The 11.1% Medicare Cuts to Skilled Nursing Communities

I confess that this is a politically incorrect article, given that skilled nursing communities are an important part of my reader base and customer base at Vigil Health Solutions.

Ever since the 11% cuts were announced, the headlines streaming from nursing home industry groups make it sound like Armageddon has arrived for the most frail of Americans, skilled nursing residents. I am a skeptic. I think the headlines sound more like Chicken Little crying, “The sky is falling!” or the little boy crying wolf. Here is why:

– A little more than a year ago CMS enacted a rule change that had the net effect of making group rehabilitation therapy less profitable and individual revenue more profitable. For reasons that are incomprehensible, CMS believed this would be a revenue-neutral adjustment (see my rant on this a few weeks ago). In reality it provided facilities an opportunity to increase revenue substantially and, by extension, increase profits. This is how the game has always been played and it is exactly what I would have done.
– After six months, CMS reviewed their payments and discovered this change had resulted in an additional Federal expenditure of $2 billion and was on track to cost $4 billion in the first year. O0ps!

– Now CMS has announced a sort of . . . . across the board cut in reimbursement of 11.1%. Resulting in lots of noise from the nursing home industry.

– The financial community has been equally alarmed, downgrading almost every single publicly traded company that operates skilled nursing communities.

Here is what that $4 billion looks like:
– $13 per year per person or about $52 per year for a family of 4, not really so much.  But still the tax payers money.

– There are 16,100 skilled nursing facilities in the US with about 1.7 million beds.

– This means that on average, each nursing home received an extra $248,000 dollars, which works out to be about $2,350 per bed.

– These averages do not paint a very accurate picture because there are facilities that have a lot of Medicare patients and others that have very few. This means the facilities that have a lot of Medicare patients received a windfall that is greater than $248,000 and in some cases much more.

Parsing the Information
This is why I think it is a Chicken Little cry!

– No one has suggested this extra $4 billion dollars has improved patient outcomes. Patients are not getting discharged any earlier, nor are they reporting less pain or a higher quality of life.

– There has been no rush by operators to sell their skilled nursing facilities; to get out of the business.

– Even more telling, there are still dozens or perhaps hundreds of individuals and companies that are looking to purchase skilled nursing facilities.

– In fairness the $4 billion are not bottom line dollars. A significant amount of that money was paid out in additional salaries. That being said, the reason facilities crave Medicare patients is that they are very profitable.

– The cost reduction is not really 11.1% because these facilities will be receiving some cost-of-living increases.

– The analysts have it wrong. This was a one year windfall for astute operators who will continue to make significant profits.

Finally, this does not mean that it will be a bump free road. There is tremendous public/political pressure to reduce the cost of government, including health care. There will be further efforts to reduce costs. If I were in charge, I would suggest starting by reducing the paperwork burden, allowing care givers to give care.

I would also add that this cut has a very real silver lining.  As the Super Committee meets to figure out how to cut more from the government, it gives the skilled nursing community the ability to plea that they have already sacrificed enough.

Please note:  This represents my opinion and does not necessarily represent the opinion of Vigil Health Solutions.

Steve Moran