Nursing Home Case-Mix Reimbursement in Mississippi and South Dakota

Case-mix reimbursement has become a widely adopted method for public financing of nursing facility care. A case-mix approach serves as the basis for the new Medicare Prospective Payment System (PPS) for skilled nursing facilities. This approach is also being used increasingly by states for Medicaid reimbursement for nursing facilities. According to Harrington et al. (1999), 26 states employed some form of case-mix reimbursement in 1997. Since the early 1990s, most states moving to a case-mix system have relied on the Resource Utilization Group (RUG-III) classification model (Fries, Schneider, Foley, et al. 1994), which was developed through the Multistate Case-Mix and Quality Demonstration sponsored by the Health Care Financing Administration (HCFA). Despite the widespread use of case-mix systems, there has been a relatively small amount of recent research into the effects of this reimbursement approach on provider behavior or delivery of care. Most studies were carried out with case-mix systems introduced in the 1980s. These systems employed a variety of case-mix classification models and rate-setting procedures. Also, they were introduced before the implementation of Omnibus Budget Reconciliation Act of 1987 (OBRA 87), which brought about major regulatory changes in the nursing home industry. To our knowledge no published research has examined Medicaid case-mix systems based on the RUG-III or the experience of states participating in HCFA's Multistate Demonstration. The purpose of our study was to describe the response of providers to the introduction of case-mix reimbursement in two states (Mississippi and South Dakota) that were part of HCFA's Multistate Demonstration. The lead author consulted on the design of these systems, and he was contracted by the states to evaluate their implementation. Both states introduced similar systems in 1993. By comparing the 1-year periods before and after case-mix reimbursement (1992 and 1994), we wanted to determine whether nursing facilities changed their behavior in line with the objectives of the new reimbursement system. Mississippi and South Dakota offer an interesting contrast. Even though both are small, largely rural states, they differ in their regional cultures (upper Midwest versus deep South) and characteristics of their nursing facilities (described later here). If the introduction of a case-mix system evoked a similar response from providers in both states, even with their differences in facility characteristics, then this offers evidence for the generalization of findings. The new case-mix reimbursement systems in Mississippi and South Dakota were intended to address problems inherent in conventional reimbursement. Conventional systems set facility-specific, prospective rates that are based on historical costs and are subject to a cost limit. They do not take resident acuity into account when setting rates. A facility that admits high-acuity residents and incurs correspondingly high-care costs is likely to be above the reimbursement limit and may face operating losses. Thus, providers are discouraged from admitting heavy-care Medicaid residents, and if they do, the reimbursement system is unlikely to compensate them for the full cost of care. In addition, if providers selectively admit light-care residents in order to hold down direct-care expenditures, these residents are less likely to receive community-based care even though it may be more appropriate and less costly to the Medicaid program. Case-mix reimbursement has the potential to address these problems in at least two ways. First, it should encourage access to nursing home care while discouraging inappropriate placements. By adjusting Medicaid per diem payments according to resident acuity, case-mix reimbursement should compensate providers for the cost of admitting heavy care residents and discourage them from selectively admitting light-care residents. Second, this approach should lead to more equitable and efficient allocation of Medicaid funds. Providers taking care of similar types of residents should receive similar Medicaid payment rates. High-cost providers serving low-acuity residents should be encouraged to reduce expenditures, and providers caring for high-acuity residents should be reimbursed at a level consistent with their high cost of care. In our study, we wanted to determine whether new systems in Mississippi and South Dakota met the main goals of case-mix reimbursement. First, did facilities increase access for heavy care residents? Second, did they modify direct care expenditures to achieve greater congruence between cost of care and resident acuity? Earlier studies looking at effects of case-mix reimbursement have arrived at mixed results. Butler and Schlenker (1989), Weissert and Musliner (1992), and others (Feder and Scanlon 1989; Thorpe, Gertler, and Goldman 1991) studied experience of states adopting nursing home case-mix reimbursement during the 1980s. Most studies suggested that case-mix reimbursement improved access for heavy-care residents, with increases in resident acuity and higher percentages of heavy-care Medicaid residents. However, Davis, Freeman, and Kirby (1998) reported a decline in the average facility case-mix score after the introduction of case-mix reimbursement in Kentucky. Nyman and Connor (1994) found evidence for differential admissions of residents in case-mix groups that were more profitable or received high payments in relation to the cost of care. Also, findings regarding resident acuity must be qualified because of potential problems with validity of case-mix data (Butler and Schlenker 1989; Weissert and Musliner 1992). With a change to case-mix reimbursement, facilities may have attempted to manipulate resident assessment items or “chart for dollars” in order to maximize reimbursement. Studies of facility cost behavior and case mix also have been inconclusive. Schlenker (1991) surveyed for-profit facilities in several states and found a stronger correlation between case mix and direct care costs in states that had case-mix reimbursement than in states with conventional systems. In their Kentucky study, however, Davis, Freeman, and Kirby (1998) reported a positive relationship between case mix and resident-care expenditures before case-mix reimbursement and a negative relationship after the new reimbursement system. Facilities seemed to have engaged in a strategy of cost minimization and profit seeking in response to the new system. Several studies suggest the need to consider provider characteristics when assessing the impact of case-mix reimbursement. When case-mix reimbursement was introduced in Maryland, for example, Feder and Scanlon (1989) found that for-profit facilities and those with a higher percentage of Medicaid residents had the largest increase in resident acuity. In New York, Thorpe, Gertler, and Goldman (1991) reported that skilled-care facilities had a greater increase in case mix than intermediate-care facilities. They also found that for-profit facilities and those with a higher percentage of Medicaid residents had lower cost growth. Additional studies have inquired into the relationship between provider characteristics, case mix, and costs in states without case-mix reimbursement. Bishop and Dubay (1991) found that access for heavy care residents was associated with a higher percentage of Medicare residents, particularly among for-profit, hospital-based, and larger facilities. Other studies reported that hospital-based, non-profit, or individually owned facilities had higher case-mix-adjusted costs than freestanding, for-profit, or chain facilities (Holmes, 1996; McKay 1991; Schlenker and Shaughnessy 1984). In addition, some studies suggest that market concentration may play a role in the relationship between case mix and costs (Bishop 1988; Davis 1993; Nyman 1988; Scanlon 1980). Facilities with monopolies in local markets might “pick and choose” their admissions and show preference for private pay or lighter-care Medicaid residents.