A proposal to ramp up reporting requirements is threatening one of skilled nursing operators' most significant revenue streams and could dent profitability, analysts said.
The CMS' proposed new rule would redefine base and supplemental payments and force states to unbundle reimbursement data as the agency looks to cut down on "shady recycling schemes that drive up taxpayer costs." This would give CMS' more latitude to restrict financing mechanisms states use to increase federal matching funds for their Medicaid program and could erode a key funding source for SNFs, said Hunter Hammond, an analyst at Height Capital Markets.
"If SNFs typically get a 4% to 5% bump in Medicaid payments year over year, driven by higher supplemental payments, it is possible that the growth rates of payments will slow or stop," he said.
Some states pay providers extra money on top of what they receive from regular Medicaid reimbursement via supplemental disproportionate-share hospital payments and upper payment-limit payments, among other sources. These supplemental payments are meant to cover uncompensated care and fill any gap between the cost to treat individuals covered by the federal government and reimbursement..
Supplemental payments to nursing facilities have more than tripled since 2010, rising from $1.1 billion a year to $3.4 billion in 2017, according to Height Capital Markets' analysis. Supplemental payments as a percent of total SNF Medicaid reimbursement surged from 2.1% to 6.8% over that span. Across all provider sectors, supplemental Medicaid payments increased from 9.4% of all Medicaid payments to 17.5%.
The post-acute investor-owned provider Ensign Group saw its skilled nursing total average daily revenue increase by 25.2% from 2010 to 2018, propelled by daily Medicaid revenue growing by nearly 35%, according to Hammond's analysis. Daily Medicare revenue only increased by 4.9% over that span.
But there is minimal to no data on how supplemental payments are spent, experts said. The Medicaid and CHIP Payment and Access Commission found that 17 states overspent on supplemental payments called upper payment limit funds by $2.2 billion in fiscal 2016.
The proposal aligns with other Trump administration attempts to curb federal healthcare spending by cutting 340B drug discount program payments and leveling reimbursement across healthcare settings. Boosting transparency through pricing disclosures and other means has also been a priority.
Meanwhile, providers continue to fight these initiatives. The American Health Care Association, which represents long-term and post-acute providers, called the proposed Medicaid financing changes "potentially devastating."
"We welcome discussions with CMS on balancing adequate Medicaid base rates with the potentially devastating effects of any changes in Medicaid financing," the association said in a statement. "This includes the vital need to protect provider taxes and supplemental payments, which are often used to offset inadequate base rates."
The proposal would require SNFs to report facility-specific supplemental payment data and where it came from, including provider taxes, donations and intergovernmental transfers.
Currently, states are incentivized to find unique ways to maximize their share of payments via provider taxes, donations and intergovernmental transfers because of the uncapped federal government match of state Medicaid payments, Hammond said.
Under the proposal, the federal government will only match provider taxes if they are uniformly imposed on all SNFs or other sector-specific providers. Donations would need to be distinctly independent from Medicaid payments to qualify for federal matching. Intergovernmental transfers could only be derived from state or local tax revenue. CMS would also scrutinize whether the transfers actually came from a government entity and not from "impermissible health care-related taxes or provider-related donations," the CMS said.
The rule would also require states to obtain CMS approval for supplemental payments that exceed three years.
The law firm Dentons said in an investors note that the proposal could have a substantial impact on existing Medicaid financing structures and supplemental payment programs beyond reporting requirements. Comments on the proposal are due Jan. 17.
SNFs are still adjusting to a new Medicare payment system known as the Patient Driven Payment Model. It replaced the therapy-hours reimbursement framework with a system based on patient acuity. This resulted in a massive workforce restructuring. A similar overhaul is occurring in the home health sector, which will operate under the Patient Driven Groupings Model starting Jan. 1.
"That is a ton of change all at once," Hammond said.