By Lin Harris

The Department of Community Health (the Department) issued a public notice of proposed changes to the Medicaid nursing home reimbursement system on May 8, 2002. The Department's stated purpose of the change is to more accurately match payments to the level of services provided. The effective date of the change is July 1, 2002 although a hold harmless provision will defer the effect of the proposed changes on nursing home payments until July 1, 2003.

The proposed reimbursement methodology is described as the case mix system. Numerous changes to the current reimbursement methodology will occur with the implementation of the case mix system. The number of cost categories or cost centers; the peer groups used for setting reimbursement standards or limits; and intensity or acuity factors are some of the changes. This article will focus on issues associated with hospital-based nursing homes.

Currently, nursing home costs are grouped into five categories or cost centers. The cost centers are (1) Routine, (2) Dietary, (3) Laundry, Housekeeping and Plant, (4) Administrative and General, and (5) Property. Peer grouping is based on defined nursing home characteristics. Peer groups are designated by bed size, level of care and hospital-based status. Peer groupings differ for each cost center.

Each nursing home's costs are converted to a cost per patient day. The specific nursing home's cost per patient day is then arrayed within the applicable peer group. Percentile values are selected to set limits for Medicaid reimbursement.

The case mix system will initially retain the five cost centers. However, a separation of the routine cost center into two cost centers is planned. Special care costs such as physical therapy costs will be separated from the routine costs and distinct limits will be set.

Hospital based nursing homes under the current system are included in various groups for rate setting purposes. Hospital based nursing homes were included in one of two peer groups for routine costs, one group for dietary costs and three groups for laundry, housekeeping and plant as well as administrative and general. Peer groups are based on bed size with the exception of the dietary cost center. The peer group for dietary includes only hospital-based facilities.

The case mix system will reduce the number of peer groups for rate setting purposes. All nursing homes will be included in one peer group for the purposes of establishing the routine cost limit. The dietary cost center will continue to include only hospital-based entities. Only one peer group will be used for the laundry, housekeeping and plant as well as administrative and general cost centers.

Case Mix Adjustments
The application of the case mix adjustments will change under the proposed system. The case mix adjustment will only affect the routine service cost center.

Under the current reimbursement system, facilities with skilled Medicaid patient census exceeding prescribed thresholds receive higher rates through the application of an intensity allowance. The thresholds are based on the percentage of Medicaid skilled patients to total Medicaid patients. The thresholds cover wide ranges of skilled patients and are applied to all cost centers with the exception of the property cost center.

Under the proposed case mix system, the case mix adjustment will only be applied to the routine service cost center and will be based on the composite case mix for each specific facility (the case mix index). Each Medicaid patient's diagnosis will affect the facility-specific case mix index.

In order to determine the routine service cost component of the Medicaid per diem, each facility's base year routine service cost will first be adjusted by the facility specific Medicaid case mix index. The resulting facility specific routine cost will be compared with the peer group case mix adjusted routine cost.

The lesser of the facility specific case mix adjusted routine cost or the peer group case mix adjusted routine cost will be the basis for reimbursement (the allowed per diem). The allowed per diem will be adjusted by the current period facility specific case mix index to determine the routine service component of the Medicaid rate.

Additional funding beyond the normal update factors is not anticipated for the case mix system. Projected increases in rates for certain facilities will be offset by decreases in other facilities' rates.

Changes in base year case mix indices and reimbursement year case mix indices will also impact a facility's rate. A higher case mix index in the reimbursement year compared to the case mix index in the base year will result in an increase in a specific facility's rate. Conversely, a lower case mix index in the reimbursement year compared to the case mix index in the base year will result in a decrease in a specific facility's rate. Differences between base year and reimbursement year case mix indices will likely be reduced as a result of improved coding, transition to a case mix reimbursed base year and stability in patient populations. As the two case mix indices converge, the effect of case mix differences will decline.

During the transitional period, appropriate coding is important. Appropriate coding is especially important in response to increases in patient acuity and any associated cost increases. Incorrect coding will increase the risk of negative financial results.

Other Proposed Changes
The Department has proposed changes to the Medicaid nursing home cost report. The stated purpose of the change is to develop consistency between freestanding and hospital-based facilities. Hospital-based facilities include both direct and indirect costs of departments shared with the hospital. Elimination of differences between hospital-based and freestanding facilities could lead to the elimination of the hospital-based distinction in rate setting.

Summary
While the effect of the case mix system has been delayed until July 1, 2003, facilities should continue to evaluate the impact of the case mix system. The Department's case mix model reflects significant shifts in reimbursement between the current peer groups. Hospital-based nursing home groups will experience decreases in reimbursement if the Department's projections are realized.
Procedures should be developed to review coding and to monitor cost behavior in response to changes in case mix. If changes in the case mix index do not adequately reimburse facilities for the related changes in cost, financial results will decline. Proposed changes in cost reporting and reimbursement methodologies will require continued evaluation.

About the Author: Lin Harris, a healthcare partner with Draffin & Tucker, LLP, has been responsible for audits, cost reports and provider representation before federal and state intermediaries for nursing homes and hospitals for over twenty years.