Nursing home operators are bracing for another financial setback: the possibility of lower reimbursements from Medicare Advantage plans next year.
The Centers for Medicare and Medicaid Services’ 0.16% base payment rate cut to Medicare Advantage payers in 2025 is ringing alarm bells among nursing home industry trade groups as some insurers said the cut could prompt them to reduce payments to providers. Lower Medicare Advantage reimbursements could partly counteract the 4.1% fee-for-service Medicare rate hike CMS proposed for nursing homes in 2025.
Related: CMS finalizes Medicare Advantage rate cut
The prospect of lower Medicare Advantage reimbursements comes amid conflicting economic indicators for nursing homes. The industry began emerging from the COVID-19 pandemic in late 2021 when rising occupancy rates resulted in stronger patient revenue. However, labor costs and other expenses began increasing at the same time. The industry also faces a possible federal staffing mandate that CMS estimates would increase nursing homes' costs by $40.6 billion over a decade.
Between 2021 and 2022, median patient revenue increased 9% at for-profit facilities, 4.5% at nonprofit facilities and 3.9% for government-owned nursing homes, according to Modern Healthcare’s Skilled Nursing Facilities Dashboard, which tracks CMS cost reports for 13,390 operators. During that same period, median operating expenses rose 8%, 7% and 1%, respectively, for those nursing home groups, putting pressure on profit margins.
The proposed 4.1% Medicare fee-for-service rate increase would adequately cover rising labor costs for most nursing homes given current inflation trends, said Scott Fidel, managing partner at investment bank Stephens. However, Fidel also warned that could change if inflation picks up.
Traditional Medicare is becoming a smaller payer source for skilled nursing facilities as more than half of older adults are opting for Medicare Advantage plans. That makes the prospect of payment cuts more troubling for providers, as the private plans typically pay providers between 20% and 25% less than fee-for-service Medicare.
In some markets, Medicare Advantage penetration is as high as 70%, according to Lisa McCracken, head of research and analytics at the National Investment Center for Seniors Housing and Care, which tracks the nursing home industry.
“There are some markets that are dominated by two or maybe three Medicare Advantage plans, so it is difficult to have negotiating power,” McCracken said. "That is not going to be good for providers from a margin standpoint.”
Nursing home trade groups are calling on private payers to think before cutting reimbursements to nursing homes. The American Health Care Association, which represents for-profit and nonprofit operators, said in an email that cutting reimbursements would add to the financial strain of nursing homes squeezed by higher labor costs.
LeadingAge, which represents nonprofit nursing homes, warned inadequate rates paid by Medicare Advantage payers could further destabilize the financial health of the industry.
Fred Bentley, a managing director at healthcare consulting firm ATI Advisory, said nursing homes could increase their negotiating power with private insurers in the event of Medicare Advantage payment cuts by targeting patients who require specialized care, such as those with tracheostomies, or by adding additional services, such as dialysis.
“Those are not cheap services to offer, but you are capturing a larger share of the wallet for those Medicare residents,” Bentley said.
Some nursing home operators are moving in that direction. ArchCare, which operates seven skilled nursing facilities in metropolitan New York, provides specialized care to patients with Huntington’s Disease at two of its facilities. Elkhorn, Nebraska-based Vetter Senior Living, which operates 24 nursing homes in Nebraska, Missouri and Wyoming, opened a pharmacy last year through a joint venture with Senior Rx Care Pharmacy to provide medication to its patients.
But even with added revenue from the pharmacy business, Vetter Senior Living Chief Financial Officer Brian Sturh said potential payment cuts from private insurers are a concern.
“Negotiations with them are just getting much more difficult because they have the upper hand," Sturh said.
