As Congress moves forward with a Republican budget resolution, Medicaid may be on the chopping block, with state governments expected to bear the cost. Nursing home leaders are warning that the cuts, if enacted, could hit the sector hard.

On Tuesday night, the House narrowly passed a budget resolution, 217-215, losing only one Republican vote. The resolution urges the House Committee on Energy and Commerce to cut $880 billion over 10 years, primarily from Medicare and Medicaid.

The federal government matches state funds for Medicaid based on need. With President Donald Trump ruling out cuts to Medicare, one likely approach to the cuts proposed in the bill is to shift Medicaid costs to states. Some in the sector also fear that the cuts could compound closures of nursing homes, especially in states where the discrepancy between reimbursement and costs is particularly high.

The specifics of the possible Medicaid cuts are unclear, according to Linda Couch, senior vice president of policy at LeadingAge, the largest nursing home advocacy group for not-for-profit aging services, including nursing homes. However, she said, potential approaches could include reducing federal contributions, imposition of policy changes to limit federal financial participation, such as alterations to the Federal Medical Assistance Percentage (FMAP), or adding work requirements. Moreover, Congressional Republicans oppose cuts to provider and managed care taxes, which, while legal, help states fund Medicaid services and quality programs, she said.

“Changes to Medicaid will cause massive holes in state budgets that will force state lawmakers to take action,” Couch said in an emailed statement to Skilled Nursing News. “Medicaid provides the lion’s share of nursing home funding.”

And the actions that the states end up taking will likely not be friendly to the nursing home sector.

States will be required to increase state taxes, reallocate state general funds to Medicaid, introduce severe cuts to benefits and services and reduce provider reimbursement rates drastically, Couch said.

“We are concerned that all Medicaid-reduction policy proposals will shift costs to states, which in turn will effectively cut services or rates – regardless of some members of Congress’ reassurances of no cuts to services or individuals. Changes to how the federal government pays for Medicaid will force states to restructure their Medicaid programs; they’ll have to make tough choices about provider rates, populations served, and services available.”

Already, research shows that reimbursement rates fall short. On average, Medicaid payment rates covered only 82% of the costs associated with providing care to Medicaid residents, while for nearly 40% of nursing homes, Medicaid per diem payments covered 80% or less of their estimated per diem costs, Couch said. Meanwhile, access to nursing home care has also declined in recent years, as more than 775 nursing homes have closed, nearly half have had to limit admissions, and 20% have had to downsize.

“No matter how cuts are implemented at the federal level, the impact on older adults who need care and on our nonprofit, mission-driven nursing home members who provide it, would be significant,” she said.

Further cuts ‘devastating’

In the aftermath of the House vote to move the budget resolution forward, the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), the largest association representing long-term care facilities, urged lawmakers to protect Medicaid from potential cuts given that the program is the primary source of coverage for residents of nursing homes as well as a critical option for many assisted living residents.

“One of Medicaid’s core functions is to protect our nation’s most vulnerable. It is a critical safety net for America’s seniors to make sure they can access the long-term care they need,” said Michael Bassett, Senior Vice President of Government Relations for AHCA/NCAL. “It’s no secret that Medicaid is already underfunded, so any further cuts would be devastating. We will continue to urge lawmakers that there’s a better way to create government efficiencies while upholding the promise made to our nation’s seniors.”

LeadingAge’s Couch also noted the ripple effect through the health care continuum.

“It is also worth noting that nursing home services are mandatory Medicaid costs for states, unlike home and community-based services (HCBS), which are optional and therefore give state policymakers greater leeway to reduce or cap services,” she said. “Reductions to HCBS services could increase demand for nursing home care, adding to demand.”

Impact on SNF transactions

Dealmaking for SNF assets hasn’t yet factored in the proposed Medicaid cuts, with prices still high for such assets, according to Kevin Pascoe, chief investment officer for National Healthcare Investors (NYSE: NHI).

However, all that may change.

“It’s something we’re watching, but it’s too soon to tell,” Pascoe said during the company’s fourth quarter earnings call on Wednesday. “[Medicaid cuts] may affect those programs … Anecdotally, though, what we’ve heard from our other sources is that it has not cooled the market in terms of skilled nursing and buyers’ interest or pricing, so we’ll see where that goes. But to date, it still remains a pretty robust market.”

Skilled nursing comprises 30% of NHI’s assets, a much smaller component of its business since its origins in 1991 when its entire investment exposure consisted of skilled nursing facilities (SNFs).