National trends in reimbursement.

Influenced by demographic and economic factors, the nursing home industry is undergoing a transformation. Industry trends, such as consolidation of facilities, integration of services, development of specialized subacute services, and the influence of managed care, reflect this change. To be competitive in the future, nursing home providers must acknowledge this transformation and strategically plan their operations accordingly.

These national trends also influence the current reimbursement trends in the industry. Based on our observation and experience with our nursing home clients, the current reimbursement trends are as follows:

* Greater Emphasis Placed on Overall Reimbursement Issues

* Greater Emphasis on Targeting Medicare Patients

* Greater Emphasis on Subacute Reimbursement Issues

* Greater Emphasis on Managed Care Reimbursement Issues

* Greater Interest in How Medicare Impacts Medicaid

Taken one at a time:

Greater Emphasis Placed on Overall Reimbursement Issues

Companies are expanding internal resources, out-sourcing more services to specialists, and acquiring or developing separate subsidiary reimbursement consulting companies to service their needs. No longer is reimbursement viewed as a compliance function; rather, it is recognized as an integral part of a facility's financial success.

Greater Emphasis on Targeting Medicare Patients

Although Medicare has recently been the subject of proposed budget cuts, Medicare still provides significant advantages to nursing home operators. Medicare provides a new revenue source, assists with marketing and development of specialized services, and pays for actual costs incurred (including fixed overhead costs).

However, many providers have not taken full advantage of the Medicare program in terms of maximizing utilization and reimbursement. Some of the more common issues that we experience include:

* Medicare is perceived as a small percentage of a facility's overall revenue source when in fact total Medicare Part A and Part B revenue can average 20% to 30% of a facility's total revenues.

* Many nursing facilities are not covering all eligible patients under the Medicare program.

* Many nursing facilities have not properly structured their operations to maximize reimbursement in such areas as establishing a certified distinct part (CDP), tracking all costs related to the Medicare program, directly assigning certain costs to the Medicare CDP area, assigning space or square footage within a nursing facility to maximize reimbursement, or enhancing overhead allocations.

* Many nursing facilities are not billing directly for all ancillary services under the Medicare Part A and Part B programs.

All of these issues, needless to say, require close attention for maximum financial well-being.

Greater Emphasis on Subacute Reimbursement Issues

Development of specialized subacute services continues is the leading trend in the industry today. Since Medicare is a major payor source for subacute services, understanding the routine costs limit exception process due to "atypical nursing services," properly defining and quantifying "atypical nursing services," directly assigning certain costs to the Medicare CDP area, and utilizing Medicare's average costing methodology to your benefit are all important to consider.

Greater Emphasis on Managed Care Reimbursement Issues

The increase of managed care is changing the reimbursement environment from a predominantly cost-based reimbursement system to a fixed-rate arrangement. Under this type of reimbursement system, the incentives traditionally provided by Medicare change. Whereas under Medicare, the more costs providers incur, the more reimbursement a provider may potentially receive, the objective when dealing with managed care is to control costs and operate as efficiently as possible. Therefore, providers must re-examine how they have arranged for certain services to be provided, particularly ancillary services, and analyze what arrangement will maximize overall profitability under fixed-rate arrangements.

Considerations will include the inherent financial risk accepted by providers under managed care contracts, accurately accounting for the costs to care for managed care patients, and the problems and issues that arise with vendor discounts, allowances, refunds or rebates.

Great Interest in How Medicare Impacts Medicaid

There are certain state Medicaid reimbursement systems whereby enhanced Medicare utilization can cause an indirect impact on the Medicaid reimbursement rate. Generally, this may occur in states that determine Medicaid rates based on a cost-based, facility-specific system. This may also occur in states that set Medicaid rates based on a facility-wide case mix methodology.

The nursing home industry is in a dramatic period of transformation. Providers must consider the trends in the industry today and strategically plan their business for the future - so that there will be a future.

V. Robert Salazar is Partner with Salazar & Solomon, a health care consulting firm based in Denver, CO.