Viewpoint: Medicaid Nursing Home Cure as Bad as the Disease
The Ohio Commission to Reform Medicaid correctly identified the cost-based reimbursement system for nursing homes as an area ripe for reform. The challenge going forward is to craft reforms that address the underlying flaws in the system and will actually improve outcomes.
Based on the Commission’s recommendations, policymakers want to end payments that are determined by the legislature and replace this methodology with a “prospective payment” system determined by Medicaid in the executive branch. The current system is fatally flawed and rewards heavily leveraged facilities with high costs at the expense of well-financed facilities with low costs and little overhead.
Unfortunately, the proposed cure for this problem may be as bad as the current disease. In the early stages of government-run health care programs such as Medicare and Medicaid, physicians and hospitals were reimbursed for their costs. One didn’t need a Ph.D. in Economics to predict that demand for services would soar in the absence of a market and the provision of “free” health care. And soar they have with Medicare and Medicaid dramatically over budget from their very beginning.
The Health Care Financing Administration (now called the Center for Medicare and Medicaid Services CMS) “solved” this problem by creating a prospective payment system. This was supposed to be a “price” that would be paid for various medical services. The idea was that a hospital being paid to do a Medicare or Medicaid beneficiary bypass would receive a set amount, thus giving them an incentive to provide the service at lowest possible cost.
Where do these “prices” come from? The correct answer is the desk of a CMS or Ohio Medicaid bureaucrat. Medicare attempts to set 10,000 prices in 3,000 counties around the U.S. This isn’t quite as ridiculous as the old Soviet Union trying to set 24 million prices around the country from Moscow, but it’s in the same ballpark. This type of payment system is flawed from the beginning because governments can never know what the “right” price is for a medical service. The result is that any prices they pay will be wrong.
Further, during tight budgets the payment system will become a budgeting tool where reimbursements are frozen or cut. This will increase the likelihood that payments will be set too low and outright shortages will occur. Unfortunately, shortages in health care can take the form of low quality. This is an old trick of government health care bureaucrats who proclaim their ability to keep costs down when in fact they are producing low quality services.
The solution lies in the creation of a real market place.
One such plan has been proposed by the state of South Carolina to CMS for possible waiver approval. It involves nursing homes bidding for beneficiary business through an auction. Facilities bidding the lowest price would be allocated all of the Medicaid beds they desire. The next lowest would then receive beds, and so on until the total number of needed beds is reached. Quality nursing care would be promoted by tying rate increases to an objective quality index.
According to them, providers would not be plagued by after-the-fact audits of cost and dependent on varying bureaucratic interpretations of definitions of rules and could offer a better buy to the state. Further, the cost of state government to run the program would be reduced since post audits, reimbursement methodology development and cost report review would be eliminated.
Ohio policymakers have taken the first step toward an effective nursing home care system by focusing on the need for reform in the way services are reimbursed by health agencies. Without changing the fundamental principles of setting prices by government fiat, however, reform efforts will meet with little success. Only by restoring a marketplace to the nursing home industry will it truly be able to serve those in need of its care.
Michael T. Bond, Ph.D., is Director of the Center for Health Care Policy at The Buckeye Institute and a professor in the Department of Finance at Cleveland State University.
