As so many in the nursing home space focus on Medicaid reimbursement, others are taking a closer look at improving rate setting methodology and how it can be optimized for facilities.
Medicaid rates are in part influenced by fair rental value, which is determined after experienced housing experts perform an in-depth market valuation on the rental value of a property.
According to Pete Van Runkle, executive director at the Ohio Health Care Association (OHCA), it’s a way for nursing home operators to be rewarded for upkeep to a building or newer builds with a higher Medicaid reimbursement rate.
But the use of fair rental value to influence Medicaid rates varies in how it’s applied across states, if it’s even used at all.
The fair rental value system in some states calculates building value, or a rental rate, based on an appraisal process or by proxy, Van Runkle told Skilled Nursing News. The state’s Medicaid reimbursement system consists of multiple cost categories including direct care, ancillary support, taxes, and capital, or the cost of the building, equipment, etc.
As of 2024, Ohio doesn’t have a fair rental value system baked into its capital portion of Medicaid rate setting methodology. Instead, there’s a pricing system where every facility, a peer group, gets the same amount for this part of the Medicaid rate, broken down by geographic area.
The capital component of Ohio’s Medicaid rate currently ranges from $10 to $11 per day, said Chris Chirumbolo, CEO of Ohio-based Carespring Healthcare Management.
The Ohio capital system hasn’t itself been rebased in a number of years, Van Runkle said. The legislature in Ohio backed off from rebasing capital because of price gouging and high rent in 2021, effectively stagnating the capital rate.
Legislators were also worried that rebasing capital would spur those in the industry – like real estate investment trusts (REITS) or private investors – to buy facilities in the state and in turn charge higher rent to their tenants, or providers.
“It hasn’t been rebased. They put in language that said it will never again be rebased,” said Van Runkle. “That’s why we started pushing forward the notion of fair rental value. It’s not that there’s a flat price that everybody gets, but it’s going to be based on an appraisal, and you can’t game that.”
Missed opportunities
The Ohio Department of Medicaid last year was directed to create a fair rental value system and bring it to legislators for review by October, but that time came and went, he said. The OHCA, along with other long-term care associations, aims to push this legislation forward on their own this year.
If the capital system stays as is, incentive to innovate will remain low.
“It doesn’t matter if you built your building yesterday, or it’s a 50-year-old building that’s completely rundown and has not been renovated, or maybe it’s only been very minimally renovated,” said Van Runkle. “You get the same number and that to us is not rational. It doesn’t encourage people to keep up their facilities and it just doesn’t reflect the market.”
In 2022, Carespring constructed and opened a new 99-bed facility in the state, featuring all private rooms, Chirumbolo said. The operator used its own general contractors and were able to build it at cost and save money.
But, average capital costs remained around $40 per day despite the cost-saving measures, Chirumbolo said, assuming full occupancy.
“From a strictly Medicaid perspective, it is clear that this is not sustainable. The losses are offset by treating short-term skilled patients,” said Chirumbolo.
Another problem, Van Runkle said, is that the peer groups for Ohio’s capital system haven’t been updated since 2014.
Some operators are being grossly overpaid, others are being underpaid and it doesn’t matter what a facility might do – or not do – to infrastructure. A building constructed in the seventies, completely paid off and without any sorts of modernizations could still be in the same peer group as a newer building, renovated with private rooms, a large therapy area and gym, said Van Runkle.
“That’s the motivation that we’re looking at,” Van Runkle noted.
Ohio could, Chirumbolo said, address any concerns about inflated rents using a third-party appraiser, similar to an approach used in Kentucky. An appraiser assesses the physical plant of the building and reviews any major capital projects every three years – this helps determine the capital rate in Kentucky.
However, Kentucky’s fair rental appraisal system still doesn’t cover capital expenses of a large-scale remodeling project or building replacement, he said. The capitalization rate in Kentucky increases to some extent, but not enough.
“The lack of significant remodeling projects or new facility construction is directly related to the absence of adequate capital reimbursement,” said Chirumbolo. “Why would an owner or operator of a 50-year-old nursing home facility, predominantly serving Medicaid residents and with little or no debt, build a new facility when there is no payment structure in place to service the new debt?”
Operators have had to shift their payer mix to make up for inadequate capital reimbursement. New facilities are usually built to accommodate short-stay residents with higher Medicare or managed care reimbursements, he said, and accept only a few Medicaid residents.
By appraisal or by proxy
Another way states calculate fair rental value is by proxy, Van Runkle said. It’s not as accurate as the appraisal process, meaning operators could be leaving money on the table. A third party for the state comes in and looks at information on construction costs per square foot for skilled nursing or assisted living properties at a high level, and that’s broken down by geographic area.
“There’s a lot of complication to doing a proxy system. What you’re trying to do is approximate what an appraisal would yield – you have to put in the factors and give them some kind of numerical value,” said Van Runkle.
The OHCA would much rather see the appraisal system for more accurate reimbursement additions rather than the proxy system, but it’s been something the association has been trying to change for years.
“It rewards providers who have put capital expenditures into their buildings, or have built them recently,” said Van Runkle. “The appraiser is going to look at how old the building is, they’re going to look at what money has been put into it. You’re going to get credit for it in some form or fashion in that appraisal.”
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