Medicaid and Quality of Care: How our Funding Structure Failed Nursing Homes

By Sam Cox

COVID-19 has upended all areas of society, but among the populations worst affected are elderly residents of long-term care facilities. Older adults are most vulnerable to serious complications of COVID-19, representing over 80% of COVID-19 deaths in the United States despite making up just 15.6% of the population. Older adults living in long-term care facilities have their vulnerability magnified, with the structure of nursing homes and intimate care making these facilities susceptible to becoming infection hotspots.

As of July 30, there have been over 62,000 COVID-19 deaths in US nursing homes, more than 40% of the national total. There are clearly widespread, structural issues at play that are jeopardizing the health of elderly nursing home residents. While many of these issues persisted long before COVID-19, the pandemic has played an important role in shining a light on systemic issues.

Many of the shortcomings of nursing homes’ structure are inextricably linked to Medicaid policy. Medicaid is the biggest funder of nursing care facilities and continuing retirement communities, providing about 30% of total reimbursements. Medicaid is the primary payor for over 60% of residents. One does not need to delve too deeply to have concerns with Medicaid’s nursing home reimbursement policy. Medicaid payment rates quite simply do not pay nursing homes enough to cover the cost of care, with Medicaid payments to nursing homes falling an estimated average $22.46 below actual costs per patient per day. The Massachusetts Senior Care Association has estimated that in Massachusetts, the average facility loses almost $1 million per year caring for Medicaid recipients.

In light of the extreme pressures nursing homes are currently facing, it is worth exploring the important role that Medicaid plays in their functioning, ranging from quality of care and rates of hospitalization to staffing ratios, admission rates, and racial disparities, and in how deficient payment rates might affect care beyond the time of COVID-19.

Quality of Care and Hospitalization Rates

We can start by examining hospitalization and general quality of care. With Medicaid often underpaying nursing homes, nursing homes that rely heavily on Medicaid will have fewer funds to devote to care, which is likely to reduce care quality. One study found that Medicaid payment rates are positively related to improved care quality, in terms of reductions in activities of daily living decline, pressure ulcer incidence, and the use of physical restraints.

With Medicaid often underpaying nursing homes, nursing homes that rely heavily on Medicaid will have fewer funds to devote to care, which is likely to reduce care quality.

Lower quality of care can in turn lead to increased hospitalization, which is both dangerous for residents and expensive. Evidence has suggested that higher Medicaid payment rates to nursing homes can decrease the odds of hospitalization by 5% for each $10 above the national average payment rate. Minority populations, more likely to be on Medicaid, would benefit most from these reduced hospitalizations. A study found that nursing homes with high concentrations of Black residents have 20% higher odds of resident hospitalization than nursing homes with no Black residents. The same study found that increasing Medicaid rates by $10 reduced the odds of hospitalization of white residents by 4%, while simultaneously reducing the odds by 22% for Black residents.

While preventable hospitalizations should be reduced as much as possible, there are cases where it’s necessary, and residents should feel comfortable leaving the nursing home for needed care without fear of losing their spot. This concern, too, can be affected by Medicaid funding methods, in the form of bed-hold policies. Bed-hold policies entail the payor continuing to pay the nursing home for a resident’s bed while the person is hospitalized, essentially reserving it until they return. One study found that nursing homes in states with Medicaid bed-hold policies have 36% higher odds of resident hospitalization, suggesting that these policies do encourage hospitalizations when necessary. Payment policies must not be so generous, however, that they provide perverse incentives to hospitalize residents excessively; a high payment rate might see a nursing home making more money from a bed whose resident is out of the facility.

In a similar vein, Medicaid and Medicare payment policies should not be so unbalanced that they incentivize “boomerang” hospitalizations, wherein nursing home residents are transferred to a hospital for potentially preventable issues, and then readmitted, allowing nursing homes to take advantage of Medicare’s higher post-acute payment rates.

Staffing Ratios

Staffing, too, can suffer from inadequate Medicaid payment rates. Higher staff to patient ratios are clearly desirable, with higher staffing levels being associated with higher quality care. However, the percentage of facilities’ beds being used by Medicaid patients has been found to be negatively associated with the staff to patient ratio. Additionally, evidence suggests that nursing homes reduce staffing in response to lower payment rates and increase it in response to higher rates. It could, however, take a large funding increase to adequately improve staffing, with one study estimating that the cost of increasing Medicaid rates enough to meet minimum staffing standards could be anywhere from $1 billion to $8 billion.

Culture Change

Medicaid payments are also related to a facility’s capacity for culture change. The culture change movement has several dimensions, including pushes to deinstitutionalize nursing facilities to make them more homelike, and to ensure that resident care is as individualized and self-directed as possible. Culture change generally also aims for staff empowerment, decentralized decision-making, and flattened hierarchical structures. In recent years, this movement has received significant backing, with the intention of improving the quality of resident life.

Evidence would suggest that payment models have a significant impact on a nursing home’s likelihood to successfully implement culture change, with higher Medicaid reimbursement and P4P programs having the potential to promote it.

A study examining three dimensions of culture change (physical environment, staff empowerment, and resident-centered care) found that a $10 increase in Medicaid rates was significantly associated with higher physical environment scores. States with pay-for-performance (P4P) Medicaid models, which grant extra payments for higher quality care, were also associated with higher levels of culture change. Nursing homes in states with P4P models that include culture change performance measures performed better in all domains, while those in states with P4P models without culture change measures performed better in physical environment and staff empowerment domains. This evidence would suggest that payment models have a significant impact on a nursing home’s likelihood to successfully implement culture change, with higher Medicaid reimbursement and P4P programs having the potential to promote it.

Admission Rates

Low Medicaid payment rates may also act as a barrier to residents being admitted into a nursing home. On a financial level, residents paying through Medicaid are less desirable to nursing homes than those paying privately or through Medicare, as Medicaid will simply provide them with less funding. In theory, facilities are prohibited from turning away residents on these grounds. Residents cannot legally be required to waive their rights to Medicaid benefits, and they cannot enter into any contracts requiring private payment for the duration of their stay. Despite these rules, there is some reason to suspect that nursing homes show bias against admitting Medicaid patients, with one study finding that potential residents on Medicaid have a significantly greater chance of being waitlisted than those not on Medicaid. As one might expect, it seems that nursing homes aim to meet non-Medicaid demand before turning to Medicaid patients to fill remaining space; such a thought process dehumanizes residents, framing them more as a monetary investment than a person. With Black Americans making up a disproportionate segment of Medicaid enrollees, such practices create barriers that reinforce structural racism in the health care system.

Quality Ratings

Finally, it is worth giving attention to the de facto “tiers” of nursing home quality that Medicaid helps create. As has been discussed, low Medicaid payments are related to several structural problems with nursing homes that affect resident care. Facilities with the highest concentrations of Medicaid patients will naturally be the worst affected by funding shortfalls, and their lack of resources often forces them into a lower tier.

These nursing homes disproportionally provide care for low-income residents and tend to be concentrated in the poorest areas; they also disproportionately provide care for minority residents, with a study reporting that 9% of white residents and 40% of Black residents reside in “low tier” nursing homes. This set of nursing homes are also more likely to serve residents with psychiatric conditions or a history of mental retardation, which can lead the facility to be negatively stereotyped, further increasing the difficulty of attracting residents. “Low tier” nursing homes with high Medicaid reliance tend to have fewer staff, go through more frequent changes in ownership, and perform worse on key quality metrics including incidence of pressure ulcers, use of physical restraints, and antipsychotic medications.

Poor metrics have the potential to create a negative feedback loop; they lead to a low quality rating from the Center for Medicare & Medicaid Services, which drives potential residents away, leaving only the poorest and most vulnerable as customers.

These poor metrics have the potential to create a negative feedback loop; they lead to a low quality rating from the Center for Medicare & Medicaid Services, which drives potential residents away, leaving only the poorest and most vulnerable as customers. In other words, high proportions of Medicaid patients can lead to poor performance, which can in turn lead to the intake of mostly Medicaid patients.

Moving Forward

There is no one ideal policy prescription to “fix” Medicaid payments to nursing homes. It is clear that there are problems that need to be addressed — poor Medicaid funding reduces the quality of care, worsens rates of hospitalization and staffing ratios, inhibits culture change, and concentrates the most vulnerable residents in the facilities with the fewest resources.

These problems have always been present, but the COVID-19 pandemic has shone a light on these shortcomings and made solutions even more imperative; this is especially true for facilities in Black and low-income communities that have the fewest resources and are suffering the most from COVID-19 infections. The numbers of infections and fatalities throughout nursing homes have been alarming, and the lack of resources have made some COVID-19 guidelines unimplementable. Potential solutions could take a variety of forms, such as implementing P4P funding models, offering implementation training to leaders of low-income facilities, or reforming the private long-term care insurance market.

Ultimately, any effort to improve nursing home funding and lift up nursing homes on the “lower tier” will require the significant devotion of public resources and a public acknowledgement of the predicament nursing homes are facing.

Sam Cox is an intern for the Office of the CMO at Ariadne Labs.

Illustration by izumikobayashi / iStock