ANALYSIS OF HOUSE BILL 1483

      Making modification to the nursing facility payment system.

Health Care Committee                          February 3, 1999

Washington State House of Representatives

SPONSORS:  Representatives Cody and Parlette.

WHAT THE BILL DOES

1)Changes the way in which economic trends are adjusted for recognizing costs by requiring the use of the Health Care Financing Administration (HCFA) index.  (This is referred to as the AHCFA basket.)

2)The ceiling for home office costs is eliminated.

3)Therapy costs are removed from the daily rate and are set up on a fee system administered by the Medical Assistance Administration within the DSHS.

4)The DSHS is given authority for establishing exceptional rates for residents needing specialized heavy care.

5)Establishes a new rate component called the Atax component@ allowing facilities that pay taxes to recoup these funds (such as B&O for the for profit facilities).  

6)Carries forward three year rebasing beyond its current 2001 expiration date.

7)Requires that the DSHS pay back to the nursing facilities when the budget dial is erroneously implemented.

BACKGROUND:

Nursing Homes:  There are 269 medicaid certified facilities in 37 counties providing care to approximately 14,500 medicaid clients.  The state plays two major roles with regard to nursing homes:  the regulator and service purchaser.  The state purchases, through Medicaid, about two-thirds of all nursing home care delivered in the state.  As of 10/98 yearly costs per person for nursing home care was $41,880 at an average daily rate of $114.74.

Nursing Home Rate Setting - The Current Payment System:  The Washington state nursing home rate refers to the Medicaid payment made to a nursing facility operator to care for one person for one day. The Washington nursing home payment system may be characterized as prospective, cost-based, and facility-specific.  This means that each facility receives its own rate of payment, which is unique to that facility, and based upon that facility=s allowable costs and case mix (facility specific).

Multiple Components to the Rate - The rates paid to nursing facilities are based on six  different components.  These components include, direct care, operations, support services, therapy care, property, and the return on investment which consists of two parts - financing allowance and variable return.  Each individual facility is paid the lower of their actual cost of providing a component of care, or they are paid up to the ceiling for that component.  The following is a description of the component rate setting system:

!Direct Care Component:  This component is the largest of the six components and comprises 55 percent of the total daily rate in a nursing home.  It includes expenses related to the direct provision of nursing and related care including, fringe benefits and payroll taxes for the nursing and related care personnel, and the cost of nursing supplies.  The payments made for direct nursing care were changed by the Legislature last year from a facility average payment to payment tied directly to the amount of care needed for each individual resident to a case mix system (CASE MIX).  Data on each resident (such as diagnosis, treatments, and activities of daily living dependencies) are required to be collected by the facility to determine a residents resource requirements.  This individual resident information is the key ingredient for setting the payment rate under the new case-mix payment system.

!Operations Component:  The operations component accounts for 18 percent of the medicaid daily rate.  The operations component includes such things as utilities, office supplies, accounting and bookkeeping, minor maintenance, etc.

!Support Services Component:  The support services component includes costs relating to food, food preparation, dietary, housekeeping and laundry services.  Support services payments may be shifted to either therapy or direct care to respond to payment deficits in either of those two components.

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!Therapy Care Component:  Therapy care includes:  physical, speech, occupational, and respiratory therapy and mental health and mental retardation therapy.  Therapy care is paid based on 1996 therapy costs beginning October 1, 1998.  Costs are lidded at 10 percent of the median or the facility=s actual costs whichever is lower. 

!Property Component:  The property cost component makes up 4 percent of the total medicaid payment rate.  The amount of payment is calculated by dividing allowable depreciation from the prior year by the greater of a facility=s total resident days for the facility in the prior period or resident days as calculated on 85 percent occupancy.  Allowable depreciation is based on the estimated economic life of the building according to the American Hospital Depreciation Schedule.  For example, a building with a 30-year life will be depreciated at one thirtieth of its value each year.  The 1997 cost report was used to set the October 1, 1998, rate and, as of June 30, 1999, the property component sunsets.  If a nursing home banks beds or converts the beds to active services the department is required to use anticipated occupancy but never less than 85 percent occupancy . 

!Return on Investment Component which consists of two sub components

!Variable Return Component:  This component does not reimburse for a specific nursing facility cost.  Instead, the variable return cost component is intended to provide an incentive for facilities to operate efficiently, and to allow for a profit.  Each facility is eligible to receive an additional 1 to 4 percent on the remainder of the rate (excluding property and financing). 

!Financing Allowance Component:  The financing allowance makes up 5 percent of the total rate and, in combination with the property component, pays for the cost of the building, building improvements and for equipment purchases.  The financing allowance is calculated by multiplying net book value (fixed assets minus depreciation) by 10 percent and dividing by total resident days at the greater of actual resident days or 85 percent occupancy.

Payments to nursing homes change in one of three ways, depending on the year and specific circumstances of the facility.  Currently, rates are rebased every three years to reflect actual review of  allowable facility costs.  During years when rates are not rebased, Washington has increased rates by using the Health Care Finance Administration (HCFA) nursing home input price index.  The case mix payment system that went into effect last year (October 1, 1998) is specifically designed to more closely match direct care payments to patient acuity.

!Occupancy Rate Used for Setting Costs Per Day - The current minimum occupancy requirement is 85 percent.  This means that we use the greater of either the facility=s reported patient days or patient days at an 85 percent occupancy.  Total costs are divided by those days to arrive at a daily rate.  All components use an occupancy rate of 85 percent.

!Provisions for Exceptional Care Rates and the DSHS Study - The DSHS was required to do further studies to adjust the RUGs III to reflect the resources required to care for HIV, traumatically brain injured (TBI), ventilator dependent, or behaviorally complex residents.  Until such adjustments can be made in facilities with atypical concentrations of such residents, the facility is paid at its June 30, 1998, rate plus inflation adjustments.  It is only the residents with these conditions that are considered for this rate adjustment.

SUMMARY:

ELIMINATION OF CENTRAL SERVICES COST LID - The internal sub lid used to cap central services or home office or central office costs such as shared kitchens, laundry, purchasing, or accounting areas, is eliminated and now subject to the operations rate component lid that is set at the median.  Currently, facilities choosing to share laundry services or any other of the appropriate shared services have one-half of their costs disallowed.  If the facilities which share laundry services each operated their own laundry, their individual laundry costs would be recognized up to the operations lid.

The department is also directed to recalculate medians that are effected by the removal of the central services sub lid and any rate appeals or subsequent errors made.  Taxes are excluded from the operations lid.

REFUNDS ON EXCESSIVE ADJUSTMENTS UNDER THE BUDGET DIAL -  Requires that the department refund, at the close of the state=s fiscal year, facilities that have had their daily rate reduced due to a department forecast that the statewide average per diem rate will be exceeded.  The department is required to refund rate payments up to the budgeted rate amount.

RATE COMPONENT MODIFICATIONS AND ADJUSTMENTS FOR BED BANKING -  Rate adjustments are made to all rate components for facilities who choose to bank beds or choose to convert beds to use again as nursing beds, and uses a resident occupancy level of 85 percent for making that rate adjustment in all components, except the new tax component. 

A new rate component is added called Atax@.  Therapy care is eliminated as a rate component.

MODIFICATION OF REBASE SYSTEM:  Clarification is made to the dates when rate components are to be rebased making it every three years and specifies the cost report period that is to be used when rebasing.  The department is required to use cost report data that is two years behind the July 1, rebase setting period.  Three year rebasing is carried out beyond its current 2001 expiration date.  Changes are made in the adjustment for economic trends in both base and rebase years.  For nonrebased rate periods, the department is required to adjust rate allocation amounts by the most recent percentage change in the HCFA index rather than the factors defined in the biennial appropriations act.  In contrast, for the years when rebasing is in effect, the department must adjust the allowable costs by the most recent percentage change in the HCFA index and then multiply it by a factor of two.

MINIMUM WAGE AND PARITY WAGE INCREASE:  The department is required to build into the current rate payment the minimum wage increases that were mandated by initiative 688 last year and any future increases in wages by state or federal law.  The parity wage increase is required to be no more than the amount increased in the minimum wage amount and only if the minimum wage and other wages exceed the HCFA index inflation factor used to adjust allowable costs (currently three percent).  As such, the department would be responsible for paying for any wage increase above the three percent.

REBATE REFUND ADJUSTMENT - The department is not allowed to use the refunded adjustment amounts to offset the expenses used to calculate the peer group median rates for all refunds or other certain revenues that are not expected to reoccur when the revenue has not been received during a period during a rebase year.  If those amounts were used, it would in effect lower the rate for three years because rates are not rebased for a three year period. 

COST REPORT DATA - Clarifies that cost report data must use an inflation factor of two percent for calculating exceptional care amounts and that the number of Medicaid days is to be used as the divisor for exceptional care rather than the total days.  It holds a facility harmless for exceptional care provided in 1997. 

EXCEPTIONAL CARE PAYMENTS - The department is given the authority to define categories of exceptional care and requires that they make exceptional care payments for certain residents such as residents who are ventilator-dependent, the traumatically brain injured, those who are behaviorally challenged, and the morbidly obese.

SEPARATE THERAPY CARE PAYMENT - A separate case managed system for therapy care is established beginning on July 1, 1999.  The Medical Assistance Administration is mandated to pay for physical, occupational, and speech therapy services.  The Medical Assistance Administration must develop a fee schedule for payment for respiratory, mental health, and mental retardation therapy services in consultation with providers.  Utilization thresholds may be established requiring preauthorization prior to the provision of care. 

SUPPORT SERVICES, OPERATIONS, DIRECT CARE COMPONENTS - The department must adjust the support services, operations, and direct care components using the HCFA index and use a resident occupancy level of 85 percent if beds are banked or returned for nursing home use.

NEW TAX COMPONENT RATE - A new tax rate component is created for real estate, personal property and business and occupation taxes in proportion to a facility=s Medicaid resident days to total days.  The department must pay the proportional share of the tax amount paid by the contractor using the prior years cost report information.  The requirement for facilities to report taxes in the operations component is eliminated.  Taxes are not adjusted for inflation.