ANALYSIS OF HOUSE BILL 2359

         Concerning the nursing facility payment rate.

Health Care Committee                          January 20, 2000

Washington State House of Representatives

SPONSORS:  Representatives Parlette and Cody.

WHAT THE BILL DOES

1)The statewide payment cap rate referred to as the Abudget dial@ is combined into one total cap rate consisting of both the capital and the non-capital costs.

2)Requires that the budget dial, specified in the biennial budget, be established following the principles of the payment system in current statute and allow for a reasonable growth rate in property and direct care acuity levels.

3)The department is required to refund nursing homes the money that the department may have recovered in excess of the amount necessary to meet the year end statewide average payment rate specified in the budget.

4)The working capital allowance is added back into the financing allowance component.

5)The number of years used to depreciate a new nursing home building is decreased from 40 to 30 years. This is made retroactive to July 1, 1999.

6)The department is directed to adjust all reported costs for nursing homes by a national inflation factor established by (HCFA),  except for those facilities that receive Aa direct care hold harmless@ payment rate.  Facilities that have their rates based on Adirect care hold harmless@ are allowed to have their rates adjusted using an inflation factor of 2%.

7)The June 30, 2001 sunset clause for the property payment system is repealed and the property payment system is maintained in statute.

BACKGROUND:

Nursing Homes:  There are 269 medicaid certified facilities in 37 counties providing care to approximately 14,000 state funded 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.  This year the average daily costs per person for nursing home care is $118.56.

Nursing Home Rate Setting - The Current Payment System:  The Washington  nursing home rate refers to the Medicaid payment made to a nursing home operator to care for one person for one day. The Washington nursing home payment system may be characterized as prospective and based on total facility costs and patient acuity.  The nursing home payment statute currently directs the department to set (rebase) October 1, 1998 through July 1, 2001 rates based on 1996 costs and to adjust those 1996 costs for inflation by a factor found in the appropriations act.  When setting facilities= July 1, 2001 through June 30, 2004 rates, the department may again be directed to adjust 1999 costs for inflation by a factor specified in the biennial budget.  Some facilities who have a Ahold harmless rate@ specified in the 1999 budget will receive a one percent inflation rate increase.  Property and financing allowances, which are specific to facilities= investments, are rebased each year.

Multiple Components to the Rate - The rates paid to nursing facilities are based on seven different components.  These components include, direct care, operations, support services, therapy care, property, 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.  For the other components, the nursing homes receive their rate.   The following is a description of the component rate setting system:

!Direct Care Component:  This component is the largest of the seven components, it includes the costs 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 are 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 17 percent of the medicaid daily rate.  The operations component includes such things as utilities, office supplies, accounting and bookkeeping, minor maintenance, etc.  This rate is set at the lower of median or cost.

!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.  This rate is set at the lower of median plus 10 percent or cost.

!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 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, but in no case can the life be shorter than 40 years.  For example, a building with a 40-year life will be depreciated at one fortieth of its value each year.  The 1998 cost report was used to set the July 1, 1999, rate and, as of June 30, 2001, the property component, and all related components, sunsets.

!Variable Return Component:  This component does not reimburse for a specific nursing home 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 one to four percent on the remainder of the rate (excluding property and financing). 

!Financing Allowance Component:  The financing allowance makes up five 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 (8.5 percent for assets acquired after 7/1/99) and dividing by total resident days at the greater of actual resident days or 85 percent occupancy.

!Hold Harmless - Currently, rates are rebased every three years to reflect allowable facility costs.  The statute does not, however, direct the department to rebase rates after the July 1, 2003 rate setting period.  Currently, the cost report data is adjusted for inflation by a factor directed by the Legislature in the biennial appropriations act.  In addition, facilities receive an economic trends and conditions adjustment called total rate Ahold harmless@ if their current rate is less than their April 1, 1999 rate case mix adjusted.  As of January 1, 2000, 48 nursing homes receive this rate adjustment. 

!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.  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 . 

!Provisions for Exceptional Care Rates - The DSHS was required to develop in rule, by January 1, 2000 a method for exceptional care provided to persons under age 65 who may functionally benefit from intensive therapy care, (e.g., traumatic head injury).  The DSHS was also required to develop, in rule, a method for exceptional direct care payments for certain persons, e.g., ventilator dependent persons and medically fragile children.

!Budget Dial - (statewide payment cap) In 1998, the Legislature implemented a statewide payment cap amount for nursing homes that cannot be exceeded referred to as the Abudget dial@.  The Abudget dial@ serves as a built-in budget lid mechanism to ensure that the cost of the case mix payment system cannot exceed the amount appropriated by the Legislature.  In the 1999 Legislature, the Abudget dial@ was modified into two separate Abudget dials@.  One Abudget dial@ is for the non-capital portion of the rate (direct nursing care, support, operations, therapy, and variable return).  The second Abudget dial@ was established for the property and financing allowance (capital) part of the rate.  There is currently no  mechanism in statute to allow the DSHS to return funds to nursing homes if the budget forecast rate amount, as determined by the department is actually lower than the Abudget dial@ rate amount . As such, if the department overestimates the amount that the Abudget dial@ will be exceeded and, therefore, over-recovers funds from nursing homes, the department has no authority to return the funds to the nursing homes. 

SUMMARY:

THE BUDGET DIAL - The statewide payment cap rate referred to as the Abudget dial@ is combined into one overall Abudget dial@ covering all rate components, both the capital and the non-capital costs.  It eliminates the principle of a dual Abudget dial@ that included Acapital@ (property and financing allowance) and Anon-capital@ (direct care, support, operations, therapy care, and variable return) rate caps.  Definitions are modified to establish a single Abudget dial@.

The statewide average payment rate, specified in the biennial budget, must follow the principles of the payment system as specified in current statute and allow for a reasonable growth rate in property and direct care acuity levels.

For any appropriated funds remaining in the appropriated rate level, the DSHS will refund rate reductions to nursing homes up to the amount of available funds.  The department is required to refund nursing homes the amount of money that the department may have recovered in excess of the amount necessary to meet the year end statewide average payment rate specified in the budget.

INFLATION CORRECTIONS -  The department is directed to adjust all reported costs for nursing homes by a national inflation factor established by (HCFA), referred to as the AHCFA index or market basket" except for those facilities that receive Aa direct care hold harmless@ payment rate.  The HCFA index is a national formula for calculating Medicare costs that reflects the rate of inflation in nursing home costs.

HOLD HARMLESS RATE - Facilities that have their rates based on  Adirect care hold harmless@ are allowed by statute to have their rates adjusted using a inflation factor of two percent.  (Currently, hold harmless facilities receive a one percent inflation adjustment on the direct care portion of their rate which is specified in the budget act.)

DEPRECIATION ON FACILITIES - The number of years over which a new nursing home building can be depreciated is decreased from 40 to 30 years.  This depreciation formula is made retroactive to July 1, 1999.

PROPERTY FINANCING SYSTEM - The June 30, 2001 sunset clause for the property financing allowance and variable return (capitol payment system) payments system is repealed.  The repealers maintain the following:  The Anet invested funds@ is included into the financing allowance rate component.  The financing allowance factor is maintained at 10 percent (8.5 percent for new buildings and remodels) a separate variable return on component is maintained, fixed equipment carrying the same number of lives as the building for purposes of depreciation is maintained, and payment for property tax increases resulting from new construction or major remodels is maintained.