Payment Challenges facing today’s nursing facilities Source: Proposed SNF Rule CMS -1351-P

1. Payment Challenges facing today’s nursing facilities Source: Proposed SNF RuleCMS -1351-P Karen McDonald, BSN, RN KLM & Associates, LTC Consulting, LLC

2. Agenda • Historical Payment System • Medicare A RUGS IV 2012 Options • Medicaid Challenges • What Providers are Doing to Prepare

3. Nursing Facility Stats • 15693 Facilities • 54.6% Multi - Facility Chains • 45.4% Independent • 6.6 % Hospital based • 67.5 % For Profit • 25.7 % Non Profit • 5.8 % Government Run • Medicare Only 5.0% • Medicaid Only 3.9% • Dual Certified 91.1% AHCA Nursing Home “Operational” Characteristics Report March 2011

4. Nursing Facility Stats • 1,394,537 Patients and Residentsin 1,671,226 Beds = 83.4% occupancy • 6.48% beds are dedicated to specialized services • 73.1% Alzheimer’s • 13.1 % Rehab • Average Staffing • Direct Care 3.63 HPPD • RN .39 HPPD • LPN .82 HPPD • Nursing Assistants 2.42 HPPD • What does that mean? • On average, each resident in a 24 hour period received 2.42 hours of direct care from a Certified Nursing Assistant AHCA Nursing Home “Operational” Characteristics Report March 2011

5. Residents • Sicker • Bigger • Needier

6. Residents Statistics • Key Payer Sources • 14.2 % Medicare • 63.6 % Medicaid • 22.2 % Other • Skin Integrity • 6.57 % with Pressure Ulcers • 3.68 % upon Admission • 78.25% have Preventative Skin Care in place AHCA Nursing Home “Residents” Characteristics Report March 2011 CMS Form 672

7. Funding / Payment • Remember Payer Breakdown? • 14.2 % Medicare • 63.6% Medicaid • 22.2 % Other • Currently Medicare Patients help to pay for Medicaid Residents • Shortfall anticipated at $17.33/day / Resident • Unreimbursed allowable Medicaid charges in 2010 5.6B • Medicare margins can no longer compensate for increasing Medicaid shortfalls • Elimination of FMPA (stimulus $$ July 1, 2011) • State revenue up should be able to cover

8. Funding / Payment • Medicare • Transitions of Care • More home care • Funding to follow the resident • Anticipated 12.5% RUGS plus an additional 1.5% inflation factor adjustment, Oct. 2011 • Case Mix is the game • ADL’s drive the payment in many state Medicaid programs and the Medicare program

9. Minimum Data Set (MDS) • Mandated Resident Assessment Instrument (RAI) • Payment is based upon “groupers” (66) • Medicare • Day 5, 14, 30, 30, 30 • Medicaid (Case Mix Stated) • Quarterly after Part A stay • Rehab services are the driver for highest payment

10. Background • July 1, 1998 (44 RUGS) • SNF PPS per diem for all Medicare Part A routine, ancillary and capital related costs • Adjusted to reflect • Wage rages • Patient case mix, RUGS (effort) • January 1, 2006 Refinements (53 RUGS) • Added 9 new categories • October 1, 2010 Refinements (66 RUGS) • MDS 3.0 • RUGS-III to RUGS-IV was mandated budget neutral

11. Background • Over ½ states utilize a RUGS based system for Medicaid • MDS data drives the classification • Nursing needs • ADL impairments • Cognitive status • Behavior problems • Medical diagnosis • Residents with more resource needs are assigned higher groups • Each October, CMS must issue new rates based upon “parity” and cost adjustments

12. RUGS-IV • Eight major classifications • Rehabilitation Plus Extensive Services • Rehabilitation • Extensive Services • Special Care High • Special Care Low • Clinically Complex • Behavioral Symptoms • Cognitive Performance Problems • Reduced Physical Function

13. Rehab Plus Extensive • 2 or more dependant ADLS • Receiving therapy • Has trach, vent, or infection isolation • Rehabilitation • 2 or more dependant ADLS • Receiving therapy • Extensive Services • 2 or more dependant ADL’s • Trach, vent, or infection isolation • Special Care High • 2 or more dependant ADL’s • Serious medical condition • Comatose, septic, DM, Quad, COPD, fever, IV, RT • Special Care Low • 2 or more dependant ADL’s • CP, MS, Parkinson's etc all ADL dependant

14. Clinically Complex • Pneumonia, hemiplegic, surgical or open wounds, burns, chemo, O2. IV, transfusions • Behavioral Symptoms and Cognitive Performance • ADL dependence of 5 or less • Behavior or cognitive problems • Reduce Physical Function • Residents who needs are primarily for support with activities of daily living

15. So What is the Plan for FY 2012?

16. SNF Proposed Rule • Two Options • Option A Recalibration of the Parity Adjustment • Option B Standard Update without Recalibration

17. Option A Recalibration • Background • To move from RUGS-III to RUGS-IV and stay budget neutral, CMS applied a 61% upward adjustment across all nursing CMI’s based upon analysis of 2009 data • Comparable actual data available for quarter 1 2011 realized utilization patterns differed significantly from the projected • Number of residents grouped in the highest paying RUG therapy categories greatly exceeded expectations • Why? • Movement from concurrent to individualized therapy

18. Option A Recalibration • Background • Parity was not achieved and RUGS-IV triggered a significant increase in overall payments • Conclusion • The 61% increase would have to be lowered to 22.55% if applied equally across all CMI’s • Most change was reflected only in rehab groups, so the decrease only applies to the nursing CMI for the RUG-IV therapy groups

19. Projected utilization was .18% of days, it was actually .60% Projected utilization was lower or as expected

20. Option A Recalibration • Impact • If parity decreased across the rehab groups and left as is for the others, the impact is an increase only to 19.81% for the rehab groups (not 61%) • Results in a $4.47 billion change in reimbursement • 2012 market basket inflation adjustment is $530 million resulting in a net $3.94 billion savings to CMS or a net 11.3% decrease to nursing facilities

21. Option A Recalibration • Issues • Utilization of 1 quarter of data • Increase coincides with movement to RUGS-IV and MDS 3.0 • Movement away from concurrent to individual and group therapy hence greater costs • SNF proposed rule would eliminate the existing incentive to substitute group therapy for concurrent and individualized therapy • CMS maintains that concurrent therapy should be the exception, group only 25% but they did not anticipate the cost of moving to individual therapy

22. Option B Update without Recalibration • Recognizing that this increase may be a temporary aberrance resulting from the limited 2011 data, the movement to RUGS-IV and the MDS 3.0 • They reserve the option to do nothing except normal wage index and market basket changes • Neither plan reflects changes to the AIDS add on

23. Comparable Rates

24. Distribution • Rehab plus Extensive • Urban 2.65% • Rural 2.09 % • Rehab • Urban 89.32 % • Rural 87.82% • Extensive Services • Urban .58% • Rural .45%

25. Medicaid • FMAP Funds decrease to many states on July 1, 2011 • Anticipated state revenues better than expected hence proposed Medicaid cuts not as great as expected • Bottom line, if Medicare Part A rates cut and any Medicaid cut, the impact is great to any facility

26. How are Providers Preparing? • Lobby • AHCA and The Alliance for Quality Health Care • Attacking on the employment side • LTC represents the 2nd largest employer in the nations health care sector • Data integrity, how can they base on 1 quarter • Revenue side • Increase the acuity of the resident admitted to increase the Rehab plus Extensive patient load • Decrease returns to hospital, close the back door • Expense side • Budgeted $PPD’s • Changing mix of staff • Decreasing overhead at “corporate” or management level

27. Bottom Line • SNF Rule remains out for comment • Anticipate Option A will be passed

28. Questions and answers