SD12 - Medicaid-Financed Long-Term Care Services in Virginia

  • Published: 1993
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 180 (Regular Session, 1991)

Executive Summary:
Senate Joint Resolution 180 (1991) directed the Joint Legislative Audit and Review Commission (JLARC) to conduct a comprehensive study of the State's Medicaid program. The study resolution was passed in response to legislative concern about the rapidly increasing costs of Medicaid in Virginia. For example, in 1980, total expenditures under Medicaid were just over $374million. By1991, although the number of recipients increased by 46 percent, the cost of the program had more than tripled to $1.2 billion.

This report presents an analysis of the implementation of Medicaid long-term care services in Virginia. These services, which are primarily targeted to persons who are elderly and disabled, include nursing home care, institutional care for persons who are mentally retarded, and a diverse array of community-based services.

JLARC previously reported on the status of long-term care in Virginia in 1978. At that time, there were serious concerns about the quality of care in nursing facilities, the Medicaid payment rates were found to need revision, and there was a lack of adequate cost controls. In addition, the 1978 study found that rapid growth in the nursing home industry had been fostered at the expense of efficiency in many cases.

Since 1978, the growth has continued, with the number of licensed beds increasing from about 14,500 to more than 30,000 in 1991. However, the issues in long-term care now are not the same as those in 1978. The creation of the Department of Medical Assistance Services (DMAS) to administer the Medicaid program has promoted a stronger focus on improved management of the program. The issues facing the Commonwealth today relate to problems with expanded Medicaid eligibility policies, the increasing costs of care for persons who are mentally retarded, effective use of community care, and the reimbursement system for community-based care.

Concerns about these issues are heightened because of the changing demographics of the State's population. With projected increases in the Virginia's elderly population, the demand for many of the long-term care services financed through Medicaid is expected to increase.

This study explores a number of options for reducing the overall costs of Medicaid funded long-term care services. As a result, the study focuses on five areas: (1) an assessment of the factors influencing trends in the State's Medicaid long-term care costs; (2) an analysis of the impact of the program's eligibility policies on Medicaid costs; (3) an assessment of Virginia's reimbursement policies; (4) a review of the Medicaid-supported community care services; and (5) an assessment of DMAS' cost audit and utilization review procedures. Within these areas, the following issues were addressed:

• What are the major factors that appear to be associated with the rising costs of Medicaid long-term care services?

• What particular cost avoidance strategies can the State pursue through altering current eligibility criteria and service options for Medicaid?

• Are the current reimbursement methodologies used to pay for institutional and community-based services appropriately designed to provide access to quality care at the lowest possible cost?

• Is community-based care adequately and appropriately used to reduce reliance on institutional services?

• Are DMAS' utilization review and cost audit processes adequate to ensure that the long-term care services supported through Medicaid are both necessary and appropriate?

Long-Term Care Services Account for Half of All Medicaid Expenditures

Expenditures on services that can be characterized as long-term care have always been a major component of Medicaid's total budget. Payments to providers of long-term care services have generally accounted for approximately one-half of the medical care expenditures for the program. In FY 1980, 51 percent of the $374 million spent for Medicaid was used to pay for long-term care services. By FY 1991, this percentage had decreased, but this type of care still represented 47 percent of total program spending.

When all of the Medicaid expenditures for long-term care recipients are considered (i.e., pharmacy expenses, inpatient hospital care), the data show that this population represents only 10 percent of the total number of Medicaid recipients, but they account for 56 percent of program costs. This means that the costs of serving this group is almost 11 times greater than for other Medicaid recipients (see figure on page ii).

Institutional Care Dominates Medicaid Long-Term Care Expenditures

Despite changes to federal statutes which are designed to encourage greater use of community-based care, almost nine out of every 10 dollars spent by Medicaid on long-term care in Virginia is still used to support institutional-based services (see figure on page iii). Payments for nursing home care constitute the largest proportion of expenditures on long-term care. In FY 1991, DMAS paid nursing homes more than $312 million - 55 percent of the total expenditures on long-term care. Another 25 percent of the payments ($145 million) can be attributed to the services that were provided persons in State and privately-operated intermediate care facilities for the mentally retarded (ICFs/MR).

Conversely, just over $29 million was used to provide non-medical, personal care services to infirm and disabled Medicaid recipients in FY 1991. More than $15 million was spent on home health care services. Finally, just over $19 million was used to provide community-based care for the mentally impaired.

Reasons for Medicaid Long-Term Cost Increases Vary by Service Type

Since 1983, the average growth in overall expenditures for long-term care has averaged slightly more than 11 percent. Among the institutional services funded by Medicaid, expenditures for State-operated facilities for the mentally retarded have grown at the fastest rate (approximately 13 percent.) These increases are due almost entirely to sharp rises in the cost of providing a day of institutional care, due primarily to increased federal regulations.

For nursing homes, average annual spending growth has been slightly more than nine percent. More importantly, this increase appears to be partly related to the fact that Medicaid is paying for a greater number of days of nursing home care due to growth in the number of recipients.

The fastest growing long-term care services are those provided in the community. Both personal care and home health expenditures have experienced substantial increases. In these programs, increases in the number of recipients have significantly outpaced the amount of spending per recipient. Still, the impact of these increases on total Medicaid spending is not as great because the services are delivered at a much lower cost than those provided in institutions.

Difficult Decisions Will Be Necessary to Control Long-Term Care Costs

The federal laws which are the basis for Medicaid's eligibility guidelines give the states considerable discretion in deciding who is served by the Medicaid program and what benefits they receive. As a result, the most effective methods for cost avoidance in Medicaid are to restrict the number of persons who have access to the program or limit the range of benefits that will be provided.

In Virginia, a substantial portion of the long-term care cost in the State is due to the extension of benefits to persons for whom Medicaid coverage is optional. In FY 1991, more than half of the 44,000 Medicaid long-term care recipients established eligibility for program benefits through provisions which were implemented at the option of the State. The total medical care expenditures for this group of recipients exceeded $370 million.

Similarly, more than half of Virginia's Medicaid expenditures for long-term care were for services which the State is not required to provide. The total cost of these optional services in FY 1991 was more than $366 million. This equals almost one-third of the total amount spent on Medicaid services in the State.

These data clearly demonstrate that the State has the discretionary authority to reduce the size and cost of its Medicaid program. However, the outcome would be a reduction in services to many elderly citizens who either live at the economic margin or rely almost exclusively on Medicaid for support of their basic health care needs.

The Reimbursement System Used for Nursing Homes Has Been Improved

When JLARC conducted a review of the Medicaid program in 1978, the State was using a retrospective cost-based reimbursement system for nursing homes. This system was criticized as inflationary because nursing homes were reimbursed 100 percent of their allowable costs. As a result, recommendations were made to establish a reimbursement system which encouraged efficiency in the delivery of nursing services.

Since that time, DMAS has made a number of improvements to the reimbursement system. Nursing home rates are now established prospectively with payment ceilings to limit the amount of reimbursement a facility can receive from the program. In addition, to enhance access for those Medicaid recipients who have substantial care needs, an adjustment is made to each nursing home's Medicaid reimbursement rate based on the intensity of the facility's case mix.

This study found that the current reimbursement system is well-designed and appropriately considers most of the key factors which influence cost. Moreover, one effect of establishing payment ceilings has been to slow the growth of nursing home expenditures. Presently, Virginia's Medicaid nursing home expenditures per elderly resident rank among the lowest in the country.

Still, three problems were found with the current system. First the payment ceilings are not based on measures of efficiency in the nursing home industry. Second, the system does not adequately account for the higher operating costs faced by smaller nursing homes. And third, the reimbursement rates do not reflect the costs nursing homes face due to legislation requiring criminal record checks and protection of employees from blood-borne pathogens.

Recommendations to improve the reimbursement system follow:

• The Department. of Medical Assistance Services should make adjustments to its reimbursement system to account for the higher indirect costs that smaller nursing facilities experience. The Secretary of Health and Human Resources should report the details of the adjustment methodology and its impact on Medicaid nursing home expenditures to the Joint Commission on Health Care prior to the 1994 session of the General Assembly.

• The Joint Commission on Health Care may wish to consider ensuring that current efforts to develop efficiency standards for the nursing home industry are coordinated so that the work of the Department of Medical Assistance Services is not duplicative or at odds with the findings being developed by the Virginia Health Services Cost Review Council.

• The Department of Medical Assistance Services should develop a methodology for determining the costs of Virginia's requirements regarding the use of criminal records checks and protection of nursing home employees from blood-borne pathogens. This methodology should be used to determine the amount of any rate adjustments required. These findings should be reported to the Secretary of Health and Human Resources by March of 1993.

No Cost Containment Incentives in Reimbursement System for ICFs/MR

Unlike for nursing homes, the reimbursement system for State-operated institutions for the mentally retarded contains no cost-containment incentives. As a result, Medicaid pays virtually 100 percent of the cost for what has become the most expensive form of long-term care in the State. In FY 1991, Medicaid paid the five State facilities an average reimbursement of $169. At this rate, the annual cost of care for a Medicaid recipient with no resources to pay for these services could be more than $61,000.

Still, if DMAS were to lower the rates for these facilities, the State would either have to ignore national trends and consolidate these operations, or use general fund dollars to replace the revenues lost due to the reduction in Medicaid payments.

Personal Care Services Could Be Better Targeted

Medicaid provides states with a number of options for developing community care programs through Section 2176 of the Omnibus Budget Reconciliation Act of 1981. One requirement of this provision is that the costs of services provided in the community do not exceed the cost of institutional care. Specifically, states are required to target services provided under the 2176 waiver program to only those people who are at risk of institutional placement.

This study found that, in almost all circumstances, the waiver services are less expensive than costly nursing home care. However, the local screening committees which are responsible for recommending personal care services, have not successfully restricted these placements to persons who are at imminent risk of institutionalization. Specifically, personal care services for 57 percent of the current recipients appear to be mistargeted. This has increased Medicaid spending by more than $16 million annually.

Another way in which targeting can affect the overall cost to the State is when people who should be offered personal care are instead steered into a nursing home. Because personal care is a more cost-effective form of care than nursing homes, these services should be offered as an alternative whenever possible.

It appears from this study that hospital-based screening committees have an inherent bias towards placing people in nursing homes rather than in personal care. After accounting for the availability of social support and the individual's functional status, hospital screening committees are still 25 percent more likely than community-based committees to place long-term care applicants in a nursing home.

The following recommendations are made:

• The Department of Medical Assistance Services should evaluate the feasibility of contracting with community-based screening committees to conduct either all or part of the hospital screening functions. If the agency determines that some screening functions should remain with the hospitals, it should also conduct a study to ensure that there are not other potential inconsistencies in the way in which hospitals conduct screenings.

• The General Assembly may wish to reduce general fund appropriations for personal care. This reduction should be between $2 million and$8 million depending on whether changes are made to personal care rates and the ability of hospital-based screening committees to divert more people to personal care. The General Assembly may wish to direct the Department of Medical Assistance Services to prepare a full analysis of alternative levels of reduction for the personal care program, including the potential impact on recipients.

Community Programs for the Mentally Retarded Have Developed Slowly

While the federal waiver authority has been used to divert the aged and disabled from nursing homes to a less expensive form of care over the past decade, the same has not been true for the mentally retarded. Although the 1981 federal legislation that authorizes waivers for the elderly and disabled also allows similar services to be targeted towards the mentally retarded, the State's use of this authority has lagged. Not until 1991 was the State able to obtain approval for the waiver and begin implementing a program that is designed to divert people from care in institutions to community programs.

Yet it is difficult to determine what impact the State's lack of participation in the waiver has had on overall Medicaid expenditures for the mentally retarded. Available data does not suggest that a more timely development of a waiver program would have led to further reductions in the number of recipients in need of institutional care. Since the early 1980s, the census in State-operated ICFs/MR has declined steadily as most residents who are moderately retarded were placed in community programs.

Further, it is current State policy to limit all non-emergency admissions in these facilities to persons who are severely or profoundly retarded. As a result, the majority of residents in these facilities have complex problems which cannot be easily met in the community. Presently, there is no evidence to indicate that the range of services that would be needed by these individuals can be provided more cost-effectively in the community.

Recommendation: The Department of Mental Health, Mental Retardation, and Substance Abuse Services should conduct a pilot study to determine whether community-based waiver services could be cost-effectively used to meet the needs of persons who are severely or profoundly mentally retarded.

Reimbursement System for Community Care Needs to be Reexamined

Although Medicaid expenditures for community-based care represent a relatively small portion of total program expenditures, spending on these services has been growing at a rapid rate of more than 70 percent since 1983. Partly as a result of this increasing trend, there is a heightened interest in the policies used by DMAS to establish reimbursement rates for both home health and personal care services.

A primary concern is whether these policies ensure patient access to community-based care while encouraging a cost-effective delivery of services. Currently, the State reimburses providers of home health care based on a fee-for-service system. However, the methodology used by DMAS to establish the prospective rates does not appropriately consider the key factors which influence home health costs. Also, fees may have been set too low to ensure patient access to these services in the future. In addition, the decision to pay hospital-based agencies higher rates for providing the same service as other operators does not appear justifiable.

The following recommendations are made:

• The Department of Medical Assistance Services should eliminate the distinctions made for hospitals when establishing fees for the delivery of home health services. In addition, the Department should only authorize payment of a higher fee to hospitals if there are no freestanding agencies which will agree to accept the home health care referral.

• The Department of Medical Assistance Services should use a revised statistical approach for setting the fees in each peer group.

The Department Has Strengthened Its Utilization Review Activities

As part of its overall efforts to contain Medicaid long-term care spending, DMAS conducts utilization review activities. Utilization review serves as a control mechanism for the amount and type of long-term care that is provided. Control of utilization is necessary to ensure that the Commonwealth pays only for those long-term care services that are necessary and appropriate.

Over the last several years certain aspects of utilization review have been strengthened. Home health agencies are, for the first time, receiving scrutiny. Nursing home and personal care admissions continue to be evaluated to ensure that only persons who meet non-financial as well as financial eligibility criteria receive the services. Still, some improvements are needed.

For example, utilization review activities for personal care recipients need to be improved to ensure that these continue to be individuals who are at imminent risk of nursing home placement. Also, utilization review activities in the ICFs/MR rely on procedures which are not adequate for evaluating the existence of active treatment. The defects in the process raise questions about the validity of the findings produced by the inspections of care.

The Cost Settlement and Audit Process is Not Timely or Comprehensive

Cost settlement and audit serves as a financial control mechanism for Medicaid reimbursement. Financial control is necessary to ensure that the Commonwealth pays only for those costs explicitly allowed under the established principles of reimbursement. Financial controls are also necessary to ensure the reliability of a provider's reported cost information.

In 1991, the Auditor of Public Accounts found that cost reports were not settled in a timely manner. DMAS recently enacted emergency regulations to lengthen the timeframe for setting interim reimbursement rates from 90 days to 180 days after receipt of a nursing home's cost report. Still, due to an increased workload, it often takes DMAS longer than 180 days to establish a new reimbursement rate and settle a cost report. This can adversely affect a provider's cash flow.

Regarding the actual audits, more than 80 nursing homes, or about a third of all those participating in the Medicaid program, have not had a field audit since at least FY 1986. This raises questions concerning the extent to which DMAS is able verify the accuracy of cost reports.

DMAS recently began to conduct additional field audits. Nursing homes are selected based on length of time since last field audit, amount of Medicaid utilization, and whether the provider's costs are below the payment ceiling. Despite this, 43 nursing homes which have not been field audited since FY 1986 have costs which are below the ceiling. However, only two of these providers were selected for audit by DMAS during FY 1992. These 43 nursing homes received, on average, $2.3 million in Medicaid reimbursement during FY 1990.

Two recommendations are made to strengthen the audit process:

• The Department of Medical Assistance Services should take the necessary steps to expedite the cost settlement process. In addition, the Department should reconsider the regulatory change that lengthens the timeframe for setting interim nursing home reimbursement rates.

• The Department of Medical Assistance Services should analyze its most recent field audit and payment data in order to select additional nursing homes for discretionary field audits. The Department of Medical Assistance Services should ensure that nursing homes selected for discretionary field audits meet, to the greatest extent possible, established selection criteria.