I 
Department  of  Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICAID  PAYMENTS  TO  INSTITUTIONS

FOR  PEOPLE  WITH  MENTAL

RETARDATION

I  -JUNE 1993  OEI-O4-91-O1O1(I 
1  EXECUTIVE  SUMMARY

PURPOSE 
To  determine  the  extent  and  causes  of variation  among  States  in per  resident 
Medicaid  reimbursement  rates  for large  intermediate  care  facilities  for people  with 
mental  retardation. 
BACKGROUND 
IntermediateC are  Facilities  for the  Mentally  Retarded  (ICF/MRs)areMedicaid 
funded  State  or privately-run  facilities  for people  with mental  retardation  or other 
developmental  disabilities.  Large  ICF/MRsarethose  with over  15 beds  andare 
traditionally  referred  to as institutions.  Seventy  percentof  all residents  oflarge 
ICF/NIRsarein  State-run  facilities. 
To  be  certified  to receive  Medicaid  reimbursement,  ICF/MRs  must  annually  meet  489 
Federal  standards.  The  standards  require  that  ICF/MRs  provide  24-hour  health  care 
and  continuous  individualized  training  for residents.  Federal  Medicaid  rules  for 
reimbursing  States  for  ICF/MRs  are  not  clearly  defined.  Each  State,  therefore,  defines 
the  rules  independently. 
The  preferred  treatment  setting  for people  with mental  retardation  has  shifted  from 
large  ICF/MRs  to community-based  care.  Yet,  in  1991 estimated  Medicaid  spending 
(including  State  and  Federal  shares)  for large  ICF/MRs  reached  $6.7 billion  for 
approximately  110,000 residents.  The  average  annual  Medicaid  reimbursement  to 
large  ICF/MRs  was $61,000  per  resident.  Eight  percent  of Medicaid  dollars  are  spent 
on 0.4 percent  of Medicaid  recipients  who still reside  in large  ICF/MRS. 
We  analyzed  factors  which  affect  per  resident  Medicaid  reimbursement  rates  for large 
ICF/MRs  in a stratified  random  sample  of 22 States. 
FINDINGS 
Medicaid  reimbumement  rates for  la~e  ICF/h4Rsare more  than jive  times  greater  in some 
States  than  in others 
The  average  annual  per  resident  Medicaid  reimbursement  for large  ICF/MRs  ranged 
among  States  from  $27,000  to $158,000  in 1991. 
State  Policia  account  for  variation  in ICF/A4R Medicaid  reimbumernent  rates  among 
States,  rather  than  qu.ulity of service, facility  chamctektics,  or r&t  demographics 
The  significant  factors  which  cause  some  States  to pay higher  rates  than  others  are 
State  rate-setting  methods,  high wages  paid  to State  employees,  higher  staff-to-resident 
1  ratios,  and  newer  facilities.  States  with  lower  reimbursement  rates  generally  had 
included,  in their  rate-setting  methodology,  caps  on costs  or efficiency  incentives  to 
control  costs. 
Wide  variation  in reimbursement  rates  is not  due  to differences  in quality  or level of 
service  at  facilities,  as measured  by ICF/MR  certification  standards.  Facility 
characteristics,  such  as occupancy  and  size, and  resident  demographics,  such  as level of 
retardation,  also  did not  account  for the  differences  in rates  among  States. 
tick  of @ective  controls  results  in excessive  spending 
Overstaffing  and  exorbitant  spending  for buildings  and  grounds  occur  at  ICF/MRs  in 
some  States  because  Medicaid  reimbursements  are  not  effectively  controlled. 
RECOMMENDATIONS 
HCFA  shouid  take  action  to reduce  excessive  spending  of Medicaid  @u&for  ICFM2s. 
HCFA  can  accomplish  this objective  in several  ways, including  one  or more  of the 
following. 
HCFA  can  take  administrative  action  to control  ICF/MR  reimbursement  under 
current  authorities.  HCFA  can  encourage  States  to adopt  cost  controls,  strengthen 
Federal  rate-setting  guidelines  and  provide  technical  assistance  to States  to help  them 
adopt  effective  controls. 
HCFA  can  seek  legislation  to control  ICF/MR  reimbursement.  Legislative  options 
include  mandatory  cost controls,  a Federal  per  capita  limit,  a flat  per  capita  payment, 
a case-mix  reimbursement,  and  a national  ceiling for  ICF/MR  reimbursements. 
HCFA  can  seek  comprehensive  legislation  to restructure  Medicaid  reimbursement  for 
both  ICF/MR  and  Home  and  Community-based  waiver  services  for developmentally 
disabled  people.  Restructuring  could  include  global  budgeting,  block  grants,  and 
financial  incentives. 
We  expect  considerable  savings  to the  Medicaid  program  depending  on what  option 
HCFA  pursues.  For  example,  we estimate  that  $683 million  in Federal  and  State 
Medicaid  funds  could  have  been  saved  in 1991 by only capping  costs. 
AGENCY  COMMENTS 
The  Assistant  Secretary  for  Planning  and  Evaluation  (ASPE)  and  HCFA  commented 
on the  report.  ASPE  concurred  with  the  recommendations.  While  HCFA  did not 
dispute  our  findings,  they  did not  concur  with the  recommendations  because  they 
considered  that  the  Medicaid  statute  and  regulations  allow them  little  discretion  in 
imposing  additional  controls  to curb  ICF/MR  payments.  Further,  HCFA  stated  that 
ii  any legislative  changes  should  be considered  within  the  framework  of national  health 
care  reform,  which  is still being  developed. 
We  continue  to believe  that  HCFA  should  take  action  to control  ICF/MR 
reimbursement.  We  have  documented  excessive  Medicaid  spending.  Prudent 
management  of Federal  resources  for  ICF/MRs  is important  and  will continue  to be  so 
under  upcoming  health  care  reform.  Therefore,  controls  over  unnecessary  Medicaid 
spending  should  not  be  delayed.  As we recommended,  HCFA  certainly  can  encourage 
States  to adopt  effective  cost controls,  can strengthen  rate-setting  guidelines,  and  can 
develop  legislative  proposals  to control  payments  for ICF/MRs. 
... 
111  TABLE  OF  CONTENTS

EXECUTIVE  SUMMARY

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...5

Wide  Variation  In Payment  Rates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...5

Reasons  For  Variation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6

Lack  Of Effective  Controls  Results  In Excessive  Spending  . . . . . . . . . . . . . . . .  9

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...11

AGENCY  COMhmms  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...13

ENDNOTES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...14

APPENDICES

/bibliography  .  . . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l

B:  Methodology  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..B-l

C.  Regression  Results  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..C-l

D:  Savings  Calculation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..D-1

E  Agency  Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..E-1
 INTRODUCTION 
PURPOSE 
To  determine  the  extent  and  causes  of variation  among  States  in per  resident 
Medicaid  reimbursement  rates  for large  intermediate  care  facilities  for people  with 
mental  retardation. 
BACKGROUND 
What  is an ICF/MR 
Intermediate  care  facilities  for the  mentally  retarded  (ICF/MRs)  are  State  and

privately-run  facilities  for people  with mental  retardation.  The  Health  Care  Financing

Administration  (HCFA)  recognizes  two categories  of ICF/MR  facilities.  Those  with  4

to  15 beds  may be  located  in community  settings  and  are  generally  referred  to as small

ICF/MRs.  Large  ICF/MRs  are  those  with over  15 beds.  Across  States,  large

ICF/MRs  average  160 residents  per  facility and  are  traditionally  referred  to as

institutions.  State-run  ICF/MRs  are  generally  much  larger  than  private  ICF/MRs.

Seventy  percent  of all residents  of large  ICF/MRs  are  in State-run  facilities.

Both  State-run  and  private  ICF/MRs  must  demonstrate  annually  that  they  meet

Medicaids  conditions  of participation.  There  are  8 conditions  or categories  of rules

encompassing  489 standards  that  facilities  must  meet  to be  certified.  The  standards

require  that  ICF/MRs  provide  24-hour  health  care  and  continuous,  individualized

training  programs  for their  residents.  States  conduct  annual  surveys  to assure  the

requirements  are  met  and  are  required  to inform  HCFA  of any deficiencies.

Who  is served  in ICF/MRs 
People  with  mental  retardation  and  related  conditions  are  sewed  in ICF/MRs. 
Medicaid  guidelines  refer  to mental  retardation  as significantly  subaverage  general 
intellectual  functioning  existing  concurrently  with deficits  in adaptive  behavior  and 
manifested  during  the  developmental  period.  Persons  with  related  conditions  have 
severe,  chronic  disability  that  is attributable  to cerebral  palsy, epilepsy,  autism,  or any 
other  condition  closely  related  to mental  retardation;  is manifested  before  a person 
reaches  age  22; is likely to continue  indefinitely;  and  results  in substantial  functional 
limitations  in at  least  three  of six major  life activities.  The  six activities  are  self-care, 
understanding  and  use  of language,  learning,  mobility,  self-direction,  and  capacity  for 
independent  living.  The  terms  mental  retardation  or related  conditions  and 
developmental  disabilities  are  generally  used  interchangeably.  Over  90 percent  of 
people  with  developmental  disabilities  who are  receiving  services  are  mentally 
retarded.  How  are ICF/iWRS jimded 
In  1971, the  Medicaid  program  wasamended  toprovide  Federal  reimbursement  to

States  forcaring  forpeople  tithmental  retardation  liting  in institutions.  Previously,

these  institutions  were  financed  solely by State,  local  and  private  funding.  Over  half of

the  States  applied  to participate  the  first year.  All States  now have  Federally-funded,

certified  ICF/MRs.

In  1980, via the  Boren  amendments,  Congress  made  significant  changes  in the

provisions  for Medicaid  reimbursement  of long-term  care  facilities,  including  ICF/MRs.

The  amendments  direct  States  to pay all long-term  care  facilities  on the  basis  of rates

which  States  assure  are  reasonable  and  adequate  to meet  the  costs which  must  be

incurred  by efficiently  and  economically  operated  facilities....  Congressional  intent

behind  the  amendments  was to give States  more  flexibility  in developing  rates,  but  not

to allow them  to develop  rates  solely on the  basis of State  appropriations.*

Federal  Medicaid  rules  for reimbursing  States  for  ICF/MRs  are  not  tailored

specifically  to ICF/MR  operations  and  are  not  clearly  defined.  Federal  regulations  do

not  precisely  define  reasonable  costs or efficiently  and  economically  operated

facility.  Each  State,  therefore,  is allowed  to define  these  terms  independently.

The  Federal  regulations  which  address  allowable  costs and  upper  payment  limits

require  States  to assure  that  the  estimated  average  payment  for  ICF/MRs  does  not

exceed,  in the  aggregate,  the  amount  that  can  reasonably  be  estimated  would  have

been  paid  for the  same  services  under  Medicare  principles  of reimbursement.  The

Medicare  law and  guidelines  specify that  reimbursement  must  be based  on the

reasonable  cost of semices  covered  under  the  program  and  must  be  related  to

patient  care.  Although  ICF/MRs  are  not  reimbursed  under  the  Medicare  program,

States  are  required  to apply  the  Medicare  principles  and  assure  HCFA  that  they  are

only reimbursing  providers  for reasonable  costs incurred  in providing  care.

What  are the  trends  in serving people  with  developmental  disabilities 
The  preferred  setting  for treating  people  with developmental  disabilities  has shifted 
from  institutional  to community-based  care.  A number  of studies  have  shown  that 
clients  with  developmental  disabilities  make  better  progress  toward  independent 
functioning  in community  rather  than  in institutional  settings. 2  Accordingly,  the 
Federal  goal  for people  with  developmental  disabilities  is to enable  independence, 
productivity  and  community  integration  .3  This goal was most  recently  reiterated  in 
the  Developmental  Disabilities  Assistance  and  Bill of Rights  Act of  1990.  Since  the 
ICF/MR  program  began  20 years  ago,  institutions  have  not  only improved  conditions 
in their  facilities,  but  have  discharged  many  residents  who could  live in a less 
restrictive  community  setting.  Appendix  A gives a bibliography  of relevant  studies. 
In  1981, Medicaid  was amended  to permit  waivers  for home  and  community-based 
(HCB)  semices.  Under  HCB  waivers,  States  may provide  semices  in a community 
2  setting  for persons  who would  othenvise  be treated  in an  ICF/MR,  if the  average 
Medicaid  cost  per  person  is the  same  or less.  Reimbursement  for HCB  care  is cost-
based,  as it is for ICF/MRs.  However,  HCFA  limits  the  number  of people  that  States 
may  serve  under  HCB  waivers.  Incentives  in the  current  reimbursement  system  are  in 
conflict  with  the  Federal  goal  of community  integration. 
What  are the present  erpenditum  for  knge  ICF/M& 
Despite  the  policy  shift toward  community-based  treatment,  most  Federal  Medicaid 
funds  for  people  with  developmental  disabilities  continue  to be  spent  on large 
ICF/MRs.  In  1991, States  average  annual  expenditure  in large  ICF/MRs  was ... 
$61,000 per  resident 
Further,  ICF/MR  expenditures  have  been  one  of the  fastest  growing  elements  of the 
Medicaid  program.  Total  Medicaid  expenditures  for large  ICF/MRs  have  more  than 
doubled  over  the  last  decade.  Over  the  same  period,  th~ population  in those 
institutions  has steadily  declined  -- reduced  by 28 percent  in the  State-run  facilities 
alone.  In  19914, estimated  Medicaid  expenditures  (including  State  and  Federal 
shares)  for both  State-run  and  private,  large  ICF/MRs  reached  ... 
$6.7 Billion  for  110,000 Residents 
1 
The  chart  belo#  illustrates  the  disproportionate  share  of Medicaid  dollars  spent  on 
people  with  developmental  disabilities  who still reside  in large  ICF/MRs. 
8%  of Total  Medicaid  Dollars  0.4%  of Total  Medicaid  Recipients 
04% 
3
 We  examined  factors  which  affect  per  resident  reimbursement  rates  for large 
ICF/MRsin22  States.  Weoriginally  selected  24 States  through  stratified  random 
sampling,  but  dropped  2 that  did not  respond  to our  survey. 
We  suxveyed  Medicaid  agencies  in each  of our  sample  States  to obtain  current 
(1) Medicaid  reimbursement  rates  for  each  large  ICF/MR,  (2) rate-setting  methods, 
and  (3)  ICF/MR  expenditures,  including  average  wage,  percent  of State  central  office 
overhead  costs  allocated  to an ICF/MR,  and  capital  expenditures.  We  obtained 
resident  and  facility characteristics  from  HCFAS On-line  Survey  and  Certification 
Reporting  System  (OSCAR). 
To  determine  the  extent  of reimbursement  rate  variation  among  States,  we compared 
the  average  facility  per  diem  rates  as reported  to us by State  Medicaid  agencies. 
To  determine  causes  of variation  among  States  in reimbursement  rates,  we performed 
a stepwise  regression  analysis  using only State-run  facilities.  We  examined  24 factors 
or independent  variables  pertaining  to (1) facility characteristics,  (2) resident 
demographics,  and  (3) State  reimbursement  policies.  We  used  the  SAS (Statistical 
Analysis  System)  software  program  to perform  the  stepwise  regression. 
We  completed  site visits to  15 ICF/MR  facilities  in 7 States.  In each  State  we selected 
at least  one  State-run  and  one  privately-run  large  ICF/MR,  where  available,  to 
determine  how ICF/MRs  are  using Medicaid  dollars.  We  interviewed  staff  at State 
Medicaid  agencies  and  State  Developmental  Disabilities  agencies.  Appendix  B gives a 
detailed  description  of the  methodology. 
our  review  was conducted  in accordance  with the  Quality  Standards  for  Inspections 
issued  by the  Presidents  Council  on  Integrity  and  Efficiency. 
4
 FINDINGS

MEDICAID  REIMBURSEMENT  RATES  FOR  LARGE  IcF_  ARE  MORE 
THAN  FIVE  TIMES  GREATER  IN SOME  STATES  THAN  IN OTHERS 
Average  Medicaid  reimbursement  in 1991 for large  ICF/MRs  ranged  among  States 
from  $27,000  to $158,000  per  resident.  In  1991, the  average  reimbursement  for all 
large  ICF/MRs  was $61,000  per  resident.  The  following  chart  illustrates  widely varying 
State  average  annual  per  resident  reimbursement  rates  for both  private  and  State-run 
large  ICF/MRs  combined. 
Annual  Per  Resident  Reimbursement  Rate 
By  State,  1991 
Over 
$100,000 
....................  ..................... 
$90,000 
....................  ......................  ....................................................................
$80,000 
....................  ....................................................................
$10,000 r 
....... 
22 Sample  States 
5
 ....  ~  . 
~ATE  POLICIES  ACCOUNT  FOR  VARIATION  IN ICF/MR  MEDICAID 
REIMBURSEMENT  RATES  AMONG  STATES,  W4THER  THAN  QUALITY  OF 
SERVI~  FACILITY  cHAIWC193RISTICS  OR  RESIDENT  DEMOGRAPHICS 
We  examined  characteristics  of ICF/MR  facilities  and  their  residents,  such  as size of 
facility  and  severity  of disability,  because  we expected  these  factors  to significantly 
affect  ICF/MR  reimbursement  rates.  Further,  in general  discussions,  we were 
frequently  told  that  variation  in rates  was due  to differences  in quality  or level  of 
semice.  We  found  that  State  reimbursement  policies  caused  most  of the  variation, 
however,  not  quality  of care  or facility and  resident  characteristics. 
State  Policies  Account  for Most  Variation  in ICF/MR  Medicaid  Reimbursement  Rates 
Among  States 
The  most  significant  causes  of variation  in lCF/MR  Medicaid  reimbursement  rates 
were  rate-setting  methods,  wages,  and  staff-to-resident  ratio.  The  age  of a faciliw  also 
caused  significant  variation  in reimbursement  rates.  Based  on our  regression  analysis, 
these  factors  explain  75 percent  of the  variation  in reimbursement  rates.  These 
factors  are  controllable  by States. 
Rate-setting  Methods 
Federal  Medicaid  law and  regulations  require  States  to describe  the  rate-setting 
method  in their  Medicaid  State  Plans,  but  do not  specify what  that  method  will be. 
Not  surprisingly,  States  employ  widely different  methodologies.  Our  analysis  showed 
that  State  reimbursement  rate  policies  accounted  for variation  in rates.  States  with the 
lower  rates 
apply  limits or caps  on costs  in calculating  reimbursement  rates, 
 
give efficiency  incentives  to encourage  cost control, 
 
do  not  reimburse  based  on a minimum  occupancy,  and 
 
have  a lower  proportion  of State  central  office  overhead  costs  allocated  to 
	
individual  ICF/MR  budgets. 
States  that  use caps  may apply  them  to specific  cost centers  (e.g.,  maintenance.

dietary,  routine  services)  or to aggregate  costs.  Frequently,  a cost  center  cap  is set  by

(a)  ranking  all the  ICF/MRs  based  on their  reported  costs  in that  cost  center,  and

(b)  selecting  a level  for the  cap.  For  example,  one  State  caps  the  cost  centers  for

administration,  room,  and  board  at  110 percent  of the  median  costs  of all large

ICF/MRs  in the  State.

In addition,  some  States  give facilities  an  incentive  to keep  costs  down.  For  example,

facilities  were  allowed  to  keep  a poruon  of the  difference  between  their  actual  costs

6  and  the  allowed  amount  under  specific  caps.  The  amount  of the  efficiency  incentive 
ranged  from  10 to  75 percent. 
Some  States  reimburse  facilities  based  only on actual  patient  days.  Other  States  base 
reimbursements  on a minimum  occupancy,  generally  80 or 90 percent  of capacity,  if 
actual  patient  days are  less.  States  that  do not  use a minimum  occupancy  adjustment 
have  lower  reimbursement  rates. 
States  allocate  a portion  of State-level  administrative  costs  to the  ICF/MRs.  The 
percent  of reimbursement  for State  administrative  costs ranged  from  less than  1 to  12 
percent.  Those  States  with  a smaller  proportion  of State  administrative  costs  allocated 
to  ICF/MR  facilities  had  lower  reimbursement  rates. 
Wages 
The  wage  level  of ICF/MR  employees  was a very influential  factor  affecting 
reimbursement  rates.  The  lower  the  wages,  the  lower  the  reimbursement  rates.  The 
large  State-run  ICF/MRs  we examined  are  staffed  with  State  government  employees; 
therefore,  the  wage  levels  are  determined  by the  State  rather  than  the  facility. 
Average  annual  wage,  including  fringe  benefits,  for direct  care  workers  at State-run 
large  ICF/MRs  ranged  from  $14,000 for the  State  with  the  lowest  average 
reimbursement  rate  to $47,000  for the  State  with the  highest  rate. 
Staff-to-Resident  Ratio 
A major  expense  for  ICF/MRs  is their  staff.  The  number  of staff  each  facility  employs 
and  how much  they  are  paid  strongly  influences  what  a facilitys reimbursement  rate 
will be.  Our  analysis  confirmed  that  ICF/MRs  with lower  staff-to-resident  ratios  have 
lower  rates.  In one  of the  States  with high reimbursement  rates  the  staff-to-resident 
ratio  was three  to one,  while  in a State  with a lower  rate  the  ratio  was one  to one. 
Facility  Age 
The  final  factor  that  our  regression  analysis  showed  had  a statistically  significant

influence  on reimbursement  rates  was age  of the  facility.  We  used  the  date  each

facility was certified  to participate  in the  ICF/MR  program  as a proxy for  age.  The

older  its certification  date,  the  lower  its rate.  This  may be  due  to the  way States

reimburse  ICF/MRs  for capital  costs.  For  example,  in one  State,  capital  costs  for its

newer  facilities  resulted  in higher  reimbursement  rates.

Wide  Differences  in ICF/MR  Reimbursement  Rates  Are  Not  Due  to Quality  of

Service,  Facility  characteristics,  or Resident  Demographics

We  included  characteristics  of ICF/MR  facilities  and  their  residents,  such  as size of

facility  and  severity  of disability,  in our  regression  analysis  because  these  factors  could  affect

7
 ICF/MR  reimbursement  rates.  Such variables,  however,  were  not  statistically 
significant;  that  is, they  did not  account  for the  wide  differences  in reimbursement 
rates  among  States. 
Quality  and  Level  of Service 
Quality  and  level  of service  as measured  by ICF/MR  certification  standards  did not 
cause  wide variation  in reimbursement  rates.  All facilities  in our  sample  had  passed 
their  most  recent  annual  sumeys  and  been  certified  as having  met  the  Federal 
operating  and  program  standards.  The  489 standards  by which  ICF/MRS  are 
evaluated  are  the  only measure  of quality  used  to authorize  or deny  payment  of 
Medicaid  funds.  Although  it is difficult  to measure  quality,  HCFAS quality  of care 
standards  require  that  each  (1)  resident  receive  continuous  active  treatment  according 
to a detailed,  individualized  training  plan,  aimed  at  increasing  independence,  and  (2) 
facility  meet  specified  management,  staffing,  treatment,  client  rights,  health,  diet,  and 
safety  requirements.  Since  1988, Federal  guidance  has directed  State  surveyors  of 
ICF/MRs  to focus  on implementation  of the  active  treatment  requirement. 
Our  regression  analysis  showed  that  level and  quality  of service,  as measured  by 
ICF/MR  certification  standards,  did  not  significantly  affect  reimbursement  rates. 
Further,  our  on-site  visits to  15 lCF/MRs  in 7 States  confirmed  this finding.  We 
observed  little  difference  in quality  and  level of care  in facilities  with the  highest  rates 
and  those  with  the  lowest. 
Facility  Charactetitics 
Our  regression  analysis  showed  that  the  following facility characteristics  of the

ICF/MRs  were  not  significant  in explaining  the  wide variation  in reimbursement  rates.

.  size, as measured  by number  of residents

.  percent  of employees  in direct  care

number  of discrete  living units

 
occupancy  rate  (number  of beds  divided  by number  of residents)

 
percent  of all beds  in a facility that  are  ICF/MR-certified

 
Resident  Demographics 
For  each  ICF/MR,  we included  in our  regression  analysis  the  percent  of residents

with  profound  retardation,

 
.  over  age  65,

under  age  22,

 
who  are  blind  or deaf,

 
who  are  nonambulatory.

 
attending  off-campus  day programs,  and

 
using medication  to control  behawor.

 
8  None  of these  resident  characteristics  had  a statistically  significant  effect  on the  wide 
variation  among  States  in reimbursement  rates.  For  example,  differences  among 
States  in the  proportion Of residents  who are  nonambulatory  or profoundly  retarded 
did  not  account  for the  wide variation  in reimbursement  rates. 
Appendix  C contains  details  of the  results  of the  regression  analysis. 
LACK  OF  EFFECTIVE  CONTROLS  RESULTS  IN EXCESSIVE  SPENDING 
Although  some  States  have  established  effective  controls  and  have  lower

reimbursement  rates,  in other  States  ICF/MR reimbursement  rates  may have  exceeded

a level  necessary  to provide  required  care.  In the  15 ICF/MRs we visited,  the

prevailing  attitude  is that  funding  is not  a problem.  In an era  when  most  Medicaid

providers  are  being  cut  back  and  States  are  faced  with budget  shortfalls,  virtually  all

ICF/MR  administrators  said  they  have  sufficient  funds.  As one  State  administrator

commented,  any request  for funds  1s rubber  stamped,  even  if it is excessive.

States  place  fewer  controls,  in particular,  on their  State-run  large  ICF/MRs  than  on

their  other  Medicaid  providers.  For  example,  all States  apply  limits  or caps  on costs

when  setting  reimbursement  rates  for their  nursing  homes  and  78 percent  of States

cap  costs  for  their  private  ICF/NfRs.  Yet, only a third  of the  States  use such  cost

control  methods  when  setting  reimbursement  rates  for their  State-run  ICF/MRs.

Across  States,  the  average,  annual,  per  resident  reimbursement  for State-run  large

ICF/MRs  ($77,000)  is almost  double  the  average  for large  private  ICF/MRs  ($42,000).

Furthermore,  in the  privately-owned  lCF/MRs  we visited,  cost  controls  had  not  forced

cuts in services;  rather,  they  had  forced  the  ICF/MRs  to operate  more  efficiently.

In some  of the  15 facilities  we visited,  we observed  the  products  of uncontrolled.

excessive  reimbursements,  notably  in staffing  and  buildings  and  grounds.  In one  State

that  has  a high reimbursement  rate,  a State  program  official  said  that  they  were

spending  dollars  on staff  and  buildings  with no attendant  improvement  in quallty  of

care.

staffing 
In some  facilities  with higher-than-average  reimbursement  rates,  the  average  staff-to-
resident  ratio  is 50 percent  higher  than  the  national  average.  Further,  our  analysls  Of 
annual  Medicaid  survey  data  shows  that  the  more  employees  per  resident  a facll]ty 
has,  the  lower  the  percent  of staff  there  are  in direct  care.  For  example,  in one  hlgh
cost  facility,  an administrator  commented  that  their  four-fold  increase  in recordkeepmg 
staff  had  not  increased  resident  care. 
In the  States  we visited,  those  with  the  highest  reimbursement  rate  not  only  hire  more 
staff, but  hire  professionals  with  ~d~anced  degrees  to do the  same  jobs  that  are  being 
done  effectively  by skilled  staff  without  tormal degrees  in States  with  lower  ra[es. 
Some  States,  for  example,  use volunteer  foster  grandparents  while  others  employ  full-
9  time  degreed  professionals  to supemise  residents  when  they are  not  engaged  in formal 
training  routines, 
Extra  staff  does  not  necessarily  improve  resident  outcomes.  Outcomes  are  less 
affected  by numbers  of staff, than  how they  are  deployed.  Our  analysis  shows virtually 
no correlation  between  staff  to resident  ratios  and  the  number  of deficiencies  on 
annual  certification  surveys.  At one  ICF/MR,  we were  told  that  correction  of most 
certification  deficiencies  requires  better  management  of staff, not  added  staff.  The 
administrator  at  another  ICF/MR  commented  that  if staff  do everything  for residents, 
prepare  food,  do laundry,  etc.,  as is done  in large  institutions,  residents  do not  have 
the  opportunity  to develop  independent  living skills. 
Buildings  And  Grounds 
As shown  by the  following  illustrations,  Medicaid  funds  are  used  to  help  maintain  large 
and  sometimes  exorbitant  ICF/MR  buildings  and  campuses. 
Two  of the  15 ICF/MRs  we visited  maintain  what  they  called  hospitals  on 
 
campus.  The  hospitals  were  fully staffed  with physicians  and  nurses,  yet  surgery 
and  inpatient  care  are  obtained  at nearby  community  hospitals. 
Another  ICF/MR  that  was slated  to close  in 3 years  is building  a $7.2 million 
	
food  service  building. 
At  another  ICF/MR  major  renovations  to dormitory  buildings  are  undenvay 
	
despite  plans  for closure  in a few years. 
Many  ICF/MRs  maintain  hundreds  of acres  of grounds  which  in some  cases  are 
	
used  for  recreational  activities  by the  neighboring  community,  more  than  by the 
ICF/MR  residents. 
10
 RECOMMENDATIONS

HCFA  SHOULD  TAKE  ACTION  TO  REDUCE  EXCESSIVE  SPENDING  OF 
MEDICAID  FuNDS  FOR  ICF~S. 
HCFA  can  accomplish  this objective  in several  ways, including  one  or more  of the 
following. 
HCFA  can  take  adrninistrotive  action  to control ICFIMR  reimbunement  under  current 
authonties.  Conceivably,  administrative  controls  can  forestall  a need  for  legislative 
action.  However,  HCFA  should  take  administrative  actions  in the  interim  even  if it 
chooses  to develop  legislative  proposals.  Following  are  examples  of specific 
administrative  actions. 
Administrative  Cost  Controls:  Encourage  States  to adopt  effective  cost  controls 
for  ICF/MRs.  HCFA  can  do so by:  strengthening  Federal  rate-setting 
guidelines,  such  as those  on upper  payment  limits;  periodically  producing  a 
compendium  of cost containment  mechanisms  successfully  used  by States  to 
control  ICF/MR  expenditures;  and  providing  technical  assistance  to State 
Medicaid  agencies  to  help  them  adopt  methods  used  by other  States  with 
effective  controls. 
HCFA
 can seek  legislation to control ICF/ikfR  reimbursement.  Following  are  several 
examples  of legislative  options. 
Mandato~  Cost  Controls:  Require  States  to implement  effective  cost  control 
mechanisms  in their  ICF/MR  rate-setting  methodology  as a condition  for 
receiving  Federal  financing.  The  legislation  could  specify  the  kinds  of controls, 
such  as caps  on costs,  or efficiency  incentives. 
Federal  Per  Capita  Limit:  Limit  Federal  financial  participation  for  each 
resident  of an  ICF/MR.  The  Federal  government  would  match  State  payments 
up  to a maximum  amount  per  resident.  State  expenditures  beyond  that  amount 
would  not  be  eligible  for Federal  matching  payments. 
Flat  Per  Capita  Payment:  Set  a specific  Federal  per  capita  payment  amount 
for residents  of ICF/MRs.  States  would  receive  a flat  amount  for each  resident 
of an  ICF/MR  regardless  of how much  States  spend.  In addition  to helping 
control  Federal  expenditures,  this would  allow States  to budget  for Federal 
funds  based  on their  institutionalized  developmentally  disabled  population. 
Case-mix  Reimbursement:  Develop  a reimbursement  system  for residents  of 
ICF/MRs  based  on the  functioning  level of the  residents  and  the  level  of care 
provided  to them.  Specific  payment  amounts  would  be based  on a facilitys 
case  mix of residents  and  the  programs  being  provided  for them.  This  option 
11  would  refine  the  typical  State  reimbursement  methodology  which  reimburses 
facilities  at the  same  rate  per  resident  regardless  of residents  needs  or level of 
care  being  provided. 
National  (Ming  for  ICF/MR  Reimbursemenfi:  Cap  total  Federal 
reimbursements  for  ICF/MR  services.  States  would  be  allocated  a sPecific 
amount  under  the  cap  regardless  of any State  program  changes. 
HCFA  can  seek  comprehensive  legislation  to restructure  Medicaid  reimbunement  for  both 
ICFIMR  and  Home  and  Communip-based  (HCB)  waiver  services for  developmentally 
disabled  people.  Restructuring  would  combine  institutional  and  community-based 
Medicaid  expenditures  under  one  authority  and  remove  the  current  reimbursement 
incentive  that  favors  institutional  over  community  spending.  HCFA  could  expand  one 
or more  of the  ICF/MR-specific  options  listed  above  to include  community-based  care 
or select  one  of the  following  broad  legislative  options. 
Global  Budgeting  for Developmentally  Disabled  Recipients  of Medicaid 
Setices:  Combine  all Federal  ICF/MR  and  HCB  waiver  funding  under  one 
authority.  To  compute  the  amount  of Federal  funds  each  State  would  receive, 
HCFA  could  negotiate  a dollar  cap with the  States. 
Block  Grants:  Provide  a grant  to each  State  for operating  institutional  and 
community-based  programs  for its developmentally  disabled  citizens.  This 
option  offers  States  flexibility;  however,  the  legislation  should  assure  that 
Federal  program  requirements  continue  to be  enforced. 
Financial  Incentives:  Offer  States  financial  incentives  to move  residents  out  of 
institutions  and  into  lower  cost community-based  care.  An incentive  system  is 
consistent  with  existing  Federal  program  policy preferences  for community-
based  care.  The  program  would  be  structured  to ensure  that  savings from 
more  cost efficient  operations  exceed  the  amount  of incentives  offered. 
The  above  options  are  not  intended  to be  an all inclusive  list for reducing  excessive 
spending  for  ICF/MRs.  However,  we estimate  considerable  savings to the  Medicaid 
program  from  implementing  one  or more  of the  suggested  options.  To  illustrate,  we 
estimate  that  $683 million  in Federal  and  State  Medicaid  funds  could  have  been  saved 
in 1991 by implementing  only the  cost control  method  of capping  costs.  Potential 
savings  from  implementing  other  options  would  depend  on how the  options  are 
implemented.  For  example,  if a Federal  per  capita  limit for  ICFNRS  were  set  at no 
more  than  the  current  average  annual  reimbursement  rate  of $61,000, we estimate 
$565 million  in Federal  and  State  Medicaid  funds  could  have  been  saved  in our 
sampled  States  in 1991.  Appendix  D shows how we estimated  savings. 
12
 AGENCY  COMMENTS

We  circulated  the  draft  report  for comment  to the  Administrator  of the  Health  Care

Financing  Administration  (HCFA),  the  Assistant  Secretary  for Planning  and

Evaluation  (ASPE),  and  the  Assistant  Secretary  for Management  and  Budget  (ASMB).

Appendix  E shows the  full text  of the  comments  provided  by ASPE  and  HCFA.

ASMB  did not  comment  on the  report.

The  ASPE  concurred  with our  recommendations  but  expressed  concern  that  they

could  appear  to some  readers  of the  report  as an  unfounded  attempt  to reduce  total

spending  on behalf  of people  with  mental  retardation.  To  clarify, our

recommendations  are  targeted  to  reduce  only excessive  spending  which we found  does

not  affect  the  quality  of care  for  residents  of ICF/MRs.  In response  to ASPES

technical  comments,  we made  changes  to clarify our  information  where  necessary.

The  HCFA  did not  dispute  our  report  findings but  did not  concur  with  our

recommendations.  They  stated  that  the  Medicaid  statute  and  regulations  allow  little

discretion  in imposing  additional  administrative  controls  to curb  ICF/MR  payments

and  that  legislation  would  be  needed  to implement  the  other  options  we

recommended.  Further,  HCFA  stated  that  any legislative  changes  should  only be

considered  as part  of the  Administrations  national  health  care  reform,  which  is still

under  development.

We  continue  to believe  HCFA  should  take  action  to control  reimbursement  and

ensure  that  Medicaid  payments  for  lCF/MRs  are  reasonable.  We  have  documented

unnecessary  Medicaid  spending  at  ICF/MRs.  HCFA  certainly  can  encourage  States  to

adopt  effective  cost  controls  for  lCF/MRs,  can  strengthen  rate-setting  guidelines,  and

can  develop  specific  legislative  proposals  and  submit  them  for Departmental  review.

We  believe  prudent  management  of Federal  resources  for  ICF/MRs  is important  and

will continue  to be  so under  the  Admlnlstrations  upcoming  national  health  care

reform.  Therefore,  controls  over  unnecessary  Medicaid  spending  should  not  be

delayed,  particularly  during  this  perwd  of financial  crisis for the  Medicaid  program.

13
 ENDNOTES

1.  House  Report  No. 96-1479  (p.  154) on H.R.  7765, the  Omnibus  Reconciliation 
Act  of  1980, Section  962 of P.L. 96-499. 
2.  See  Bibliography  for exact  citations  of studies  conducted  by Conroy,  and  Bradley; 
Nerney,  Conley,  and  Nisbet;  and  Moscovitch.  These  are  just  a few of the  studies  on 
this issue.  Many  more  are  cited  in the  report  by Robert  Helms,  Assistant  Secreta~ 
for Planning  and  Evaluation. 
3.  In the  1990 reauthorization  of the  Developmental  Disabilities  Assistance  and  Bill of 
Rights  Act,  one  of the  stated  purposes  of the  law is, to enable  [persons  with 
developmental  disabilities]  to  achieve  their  maximum  potential  through  increased 
independence,  productivity,  and  integration  into  the  community.  42 U.S. C., section 
6000, (b)(l). 
4.  To  estimate  total  1991 Medicaid  expenditures,  we multiplied  the  average 
reimbursement  per  resident,  obtained  from  our  State  survey,  by the  number  of 
residents  in ICF/MRs  over  15 beds.  The  latest  available  data  for  residents  in facilities 
over  15 beds  is 1990 -- 110,548.  The  resident  data  was obtained  from  the  Recurring 
Data  Set  Project  of the  Center  for  Residential  Services  and  Community  Living, 
University  of Minnesota,  K.C. Lakin.  We  reduced  the  1990 figure  and  used  110,000 as 
an  estimate  for  1991, a conservative  reduction  of 0.5 percent. 
5.  To  calculate  the  percentage  of total  Medicaid  dollars  and  recipients  attributable  to 
large  ICF/MRs,  we referred  to HCFAS Form  2082 which reports  the  total  vendor 
payments  and  total  recipients  for all Medicaid  for Fiscal  Year  1991.  We  then  divided 
the  expenditure  and  recipient  figures  we use in the  report  for  large  ICF/MRs  ($6.7 
billion  and  110,000, respectively)  by the  Medicaid  totals  from  the  HCFA  Form  2082. 
14
 APPENDIX  A

BIBLIOGRAPHY 
Braddock,  David.  Federal  Policv toward  Mental  Retardation  and 
Developmental  Disabilities.  Baltimore,  Md.:  Paul  H. Brookes  Publishing  Co.,  1987. 
Braddock,  David,  Hemp,  Richard,  Fujiura,  Glenn,  Bachelder,  Lynn,  and 
Mitchell,  Dale.  The  State  of the  States  in Developmental  Disabilities.  Baltimore, 
Md.:  Paul  H. Brookes  Publishing  Co.,  1990. 
Braddock,  David,  Hemp,  Richard,  and  Fujiura,  Glenn.  National  Study  of 
Public  Spending  for Mental  Retardation  and  Developmental  Disabilities,  American 
Journal  of Mental  Deficiency,  1987, vol.  92, No. 2, pp.  121-133. 
Boggs, Elizabeth  M.  Legal,  Legislative,  and  Bureaucratic  Factors  Affecting 
Planned  and  Unplanned  Change  in the  Delivery  of Services  to the  Mentally  Retarded 
in Begab,  Michael  J., and  Richardson,  Stephen  A., eds.  The  Mentallv  Retarded  and 
Societv:  A Social  Science  Perspective.  Baltimore,  Md.:  University  Park  Press,  1975. 
Conroy,  J. W. and  Bradley,  V. J. (1985).  The  Pennhurst  Longitudinal  Studv:  A 
re~ort  of five vears  of research  and  analysis.  Philadelphia:  Temple  University 
Developmental  Disabilities  Center.  Boston:  Human  Services  Research  Institute. 
Conroy,  J. W., Dickson,  M. M., and  Lemanowicz,  J. A.  Pennsylvania  Waiver 
Evaluation:  Results  of the  Independent  Assessment  of Pennsylvanias  Home  and 
Communitv-Based  Services  Waiver  Pro~ram  in the  Area  of Mental  Retardation. 
Philadelphia:  Temple  University  Developmental  Disabilities  Center/UAP,  Research  & 
Quality  Assurance  Group,  July  1989. 
Ellis,  Norman  and  Bray,  Norman,  eds.  International  Review  of Research  in 
Mental  Retardation.  Orlando,  Florida:  Academic  Press,  Inc.,  1984. 
Helms,  Robert  B., Chairman  and  Assistant  Secretary  for Planning  and 
Evaluation.  Renort  from  the  Workinu  Group  on  Improving  Public  Policies  and 
pro~rams  Affectin~  Persons  with  Mental  Retardation  and  Other  Developmental 
Disabilities,  Washington,  D. C., U.S. Department  of Health  and  Human  Services, 
December  1988. 
Lakin,  K. Charlie,  et  al.  Longitudinal  Patterns  in ICF/MR  Utilization,  1977-
1986, Mental  Retardation,  1989, Vol. 27, No. 3, pp.  149-158. 
A-1
 Lakin,  K. Charlie,  Kimm,  Christina,  Li, Xiaoming.  The  Costs  of State 
Institutions  in the  United  States  and  Factors  Associated  with  Variability,  University  of 
Minnesota,  Research  and  Training  Center  on Residential  Services  and  Community 
Living,  Institute  on Community  Integration/UAP. 
Lakin,  K.C., White,  C.C., Prouty,  R.W., Bruininks,  R.H.,  and  Kimm,  C. (1991). 
Medicaid  Institutional  fICF-MR)  and  Home  and  Community  Based  Services  for 
Persons  with  Mental  Retardation  and  Related  Conditions  (Report  No.  35). 
Minneapolis:  University  of Minnesota,  Center  on Residential  Setices  and  Community 
Living. 
Moscovitch,  Edward.  Mental  Retardation  Programs:  How  Does  Massachusetts 
Compare?  Boston,  Massachusetts,  Pioneer  Institute  for Public  Policy Research,  1991. 
Nerney,  Tom,  Conley,  Ron,  and  Nisbet,  Jan.  A Cost  Analvsis  of Residential 
Svstems  Seting  Persons  with Severe  Disabilities:  New Directions  in Economic  and 
Policv Research.  Cambridge,  Massachusetts,  Human  Services  Research  Institute. 
Smith,  Gary  A., and  Gettings,  Robert  M.  The  HCB  Waiver  Program  and 
Semites  for  People  with  Developmental  Disabilities:  An U~date.  Alexandria, 
Virginia,  National  Association  of State  Mental  Retardation  Program  Directors,  Inc., 
January  1991. 
A-2
 APPENDIX  B

METHODOLOGY 
Sample  Selection 
Our  population  included  48 States  and  the  District  of Columbia.  Wyoming  and 
Arizona  were  excluded  because  they  participated  in the  ICF/MR  program  for only 
part  of the  1981 to  1990 period  we used  for stratification. 
For  a regression  analysis,  we stratified  States  by percent  change  in number  of residents 
of all large  ICF/MRs  (over  15 beds)  between  1982 and  1990.  We  placed  each  of the 
48 States  and  the  District  of Columbia  in one  of three  strata. 
1)  Large  decrease  in residents  (26%  - 78%) 
2)  Moderate  decrease  in residents  (1%  - 25%) 
3)  Increase  in residents 
By stratifying  and  then  randomly  choosing  States  from  each  strata,  we assured  that  our

sample  included  States  that  are  pursuing  different  policies  regarding  the  size of their

institutions.  The  amount  of decrease  in institutional  residents  reflects  differing  State

policies  on downsizing  institutions  and  increasing  community-based  care.  We  obtained

the  number  of residents  in ICF/MRs from  the  Recurring  Data  Set  Proj?ct  of the

Center  for  Residential  Sexvices and  Community  Living, University  of Minnesota,

K. Charlie  Lakin.

We  then  selected  24 States  through  random  sampling.  Within  these  States,  we

included  all large  ICF/MRs.

Two  States  did  not  respond  to our  survey  questionnaire,  reducing  the  sample  from  24

States  and  399 large  ICF/MRs  to 22 States  and  380 large  ICF/MRs.  Of the  large

ICF/MRs  in the  sample,  117 were  State-run  and  263 were  private.

For  site visits, we arrayed  the  22 sampled  States  according  to percent  change  in

(1) number  of residents  between  1982 and  1990, and  (2) expenditures  for large

ICF/MRs  between  1981 and  1988 (latest  available  data).  We  placed  the  States  in two

strata  based  on change  in expenditures,  We  obtained  the  expenditure  data  from  a

study  done  by the  University  Affiliated  Program,  University  of Illinois  at  Chicago,

Dave  Braddock,  et.al.,  1989.

B-1
 The  following  matrix  illustrates  the  6 categories  (cells)  our  bracketing  created  and  the 
number  of sampled  22 States  in each  cell. 
SAMPLING  MATRIX 
I 
I  % CHANGE  IN ICF/MR  RESIDENTS 
I 
Large  Moderate 
Decrease  Decrease  Increase 
-. 
Smaller  i3 
~  Increase  4(  2 
% CHANGE  IN 
TOTAL  ICF/MR  ~ 
Larger
EXPENDITURES 
1  Increase  4  5  4 
1  .-
For  our  site visits, we then  randomly  selected  one  State  from  each  cell, a total  of six 
States.  We  selected  States  this \va} to assure  that  we visited  States  that  represent 
wide  differences  in expenditure  :lnd resident  trends.  In addition  we visited  one  State 
to test  our  data  collection  instruments.  tor a total  of seven  States  selected  for site 
visits. 
Data  Collection 
We  collected  data  from  the  following  tour sources. 
1)	 The  On-line  Sumey.  Certification  and  Reporting  System  (OSCAR) 
maintained  by HCFA 
2)  A mail  survey  of State  Jfedicaid  agencies 
3)  Interviews  with State  [Jfficiais in seven  States 
4)  Site visits to  15 large  ICF \lRs 
The  OSCAR  database  contains  detailed  information  on ICF/MRs.  These  data  are 
updated  at  least  once  a year  when  a facility is sumeyed  for Medicaid  recertification. 
We  compiled  a database,  using dBase  111+, consisting  of variables  from  the  OSCAR 
file for  all the  facilities  in our  22 sample  States.  The  variables  identified  the  facilities, 
including  whether  they were  private  or State-run,  and  described  the  residents  and  the 
facilities.  We  also  used  existing  OSCAR  data  to create  new variables,  such  as staff-to-
resident  ratio. 
We  compiled  a second  database  !r,~m !hc results  of a State  sumey.  We  asked  each 
State  Medicaid  agency  to answer  qucs[l,]ns  concerning  (1) reimbursement  rate  for 
each  facility  for State  Fiscal  Year  1W 1, (2) how States  set  reimbursement  rates  for 
both  State-run  and  private  ICF,\fRS.  {3J average  wage  for  direct  care  workers  at 
State-run  and  private  ICF/MRs.  iind i 4 ) percent  of reimbursement  for capital, 
administration,  and  State  centra  office  (>verhead allocated  to ICF/MRs.  When  needed  for clarification,  we requested  that  States  also send  supporting  documents

describing  their  rate-setting  methodologies.

Finally,  we visited  seven  States  and,  using structured  guides,  intewiewed

Developmental  Disabilities  program  staff,  and,  in most  cases,  State  Medicaid  agency

staff  involved  in setting  ICF/MR  rates.  We  also visited  at least  one  State-run  and  one

private  ICF/MR,  where  available,  in each  State,  toured  the  facility, and  intewiewed

staff.

Data  Ana$wb 
To  determine  the  extent  of variation  in reimbursement  rates,  we computed  each 
States  average  rate  and  compared  those  across  States.  We  used  analysis  of variance 
to confirm  that  there  was significant  variation  in rates  among  States. 
To  determine  causes  for variation  in rates,  we completed  a regression  analysis.  We 
constructed  and  tested  a model  consisting  of 24 independent  variables  to determine 
which variables  affect  the  reimbursement  rate  (dependent  variable). 
The  independent  variables  are  listed  below  by three  categories.  Following  each 
variable,  in parentheses,  is an abbreviated  title  that  we used  for  our  regression  analysis 
described  in Appendix  C. 
Facility  Characteristics 
1)  Size, measured  by number  of residents  (Size) 
2)  Number  of discrete  living units  (#  Units) 
3)  Occupancy  rate  -- number  beds divided  by number  residents  -- (Occup. ) 
4)  Percent  of all beds  in a facility that  are  ICF/MR  certified  (% ICF/MR) 
5)	 Age  of facility  -- date  began  participation  in the  ICF/MR  program  --
(Part.date) 
6)  Percent  of employees  working  in direct  resident  care  (% DirCare  ) 
7)	 Total  number  of deficiencies  on the  facilitys last annual  Medicaid 
certification  smwey (De fies.) 
8)  Total  staff-to-resident  ratio  (StffRes) 
Resident  Characteristics 
Percent  of residents 
1)  with  profound  retardation  (70ProRtrd) 
2)  over  age  65 (%Over  65) 
3)  under  age  22 (% Under  22) 
4)  who are  blind  or cleat (7c Bid/Deaf) 
5)  who  are  nonambulatory  (% Nonambu) 
6)  attending  off-campus  day programs  (% DayProgs) 
7)  using medication  to control  behavior  (%onDrugs) 
B-3  State  Reimbursement  Policy Factors 
1)  Limits  or caps  on allowable  costs (Caps) 
2)  Efficiency  incentive  (Incentive) 
3)  Minimum  occupancy adjustment  (OccAdjmt) 
4)  Amount  of cost of living adjustment  (COLA) 
5)  percentage  of total  reimbursement  for capital  expenditures  (Capital) 
6)  Percentage  of total  reimbursement  for administration  (Admin.) 
7)	 Percentage  of total  reimbursement  for State,  central  office  overhead 
allocated  to the  ICF/MRs  (Overhead) 
8)  Average  wage  of direct  care  staff  (Wage) 
9)	 Per  capita  State  spending  for all services  -- total  direct  general 
expenditures  for the  State  divided  by total  residents,  based  on data 
obtained  from  the  U.S. Bureau  of the  Census,  Government  Finances, 
Series  GF,  No. 5, annual  -- (PerCapSp.) 
Our  regression  analysis  included  only State-run  facilities.  We  did not  complete  a 
regression  analysis  of the  private  ICF/MRs  because  many  States  were  unable  to 
provide  data  on wages,  proportion  of reimbursement  for capital,  administration  and 
central  office  costs. 
We  did not  validate  the  OSCAR  database  prior  to  our  analysis. 
We  used  a linear  regression  analysis  to determine  which  of the  above  variables 
significantly  affected  Medicaid  expenditures  for ICF/MRs.  This  method  uses the  data 
from  the  independent  variables  to explain  variation  of the  dependent  variable.  Linear 
regression  fits a straight  line  to the  data  using the  method  of least  squares.  Below  is 
the  equation  for the  general  model. 
Y=po+p1x1+p2x2+.  . .pJk+(3 
In this equation,  Y, the  dependent  variable,  is the  per  diem  reimbursement  rate.  The 
Xs, the  independent  variables,  are  the variables  listed  above  that  we included  in the 
model  (the  facility  and  resident  characteristics,  and  State  reimbursement  policy 
factors).  The  Betas  are  values  calculated  as a result  of the  regression  and  show the 
influence  of each  factor  on the  reimbursement  rate.  The  Beta  values  are  reported  in 
Appendix  C under  Parameter  Estimate.  The  epsilon  represents  the  residuals,  the 
difference  between  the  obsewed  and  the  predicted  values  according  to the  model. 
B-4
 APPENDIX  C

REGRESSION  RESULIX 
We  used  SAS (Statistical  Analysis  System)  software  for the  regression  analysis.  The 
SAS program  eliminates  all data  for an observation  with  missing values.  We  did not 
receive  complete  information  for 20 State-run  facilities.  Therefore,  the  regression 
model  was computed  using 97 of 117 selected  State-run  ICF/MRs. 
The  following  table  shows the  overall  regression  results  of our  full model,  i.e., with  all 
24 variables.  It includes  the  estimate,  standard  error,  t-value  for all variables  and  the 
significance  level  (probability  >  It I).  The  t-value  for each  variable  tests  for the  effect 
of each  independent  variable  on the  dependent  variable.  The  last column  gives the 
probability  of the  t-value.  The  t-values  and  the  associated  probabilities  (probability  > 
It I) test  the  hypothesis  that  the  parameter  is actually  zero  and  answers  the  question: 
If the  true  slope  and  intercept  were  zero,  what  would  the  probability  be  of obtaining, 
by chance  alone,  a value  as large  or larger  than  the  one  actually  obtained? 
STATE  FACILITIES  FULL  MODEL 
Parameter  Standard  Probability
> 
Variable  Estimate  Error  t-Value  Itl 
Intercept  -141.94  151.25  -0.938  0.3511 
Caps  -32.69  20.58  -1.589  0.1165 
con  3.11  2.64  1.177  0.2429 
incentive  -76.82  25.07  -3.064  0.0031 
OccAdj  nk  110.35  27.56  4.004  0.0001 
Wage  .003  . 0009  3.166  0.0023 
Capital  -2.08  3.93  -0.529  0.5983 
Overhead  3.60  4.16  0.867  0.3889 
Admin.  -1.84  1.20  -1.536  0.1288 
Part.  date  2.86  1.63  1.751  0.0843 
PercapSp.  . 003  0.02  0.136  0.8920 
Def ics.  0.57  0.32  1.778  0.0797 
Size  -0.01  0.03  -0.423  0.6737 
#  Units  -0.62  0.68  -0.909  0.3665 
Occup  .  -0.04  0.08  -0.444  0.6581 
glCF/MR 
0.57  1.45  0.391  0.6971 
%Bld/Deaf  1.74  68.51  0.025  0.9798 
%DayProgs  -21.18  34.52  -0.614  0.5414 
%onDrugs  -14.82  35.82  -0.414  0.6802 
%ProRtrd  -17.53  26.14  -0.670  0.5048 
Stff:Res  30.04  10.34  2.904  0.0049 
%DirCare  -2.76  29.13  -0.095  0.9248 
%Undr22  -30.71  38.70  -0.794  0.4300 
%Over65  1.60  54.12  0.030  0.9765 
%Nonambu  14.23  16.17  0.880  0.3817 
c-1  The  R-square  term  indicates  the  percentage  of the  variation  explained  by the  model. 
The  R-squared  value  and  adjusted  R-squared  values  of.80  and  .73, respectively, 
indicate  that  73 percent  of the  variation  in per  resident  reimbursement  rate  in State-
run  facilities  is explainedby  the  full model. 
Redllced  mudt?l 
Next,  we performed  astepwise  regression  in order  to find  the  model  which  explains 
the  greatest  amount  of the  variation  in the  dependent  variable  with  the  fewest  number 
of independent  variables.  Most  variables  that-were  statistically  significant  in the  full 
model  were  also significant  in the  stepwise  regression,  However,  in the  regression 
model  building  process,  the  statistical  significance  of the  independent  variables  may 
change  in the  reduced  model.  The  following  table  shows the  results  of the  stepwise 
regression.  As shown  in this table,  all eight  independent  variables  in our  reduced 
model  were  statistically  significant  at the  .01 level.  We examined  the  residuals  and 
found  that  they were  normally  distributed. 
of  the  24 independent  variables,  only the  following  8 variables  were  statistically 
significant.  These  8 variables  explain  75 percent  of the  variation  in the  dependent 
variable.  The  regression  modelproducedanR-squareof .77andanadjusteRd
squareof .75. 
STATE FACILITIES REDUCED  MODEL

Parameter  Standard  Probability 
Variable  Estimate  Error  t value  > ;t~ 
Intercept  -198.19  122.10  -1.62  .1081 
Caps  -33.16  13.20  -2.51  .0138 
Incentive  -88.59  19.95  -4.44  . 0001 
OccAdjmt  145.89  17.69  8.25  .0001 
Wage  0.0026  0.0006  4.28  .0001 
Overhead  7.70  2.54  3.04  .0031 
Admin.  -3.01  0.87  -3.47  .0008 
Part.date  3.55  1.40  2.54  .0129 
Stff:Res.  26.05  6.95  3.75  .0003 
c-2  APPENDIX  D

SAVINGS  CALCULATION 
COST  CONTROLS 
1.  From  our  sample,  we determined  that  73 percent  of residents  in State-run 
ICF/MRs  are  in States  where  the  rate-setting  methodology  does  not  include 
caps  on costs. 
2.  Based  on data  from  the  Recurring  Data  Set Project,  there  were  77,281 
residents  in all State-run  large  lCF/MRs  in 1990. 
3.  77,281 residents  x 73 percent  =  56,415 residents  are  in State-run  large 
ICF/MRs  in States  without  c:]ps. 
4.  The  regression  results  sh{~wcd th:lt,  controlling  for all other  variables  in our 
model,  States  that  applied  c:ips In their  rate-setting  methodologies  had 
significantly  lower  per  die m r:ltes.  The  cumulative  effect  of caps  over  time  was 
a reduction  in the  per  diem  rate  of $33.16 per  resident  on average,  or $12,103 
per  year  per  resident. 
5.  If all States  that  did not  cap  allowable  costs  in 1991 had  implemented  caps  at 
the  same  time  intervals  as those  with caps,  then  the  Medicaid  savings,  Federal 
and  State  shares  combined.  in  1991  would  have  been  $683 million  (56,415 
residents  x  $12,103  per  resident). 
FEDERAL  PER  CAPITA  LIMIT

1.  From  our  sample,  we listed  lhe  average  annual  reimbursement  per  resident  in 
large  State-run  ICF/MRs  in 1W 1 for each  of the  22 sampled  States. 
2.  We  selected  the  overall  average  annual  rate  of reimbursement  for all large 
ICF/MRs,  $61,000, as the  per  capita  limit.  HCFA  may select  other  ways of 
determining  a per  capita  IImlt. 
3.  We  subtracted  the  per  caplI;I Ilmlt from  each  States  1991 average  annual 
reimbursement  for  large  St:ltc-run  [CF/MRs  to determine  the  amount  each 
State  exceeded  the  liml~.  Stiltes  with average  per  capita  reimbursement  below 
the  limit would  not  hale  been  subject  to the  limit;  therefore,  they were  not 
included  in this  calculation. 
4.  We  then  multiplied  the  amount  each  State  exceeded  the  limit by the  number  of 
ICF/MR  residents  in the  State  :~nd determined  the  savings would  have  been 
$565 million  in  1991. 
D-1  APPENDIX  E 
AGENCY  COMMENTS 
E-1  m3  5B93

TO:	 Bryan B. Mitchell

Principal Deputy Inspector General

FROM:  Acting Assistant  Secretary  for  Planning  and  Evaluation 
SUBJECT:	 OIG Draft Report: Medicaid Payments to Institutions

for Mentally Retarded People, OEI-O4-91-O1O1O --

CONCUR WITE COMKENTS

I am pleased to have the opportunity to comment on your recently

completed  study Medicaid  Pa~ents  to Institutions for Mentally

Retarded People.  Your staff has worked closely with ASPE in the

design  of this study and I hope that we will be able to continue

such collaborative  efforts  in the future.

I would also like to commend your staff for taking on such a

methodologically complex task.  The findings are very important

and we appreciate their good work.

COMMENTS 
, 
Primarv  Comment

In our original discussions with your staff, we proposed that you

analyze  the extent and causes of variations in the costs of large

ICFs/MR  and compare them to the costs of serving people with

mental retardation in community-based residential settings funded

under the Medicaid waiver program.  Because the focus of the

actual study was limited to large ICFs/MR, the policy implica

tions tend to focus on strategies for limiting the cost of these

types of facilities.  Yet, as you point out in the report, large 
state institutions are becoming anachronistic as  a way  of 
providing services to people with mental retardation and there  is

widespread  agreement  that small community-based  residential

arrangements  are superior  settings  for virtually  everyone

regardless  of their  level of disability.

In addition, recommending that HCFA take action to reduce ICF/MR 
spending could appear to some readers of the report as an 
unfounded attempt to reduce spending on behalf of a population

that receives a relatively small percentage of total Medicaid

spending.  That is, while ICF/MR  per  capita  expenditures  are 
high,  and  while  ICF/MR  costs  are  several  times  higher  than 
community  MR/DD Medicaid  costs,  spending  on behalf  of other  Page 2 - Bryan  B.  Mitchell 
populations far exceeds MR/DD spending.  I do not believe the

intent of this report was to reduce total federal spending on

behalf of people with mental retardation. 
-.

I think the repoti would be strengthened if it straightforwardly

acknowledged right up front some of these issues and dilemmas.

For example, it should point out that there is widespread

agreement in the MR/DD field that people with mental retardation

are better off in community settings rather than in institutions.

It should also point out that in spite of some steps such as the

waiver program and the new Community Supported Living

Arrangements program in Medicaid, Medicaid expenditures go

overwhelmingly to support large scale institutions.  It should

also acknowledge that the scope of this report had to be limited

to a study of institutions although it would have been desirable

to do the comparisons with community settings originally

contemplated.  Finally the report should state that although the

findings of the study largely focus on short term ways to control

reimbursement to large institutions, comprehensive reform of 
federal MR/DD policy is required to align it with what we know 
dbout the best way to provide services to people with mental 
retardation.  The report should also acknowledge the fact that 
the evolution of ICF/MR policy has resulted  in  some  perverse 
incentives  for  state  offi.ci.als  to  over-rely  on  ICF/MR 
reimbursements  in  order  to  buy  flexibility  on  the  community  side 
of  the  equation. 
Other Comments

1.	 It would be useful to include statistics  comparing  the 
proportion  of  total  Medicaid  dollars  spent  on  large  ICFs/MR 
and  on  community  residential  settings.  Such  comparisons 
could  be  drawn  using  the  work  of  Charlie  Lakj.n  and  Dave 
Braddock.  The  report  should  also  compare  the  number  of 
people  residing  in  large  ICFs/MR with the  number  of  persons 
receiving  community  based  MR/DD  services. 
2.	 People First language should be used throughout the 
report, consistent with efforts by Congress and the 
Administration to use such language.  In particular, the

report should refer to people with mental retardationt

rather than the mentally retarded,~~or mentally retarded

people.tt

3.	 In explaining !Whois Served in ICF/MRs in the 
Introduction, the authors use definition of developmental 
disability contained in the Developmental Disabilities and 
Bill of Rights Act.  Since Title XIX defines ICF/MR

eligibility in terms of people with ~mentalretardation and

related conditions, and Medicaid guidelines define that

phrase, it would be more clear to explain who is served in

ICF/MRs in terms of ICF/MR eligibility guidelines.
 Page 
3  - B~~a~  B.  Mitchell 
4.	 In the section on Trends, it is confusing to say that

federal program policy encourages treatment in community

settings.  It is much more accurate to say that the federal

DD Act goals for people with mental retardation which

promote productivity, independence and community integration

are in conflict with federal financing policy under the

Medicaid pro~am  which continues to be biased in favor of

institutional care (as you explain when you talk about

limits on the munber of people served under the HCB

waivers).

5.	 In the section on  Methodology, it is not clear whether you 
interviewed staff of State MR/DD agencies, developmental 
disability councils or both. 
6.	 Regarding l~Qualityand Level of Service, the point should

be made that compliance with the ICF/MR standards ensures

only a minimal level of quality.  It is very difficult to

measure quality of life and service outcomes, even in the

relatively controlled environment of an institution.

If you have questions or concerns, please contact Mary Harahan,

Acting Deputy Assistant Secretary for Family, Community and Long-

Term Care Policy at 690-6443.

cc:	 William Toby, Jr.

Acting Administrator

Health Care Financing Administration

Elizabeth M. James

Acting Assistant Secretary for

Management and Budget
 . 
_-.wr, ,,  Health  Care 
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,. ,   .* **  Jg DEPART,MENTOFHEALTH  & HUMAN  sERVsCES  Financing  Admlnistratmn 
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r 1993 
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Date  ~-
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iHiam Toby~  r. 
From  Acting  Administrator 
Office of Inspector  General(OIG)DraftReport:MedicaiPdaymentsfor

Sub)ect 
InstitutifoonrMse ntallRye tardedP
eopleC)EI-O4-9I-O1O1O

To	 BryanB.Mitchell 
principDaelp utyXnspectoGre
neral
We  havereviewetdh eabove-referendcreadfrte porwth ichattempttso 

determinteh eextenatn dcauseso fvariatiaomno ngStateisn px residenMte dicaid
reimbursemenrta tefso rlargei ntermediactaer efacilitfioertsh
 ementally retarded
(lCF~R). 
OIG found that Medicaid  reimbursement  rates  for large  ICFS/MR  are  more 
than  five times  greater  in some  States  than  in others.  State  polici*  rather  than 
qualitoyf servicfea,c ilicthya racterisotri~r esidednetm ographicasc,c ounfto
 r

variatiionnI CF/MR Medicaidr eimbursemenrta tesa mongStatesA.s aresulotf
 

thefindingO%I G recommendsthatt heHealthCareFinancinAgd
ministration

(HCFA) takeaction to reduce  excessive spending of Medicaid funds for ICFs/MR. 
We must  nonconcur  with  the  recommendation.  Medicaids  statutory  provisions 
allow  States  to establish  their  own payment  systems.  This  flexibility  allows for the 
variation  among States  in their  payment rate% meth~  and  standards  used  in 
determining  these rates. 
States  are  free,  within  two mnstrati~  to establish  their  methods  and  standards 
fordeterminiInCgF /MR ratesTherninimurlni miitsthattheratepaidmust  be, as 
required  by section  WOE  of the  ~ial  Security  Am  reasonable  and 
adequate  to meet  the costs incumed  by efficiently  and  economically  operated 
facilities.  The  maximum limit is that aggregate payments may not exceed the 
amount  that would have been paid using the Medicare  principles of reimbursement. 
The  State must provide an assurance  to the Secretary that its rates are consistent 
with the upper  limit requirements  at 42 CFR 447.272.  Iheregulation also requires 
States to provide this assurance  for State-operated  facilities  Page 2 =Principal Deputy  Inspector General 
Xlerefore, the statute  and implementing regulations  thatgovernMedicaid 
payments toICFs/MR, allow HCFA little discretion in imposing additional 
administrative  controls to curb ICF/MR  payments.  Legislative action would be 
necessary to implement  the mandato~  cost controls contained  in the 
recommendation.  Furthermore,  any new legislation should be considered within the 
national  health care reform framework being developed by the new administration. 
Thank you for the opportunity  to review and comment  on this draft report. 
Please advise us if you agree with our position on the reports recommendation  at 
your earliest  convenience. 
. 
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OFFICE  OF  AUDIT  SERVICES 
The OIGS Office of Audit Services (OAS) provides all auditing services for HHS, either  by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance  of HHS programs and/or its grantees and contractors  in 
carrying out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations  in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout  the Department. 
OFFICE  OF  INVESTIGATIONS 
The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 
unjust enrichment  by providers.  The investigative efforts of 01 lead to criminal convictions, 
administrative sanctions, or civil money penalties.  The 01 also oversees State Medicaid fraud 
control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 
OFFICE  OF  EVALUATION  AND  INSPE~ONS 
The OIGS Office of Evaluation and Inspections (OEI) conducts short-term  management  and 
program evaluations (called inspections) that focus on issues of concern to the Department, 
the Congress, and the public.  The findings and recommendation  contained in these inspection 
reports generate  rapid, accurate, and up-to-date information on the efficiency, vulnerability, 
and effectiveness of departmental  programs. 
This report was prepared  in the Atlanta regional office under the direction of Jesse J. Flowe~, 
Regional Inspector General  and Christopher Koehler, Deputy Regional Inspector General. 
Project staffi 
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