Adventures in Rate Setting: Pull Up a Chair, Class Is in Session

The following is the first of a regular series examining how SNF dollars make little sense, and what that means for the sector, and your operation.

Impudent Base Rates: Imputed Occupancy in a High-Cost Environment

Skilled nursing is a high fixed-cost business with many expense items required before accepting a single resident.

Many Medicaid payment systems have evolved into “price-based” or managed rate structures, but the cost report remains a fundamental rate-setting instrument throughout the country. In basic terms, “cost-based reimbursement” is a series of calculations, controls, and adjustments that begin with simple division: Allowable expenses (numerator) are divided by patient days (denominator). The quotient represents cost per patient day ($PPD). Think of this as a provider’s “Base Rate” that gets adjusted by the familiar levers of rate setting: CMI, QIPs, Add-ons, BAF, etc. They get all the attention, but the cost report is where it all begins.

Facilities A and B:

For example, assume fixed overhead is reimbursed at reasonable cost per patient day in the following scenarios:

A. 100-bed SNF, 100 percent occupied, $1,000,000 of fixed, allowable annual expenses. $1,000,000 / 36,500 days = $27.40 toward the rate.

B. 100-bed SNF, 60 percent occupied, $1,000,000 of fixed, allowable annual expenses. $1,000,000 / (36,500 x 60 percent) = $45.66 toward the rate.

Why is Facility B paid so much more per day because its occupancy is low? That sounds like state-subsidized inefficiency. Not so fast. Medicaid systems avoid rewarding providers for suboptimal performance by setting limits on allowable costs or “imputing” occupancy for the rate equation.

Imputed Occupancy is a floor on patient days equal to a percent of certified bed capacity (for example, 80 percent).

Back to Facility B:

B. 100-bed SNF, 60 percent occupied, $1,000,000 of annual fixed expenses; 80 percent occupancy floor.

$1,000,000 / (36,500 x 80 percent) = $34.25 toward the rate. Cost per PPD remains $45.66, but Facility B is “penalized” $11.41 PPD for its low occupancy.

Facility B takes a big hit. The operator is stuck with that anchor until the next rebasing. When is that? It depends on where you are because states have their own rules, remember? Usually, two to four years, but as state rate-setting departments were hollowed out, I’ve had to count the in-between years using two digits on several occasions. Is that good or bad? Depends on which side of arbitrary a SNF finds itself.

Enter Facility C:

C. 100-bed SNF, 80 percent occupied, $1,000,000 of fixed, allowable annual expenses. $1,000,000 / (36,500 x 80 percent) = $34.25. C is at the floor, so days are not imputed.

C is paid nearly $8 more per day than A. Their costs are the same, but C has fewer days, so it evens out. Until it doesn’t. Turns out C had been renovating a unit that reopened the day rates were promulgated. Within a few months, C has a waiting list and is on pace to bill for most or all of the 7,300 bed days unavailable during renovation. C’s average fixed costs per day get averaged down to match A at $27.40; both rates are locked until some unknown point in the future. At full capacity, C’s closed unit counterintuitively generates C an extra $250,000/year bottom-line dollars relative to Facility A.

This is an example of how occupancy works in SNFonomics; trust me when I say it is but the first step in the awkward SNF census dance. There are many ways a dynamic rate-setting system could adjust for it, but for the most part, they don’t.

How do we assess a county?

Questions about reimbursement? Give us a topic and we'll give you a rate... I mean we'll do our best to answer in Adventures in Reimbursement.

Marc Zimmet is the CEO of Zimmet Healthcare Services Group.