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Creating a hospital-based skilled nursing facility.


There are a lot of good reasons for both hospitals and nursing homes to consider establishing a hospital-based nursing home in today's health care environment:

With hospitals having the incentive to limit inpatient length of stay, the SNF can fill its need for a venue that would provide a lower level of care but still keep the patient within the hospital's continuum of care. Also, the SNF represents a cost center where costs can be allocated. Further, the hospital's discharge planners can place sub-acute patients into the unit, confident that the quality is high and the beds are available.

For the SNF the benefits are equally apparent. The hospital's rehab, subacute, or terminal patients represent a steady stream of paying clients for the Unit. Since many of these patients have a higher acuity than the traditional "Board & Care" residents, the facility's Medicare utilization and reimbursement will be higher. Finally, the relationship with the Hospital's physicians would be enhanced. For example, the increased number and close proximity of the patients, coupled with their higher acuity, necessitates and facilitates greater physician involvement in the Unit.

The Medicare program has recognized the positive attributes of establishing the less costly alternative to acute care and has made the establishment of such facilities attractive. A key element in the process is the "exemption" period that Medicare grants new SNFs. The hospital-based skilled nursing facility is reimbursed via a cost-based system whereby the SNF is exempt from reimbursement limitations on its routine costs for at least the first three full years of its existence.

The exemption would therefore allow the new provider time to organize its operations, while not being held to efficiency guidelines imposed upon the expiration of the exemption period. To take the fullest advantage of the time frame allowed, the SNF can be opened shortly after the start of the hospital's fiscal year. This allows for the longest possible exemption -- just shy of four years.

Within the exemption period, some SNFs have opted to hire outside operators to establish the SNF's procedures and to get the program underway. The operators' management fees attributed to Medicare patients (considered a routine cost) are fully reimbursable. Once the exemption period ends, arrangements with the operators can be renegotiated or the SNF can assume full responsibility.

Please note that for existing facilities which shift their status, rather than their physical location, from free-standing to hospital-based, HCFA is not granting a new three-year exemption. Nursing home operators who find this to be a disincentive may have to consider closing their existing facility, perhaps in return for part ownership of the hospital.

During the exemption phase for those SNFS that qualify, a sense of euphoria may exist within the new facility. However, an unusual metamorphosis occurs as the SNF draws near the end of its exemption period. Talk of an impending "routine cost limitation" may be heard in the hospital's administrative offices. Fingers begin to be raised in readiness to place blame on those responsible for impending SNF deficits at the now rapidly maturing facility. The fingers may be pointed at the SNF's administration or outside operators, while plans are made to review salaries, consulting fees and nurse staffing.

As its name would indicate, the RCL relates only to the routine services; including room and board and related routine service, especially nursing care. (Fortunately, ancillary services are still exempt from the limitations). The RCL can be identified as an element of the hospital's audited Medicare cost report and is measured as the difference between the actual cost for all Medicare days and the total of the allowable "per diem" limit.

Amongst the discussions of the dreaded "routine cost limitation" (RCL) will be strategies to reduce or possibly eliminate it. In fact, to counteract a severe RCL, Medicare has established the "exception request" methodology. Although traditionally performed within the 180 days subsequent to a final Medicare cost report settlement, the exception request can be requested well in advance of this.

To be granted an exception, the provider must demonstrate to HCFA that the costs incurred above the routine cost limitation were necessary atypical costs incurred due to the atypical nature of the SNF's patient population. The concept of atypical costs is generally derived from a comparison of costs incurred by the SNF's presumed sicker patient population in comparison to certain "norms" as established by HCFA.

The specific criteria are contained in 42 CFR 405.460. The basis for the exception to the limits are contained in Sub-Section F "Exceptions" to the regulations, which reads as follows:

Limits established under this section may be adjusted upward for a provider under the circumstances specified in paragraphs (f) (a) through (f) (8) of this section, and may be adjusted upward or downward under the circumstances specified in paragraph (f) (9) of this section. An adjustment is made only to the extent the costs are reasonable, attributable to the circumstances specified, separately identified by the provider, and verified by the intermediary.

The specific grounds for exception include (1) Atypical Services, and (b) Extraordinary Circumstances. The Atypical Services portion reads as follows:

The Provider can show that (i) The actual cost of items or services furnished by a provider exceeds the applicable limit because such items or services are atypical in nature and scope, compared to the items or services generally furnished by providers similarly classified; and (ii) The atypical items or services are furnished because of the special needs of the patients treated and are necessary in the efficient delivery of needed health care.

Although it would appear that the mere incurrence of additional cost would "prove" that atypical services have been rendered, corroborative information is often requested to substantiate the SNF's claim. This information could take the form of categorizing the patients into homogeneous groups (e.g. ventilator patients) that would indicate a patient population requiring a higher than average resource consumption. Under the traditional approach, a hospital would have to submit a full package to the Intermediary within 180 days of the cost report settlement notice. The Intermediary would have 75 days to develop its recommendation to HCFA, while HCFA has another 180 days to prepare its determination. As with other types of examinations, HCFA's ruling can be further appealed.

An obvious advantage of the prospective exception request is the cash flow aspects of receiving a full or partial exception (i.e. a higher per diem limit) prior to the implementation of the RCL via a reduced interim rate. By filling a prospective exception request, the provider can get the process started much earlier and enjoy at least interim relief and needed cash flow up front.

The key differences with a prospective request is that the SNF must demonstrate that a RCL will be incurred in the subject year based on available data, often from preceding years. To do this, there is a need to use either budgeted data for the subject year or historical data from prior years, including cost report filings and medical record abstracts, as well as an analysis of nursing salary information by level (RN, LVN and other). Although HCFA has established the prospective mechanism, the relief granted would be subject to revision, based on the findings of the final audited cost report.

In sum, the establishment of a hospital-based SNF remains a good idea. Frequently SNFs which are already working in concert with hospitals never explore the option of becoming hospital-based simply because it represents change. However, with the changing health care environment, the financial incentives and demand for quality care encourage such relationships. In response to the incentives of the "prospective payment" methodology, length of stay can be decreased, costs can be spread over a wider base, and "full service" can be offered to the community.

The eventual reigning in of cost via RCL should not come as a surprise, but should be planned for and acted on through a group effort of both the hospital and the SNF, with the possible assistance of reimbursement consultants. Upon consideration of these factors, the provider can effect a smooth transition from its start-up mode to the realities of cost control.

Eytan R. Ribner, CPA, MBA, is President, and David L. Cohan, NHA, MBA, MHA, is a Consultant with Blumberg Ribner, Inc., a Beverly Hills-based reimbursement consulting firm.
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Author:Cohan, David
Publication:Nursing Homes
Date:Nov 1, 1993
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