‘Gobbled Up’: CMS Medicare Increase for Nursing Homes Fails to Price in Dire Economic Environment, Costly Regulation

The federal government’s proposed Medicare payment increase for 2025 is not sitting well with the nursing home sector, with financial experts and operators raising concerns that the bump fails to compensate for inflation-induced operating costs – and a staffing proposal anticipated to cost in the billions each year.

For some experts, the Centers for Medicare & Medicaid Services (CMS) has failed to fully price in the current economic pressures confronting the sector and the underlying cost concerns, especially those stemming from labor.

“If inflation was in check, and labor shortages weren’t a major issue, then I think the industry’s response would be relatively pleased,” said Steve Kennedy, executive managing director for VIUM Capital. “But that’s just not the environment that we’re in.”

Moreover, cost concerns surrounding the minimum staffing proposal, or other adjustments in the proposed rule, including expanded penalties and changes to value-based purchasing, come across as punitive, the experts said.

“It is interesting when you look at what’s not in the rule,” said Fred Bentley, managing director for ATI Advisory’s post-acute and long-term care and senior living practice, referring to lack of mention of funding for the minimum staffing proposal, or even further guidance on it.

And while labor costs for the sector are starting to come down to moderate levels – albeit with mixed results so far – the SNF Prospective Payment System’s (PPS) increase will still be “gobbled up” by labor cost inflation, said Bentley.

“My gut says any increase will be helpful, but we are still, in the long-term care industry, in an inflationary period. And there are workforce shortages, and will be for the foreseeable future. That all portends significant labor cost inflation,” said Bentley.

Federal officials have said the staffing rule would cost the sector $4 billion per year, but an independent analysis by CliftonLarsonAllen (CLA) anticipates an even higher cost of $6.8 billion per year.

The proposed SNF rule discusses staffing in general and composite measures, but is “very silent” on the staffing minimums, said Aaron Kirkman, senior analyst in ATI’s value-based care design and delivery practice.

CMS estimates that the aggregate impact of the payment policies in the latest rule would result in a net increase of 4.1% in Medicare Part A payments to SNFs in fiscal year 2025.

This estimate is based on the proposed SNF market basket of 2.8% plus a 1.7% market basket forecast error adjustment, and negative 0.4% productivity adjustment. These figures do not incorporate the SNF VBP reductions for certain SNFs subject to the net reduction in payments under the SNF VBP. Those adjustments are estimated to total $196.5 million in 2025.

A lender’s perspective

Owners, operators, and lenders in the industry generally feel the increase is inadequate given different financial pressures, Kennedy said. From a lender’s perspective, it’s not like interest rates have gone down, he added.

And ATI’s Kirkman said that even if interest rates did decrease, this still might not be enough to balance labor costs.

Currently, the federal funds rate stands at 5.25% to 5.50%, a number not seen since 2001. The Federal Reserve set the rate in late July 2023 after putting in place a series of rate increases to fight inflation. However, at its most recent meeting in March, the Fed decided to leave interest rates unchanged and is now proposing cuts going forward in response to the dire economic environment.

As lenders such as VIUM await lower interest rates, they acknowledge that operators are facing varying forms of expense pressures that impact their ability to cover costs, let alone generate some sort of return on their investment.

The high interest rates coupled with high inflation has made it very challenging right now for operators to be able to reinvest back into care quality.

“You never want to come across as … just saying no to everything, or being disgruntled about everything,” said Kennedy, who stressed the need for a more friendly lending environment for the nursing home sector at large. “We also have to be able to provide adequate capital for the majority of operators to run their business and provide care.”

Labor costs alone are the biggest expense line item in an income statement for an operator.

“We deal in financing the sector that is located in commercial real estate, but there’s really not commercial real estate. It’s an operating business, and labor is going to be your number one component,” said Kennedy. “You couple that with if you have a shortage of labor … [and] that’s going to bid up compensation, which just drives further labor inflation.”

And the staffing proposal adds fuel to this fire, he noted.

Nearly 94% of facilities are not able to comply with at least one of the staffing proposal’s stipulations, and 35% are failing all three asks in the proposal, according to the CLA analysis, which also points to a need for an appropriately timed – and funded – blueprint to improve the workforce.

“The industry is not against change. I just think they want that change to be meaningful and pointed in the right direction,” said Kennedy. In the end it’s more stick than carrot, he said, if one takes into account other aspects of the payment rule like expanding civil monetary penalties.

“We want to have the ability to level penalties, no doubt, because we do not need bad actors in this sector,” said Kennedy. “Those bad actors should be penalized and pushed out. But we want to make sure that, especially for those good operators, which is the majority of operators, that there’s equity to ramifications on their already limited revenue streams.”

Impact on access

LeadingAge President and CEO Katie Smith Sloan said in a statement that operators are already struggling to stay above water with such costs, and that the bottom line is, “without staff, there is no care, and the national caregiver crisis is happening in real time.”

The increase won’t stem the tide when it comes to meeting the federal minimum staffing rule, added Mark Parkinson, president and CEO of fellow advocacy group the American Health Care Association (AHCA). The modest Medicare increase is “woefully inadequate” considering the cost of the staffing mandate, he said.

Aside from the mandate, Kennedy said that operators must also consider the Medicare increase with other aspects of the SNF PPS, notably the CMP expansion and how that might have ramifications on already limited revenue streams.

“It just seems like it’s weighted towards being more penal than really trying to drive improvement in care,” Kennedy said of other factors in the SNF PPS. “Understanding how those expanded penalties and value-based purchasing potential ramifications are going to be implemented will be important for providers.”

Immediate support is needed from policymakers in Congress and the Biden administration, Smith Sloan said, to expand and enhance the nursing home workforce.

“Every month they wait to confront the growing difficulties in access to care will mean hardships for more older adults and more American families,” she said.

In 2024, CMS approved a net increase of 4.0%, or approximately $1.4 billion, in Medicare Part A payments to SNFs.