By Anthony L. Morrone and Jill Smoller

Numerous changes in the economic environment, technology, and business practices have created a host of new conditions and problems for nursing home operators to manage. Not the least of their problems is the propensity to cling to obsolete ways of accounting. There are numerous reasons for nursing home operators to adopt new approaches to their costing problems.

Dramatic Changes

Care in nursing homes has broadened to include sub-acute admissions, shorter-stay residents, and altered staffing patterns. Registered nurse staffing, as well as nursing hours per patient day, has increased in some cases to accommodate heavier-care residents. Nursing home operators have had to adapt to a new language, new definitions, and new documentation requirements, such as RUG III (resource utilization group), Prospective Payment System (PPS), and MDS 2.0 (cost reimbursement system).

All the disciplines involved assume greater burdens as a result of shorter stays and higher discharge rates. Shortened lengths of stay not only affect the nursing and rehabilitation departments, but they also create new burdens for the bookkeeping, dietary, social services, admission, administration, and housekeeping services. For example, drug costs per patient, once a stable and predictable cost, have skyrocketed dramatically as a result of short stays and sub-acute admissions. In addition, facilities used to be comfortable with a 99% occupancy rate; now they must handle 92% occupancy. This decrease in occupancy, coupled with fixed labor costs, increases the cost of care per unit.

Business Process Management

Managing such change requires not only acceptance by the operators of facilities, but also the cooperation and teamwork of all the disciplines. The accurate, timely, and consistent completion of the MDS 2.0 system requires a strong working relationship between the clinical and finance disciplines. This simple tool is vital to the legitimate reimbursement for a facility.

Not only is it essential to capture information on MDS correctly for proper reimbursement, it is equally important to consciously make decisions, as a team, about admissions. Creating an admission selection process based on clinical needs, drug costs, and necessary staffing patterns is a mechanism for dealing with change. Once a resident is admitted to a facility, all disciplines need to work cohesively. PPS demands the maintenance or betterment of outcomes while containing the cost.

Lingering Effects

Twenty-five years ago, New York nursing home managers were concerned solely with spending models. Nursing homes were reimbursed on a “spend it to get it” basis (within the constraints of a ceiling limitation) for Medicaid and Medicare. This is no longer the case.

Under Medicare PPS, payment price rates are all-inclusive, so facilities will not receive additional reimbursement if utilization exceeds the set amount built into the per diem payment rates. If costs grow faster than the per diem prices, surplus margins decrease or losses increase. Since there is no rebasing, these diminished margins or higher losses cannot be recovered in future years.

New York nursing homes used to be reimbursed by Medicaid and Medicare on an “average” cost basis. All allowable patient care costs (for all types of nursing home programs) were added together (without regard to payer source), divided by total days, and reimbursed on an average cost basis (except for Medicare ancillary costs, which were reimbursed on utilization of care given).

A nursing home today cannot rely exclusively on average costs. Residents admitted today are different from the past. Patient acuity has increased significantly. Discharges from hospitals to nursing homes for patients less than one week from post-operating care are now the norm. Nursing homes perform complex wound care and extensive IV therapy, along with a myriad of other technologically advanced services once provided only in acute care settings. Nursing homes find it difficult to attain 98% to 99% levels of occupancy today because of the decrease in length of stay and the increase in alternatives to institutional long-term care programs (e.g., assisted living, home healthcare).

New York staffing patterns were developed with private pay residents in mind. Twenty-five years ago, private pay was the only financial source capable of producing a surplus. The Medicare and Medicaid rate methodologies had no mechanism for surplus. A facility would spend a dollar to receive the same dollar back through the calculation of a future rate (Medicaid prospective reimbursement method) or receive a budgeted interim dollar which was adjusted in settlement at a later date (Medicare retrospective reimbursement method). However, both third-party programs of reimbursement were similar in one respect: Costs were reimbursed at an average cost basis of pay.

Competition between nursing homes for private pay residents set the standard for staff levels. The restrictive cost ceilings attached to third-party rates would not necessarily allow full reimbursement of costs set at this spending standard; however, the marginal surplus on the patient census often offset the unfavorable reimbursement deficit on Medicaid and Medicare.

Nursing home decision-makers are forced to change the established staffing practices of yesteryear now that the proportion of private pay residents has declined within the provisions of elder-care sheltering strategies. Many nursing homes have not changed staffing patterns even though they have experienced a significant declines in private admissions and occupancy.

Understanding the Changes

In 1986 there was a major New York State (Medicaid) reimbursement change. The cost base methodology was changed to a modified pricing method of reimbursement. Costs now would be compared to an established price, and a subsequent price or cost would be selected. For the first time, nursing homes could make money on a Medicaid patient if they could keep costs below the price and control the rate of growth of these costs.

Starting in 1995, nursing facilities in New York that participated in the Medicare Part A Demonstration Project received substantially higher reimbursement rates of pay without a reduction in their Medicaid rate. This was a result of a payment system that was based on a “pricing system” driven by a predetermined charge for a RUG, rather than by a “retrospective cost reimbursement.” Medicare Part A patients were no longer held to diluted (average) cost reimbursement. Rates for these types of services substantially increased revenues.

In exchange for higher rates of reimbursement, New York nursing homes participating in the Medicare Part A demo project, along with four other states, shared their clinical data (MDS+) with the federal government. This information was used in the development of the PPS rates instituted nationally.

In 1999, Medicare introduced the PPS to all nursing facilities in the country. The prices developed by the federal government were substantially greater than the cost-based rates used in New York. Yet these same prices became financially devastating for many non–New York nursing homes, which had previously been paid using a reimbursement method based on segregating, identifying, and concentrating costs attributable to a distinct-part nursing unit or cluster of rooms.

The high costs of providing a Medicare resident stay (100 days) was diluted in New York by the use of an average unit of cost reimbursement methodology and further limited to a restrictive routine cost ceiling. Nursing homes outside New York that were eligible to elect, if state law permitted, the cost-based distinct-part reimbursement generated a rate that mirrored the specific cost of service rendered to a Medicare resident with an application and approval of a ceiling waiver. Thus, the PPS rates issued in 1999 were substantially higher than the average unit cost methodology used by New York but significantly lower than the specific unit cost used with the cost-based distinct-part reimbursement methodology.

With the introduction of the modified pricing method and per diem rates for PPS, New York providers were challenged to track revenues and costs by RUG III on a regular basis. This is the key that will allow facilities to adapt and benefit from change.

Cost Tracking

The concepts of cost finding, cost tracking, and cost accounting could serve as valuable resources in the changing healthcare climate.

Most nursing facilities do not track revenues and costs by payer source or by resident. A typical financial statement may detail revenues by payer source, but departmental expenses (costs) usually are reflected in the aggregate. New York nursing homes did not typically reflect costs by payer source, even in the preparation of Medicare and Medicaid cost reports (except for Medicare ancillary costs).

Today a facility needs to predict the utilization of services at the time of admission and then accurately track utilization, by resident, on an ongoing basis, as well as accurately project and verify the cost per unit of service delivered. This data must be gathered and reports completed in a timely manner so that the facility may then evaluate the findings and test outcome results.

Without exploring cost accounting alternatives, many administrators and owners scrambled to admit residents with higher acuities to produce higher gross revenues. Although it has been historically true that higher-acuity patients have generated increases in gross revenues in excess of the incremental costs of serving them, it is potentially dangerous to conclude that this will always be the case. One must take into account, for example, the absorption principle, which raises the possibility that staff utilization did not approach capacity levels in prior years. As admission policies targeted heavier-care patients, many New York nursing homes were able to absorb the underutilized staff, and the resulting revenues fell directly to the bottom line. This has led some nursing home managers to believe that higher-acuity patients will always produce increased new surplus. But as utilization increases in these RUG categories, staff productivity eventually reaches its optimal level, and, once surpassed, the crossover will lead to a decline in net revenues.

Cost accounting provides nursing facilities the necessary understanding of unit margins and could serve as the basis for the development of an admission plan strategy. Both the financial advisor and the healthcare provider of a skilled nursing facility must realize that financial reimbursement has changed, and will continue to change.

Today’s manager must learn to use financial formulas to create results rather than to simply verify them. This can be accomplished in two steps:

The result will optimize admissions’ efficiency, streamline operations, and capitalize on profit potential.

Standard Off Par Approach (SOPA)

Today’s pricing-based methodologies demand the prediction of the costs of a patient prior to admission. In other words, the patient’s reimbursement rate must cover the services that will be provided. Knowing this information is crucial to success.

A provider can determine the financial feasibility of any resident prior to admission through a simple cost accounting system. Cost accounting enables a facility to take its aggregate operational costs and reduce them to a unit cost. This will allow the facility to visualize how expenses are incurred and if those expenses are being incurred proportionately or according to plan. Above all, assessing patient costs at time of admission will give a clarity and understanding that would otherwise be lacking.

SOPA is a measuring stick for tracking the difference between the average costs of all the units and a specific unit cost. This is achieved by building relationships between actual costs and a facility’s statistical data associated with that cost. The financial costs of operating a nursing facility differ from facility to facility (e.g., wage scales, utilities, property costs, real estate taxes). The advantage of SOPA is that it takes into account the unique and individual cost structure of the nursing home. Data used in SOPA comes from accounting records and statistical data provided by the operating departments.

Making admissions under prospective payment is a risky practice. Estimating the cost of providing care using SOPA will help make difficult admissions decision easier. Basing decisions on their financial impact is a positive change.