The Effect of Prospective Payment on Medicaid Payment Rates for Nursing Home Care

Abstract

Medicaid has become an important source of payment for long term care over the last twenty years. Of the $40.6 billion spent on nursing home care in 1987, Medicaid payments accounted for $17.8 billion-about 42 percent of the total [24]. The aging of the population, along with advances in health care technology that increase life expectancy, are likely to further increase the demand for nursing home services and inflate Medicaid expenditures. From 1987 to the year 2000, the U.S. population age 65 and above is projected to increase by 18 percent, and the population age 85 or more years is projected to increase by 53 percent, compared to an overall population increase of 10 percent [24]. Recent experience suggests that about 37% of those over 65 and about 60% of those over 85 at the time of their deaths had used nursing homes [16]. Due in part to this projected rapid growth in the population most likely to use nursing home services, by the year 2000 total expenditures on nursing home care are expected to be $130 billion, with Medicaid expenditures approaching $45 billion [9]. In response to actual and anticipated growth in Medicaid expenditures, state governments have experimented with a variety of cost control measures. Most of these control expenditures by reducing access to care, such as tightening eligibility criteria. Over the past decade, however, many states also adopted prospective payment for nursing homes-a method of reimbursement designed to increase efficiency and control costs. The hope was that adoption of prospective payment would hold down Medicaid expenditures without substantially reducing the availability or quality of care.