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The Nursing Home Crisis: Public Policy Gone Awry No. 140

Adopted 1999
Reaffirmed 2001
Reaffirmed 2003
Reaffirmed 2004
Reaffirmed 2005


America's nursing home industry is in serious trouble. Many for profit nursing home chains are on the verge of bankruptcy, and others already have filed for Chapter 11 protection. Patients and their families are filing negligence claims against nursing homes at an ever-increasing rate, some of which have led to large punitive damage awards. A GAO investigation of nursing home regulation in California found that over 30% of facilities in California failed to comply with standards to such an extent that a significant risk of "death or life-threatening harm" existed. Senator Grassley has referred to the quality of nursing home care in America as a "national scandal."

Consideration of nursing home care in America, an industry with revenues of over $100 billion per year, must begin with an appreciation of how care is funded. Medicaid is the biggest single provider for nursing home care, accounting for almost 2/3 of all dollars spent. To become eligible for Medicaid, many middle-income persons spend all their savings. Medicare covers less than 10% of overall costs, but covers the majority of "post-acute" care, namely rehabilitation and recuperation after major illness or surgery. Because hospital stays are growing shorter, the Medicare proportion is increasing. Out-of-pocket payments for nursing home care are large, reaching as high as $40 billion this year. In contrast to acute care, there is relatively little private insurance for nursing home care, and what is available is very expensive.

Congress has been deeply concerned with the quality of nursing home care since 1986, when it held hearings that led to the Nursing Home Reform Act of 1987. However, Congress has also been preoccupied with limiting expenditures. It has never appropriated sufficient funds to enforce the provisions of the Act or funded the personnel and training necessary to inspect nursing homes frequently and intensively. Nor has it funded the lawyers and staff needed to pursue effective sanctions against non-compliant homes. Congress also permitted Medicaid rates for nursing home care to be far below the actual cost of appropriate care. It has not funded adequate programs for protecting the welfare of residents in poor-quality homes that should be closed. The threat of closure must be a credible and effective sanction against substandard conditions.

Given a dependence upon money from entitlement program and lax regulation, the nursing home industry has developed some bad habits, which reflect financial incentives that have had little or no relationship to quality clinical care. Under the fixed per-diem rate paid by Medicaid for nursing home care in many states, nursing home owners can make money by filling their beds with Medicaid recipients while spending as little as possible on their care. To save money, nursing homes employ under-trained aides to care for infirm elderly patients. Payments are the same for excellent care or outrageously bad care, and few homes are closed down for mistreating their residents. When poor treatment makes residents sicker, they can be sent to an acute care hospital, where thousands of Medicare dollars will be spent attempting to reverse the harm. Yet nursing homes with low quality care face no real consequences.

Under the previous Medicare policy of cost-based reimbursement, nursing home owners could make large profits by providing (or claiming to provide) long-term rehabilitation and other ancillary services to Medicare-covered residents, whether or not those services were necessary or effective. As with Medicaid residents, quality and outcomes of care had no influence on payment rates. Nursing homes make their greatest profits on private-pay residents, charging them high fees to compensate for underpayment by Medicaid or they exclude Medicaid patients entirely. The excess in such fees amounts to a tax on private-pay residents and their families to cover shortfalls in the Medicaid program. This leads to some nursing homes refusing to take Medicaid patients, providing expensive care to patients paying privately instead. In turn, this creates a two-class system; high-quality care for the rich and low-quality for everyone else.


Concerned about escalating costs of nursing home care in the Medicare program, Congress, in the Balanced Budget Act of 1997 (BBA), implemented changes in the way that Medicaid pays nursing homes. These changes led to radical cuts in the services available to nursing home residents, and drove some facilities out of business. The intention of Congress was to take Medicare dollars out of nursing home care, regardless of clinical needs of residents. Even if nursing homes undertook care of sicker patients, Congress insisted that not one dollar more be spent.

The Health Care Financing Administration (HCFA) implemented the BBA provisions by establishing a prospective payment system for nursing homes. The system assigns every Medicare resident to one of 44 groups based on their health status, function, and services received. Based on the group the resident is in, the facility receives a fixed payment per day. The fixed payment is supposed to cover everything, from special diets to medications to kidney dialysis to chemotherapy. Therefore, facilities have strong incentives to take the healthiest residents they can within each group, and to provide them with as little care as possible.

The situation is getting worse. Medicare pays nursing homes a "blended" rate: 25% of the resident-specific daily rate, plus 75% of a fixed daily rate. The fixed rate is the same for all residents of a given facility regardless of their health status or clinical needs. The basis of this facility-specific amount is the facility's average per diem cost of care in 1995. Thus, if a facility was grossly inefficient in 1995 or if it treated very sick residents, it has "won the lottery." If a facility ran efficiently in 1995 or treated a less sick population, it must stop caring for Medicare patients or face bankruptcy. This policy transfers massive amounts of money from one set of nursing homes to another, without regard to quality of care or community need. The "blended rate" means that Medicare pays a facility on average 25 cents of every dollar spent on a resident's care. Thus, the incentives to under-serve residents are high.

Furthermore, Centers for Medicare and Medicaid Services (CMS) has arbitrarily limited to $1500 per year the total amount that Medicare will pay for rehabilitation during a nursing home stay. Thus, a long-stay nursing home resident who suffers a small stroke or a fracture that does not warrant hospitalization but does require rehabilitation, will receive no more than $1500 worth of physical, occupational, and speech therapy, no matter how much is medically needed.

At the same time, as active proponents of choice, ADA also opposes any coercive measures that limit women's reproductive options. Thus, we adamantly oppose requirements such as use of long-acting contraceptives (e.g., Norplant) or involuntary sterilization as a condition of parole, welfare payments, or other governmental programs or services.

Finally, the CMS Office of the Inspector General (OIG) has been cracking down on physicians who visit their nursing home patients too often. While fraud should be rooted out, nursing home residents hardly suffer from an excess of medical attention. Residents and their families repeatedly express their wish for more physician visits, and facility nurses complain continually about physicians' limited availability. Terrifying physicians with the prospect of an OIG audit is not a way to encourage their involvement in nursing home medicine.


The nursing home industry is in a clinical and financial crisis. Federal policy only makes the crisis worse, and nursing home residents are suffering. Current policies often result in rewards for mediocrity and cynicism, and penalties for excellence and altruism.

In the absence of a federal program for universal health care, including nursing home care, some ways to remedy the problem:

  1. Require Medicaid payments to accurately reflect that cost of care (Minnesota does this now).
  2. Make Medicare payments 100% prospective (not blended and based on 1995 costs), but include an exception procedure for residents with unusually high costs of care.
  3. Quadruple the budget for personnel, training, and information technology for inspecting nursing homes and monitoring their performance.
  4. Administer swift, severe, and consistent penalties to facilities that mistreat their residents.
  5. Pay Medicare physicians for visits to their nursing home patients as frequently as they deem medically necessary, requiring that medical records accurately reflect the service rendered and the reason for it, so as not to harass physicians for choosing to monitor their patients conscientiously.


This policy draws on an analysis by LTCQ, Incorporated, a private company based in Massachusetts that provides information services to the nursing home industry in an effort to improve the quality of care. LTCQ provides performance measurement and quality improvement services to nursing homes, and offers other analytic and reporting services to payers, suppliers, regulators, and consumers.

The company is not a partisan of either industry or consumer interests, but seeks to be a reliable source of information and analysis to support decisions in the field of long-term care.

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No. 140