Medicaid Payment Rates for Nursing Homes, 1979-86

By Gohmann, Stephan F.; Ohsfeldt, Robert L. | Health Care Financing Review, Winter 1990 | Go to article overview
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Medicaid Payment Rates for Nursing Homes, 1979-86

Gohmann, Stephan F., Ohsfeldt, Robert L., Health Care Financing Review

Medicaid payment rates for nursing homes, 1979-86


Medicaid nursing home expenditures constitute the largest portion of total Medicaid expenditures. In 1986, total Medicaid expenditures on both skilled nursing facilities (SNF) and intermediate care facilities (ICF) were $17.52 billion and constituted 42.7 percent of total Medicaid expenditures (Health Care Financing Administration, 1986; Muse and Sawyer, 1982). A large portion of Medicaid long-term care expenditures, $5.08 billion, is paid to intermediate care facilities for the mentally retarded (ICF-MR), but expenditures on nursing homes that primarily care for the elderly constitute 30.3 percent of total Medicaid expenditures. These expenditures have grown in real terms at a relatively slow pace in the 1980s. Medicaid nursing home expenditures, excluding ICF-MR, were $7.13 billion in 1979. By 1986, real expenditures (in 1979 dollars) were $8.19 billion (an average annual percent growth rate of 2.04 percent). Thus, it appears that States have been relatively successful in containing nursing home expenditures in the 1980s.

Although much of this containment of the growth in expenditures may be attributable to changes in Medicaid eligibility requirements, some may be attributable to changes in the payment systems States use. In December 1980, Congress passed the Omnibus Reconciliation Act (ORA) which included the Boren amendment. The Boren amendment allowed States more discretion in setting eligibility requirements and payment rates for Medicaid. As a result, many States changed the type of payment scheme they use to reimburse nursing homes. The payment system options available to the States may be classified into two broad categories--retrospective and prospective payment schemes. Under a pure retrospective system, nursing homes are reimbursed for actual covered costs. Pure prospective payment systems are designed so that the amount of payment a nursing home will receive for a particular type of patient is predetermined.

Prospective schemes can be further categorized as prospective facility-specific and prospective class. Under a facility-specific scheme, rates are set specifically for each home based on its costs, caseload, and other attributes. Class systems are based on a weighted average of costs for groups of homes classified by their caseload, size, and other attributes. Some States may use a combination of prospective and retrospective systems in which some costs are paid fully up to a prospectively determined maximum amount.

This article addresses the issue of the impact of payment systems on per diem payments by Medicaid to nursing homes. Our analysis builds on the analysis presented in Swan, Harrington, and Grant (1988) by using the same type of broad payment system classification they use, but with a more complete model specification. We also highlight significant methodological concerns that need to be addressed in future research on the cost containment effects of payment systems.


The nursing home literature contains considerable debate regarding the effects of payment systems on nursing home care costs and quality. An argument against pure retrospective systems is that such systems offer little incentive for the nursing home to contain costs. Because covered costs are fully reimbursed, the nursing home may more intensely use covered treatments in the care of its patients. Although this may lead to an increase in costs, it also allows the home to provide higher quality of care. Prospective systems may be more conducive to cost containment because these systems give homes an incentive to keep costs at or below the payment rate. One of the major arguments against prospective systems, however, is that this tends to reduce nursing homes' incentive to admit patients with more severe medical needs since giving care to these patients generally is less profitable.

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Medicaid Payment Rates for Nursing Homes, 1979-86


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