This is the accessible text file for GAO report number GAO-03-183 
entitled 'Skilled Nursing Facilities: Medicare Payments Exceed Costs 
for Most but Not All Facilities' which was released on December 31, 
2002.



This text file was formatted by the U.S. General Accounting Office 

(GAO) to be accessible to users with visual impairments, as part of a 

longer term project to improve GAO products’ accessibility. Every 

attempt has been made to maintain the structural and data integrity of 

the original printed product. Accessibility features, such as text 

descriptions of tables, consecutively numbered footnotes placed at the 

end of the file, and the text of agency comment letters, are provided 

but may not exactly duplicate the presentation or format of the printed 

version. The portable document format (PDF) file is an exact electronic 

replica of the printed version. We welcome your feedback. Please E-mail 

your comments regarding the contents or accessibility features of this 

document to Webmaster@gao.gov.



Report to Congressional Committees:



United States General Accounting Office:



GAO:



December 2002:



Skilled Nursing Facilities:



Medicare Payments Exceed Costs for Most but Not All Facilities:



Medicare Skilled Nursing Facility Payments:



GAO-03-183:



Contents:



Letter:



Results in Brief:



Background:



Medicare Payments Considerably Higher than Costs for Most Freestanding 

SNFs, Thereby Improving Their Overall Financial Performance:



Reported Medicare Costs of Hospital-Based SNFs Substantially Exceeded 

Medicare Payments:



Concluding Observations:



Agency and Other Comments and Our Evaluation:



Appendix I: Methodology for Calculating and Analyzing SNF 

Margins:



Appendix II: Medicare Margins of Freestanding SNFs by Selected 

Characteristics, 1999 and 2000:



Appendix III: Comments from the Centers for Medicare & Medicaid 
Services:



Appendix IV: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Acknowledgments:



Related GAO Products:



Tables:



Table 1: Freestanding and Hospital-Based SNFs by Type of Ownership, 

1999:



Table 2: Freestanding SNFs’ Median Medicare Per Diem Payments and 

Costs, 1997-2000:



Table 3: Median Medicare Margins for Freestanding SNFs by Type of 

Ownership, 1999 and 2000:



Table 4: Median Medicare Margins for Freestanding SNFs by Occupancy 

Rate, 1999:



Table 5: Median Margins for Freestanding SNFs, 1999 and 2000:



Table 6: Median Total Margins for Freestanding SNFs by Medicaid Share 

of Patient Days, 1999:



Table 7: Median Total Margins for Freestanding SNFs by Type of 

Ownership, 1999 and 2000:



Table 8: Hospital-Based SNFs’ Median Medicare Per Diem Payments and 

Costs, 1997-1999:



Table 9: Therapies, Special Treatments, and Nursing in Hospital-Based 

and Freestanding SNFs, 1999:



Table 10: Distribution of Freestanding SNFs for Which Margins Were 

Calculated, 1999 and 2000:



Abbreviations:



AAHSA: American Association of Homes and Services for the Aging: 



AHCA: American Health Care Association: 



AHA: American Hospital Association: 



BBA: Balanced Budget Act of 1997: 



BBRA: Medicare, Medicaid, and SCHIP Balanced Budget

Refinement Act of 1999:



BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and

Protection Act of 2000:



CMS: Centers for Medicare & Medicaid Services: 



HCFA: Health Care Financing Administration: 



IV: intravenous: 



MDS: minimum data set: 



MedPAC: Medicare Payment Advisory Commission: 

OACT: Office of the Actuary: 



OIG: Office of Inspector General: 



OSCAR: Online Survey Certification and Reporting System: 



PPS: prospective payment system: 



RN: registered nurse: 



RUG: resource utilization group: 



SNF: skilled nursing facility:



Letter:



December 31, 2002:



The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Committee on Finance

United States Senate:



The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives:



From the mid-1980s through 1997, Medicare’s spending for skilled 

nursing facility (SNF) care rose at an average annual rate of 30 

percent, making it one of the fastest growing components of the 

Medicare program. During this period, Medicare paid SNFs based on their 

reported costs of delivering care, subject to certain limits that were 

higher for hospital-based SNFs than for freestanding SNFs.[Footnote 1] 

Growth in the number of services provided to an increasing number of 

patients resulted in Medicare spending for SNF care reaching $13 

billion in 1997. In response, the Congress established in the Balanced 

Budget Act of 1997 (BBA) a SNF prospective payment system (PPS) under 

which SNFs receive a fixed payment that covers almost all services 

provided during each day of a Medicare-covered stay.[Footnote 2]



With the implementation of the PPS, providers stated that the payments 

were inadequate, threatening their financial viability and their 

ability to serve beneficiaries. The Congress subsequently modified the 

PPS with several temporary payment increases. Some of these increases 

expired on October 1, 2002, and provider representatives have said that 

they should be restored due to payment shortfalls from other payers. 

These representatives are mainly concerned about Medicaid, a joint 

federal-state program for certain low-income individuals. According to 

this argument, when Medicaid payments do not cover the costs of 

Medicaid patients, higher payments are needed from Medicare to offset 

current or anticipated financial difficulties.



The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 

Act of 2000 (BIPA) directed us to examine the adequacy of Medicare 

payments for SNFs and the extent to which Medicare revenues contribute 

to SNFs’ financial viability.[Footnote 3] This report addresses (1) the 

relationship between Medicare SNF payments and the costs of treating 

Medicare patients in freestanding SNFs, as well as the effect of 

Medicare SNF payments on the financial condition of these facilities, 

and (2) the relationship between Medicare SNF payments and the costs of 

treating patients in hospital-based SNFs, as well as the factors that 

may account for cost differences between hospital-based and 

freestanding SNFs. To address these issues, we analyzed 1997 through 

2000 SNF Medicare cost reports, which are the financial documents that 

facilities submit annually to receive payment from Medicare.[Footnote 

4] We supplemented the cost report data with admissions data from 

Medicare claims, data on facility characteristics from the Online 

Survey Certification and Reporting System (OSCAR) maintained by the 

Centers for Medicare & Medicaid Services (CMS), and data on patient 

services from CMS’s nursing home minimum data set (MDS). We did not 

verify these data, but we excluded a SNF from our analysis if one or 

more of its reported data items likely represented data entry or other 

reporting errors. We also interviewed representatives of the SNF 

industry. (See app. I for a more complete discussion of our methods.) 

We performed our work from October 2001 through December 2002 in 

accordance with generally accepted government auditing standards.



Results in Brief:



Under the PPS, most freestanding SNFs’ Medicare payments substantially 

exceeded the costs of caring for Medicare patients, contributing to 

facilities’ overall positive financial condition. In 1999, the first 

full year under the PPS, the median freestanding SNF Medicare margin--

a measure that compares Medicare payments with Medicare costs--was 

slightly over 8 percent.[Footnote 5] By 2000, when the temporary 

payment increases authorized by the Congress started to take effect, 

the median Medicare margin had risen to almost 19 percent. However, 

nearly one-quarter of SNFs in 2000 had Medicare margins exceeding 30 

percent, while about one-fifth had negative Medicare margins; that is, 

the payments they received from Medicare did not cover their costs of 

providing care. Medicare margins were higher for freestanding SNFs 

affiliated with large, for-profit nursing home chains and for those 

with high occupancy. The median SNF total margin--which reflects total 

revenues and costs across all patients--was 1.3 percent in 1999 and 1.8 

percent in 2000. A SNF’s total margin tended to be higher when its 

Medicare margin was higher despite the fact that, in most SNFs, 

Medicare’s share of patient days was small. The total margins for 

freestanding SNFs tended to be lower when a higher proportion of a 

SNF’s patients had their care paid for by Medicaid.



Unlike freestanding SNFs, about 90 percent of hospital-based SNFs 

reported significantly negative Medicare margins after Medicare’s new 

SNF payment system was launched. The median hospital-based SNF Medicare 

margin was -53 percent in 1999. Under the PPS, per diem payments to 

hospital-based SNFs dropped considerably, reflecting the change from 

payments based on a facility’s own costs to fixed payments based on 

average costs for all facilities. At the same time, hospital-based 

SNFs’ reported per diem costs rose from 1997 through 1999. This is in 

contrast to the experience of freestanding SNFs, which had lower per 

diem Medicare costs than hospital-based SNFs prior to the PPS and 

reduced their costs further after the shift to the PPS. The higher 

Medicare costs reported by hospital-based SNFs may stem in part from 

differences in services provided to patients. The higher costs may also 

reflect the historical allocation of overhead costs to the SNF from the 

hospital, an accounting practice that, while consistent with the 

payment incentives under the prior cost-based reimbursement system, 

means that hospital-based SNFs’ reported costs should be treated 

cautiously.



We received written comments from CMS stating that our findings are 

consistent with a recent analysis conducted by MedPAC and other 

analyses of Medicare margins. CMS noted that this report supports its 

position that Medicare SNF payment rates are more than adequate to 

cover the cost of services provided to Medicare beneficiaries. CMS’s 

comments are reprinted in appendix III.



Background:



About 15,000 SNFs provide care for patients who are temporarily or 

permanently unable to care for themselves, but who do not require the 

level of care furnished in an acute care hospital. SNFs provide a 

variety of services to patients, including nursing care; physical, 

occupational, respiratory, and speech therapy; and medical social 

services. Medicare covers these SNF services for Medicare beneficiaries 

who have recently been discharged from a stay in an acute care hospital 

lasting at least 3 days and who need daily skilled care. In addition, 

many of these facilities provide long-term care, mostly to Medicaid or 

private paying patients. (Over 2,200 nursing homes are not SNFs and 

treat Medicaid but not Medicare patients.) A SNF must meet federal 

standards to participate in the Medicare or Medicaid program. About 85 

percent of SNFs, or roughly 13,000, are freestanding and three-quarters 

of these are for-profit entities. Nearly half of freestanding SNFs are 

owned by for-profit chains--corporations operating multiple 

facilities. Hospital-based SNFs, which number about 1,900, are usually 

part of not-for-profit acute care hospitals. (See table 1.):



In 2000, Medicare SNF expenditures were $13 billion for services 

provided to 1.4 million Medicare patients. About two-thirds of these 

patients received care in freestanding SNFs and the remaining one-third 

received care in hospital-based SNFs. On any given day, about 10 

percent of freestanding SNFs’ residents were Medicare 

beneficiaries.[Footnote 6] Most other patients cared for in a 

freestanding SNF were longer-stay patients receiving nursing or long-

term care, which generally is paid for by Medicaid or by the patients 

themselves. Medicare patients account for a larger share of patients in 

hospital-based SNFs compared to freestanding SNFs. About 56 percent of 

patients in hospital-based SNFs are Medicare patients.



Table 1: Freestanding and Hospital-Based SNFs by Type of Ownership, 

1999A:



Numbers in percent: 



Type of ownership: 10 largest chains[B]; 

Freestanding SNFs: 20; Hospital-based SNFs: 1.



Type of ownership: Smaller chains; Freestanding 

SNFs: 29; Hospital-based SNFs: 9.



Type of ownership: Independents; Freestanding SNFs: 

26; Hospital-based SNFs: 6.



Type of ownership: All for-profit; Freestanding 

SNFs: 75; Hospital-based SNFs: 16.



Type of ownership: Not-for-profit; Freestanding 

SNFs: 22; Hospital-based SNFs: 65.



Type of ownership: Government[C]; Freestanding 

SNFs: 3; Hospital-based SNFs: 19.



Type of ownership: Total; Freestanding SNFs: 100; 

Hospital-based SNFs: 100.



Source: GAO analysis of OSCAR data and of CMS data based on “Top 50 

Nursing Facility Chains,” Provider, July 1999.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Chain size is measured by the total number of beds in the chain’s 

SNFs. This number is self-reported.



[C] Primarily facilities operated by counties or cities.



[End of table]



Medicare Payment for SNF Care:



During most of the 1990s, Medicare spending for SNF care grew much more 

rapidly than spending for most other Medicare services. Under the cost-

based reimbursement system then in effect, Medicare paid SNFs’ costs 

for routine care (room and board and routine nursing) up to a specified 

limit, with higher limits applied to hospital-based SNFs than to 

freestanding SNFs. New providers were exempt from the routine-care cost 

limits for their first 4 years, and all providers could be granted 

exemptions to the limits by demonstrating that their higher costs were 

due to atypical patients or patterns of care. Unlike routine-care 

costs, payments for ancillary services such as therapy were not subject 

to cost limits, giving facilities few incentives to control those 

costs.



The Congress, in the BBA, directed the Health Care Financing 

Administration (HCFA)[Footnote 7] to replace the cost-based 

reimbursement system with a PPS. The PPS is designed to give SNFs 

incentives to furnish only necessary services and to deliver those 

services efficiently by allowing facilities to retain any excess of 

Medicare payments over costs, but requiring them to absorb any costs 

that are greater than payments. Under the PPS, SNFs receive a per diem 

payment, adjusted for geographic differences in labor costs and for 

differences in the resource needs of patients. Adjustments for 

patients’ resource needs are based on a patient classification system, 

resource utilization group (RUG), version III. This system assigns 

patients to 1 of 44 payment groups or RUGs, based on their clinical 

condition, functional status, and use or expected use of certain types 

of services. With few exceptions, the payment covers all routine, 

therapy, and nursing costs incurred in treating patients.



Although we have reported that total SNF PPS payments are likely to be 

adequate, we, MedPAC, and others have raised concerns that the Medicare 

payments for certain types of patients may be too low because of 

inadequacies with the patient classification system.[Footnote 8] The 

patient classification system may not sufficiently reflect the greater 

resource needs of those patients who require multiple kinds of health 

care services, such as drugs, laboratory services, and 

imaging.[Footnote 9] In response to BIPA’s requirement that CMS report 

on alternatives to the RUG patient classification system by January 1, 

2005, CMS has sponsored research to determine the feasibility of 

refinements as well as alternatives to the RUG system.



After the implementation of the SNF PPS, some SNF representatives 

claimed that Medicare payments were inadequate and contributed to SNFs’ 

poor financial performance. The Congress responded to provider concerns 

about the adequacy of SNF payments by making several temporary 

modifications to the PPS payment rates. Two of these changes, which 

applied to all Medicare SNF patients and represented about 

$1.4 billion in annual payments, expired on October 1, 2002:



* an increase provided by the Medicare, Medicaid, and SCHIP Balanced 

Budget Refinement Act of 1999 (BBRA) of 4 percent in the payment rate 

for all RUGs for fiscal years 2001 and 2002;[Footnote 10] and:



* an increase provided by BIPA of 16.66 percent in the nursing 

component of the payment rate for all RUGs for April through September 

2001 and fiscal year 2002.[Footnote 11]



Two additional changes were enacted for selected types of Medicare 

patients. These changes, which affect 26 of the 44 RUGs and total about 

$1 billion per year, will remain in effect until CMS refines the 

patient classification system. CMS has announced that, although it is 

examining possible refinements, the system will not be changed for the 

2003 payment year. The two payment changes are:



* an increase provided by BBRA of 20 percent in the payment rate for 15 

RUGs, including those for extensive services, special care, clinically 

complex care, and certain rehabilitation services;[Footnote 12] and:



* an increase provided by BIPA of 6.7 percent in the payment rate for 

14 rehabilitation RUGs.[Footnote 13] This redirected the funds from the 

3 rehabilitation RUGs that had received the 20 percent BBRA increase 

and applied these funds to all 14 rehabilitation RUGs. As a result of 

this redirection of funds, aggregate payments did not increase.



Prior to October 1, 2002, when two of these temporary payment increases 

expired, some SNF representatives stated that Medicare payments were 

adequate, although they said inadequate Medicaid payments compromised 

SNF financial viability. Following the expiration of these two 

temporary Medicare payment increases, provider organizations have again 

expressed concern that Medicare payments are now not adequate.



Other legislative provisions also affected Medicare payments to SNFs. A 

key provision was the 3-year phased transition to the PPS that the BBA 

established. Under this transition, which began in 1998, SNFs were paid 

a blend of facility-specific rates, based on each SNF’s 1995 costs, and 

the PPS rate. BBRA allowed SNFs to receive the full PPS rate for cost 

reporting periods beginning on or after January 1, 2000.[Footnote 14] 

This provision permitted SNFs that were advantaged by the PPS rate to 

be paid under it, while SNFs that were disadvantaged by the new rate 

could transition to it on the original 3-year schedule.



Use of Medicare-Covered SNF Care:



Medicare-covered SNF use quadrupled from 1985 to 1997, rising from 10 

SNF users per 1,000 Medicare fee-for-service beneficiaries to 41 

users.[Footnote 15] A variety of factors contributed to this increase:



* In 1983, Medicare began paying hospitals a fixed rate per stay as an 

incentive to control costs. Hospitals responded as expected and, to 

reduce costs by cutting the length of hospital stays, transferred 

patients more quickly to SNFs and other post-acute care settings.



* In 1988, clarification of Medicare coverage guidelines allowed more 

beneficiaries to qualify for SNF services.



* From 1990 through 1996 the number of freestanding SNFs increased 49 

percent, while hospital-based SNFs increased 82 percent. This growth in 

providers was encouraged by Medicare payment policies, which did not 

subject new SNFs to payment limits for their first 4 years of 

operation, and by the growth in payments. From 1990 through 1996, the 

average Medicare payment per SNF day of care climbed from $98 to 

$292.[Footnote 16]



During this period prior to the implementation of the SNF PPS, 

hospitals that had SNFs were particularly advantaged by transferring 

acute care patients sooner to their own SNFs. Transfers enabled these 

hospitals to reduce their acute care costs and increase their SNF 

revenues. To help ensure that Medicare did not overpay for services at 

the end of an acute episode of care, the Congress required HCFA to 

reduce hospital payments for patients transferred to post-acute care 

after a shorter-than-average hospital stay.[Footnote 17] In fiscal year 

1999 HCFA implemented this policy for 10 types[Footnote 18] of patients 

with high use of post-acute care.



The reduction in hospital payment for patients transferred to post-

acute care lessened the incentive for hospitals to shorten the stays of 

these patients. Following this change, SNF admissions per 1,000 

hospital discharges decreased by 4 percent from 1996 to 2000. After 

adjusting for differences in patients’ clinical conditions,[Footnote 

19] the number of admissions was only 2 percent lower in 2000 than in 

1996, indicating that part of the decline was due to reduced need for 

SNF care. However, if the 10 types of patients affected by the change 

in hospital payment for transfers are excluded, SNF admissions were the 

same in 2000 as in 1996. This suggests that some of the observed 

decline in SNF admissions may be due to the change in payment policy 

for hospital transfers.



Despite this observed decline in SNF admissions, the evidence does not 

suggest major problems with beneficiary access to SNF care. Beginning 

in 1999, the Department of Health and Human Services’ Office of 

Inspector General (OIG) has examined SNF access in several surveys of 

hospital discharge planners to determine whether they are able to place 

their Medicare patients who need care in SNFs.[Footnote 20] These 

surveys have found that planners can place most patients needing care. 

In the most recent OIG survey, about three-quarters of discharge 

planners reported that they were able to place all patients. However, 

some planners reported delays in placing patients with particular 

medical conditions or service needs, resulting in these patients 

continuing to receive care in the hospital rather than in a SNF. 

Patients who took longer to place included those who needed intravenous 

(IV) antibiotics or expensive drugs, as well as those who were 

ventilator-dependent or who required dialysis or wound care.



Medicare Payments Considerably Higher than Costs for Most Freestanding 

SNFs, Thereby Improving Their Overall Financial Performance:



In the first 2 full years under the PPS, Medicare payments more than 

covered Medicare costs for most freestanding SNFs, although their 

experiences varied widely. Many SNFs had very high Medicare margins, 

particularly in 2000, although in both years a minority of SNFs had 

negative Medicare margins--payments from Medicare did not cover their 

costs of serving Medicare patients. The median Medicare margin for SNFs 

that were owned by large nursing home chains and for those SNFs with 

high occupancy was much higher than the overall median Medicare margin 

for all SNFs. SNFs’ Medicare margins were sufficiently high that, while 

Medicare’s share of most SNFs’ total patient days was relatively small, 

SNFs with higher Medicare margins generally had higher total margins, 

which reflect all SNF revenues and costs. For-profit facilities 

generally had higher total margins, as did facilities owned by large 

chains. SNFs with higher proportions of Medicaid patients generally had 

lower total margins.



Medicare Margins Generally High, Particularly in 2000 and for SNFs in 

Large For-Profit Chains and Those with High Occupancy:



For their first 2 years under PPS, most freestanding SNFs reported 

positive Medicare margins, meaning that their payments more than 

covered their costs.[Footnote 21] In 1999, the median facility had a 

Medicare margin exceeding 8 percent, and over one-tenth had margins of 

30 percent or more. By 2000, the median Medicare margin for 

freestanding SNFs had risen to nearly 19 percent[Footnote 22], and 

almost one-quarter of SNFs had Medicare margins of 30 percent or more. 

These positive margins resulted largely from SNFs reducing their costs. 

Although Medicare payments per day were 8 percent lower in 1999 than in 

1997, for the median facility these lower payments were more than 

offset by lower costs. (See table 2.) From 1999 through 2000, costs had 

again declined, although by a smaller amount. At the same time, 

payments increased, as the temporary increases authorized by the 

Congress began to be implemente[Footnote 23]d.



Table 2: Freestanding SNFs’ Median Medicare Per Diem Payments and 

Costs, 1997-2000:



In dollars.



Medicare payments per day; Year[A]: 1997: 264; Year[A]: 1998: 270; 

Year[A]: 1999: 243; Year[A]: 2000: 269.



Medicare costs per day; Year[A]: 1997: 273; Year[A]: 1998: 279; 

Year[A]: 1999: 224; Year[A]: 2000: 220.



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[End of table]



Although most freestanding SNFs had positive Medicare margins, for a 

minority of SNFs, Medicare payments did not cover Medicare costs. In 

1999, more than one-third of freestanding facilities reported negative 

Medicare margins, with one-tenth reporting margins that were -30 

percent or less.[Footnote 24] By 2000, the number of facilities with 

negative margins had declined substantially: about 19 percent had 

margins that were less than zero, and 4 percent had margins of -30 

percent or less.



Freestanding SNFs’ Medicare margins differed by type of ownership. For-

profit SNFs--particularly those associated with the largest chains--had 

positive Medicare margins in both 1999 and 2000 that were higher than 

those of both not-for-profit and government-operated SNFs.[Footnote 25] 

In 1999, median margins for not-for-profit and government-operated SNFs 

were negative, while in 2000 the median margins for all types of 

freestanding SNFs were positive. (See table 3.):



Table 3: Median Medicare Margins for Freestanding SNFs by Type of 

Ownership, 1999 and 2000:



Numbers in percent.



For-profit:



10 largest chains[B]; 1999[A]: 18.2; 2000[A]: 25.2.



Smaller chains; 1999[A]: 7.6; 2000[A]: 16.8.



Independents; 1999[A]: 6.6; 2000[A]: 17.7.



All for-profit; 1999[A]: 11.7; 2000[A]: 20.4.



Not-for-profit; 1999[A]: -1.4; 2000[A]: 11.1.



Government[C]; 1999[A]: -13.9; 2000[A]: 8.2.



All freestanding SNFs; 1999[A]: 8.4; 2000[A]: 18.9.



Source: GAO analysis of Medicare cost report data, OSCAR data, and CMS 

data based on “Top 50 Nursing Facility Chains,” Provider, July 1999.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Chain size is measured by the total number of beds in the chain’s 

SNFs. This number is self-reported.



[C] Primarily facilities operated by counties or cities.



[End of table]



Medicare margins also varied with occupancy.[Footnote 26] Higher 

occupancy resulted in higher margins. For example, in 1999, 

freestanding SNFs with occupancy rates[Footnote 27] of 90 percent or 

more had a median margin of 10.2 percent, while SNFs with occupancy 

rates below 70 percent had a median margin of 0.6 percent. (See table 

4.) These results are not surprising, because higher occupancy reduces 

per diem costs, as fixed costs are spread across more patient days.



Table 4: Median Medicare Margins for Freestanding SNFs by Occupancy 

Rate, 1999A:



Numbers in percent.



Less than 70 percent; Share of SNFs: 11; Medicare margin: 0.6.



70 to 79 percent; Share of SNFs: 13; Medicare margin: 6.1.



80 to 89 percent; Share of SNFs: 28; Medicare margin: 8.3.



90 to 100 percent; Share of SNFs: 48; Medicare margin: 10.2.



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] The occupancy rate is based on all beds in the facility, regardless 

of whether they were occupied by Medicare patients or other patients.



[End of table]



Despite the expiration of two temporary Medicare payment increases and 

the completed transition from payments based on a facility’s own costs 

to PPS rates, SNFs’ positive Medicare margins are likely to continue. 

MedPAC has estimated that freestanding SNFs’ aggregate Medicare margin 

for 2002 would be 9.4 percent, excluding for the entire year the 

temporary payment increases that expired on October 1, 2002, and 

assuming that all facilities had completed the transition to the 

PPS.[Footnote 28]



Despite Medicare’s Small Share of Patients, Medicare Margins 

Significantly Affected Freestanding SNFs’ Total Margins:



Although most freestanding SNFs had positive Medicare margins, most had 

few Medicare patients and Medicare accounted for a small share of their 

revenue. In 1999, the median SNF had about six Medicare patients each 

day and received about 13 percent of its revenue from Medicare. By 

contrast, the care for about two-thirds of patients was paid for by 

Medicaid with the remainder generally paid for by the patients 

themselves.



Despite Medicare’s small share of most freestanding SNFs’ patients, 

Medicare contributed substantially to these facilities’ total margins, 

because Medicare payments were much higher than costs. In general, 

facilities with higher Medicare margins had higher total margins. 

Moreover, in 1999 and 2000, the median total margin would have been 

negative without Medicare; for example, in 2000, it would have been -

1.2 percent. With Medicare, the actual median total margin was 1.8 

percent. (See table 5.):



Table 5: Median Margins for Freestanding SNFs, 1999 and 2000:



Numbers in percent.



Medicare margin; 1999[A]: 8.4; 2000[A]: 18.9.



Total margin; 1999[A]: 1.3; 2000[A]: 1.8.



Total margin without Medicare; 1999[A]: -0.1; 2000[A]: -1.2.



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[End of table]



Freestanding SNFs’ Total Margins Varied by Medicaid Share of Residents 

and Type of Ownership:



Medicaid’s share of freestanding SNFs’ residents influenced facilities’ 

overall profitability. The larger Medicaid’s share of a SNF’s patient 

days, the smaller its total margin.[Footnote 29] (See table 6.) For-

profit status and ownership by a chain also affected freestanding SNFs’ 

total margins. For-profit facilities showed higher median total margins 

than not-for-profit and government-operated facilities, and large 

chains displayed the highest total margins. (See table 7.):



Table 6: Median Total Margins for Freestanding SNFs by Medicaid Share 

of Patient Days, 1999A:



Numbers in percent.



Medicaid share of patients: Less than 56 percent; Total margins: 2.2.



Medicaid share of patients: 56 to 69 percent; Total margins: 1.8.



Medicaid share of patients: 70 to 79 percent; Total margins: 1.0.



Medicaid share of patients: 80 percent and above; Total margins: 0.6.



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Each group contains roughly one-quarter of all freestanding SNFs.



[End of table]



Table 7: Median Total Margins for Freestanding SNFs by Type of 

Ownership, 1999 and 2000:



Numbers in percent.



For-profit:



10 largest chains[B]; 1999[A]: 2.7; 2000[A]: 3.8.



Smaller chains; 1999[A]: 0.6; 2000[A]: 1.5.



Independents; 1999[A]: 1.8; 2000[A]: 1.8.



All for-profit; 1999[A]: 1.6; 2000[A]: 2.2.



Not-for-profit; 1999[A]: 0.6; 2000[A]: 0.3.



Government[C]; 1999[A]: 0.3; 2000[A]: 0.6.



All freestanding SNFs; 1999[A]: 1.3; 2000[A]: 1.8.



Source: GAO analysis of Medicare cost report data, OSCAR data, and CMS 

data based on “Top 50 Nursing Facility Chains,” Provider, July 1999.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Chain size is measured by the total number of beds in the chain’s 

SNFs. This number is self-reported.



[C] Primarily facilities operated by counties or cities.



[End of table]



Many other factors were also related to differences in freestanding 

SNFs’ total margins. Factors contributing to high total margins 

included high occupancy and location in a rural area. Factors 

associated with low total margins were a high concentration of SNFs in 

a geographic area, and location in a state with relatively high average 

wages for nursing staff.



Reported Medicare Costs of Hospital-Based SNFs Substantially Exceeded 

Medicare Payments:



In contrast to freestanding SNFs, hospital-based SNFs reported very 

negative Medicare margins after the introduction of the PPS. These low 

margins reflected a substantial decline in Medicare payments to 

hospital-based SNFs under the PPS as well as hospital-based SNFs’ weak 

response to PPS incentives to reduce costs. Differences in services 

between hospital-based SNFs and freestanding SNFs could have resulted 

in higher costs for hospital-based SNFs that may not have been fully 

accounted for by the patient classification system in the PPS. The 

negative margins reported by hospital-based SNFs were also due in part 

to their high costs per day, which may reflect the historical 

allocation of hospitals’ overhead to their SNF units.



Unlike Freestanding SNFs, Most Hospital-Based SNFs Had Very Negative 

Medicare Margins:



In 1999, about 90 percent of all hospital-based SNFs reported Medicare 

costs exceeding Medicare payments, and the median hospital-based SNF 

posted Medicare margins of -53 percent.[Footnote 30] While insufficient 

data were available to compute margins for hospital-based SNFs for 

2000, their margins likely improved with the payment increases, but 

remained significantly negative[Footnote 31]. Only a small minority--

about 10 percent--reported positive margins in 1999. These more 

successful hospital-based SNFs generally had high occupancy and did not 

rely heavily on Medicare payments.



The explanation of these low margins lies partly in the large decline 

in Medicare per diem payments that followed the shift to the PPS. Prior 

to the PPS, Medicare’s payments to SNFs were based on each facility’s 

own costs. This led to higher payments for hospital-based SNFs: a 

median of $378 per day for hospital-based SNFs in 1997 (see table 8), 

compared to a median of $264 for freestanding SNFs.



Table 8: Hospital-Based SNFs’ Median Medicare Per Diem Payments and 

Costs, 1997-1999:



In dollars.



Medicare payments per day; 378; Year[A]: 1998: 347; Year[A]: 1999: 281.



Medicare costs per day; 461; Year[A]: 1998: 484; Year[A]: 1999: 490.



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[End of table]



In the first year of the PPS, hospital-based SNFs, unlike their 

freestanding counterparts, did not respond to the incentives in the PPS 

by reducing costs: compared to 1997, hospital-based SNFs’ costs in 1999 

were higher by $29 per day.[Footnote 32] By contrast, freestanding SNFs 

reduced costs by $49 per day. As a result, per diem costs continued to 

be substantially higher in hospital-based facilities than in 

freestanding SNFs--more than twice as high in 1999.



Differences in Services and Accounting Practices May Contribute to Cost 

Differences between Hospital-Based and Freestanding SNFs:



Some differences in costs between hospital-based and freestanding SNFs 

may also reflect differences in services in the two settings. Although 

patients in hospital-based SNFs had received less therapy as of their 

initial Medicare assessment than patients in freestanding SNFs (and 

slightly more as of their second assessment),[Footnote 33] they were 

more likely to receive other kinds of services, including IV 

medications, oxygen therapy, and transfusions. Hospital-based SNFs also 

gave significantly more nursing care, as measured by the ratio of 

nurses to patients. However, when patients’ resource needs were 

measured by RUGs, patients in the two settings appeared identical, 

suggesting that their service needs should be comparable. Consequently, 

the observed differences in the treatments that patients received may 

suggest that the RUGs do not fully measure differences in patients’ 

conditions and could account for part of the cost difference between 

hospital-based and freestanding SNFs[Footnote 34]. (See table 9.):



Table 9: Therapies, Special Treatments, and Nursing in Hospital-Based 

and Freestanding SNFs, 1999:



Average therapy per patient, minutes[A]:



Measured at initial Medicare assessment; Hospital-based: 337; 

Freestanding: 369.



Measured at second Medicare assessment; Hospital-based: 446; 

Freestanding: 440.



Patients receiving special treatments, percentage[B]:



IV medication; Hospital-based: 57; Freestanding: 37.



Intake/output; Hospital-based: 70; Freestanding: 53.



Monitoring acute medical condition; Hospital-based: 62; Freestanding: 

57.



Ostomy care; Hospital-based: 3; Freestanding: 6.



Oxygen therapy; Hospital-based: 38; Freestanding: 28.



Suctioning; Hospital-based: 4; Freestanding: 3.



Tracheotomy care; Hospital-based: 1; Freestanding: 1.



Transfusions; Hospital-based: 8; Freestanding: 4.



Average nurse staffing ratio:



Average registered nurse (RN) hours per patient day; Hospital-based: 

1.81; Freestanding: 0.37.



Average total nurse hours (RN, licensed practical 

 nurse, aide) per patient day; Hospital-based: 5.57; Freestanding: 

3.12.



Source: GAO analysis of MDS data and OSCAR data.



Note: Entries are not adjusted for differences in patients’ clinical 

conditions between hospital-based and freestanding SNFs. Their RUG 

scores are similar.



[A] SNFs document the amount of therapy a patient has received in the 

last 7 days at an initial assessment (often called the 5-day 

assessment) and again at a second assessment (often called the 14-day 

assessment). The amount of therapy documented includes only therapies 

provided in the SNF; if the initial assessment occurs on the fifth or 

sixth day, then only 5 or 6 days of therapy are documented. Therapy 

includes physical, occupational, and speech therapy. Patients who were 

receiving chemotherapy, dialysis, IV medications, oxygen therapy, 

radiation, or ventilator or respiratory care were excluded from the 

analysis of therapy.



[B] Based on the initial Medicare assessment. Similar results were 

obtained using the second assessment.



[C] These staffing ratios are based on SNFs’ overall direct nursing 

care staff and the total number of patients. These ratios are facility-

wide rather than ratios specific to Medicare patients.



[End of table]



Part of the cost differential between hospital-based and freestanding 

SNFs may reflect accounting practices that increase reported costs for 

individual units of the hospital, such as SNFs, that had been paid on 

the basis of these reported costs. MedPAC “believe[s] a significant 

portion of the negative [hospital-based] SNF margin reflects the 

allocation of hospital overhead costs to cost-reimbursed 

units.[Footnote 35]” Prior to the SNF PPS, but after Medicare had 

implemented its per case PPS for acute inpatient hospital care, 

hospitals had an incentive to allocate administrative and capital costs 

to cost-reimbursed units, including SNFs, potentially raising reported 

costs for these units. (Capital as a share of Medicare per diem costs 

for hospital-based SNFs was about 96 percent higher than it was for 

freestanding SNFs in 1999.) Now that SNFs are paid a fixed rate, this 

incentive no longer exists--but neither is there an incentive to change 

historical cost allocations. In fact, capital as a share of Medicare 

costs for hospital-based SNFs has changed little since before PPS. In 

light of these accounting issues, reported costs of hospital-based 

SNFs, as well as margins calculated from these costs, should be treated 

cautiousl[Footnote 36]y.:



Concluding Observations:



Our analysis shows that the Medicare PPS generally pays SNFs adequately 

for the services that beneficiaries receive. Freestanding SNFs, which 

treat most Medicare SNF patients, generally received Medicare payments 

that exceeded their costs, often by considerable amounts. Most 

hospital-based SNFs reported costs that were greatly in excess of 

Medicare payments, but these hospital-based SNFs did not respond to the 

incentives in the PPS by reducing costs. Some of their high costs may 

also be due to differences in patients that lead to higher resource use 

and that are not captured by the payment system. This problem could be 

addressed through refinements to the patient classification system, 

which CMS is currently studying.



Concerns about the financial conditions of some nursing homes have led 

to interest in using Medicare payment policy to offset current or 

anticipated financial difficulties. Whatever the merits of the case for 

aiding these facilities, an across-the-board increase in Medicare 

payments, such as the restoration of the expired temporary increases, 

would be particularly inefficient. An across-the-board increase would 

go to all providers of Medicare SNF care, even those for which 

Medicare’s current payments already greatly exceed costs and which are 

not experiencing any financial difficulty. Such an increase could also 

not take account of differences in the adequacy of revenues from other 

payers, especially the state Medicaid programs. Moreover, over 2000 

nursing homes would not get any increase, because they do not 

participate in Medicare.



Agency and Other Comments and Our Evaluation:



We received written comments on a draft of this report from CMS (see 

app. III) and oral comments from the American Association of Homes and 

Services for the Aging (AAHSA), which represents not-for-profit nursing 

facilities; the American Health Care Association (AHCA), which 

represents for-profit and not-for-profit nursing facilities; and the 

American Hospital Association (AHA), which represents hospitals. We 

incorporated their comments as appropriate. Industry representatives 

agreed with our basic findings concerning SNF margins and several 

stated that it was a good report.



CMS:



CMS noted that our findings are consistent with a recent analysis 

conducted by MedPAC and other analyses of Medicare margins. CMS stated 

that the report supports its position that Medicare SNF payment rates 

are more than adequate to cover the cost of services provided to 

Medicare beneficiaries.



Industry Associations:



Representatives of AHCA and AAHSA who reviewed the draft report were 

concerned that the report does not address the issue of Medicaid 

payments being too low and the role they play in SNFs’ financial 

viability. AHCA also objected to the prominence given to differences in 

payments by type of ownership, which they believe is a less important 

factor than occupancy and Medicare percentage of total SNF days in 

explaining SNF total margins. They characterized as misleading the 30 

percent annual growth rate in Medicare SNF expenditures that we 

reported for 1985 through 1997, stating that spending growth was driven 

by growth in utilization.



Both the AHCA and AHA representatives commented on our findings 

concerning the differences between freestanding and hospital-based 

SNFs. AHCA stated that any differences in services between hospital-

based and freestanding SNFs are due to differences in patients’ 

clinical conditions. The AHA representatives objected to our statement 

that the higher per diem costs of hospital-based SNFs could be partly 

due to the historical patterns of allocating overhead and other costs 

to the SNF. They stated that hospital cost accounting systems are 

constantly changing as hospitals add and drop services, and that the 

cost allocation issue in general is an artifact of the 15 years of 

operation of Medicare’s inpatient PPS. According to AHA, hospitals were 

already operating at an efficient level when the SNF PPS was 

implemented and therefore had fewer excess costs to trim. The AHA 

representatives also noted the shorter average length of stay of 

hospital-based SNFs and suggested that reporting costs on a per case 

basis, which reflects this shorter length of stay, rather than on a per 

diem basis, would show that hospital-based SNFs are less costly than 

freestanding SNFs.



Both AAHSA and AHA addressed possible changes to the PPS. The AAHSA 

representative stressed that Medicare payments are inadequate for 

patients who need medically complex nonrehabilitation ancillary 

services. She stated that the report should include language suggesting 

that the patient classification system should be changed to better 

reflect patient characteristics. Regarding our concluding 

observations, AHA inferred from our discussion of across-the-board 

increases in payment rates that we would favor targeted increases.



Our Response:



Regarding payments, we accounted for Medicaid payments in our analysis 

of total margins but were unable to conduct a separate analysis of 

Medicaid payment adequacy for nursing homes because of the lack of 

suitable data. Isolating the impact of Medicaid payments was not 

possible because the Medicare cost reports do not report Medicaid 

payments or costs separately and because there is no source of Medicaid 

financial data collected on a consistent and ongoing basis across all 

facilities and states. Although occupancy and Medicare percentage of 

total SNF days were important factors in explaining differences in 

total margins, we found that after accounting for these factors, type 

of ownership remained a significant factor. We agree that utilization 

growth was a key factor in the rise in Medicare SNF spending, as this 

report states. Nonetheless, the rapid growth in spending, which we 

characterized correctly, provided the impetus for enactment of the SNF 

PPS.



With regard to differences between freestanding and hospital-based 

SNFs, our analyses reported in the draft show that the average RUG 

score, a measure of patients’ clinical conditions, is nearly the same 

for both. We acknowledged, moreover, that the RUG system may not 

adequately account for differences across patients. As we stated in the 

draft, the higher costs of hospital-based SNFs are consistent with 

historical patterns of allocating overhead costs to SNF units. Whatever 

changes are occurring in hospital cost accounting, hospitals have had 

no incentive to change their historical cost allocations since the 

implementation of the SNF PPS. Moreover, we found no evidence to 

suggest that they had done so. For example, as we stated in the draft, 

capital costs expressed as a share of Medicare per diem costs have not 

changed. Although AHA representatives said that hospitals were more 

efficient and consequently had less flexibility to reduce costs after 

the implementation of the SNF PPS, they did not offer evidence to 

reconcile this view with hospital-based SNFs’ higher costs. Hospitals’ 

efficiency may have improved on the inpatient side as a result of the 

hospital PPS, but this would not necessarily improve the efficiency of 

hospital-based SNFs. Although we agree that hospital-based SNFs are 

less costly than freestanding SNFs on a per case basis, we did not 

present this measure because payments under the SNF PPS are not made on 

a per case basis.



Regarding possible changes in the PPS, we have previously acknowledged 

that the current patient classification system may not adequately 

recognize the greater resource needs of some patients[Footnote 37]. We 

support CMS’s sponsorship of research to investigate improvements in 

the system. Our analysis does not support an increase in Medicare 

payment rates. Instead, it would be preferable to refine the patient 

classification system underlying the SNF PPS, if necessary 

redistributing money to ensure that payments vary appropriately to 

reflect patient resource needs.



We are sending copies of this report to the Administrator of CMS, 

appropriate congressional committees, and other interested parties. We 

will also provide copies to others upon request. In addition, the 

report is available at no charge on the GAO Web site at http://

www.gao.gov.



If you or your staffs have any questions, please call me at (202) 512-

7114. Other GAO contacts and staff acknowledgements are listed in 

appendix IV.



Laura A. Dummit

Director, Health Care--Medicare Payment Issues:



Signed by Laura A. Dummit:



[End of section]



Appendix I: Methodology for Calculating and Analyzing SNF Margins:



This appendix describes the data and methods used to calculate margins 

for SNFs as well the analyses of factors affecting margins.



Data and Methods Used in Calculating Margins:



In general, a SNF margin is the difference between its payments and its 

costs, divided by payments; this ratio is expressed as a percentage. 

Using this definition, a total margin for a SNF is based on the 

difference between its total payments--derived from all payers--and its 

total costs. A Medicare margin for a SNF is based on the difference 

between its Medicare payments and its reported costs of serving 

Medicare patients.[Footnote 38] We report the median margins for 

freestanding and hospital-based SNFs, as well as for subgroups (for 

example, not-for-profit freestanding SNFs).[Footnote 39]



We computed Medicare and total margins for freestanding and hospital-

based SNFs using methods similar to those developed by MedPAC and CMS’s 

Office of the Actuary (OACT). Our primary data sources for SNF payments 

and costs used in calculating Medicare and total margins were the 1997 

through 2000 Medicare SNF cost report files maintained by CMS.[Footnote 

40] Our methods differed slightly from those used by MedPAC and OACT 

with respect to the definition of outliers and the application of an 

adjustment to Medicare costs.



Definition of outliers. The data for some SNFs must be excluded from 

the analysis because they result in outliers--implausibly high or low 

margins that suggest data error. To identify outliers, MedPAC uses a 

method based on percentiles. We used a standard statistical 

distribution (lognormal) and removed SNFs where margins were plus or 

minus 3 standard deviations or more from the mean. We used this method 

because it improved our ability to detect and eliminate extreme values.



Application of cost adjustment. MedPAC adjusted 1999 cost data for 

freestanding SNFs that, after the implementation of the SNF PPS, 

changed from certifying a portion of their beds for use by Medicare 

patients to certifying all or most their beds for Medicare patients. 

This increase in certified beds resulted in the average cost per day 

reflecting the cost experience of a broader range of patients, many of 

whom may not have received skilled care. The adjustment made data more 

comparable over time by making costs for 1999 more similar to costs in 

1997 and 1998, which were based on a larger share of patients needing a 

SNF level of care.



To better ensure comparability of cost data across time, we made an 

adjustment similar to MedPAC’s. Following MedPAC’s approach, we 

identified freestanding SNFs for which this adjustment should be made 

by examining the change between years in the number of Medicare-

certified beds. If the number of certified beds increased 50 percent or 

more, over 90 percent of the SNF’s beds were Medicare-certified, and 

certain other conditions were met, MedPAC adjusted the SNF’s routine 

costs. We used similar criteria: If a SNF had over 90 percent of its 

beds certified as Medicare and if, in addition, this percentage had 

changed by more than 30 percentage points from 1998, we adjusted the 

SNF’s routine costs. The adjustment raised or lowered routine costs 

based on the pre-PPS ratio of Medicare SNF routine costs per day to the 

entire facility’s routine costs per day. We applied this adjustment in 

both 1999 and 2000. We found that our criteria identified about 10 

percent of SNFs in 1999 and 18 percent in 2000 for which the adjustment 

was appropriate. Without the adjustment, the median Medicare margin for 

freestanding SNFs in 1999 would have been 10.2 percent rather than 8.4 

percent, and the median Medicare margin in 2000 would have been 21.7 

percent rather than 18.9 percent.



Refining the Measurement of Medicare Costs:



A more refined measure of the routine costs attributable to Medicare 

patients in all SNFs would reflect the difference in nursing needs 

between Medicare patients and other patients in the facility. To test 

the impact of such an adjustment, we used patient-specific data on 

services from CMS’s nursing home minimum data set (MDS) to approximate 

the difference in nursing needs between Medicare patients and other 

patients for each SNF. Using this estimate, we adjusted the portion of 

total facility routine costs attributable to employee wages and 

benefits, which we used as a proxy for nursing costs. Based on this 

analysis, we estimate that using a more refined measure of Medicare 

costs would likely have reduced the median Medicare margin we reported 

for freestanding SNFs by between 0.6 and 1.6 percentage points. This 

adjustment would not affect SNF total costs or total margins.



Characteristics of the Files Used to Calculate Margins:



The SNF cost report files we used to calculate 1999 and 2000 Medicare 

margins were the most current files as of May 2, 2002. The 1999 and 

2000 files differed with respect to their completeness. The 1999 file 

was over 97 percent complete, while the 2000 file was 80 percent 

complete.[Footnote 41] After excluding freestanding SNFs that had 

outliers or lacked key data, including data necessary to adjust routine 

costs, 7,805 facilities were available for analysis in 1999 and 6,975 

facilities in 2000. After exclusions, 1,506 hospital-based SNFs were 

available for analysis in 1999. The 2000 file contained very few 

records for hospital-based SNFs; as a result, we could not reliably 

calculate and report 2000 margins for these providers. Table 10 shows 

that the distribution of freestanding SNFs is similar in both years for 

type of ownership, location (urban versus rural), and census region. 

Compared to the 1999 file, the 2000 file has more SNFs that provide 

4,000 or more days of care to Medicare beneficiaries and 

correspondingly fewer that provide less than 1,500 days of care.



Table 10: Distribution of Freestanding SNFs for Which Margins Were 

Calculated, 1999 and 2000:



Numbers in percent.



[See PDF for image]



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Based on 7,805 facilities, after excluding SNFs that lacked key 

data or were outliers.



[C] Based on 6,975 facilities, after excluding SNFs that lacked key 

data or were outliers.



[End of table]



Methods for Analysis of Factors Affecting SNF Margins:



To account quantitatively for factors that potentially influence SNF 

margins, we analyzed SNF margins using multiple regression. This 

statistical technique accounts for variation in margins by estimating 

the separate contribution of each of several explanatory factors 

included in the analysis, while controlling for the effect of all other 

included factors. For freestanding SNFs, we estimated separate 

regressions for Medicare margins and for total margins. Each regression 

included contextual factors, such as the number of SNFs in a geographic 

area and the state in which the SNF was located, and individual 

factors, such as each SNF’s proportion of Medicaid patients, its 

occupancy rate, and whether it was for-profit. We report only results 

that are statistically significant.



[End of section]



Appendix II: Medicare Margins of Freestanding SNFs by Selected 

Characteristics, 1999 and 2000:



Numbers in percent.



[See PDF for image]



Source: GAO analysis of Medicare cost report data.



[A] Year refers to each SNF’s cost reporting year, which corresponds to 

its fiscal year that begins during the federal fiscal year.



[B] Based on 7,805 facilities, after excluding SNFs that lacked key 

data or were outliers.



[C] Based on 6,975 facilities, after excluding SNFs that lacked key 

data or were outliers.



[End of table]



[End of section]



Appendix III: Comments from the Centers for Medicare & Medicaid 

Services:



DEPARTMENT OF HEALTH & HUMAN SERVICES:



Centers for Medicare & Medicaid 

Services:



SEP 9 2002:



Administrator Washington, DC 20201:



To: Laura A. Dummit:



Director, Health Care-Medicare Payment Issues General Accounting 

Office:



From: Thomas A. Scully Administrator Centers for Medicare & Medicaid 

Seices:



Subject: General Accounting Office (GAO) Draft Report, “Skilled Nursing 

Facilities: Medicare Pavments Exceed Costs for Most But Not All 

Facilities,” (GAO-02-1023):



The Centers for Medicare & Medicaid Services (CMS) appreciates the 

opportunity to comment on the report entitled, “Skilled Nursing 

Facilities: Medicare Pavments Fxceed Costs for Most But Not All 

Facilities. “ After carefully reviewing this report, we believe the 

findings to be consistent with the recent analysis conducted by the 

Medicare Payment Advisory Commission and other analysis of Medicare 

margins. The study provides support to GAO’s and CMS’s position that 

the skilled nursing facility payment rates are more than adequate to 

compensate providers for the services provided to Medicare 

beneficiaries.



We look forward to working with GAO on this and other issues.



[End of section]



Appendix IV: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Jonathan Ratner, (202) 512-7107

Phyllis Thorburn, (202) 512-7012:



Acknowledgments:



Contributors to this report were Dae Park and Eric Wedum.



[End of section]



Related GAO Products:



Skilled Nursing Facilities: Available Data Show Average Nursing Staff 

Time Changed Little after Medicare Payment Increase. GAO-03-176. 

Washington, D.C.: November 13, 2002.



Skilled Nursing Facilities: Providers Have Responded to Medicare 

Payment System by Changing Practices. GAO-02-841. Washington, D.C.: 

August 23, 2002.



Nursing Homes: Quality of Care More Related to Staffing than Spending. 

GAO-02-431R. Washington, D.C.: June 13, 2002.



Skilled Nursing Facilities: Services Excluded from Medicare’s Daily 

Rate Need to be Reevaluated. GAO-01-816. Washington, D.C.: August 22, 

2001.



Nursing Homes: Aggregate Medicare Payments Are Adequate Despite 

Bankruptcies. GAO/T-HEHS-00-192. Washington, D.C.: September 5, 2000.



Skilled Nursing Facilities: Medicare Payment Changes Require Provider 

Adjustments but Maintain Access. GAO/HEHS-00-23. Washington, D.C.: 

December 14, 1999.



Skilled Nursing Facilities: Medicare Payments Need to Better Account 

for Nontherapy Ancillary Cost Variation. GAO/HEHS-99-185. Washington, 

D.C.: September 30, 1999.



FOOTNOTES



[1] A freestanding SNF is a nursing home that provides skilled nursing 

care and is not attached to a hospital. A hospital-based SNF is a unit 

of an acute care hospital.



[2] Pub. L. No. 105-33, § 4432(a), 111 Stat. 251, 414 (codified at 42 

U.S.C. § 1395yy(e)). 



[3] Pub. L. No. 106-554, App. F, § 311(d), 114 Stat. 2763A-463, 2763A-

498.



[4] Hospital-based facilities’ 2000 cost reports as well as more recent 

cost reports for all SNFs were not available when we did our analysis.



[5] The Medicare margin is the difference between Medicare payments and 

Medicare costs, divided by Medicare payments, expressed as a 

percentage. We computed Medicare margins for SNFs using methods similar 

to those developed by the Medicare Payment Advisory Commission (MedPAC) 

and CMS’s Office of the Actuary (OACT). These methods assume that the 

average routine costs per day of Medicare patients are equal to the 

average routine costs per day of all patients in the SNF. (See app. I.)



[6] The 10 percent refers to SNF patients whose care is covered by 

Medicare. It excludes Medicare beneficiaries who are long-stay patients 

receiving long-term care or nursing care that Medicare does not cover. 

In this report, Medicare patients refers to Medicare beneficiaries who 

receive Medicare-covered SNF care.



[7] On July 1, 2001, the Secretary of Health and Human Services changed 

the name of HCFA to CMS. In this report, we will continue to refer to 

HCFA where our findings apply to the organizational structure and 

operations associated with that name.



[8] U. S. General Accounting Office, Skilled Nursing Facilities: 

Medicare Payment Changes Require Provider Adjustments but Maintain 

Access, GAO/HEHS-00-23 (Washington, D.C.: Dec. 14, 1999); Medicare 

Payment Advisory Commission, Report to the Congress: Medicare Payment 

Policy (Washington, D.C.: March 1999); Korbin Liu, Jennie Harvell, and 

Barbara Gage, Post-Acute Care Issues for Medicare: Interviews with 

Provider and Consumer Groups, and Researchers and Policy Analysts 

(Washington, D.C.: May 2000), http:www.hhs.gov/aspe.hhs.gov/search/

daltcp/Reports/pacissue.htm (downloaded 

August 1, 2002). 



[9] Medicare Payment Advisory Commission, Report to the Congress: 

Medicare Payment Policy (Washington, D.C.: March 2001).



[10] Pub. L. No. 106-113, App. F, § 101(d), 113 Stat. 1501A-321, 1501A-

324.



[11] BIPA § 312(a). This increase raised the overall payment rate from 

4 to 12 percent, depending on the RUG. See U.S. General Accounting 

Office, Skilled Nursing Facilities: Available Data Show Average Nursing 

Staff Time Changed Little after Medicare Payment Increase, GAO-03-176 

(Washington, D.C.: Nov. 13, 2002). 



[12] BBRA § 101.



[13] BIPA § 314.



[14] BBRA § 102.



[15] Beneficiaries enrolled in managed care plans are excluded from the 

calculation.



[16] Prospective Payment Assessment Commission, Medicare and the 

American Health Care System, Report to the Congress (Washington, D.C.: 

June 1997), p. 107.



[17] BBA § 4407. Without this provision, Medicare would pay hospitals a 

fixed amount per stay--whether the patient had an average or shorter-

than-average hospital stay. In addition, Medicare would pay SNFs for 

each day of SNF care, even if--prior to the change in hospital payment-

-some of this care would have been provided in the hospital.



[18] “Types” refers to diagnosis-related groups (DRG), a classification 

scheme that groups acute care hospital patients according to diagnosis, 

type of treatment, age, and other criteria.



[19] “Patients’ clinical conditions” refers to DRGs. 



[20] Department of Health and Human Services, Office of Inspector 

General, Medicare Beneficiary Access to Skilled Nursing Facilities: 

2001, OEI-02-01-00160 (July 2001); Department of Health and Human 

Services, Office of Inspector General, Medicare Beneficiary Access to 

Skilled Nursing Facilities: 2000, OEI-02-00-00330 (September 2000); and 

Department of Health and Human Services, Office of Inspector General, 

Early Effects of the Prospective Payment System on Access to Skilled 

Nursing Facilities, OEI-02-99-00400 (August 1999).



[21] In aggregate, Medicare payments to freestanding SNFs exceeded 

Medicare costs by 11 percent in 1999 and by 24 percent in 2000.



[22] We computed Medicare margins for SNFs using methods similar to 

those developed by MedPAC and CMS’s OACT. These methods assume that 

average nursing costs are the same for Medicare and other patients. A 

more refined measure of costs would reflect the difference in nursing 

needs between Medicare patients and other patients in the facility. We 

tested such a refinement but could not calculate it for all SNFs due to 

incomplete data. Using available data, we estimated that the median 

Medicare margin in 2000, based on a more refined measure of costs, 

would have been between 0.6 and 1.6 percentage points lower than that 

reported here. (See app. I.)



[23] The impact of the temporary increases on 2000 payments depended 

both on the effective date in the law and on the start date of each 

SNF’s fiscal year. The 4 percent across-the-board increase was in 

effect for the entire year for all facilities. The 20 percent temporary 

increase in payments for 15 RUGs was in effect for part of 2000 for 

most facilities. The other two increases--the increase in the nursing 

component and the increase for rehabilitation RUGs--had a smaller 

effect in the 2000 cost reporting year: 16 percent of SNFs were 

affected for part of the year. 



[24] That is, Medicare payments fell short of costs by at least 30 

percent.



[25] This relationship held true even after accounting for other 

factors. (See app. I.)



[26] Other factors associated with higher Medicare margins included 

urban location, while factors associated with lower margins included 

having a small number of Medicare SNF patient days per year. 



[27] The occupancy rate is based on all beds in the facility, 

regardless of whether they were occupied by Medicare patients or other 

patients.



[28] In its estimate, MedPAC updated 1999 costs and payments through 

2002 for inflation and used payment policies expected to be in effect 

in 2003: temporary payment increases due to expire on October 1, 2002, 

were excluded and all facilities were assumed to be paid entirely under 

the PPS. MedPAC included the temporary payment increases that will be 

in effect in 2003 and will not expire until the patient classification 

system is refined. It estimated the margin using aggregate Medicare SNF 

payments and aggregate Medicare SNF costs. Medicare Payment Advisory 

Commission, Report to the Congress: Medicare Payment Policy 

(Washington, D.C.: March 2002).



[29] Our statistical analysis of SNF total margins showed that the 

Medicaid share of patient days remains significant after accounting for 

SNF characteristics, including for-profit status.



[30] In aggregate, Medicare costs of hospital-based SNFs exceeded their 

Medicare payments by 55 percent.



[31] We were not able to calculate margins for 2000 because most 

hospitals’ cost reports were not yet available when we performed our 

work.



[32] Nearly one-quarter of hospital-based SNFs closed after the 

implementation of the PPS. These closures accounted for 4 percent of 

all Medicare-covered SNF days in 1997 and 22 percent of Medicare-

covered SNF days provided by hospital-based SNFs. Hospital-based SNFs 

that opened after 1995 were more likely to close than those that had 

been in business longer. 



[33] SNFs document the amount of therapy a patient has received in the 

last 7 days at an initial assessment (often called the 5-day 

assessment) and again at a second assessment (often called the 14-day 

assessment). The amount of therapy documented includes only therapies 

provided in the SNF; if the initial assessment occurs on the fifth or 

sixth day, then only 5 or 6 days of therapy are documented. Therapy 

includes physical, occupational, and speech therapy.



[34] A study by Abt Associates found that hospital-based SNFs have 

significantly higher per-patient costs than freestanding SNFs after 

controlling for various factors, but could not explain why. Abt 

Associates, Inc., Why Are Hospital-Based Nursing Homes So Expensive? 

The Relative Importance of Acuity and Treatment Setting, Health 

Services and Evaluation (HSRE) Working Paper No. 3 (Cambridge, 

Massachusetts: February 2001).



[35] See Medicare Payment Advisory Commission, Report to the Congress: 

Medicare Payment Policy (Washington, D.C.: March 2001), p. 67. 



[36] In addition to the differences in per diem cost, the average 

length of stay in hospital-based SNFs was less than half that in 

freestanding facilities. It is uncertain whether the difference in 

length of stay resulted from differences in patients, effectiveness of 

treatment, or other factors. For analysis of selected differences in 

outcomes, see DataPRO Team, Skilled Nursing Facilities Prospective 

Payment System, Findings from Rehospitalization Transfer within 30 Days 

Analysis: Summary and Selected Results, Ad Hoc Report E (Washington, 

D.C.: June 2002).



[37] See U.S. General Accounting Office, Skilled Nursing Facilities: 

Medicare Payment Changes Require Provider Adjustments but Maintain 

Access, GAO/HEHS-00-23 (Washington, D.C.: Dec. 14, 1999).



[38] The definition of Medicare costs excludes nonallowable costs such 

as patients’ telephones and personal laundry services.



[39] MedPAC primarily reports revenue-weighted, or aggregate, margins. 

These are calculated by summing the revenues of all providers in a 

group (for example, freestanding SNFs) and separately summing these 

providers’ costs. Using these sums, a margin is calculated for the 

group. Reporting revenue-weighted margins is consistent with MedPAC’s 

focus on the adequacy of Medicare’s aggregate payments for SNF care.



[40] Each annual cost report file contains data for SNFs’ cost 

reporting periods beginning on or after the start date of the relevant 

federal fiscal year.



[41] A large proportion of these cost reports--36 percent in 1999 and 

63 percent in 2000--are “as submitted,” meaning that, although they 

have passed initial automated checks and edits, final payment has not 

been made.



GAO’s Mission:



The General Accounting Office, the investigative arm of Congress, 

exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability 

of the federal government for the American people. GAO examines the use 

of public funds; evaluates federal programs and policies; and provides 

analyses, recommendations, and other assistance to help Congress make 

informed oversight, policy, and funding decisions. GAO’s commitment to 

good government is reflected in its core values of accountability, 

integrity, and reliability.



Obtaining Copies of GAO Reports and Testimony:



The fastest and easiest way to obtain copies of GAO documents at no 

cost is through the Internet. GAO’s Web site ( www.gao.gov ) contains 

abstracts and full-text files of current reports and testimony and an 

expanding archive of older products. The Web site features a search 

engine to help you locate documents using key words and phrases. You 

can print these documents in their entirety, including charts and other 

graphics.



Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its 

Web site daily. The list contains links to the full-text document 

files. To have GAO e-mail this list to you every afternoon, go to 

www.gao.gov and select “Subscribe to daily E-mail alert for newly 

released products” under the GAO Reports heading.



Order by Mail or Phone:



The first copy of each printed report is free. Additional copies are $2 

each. A check or money order should be made out to the Superintendent 

of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. 

Orders should be sent to:



U.S. General Accounting Office



441 G Street NW,



Room LM Washington,



D.C. 20548:



To order by Phone: 	



	Voice: (202) 512-6000:



	TDD: (202) 512-2537:



	Fax: (202) 512-6061:



To Report Fraud, Waste, and Abuse in Federal Programs:



Contact:



Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov



Automated answering system: (800) 424-5454 or (202) 512-7470:



Public Affairs:



Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.



General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.



20548: