Analysis: Nursing home moratorium would yield smaller-than-expected savings

The nursing home industry was delighted in December when a study concluded the state would pay an extra $24.6 million due to a recent building boom among nursing home operators.

That figure, they hoped, would convince legislators to halt construction of nursing homes for three years. That would give their businesses a chance to absorb the 5,000 new skilled nursing beds added around the state over the past seven years.

But, it turns out, the actual legislation moving through the Indiana General Assembly would save the state just one-tenth that amount—or $2.2 million—according to a fiscal impact analysis conducted by the Indiana Legislative Services Agency.

Why the drastic difference?

First, LSA made clear that only one-third of the total savings—whatever they are—would be enjoyed by the state. That’s because the state-run Medicaid program receives two-thirds of its funding from the federal government.

Second, LSA noted that none of the facilities already in progress would be impacted by the language of Senate Bill 460, which exempts facilities on which construction starts before July 1, 2015.

The LSA analysis used the same figures as the December report, which was prepared by the accounting firm Myers & Stauffer for the Indiana Family and Social Services Administration, the agency that operates the Indiana Medicaid program.

The Myers & Stauffer analysis noted 17 new nursing home facilities are in progress, and it projected that 10 more would be started over the next three years. Those 27 new facilities, it calculated, would reduce average occupancy rates at Indiana’s nursing homes by 4.4 percent.

That reduction in occupancy would induce larger payments from Indiana Medicaid due to the convoluted way the state pays for nursing home care. The Medicaid program sets its payments based on cost data from each nursing home, including costs of care, of administration and of capital. But the state assumes nursing homes are at least 90-percent occupied. When they are not, nursing homes stretch their fixed costs over fewer patients, which raises the per-patient cost data on which the state bases its payments.

But LSA’s analysis looked only at the 10 new facilities projected to be built after the moratorium goes into effect. Those facilities would cause only a 1.2 percent decline in occupancy, leading to larger payments of about $6.6 million. The state would pay only one-third of that amount, or $2.2 million.

Scott Tittle, president of the Indiana Health Care Association, said the Myers & Stauffer analysis is still valid, because it reflects the costs of not passing the moratorium last year (it was killed in a controversial, 11th hour caucus decision by House Republicans) combined with the costs of not passing it this year.

Also, IHCA thinks the Myers & Stauffer projections on new construction over the next three years were conservative. Historical trends suggest another 21 new facilities, not 10, Tittle wrote in an email.

“Regardless of the size of the cost, taxpayers are shouldering more expense in order to build nursing homes that just aren’t needed, and the fiscal impact to the Medicaid budget past and future will not serve one more Hoosier,” Tittle wrote. “Any savings, whether its $1 or $25 million, would be best used to serve people at or closer to home.”

What he means is that the number of nursing home residents has been flat, even as new facilities have come online. Meanwhile, the state has lagged nearly all others at shifting its long-term care spending from nursing homes to home- and community-based care.

Frank Howland, an economics professor at Wabash College, said the problem with the Myers & Stauffer study (which also undergirds the LSA analysis) is that it assumes neither nursing home operators or consumers would change their behavior in response to the new construction.

“On the supply side, it is possible that some nursing homes will go out of business; on the demand side it is also possible that prices may fall or quality will improve, inducing people to choose nursing homes over other options,” Howland wrote in an email. “Both supply and demand factors could increase occupancy and mitigate the problem to some extent.”

Howland added that he’d like to see studies that factor in projected changes to the number of Hoosier seniors on Medicare and Medicaid over the next few years.

SB 460 passed the Senate easily this month, on a vote of 35-14. It will be taken up by the House of Representatives as early as March 1.