM. However, such projections aren’t expected to stay in place, Zimmet said, as states aim for budget neutrality.
Learning from Medicare adjustment
When CMS transitioned to PDPM, they looked at scores from assessments that were done when there was no PDPM – and providers weren’t “optimizing,” he said. Now, after the switch, providers are indeed trying to optimize reimbursement. Efforts to better capture depression is a good example, with assessment scores coming in much higher than Medicare had anticipated.
This resulted in 5% in overspending for the first year of PDPM, or $1.7 billion more than under RUGs, short for Resource Utilization Groups.
The Centers for Medicare & Medicaid Services (CMS) had intended to spend the same amount of Medicare money on nursing home care through PDPM as it had under the system it replaced.
“[CMS] comes in and says, we’re doing a recalibration, we’re taking the money back because it was supposed to be budget neutral. That happens all the time with Medicaid. When Medicaid does a transition, they model it based on old assessments,” said Zimmet.
What changes with the transition is provider behavior, he continued, as they start capturing everything that drives reimbursement.
“So then the [initial] rates don’t come in at $200, they come in at $250. The nursing homes are all psyched. [They think] they ‘re getting a windfall,” Zimmet said, using hypothetical numbers. But, just like what happens with Medicare rate adjustments, states notice that nursing homes are spending above budget and, because the transition is supposed to be budget neutral, they now “claw back the money,” said Zimmet, explaining the process by which the reductions to reimbursements are made on the state level.
The difference now, he said, is that this claw back is happening in dozens of states.
He calls it the “great transition,” since there are a large number of states changing their payment model. History tells us that when there’s a change of payment model, provider behavior changes, he said.
On paper, it’s going to look like facilities are getting big Medicaid rate increases, but history also tells us that states don’t come up with all that money. A budget adjustment factor, or recalibration, will pare back any reimbursement beyond what was accounted for in the state budget.
In the end, Zimmet expects the same operators that were good at optimizing under RUGS will continue to be good at optimizing under PDPM moving forward – net results will be the same.
Implications for dealmaking
As industry leaders keep track of Medicaid rate changes and budget adjustment proceeds at the state level, Zimmet said this will affect dealmaking as well – and already has.
He’s getting calls from banks who do underwriting for nursing home loans. They’re buying facilities and seeing that rates have gone up, and are now basing loans on these increased rate projections.
“The state is not all of a sudden going to come up with another $100 million dollars. There’s going to be a budget adjustment,” he said. “It’s a bubble. These loans are going to be made, are being made, and the rates are not going to be what they think they’re going to be on paper, they will be clawed back; you’re going to have [something] like the housing crisis.”
This scenario is unfolding in multiple states, he said, as banks are lending based on reimbursements that aren’t going to stay in place – they’re going to get clawed back.
Some states have already started addressing the change between RUGS and PDPM in terms of Medicaid rates, Zimmet said, pointing to Pennsylvania and Colorado in particular.
For Colorado’s Medicaid nursing home rate, statewide average rates increased 10% starting in July, and another increase of 3% is anticipated for July 2024 and then no less than 1.5% in July 2025, according to Doug Farmer, president and CEO of the Colorado Health Care Association.
“Between now and July 1, 2025, there will be a process to determine the structure of our [Medicaid] rates moving forward. That rate methodology will be taking into account the interest of stabilizing the profession, ensuring access and working to address the increases in behavioral health needs in long term care settings,” Farmer said in an email to Skilled Nursing News.
Colorado moved away from RUGS and began using PDPM on July 1 2023, he said.
“For this first year, the state enacted a ‘hold harmless’ in rate setting, which ensured that no provider saw a rate decrease as a result of the change,” said Farmer. “That ‘hold harmless’ was used because providers did not have time to begin coding under the new PDPM-based requirement prior to the shift in methodology.”
Pennsylvania won a significant 17.5% increase in its Medicaid rate in 2022 after no increases for a decade. This year, the state approved a $16 million increase in Medicaid rates, about $10 million short of what associations had advocated for.
State lawmakers still have to agree on a budget for fiscal 2024.
Looking ahead, there’s much volatility in the state when it comes to Medicaid rates despite the state not switching to PDPM as of yet. Volatility has been caused by Covid costs and the fact that overall costs have not been included at the same time for providers.
Prior to last year, the amount the state took off the top for the budget adjustment factor was more than 20%. With the reduction in April 2023, after the 17.5% increase for the staffing regulations in 2022, the budget adjustment factor dropped to about 10%. If July 2023 rebasing would have played out as proposed, the reduction would have been at about 17%, or more than $500 million annually taken off the table from supporting Medicaid care.
Legislation was passed in September to diminish some of the rebasing volatility, freezing the cost database used to to establish nursing home rates in the state, but the issue will need to be looked at again next summer.