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Medicaid Rate Increase? The State May Give it; but the Federal Government May Take it Away

May 10, 2011

By George Thomas, CPA

The fiscal 2012 state budget proposed by Governor Malloy includes a provision to increase the resident user fee (provider tax) for nursing homes. This increased fee will result in additional federal matching funds for the state which would allow for a Medicaid rate increase of 1.25% for most nursing homes. This can occur based on provisions in the federal law which allows revenues from a provider tax to be returned directly or indirectly to the providers who have been taxed. While all additional funding that is put into the nursing home system is critical to facilities' financial well-being, this type of increased funding can also be hazardous to the industry as well.

Including the state fiscal year beginning July 1, 2011 as proposed under the current budget, the average net nursing home Medicaid rate increase for the past five years is less than 1% a year. Without the provider tax increase the rate decreases to approximately ½ of 1%. Over the last ten years the average net Medicaid nursing home rate increase is approximately 1.5% and, without the provider tax, is approximately 1%.

The Consumer Price Index (CPI) (national inflation) rates over the last five years have averaged 2.2% and over the last ten years averaged 2.4%. As you can see, the Medicaid rate increases over the last ten years only cover about 50% of this increase. This is also not accounting for the fact that Connecticut has historically outpaced the national inflation rate, and two key elements of the CPI for nursing homes, fuel and food costs, have increased at a rate much higher than the overall CPI.

This scenario has resulted in an extremely challenging operating environment for most nursing homes. Compounded by recent occupancy issues, many facilities are currently struggling to make ends meet. 

Even with this situation, the worst may be yet to come. Federal legislation over the last several years has been attempting to reduce Medicaid payments to the states and, in some instances, has targeted reduction or elimination of the provider tax as a way to achieve this savings. Certain proposed legislation attempted to significantly reduce the amounts that are allowed to be refunded to the provider. If this were to occur, federal matching funds for the provider tax could be significantly reduced, and it is unlikely that the state would be able to find funds to replace these amounts. As the provider tax accounts for approximately 6% of the net rate increase nursing facilities have received over the last ten years, a reduction by half would cost a facility with a $200 a day Medicaid rate a $6.00 reduction after the netting of the provider tax expense. As most nursing facilities do not have an operating margin of $6.00 a day this would place many facilities in extreme fiscal distress.

Even though the potential for additional Medicaid funding today may sound promising, our recommendation would be not to spend it too quickly as it may be gone tomorrow.

So what can my organization do to prepare for the possible negative impacts of these potential changes?

  1. Make sure you understand the current drivers of your costs. Identify areas where you might be able to make changes to reduce costs. Begin the process of educating your employees and residents (and their families) on the possible changes both in reimbursement and operating processes that might be necessary.
  2. Be an advocate with your legislators. Make sure they understand the positive impact your facility makes in the local community and in the state. Involve employees, families and residents in meetings and activities with the politicians.
  3. Be proactive and put together contingency plans that include actions and timelines for steps you can take under various scenarios of revenue adjustments.

George W. Thomas, CPA, is a Director at BlumShapiro, specializing in hospitals and long-term care.  BlumShapiro is the largest regional accounting, tax and business consulting firm based in  New England, with offices in West Hartford, Shelton and Westport, Connecticut and Rockland, Massachusetts.  The firm serves as business advisors for today's leading middle market companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization's full potential. 


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