Summary
Nursing homes can't be ranked like restaurants because their market is more regulated, more complex, and, unlike food service, mostly government-financed. The finding that for-profit nursing homes provide worse care than non-profits does not reflect a problem with profit motive, but rather that for-profit nursing homes depend more heavily on Medicaid's notoriously low reimbursements and lack supplementary funding sources, such as philanthropic funds, available to non-profit homes. Why do we have a welfare-financed, nursing-based system in the first place? Why isn't there a market for privately financed home and community-based care and home equity conversion or long-term care insurance to pay for it? What does this mean for future prospects for investors in long-term care service delivery or financing? These are the questions investors should be asking.
Analysis
Yesterday's news was full of stories about the new "5-Star" nursing home ranking system just implemented by the Centers for Medicare and Medicaid Services (CMS). What does this story really mean?
QUESTION: Why do we need a rating system for nursing homes?
ANSWER: Some nursing homes are better than others and its good to know, just like for restaurants, which are better and which are worse.
Q: Is it fair to rank nursing homes like Zagat ranks restaurants?
A: Probably not. Compared to nursing homes, restaurants are nearly unregulated. They compete mostly based on quality, décor, and price. They appeal to private consumers spending their own hard-earned dollars. Nursing homes, on the other hand, are super-regulated. Their supply is controlled (Certificate of Need) and their revenue is capped (Medicaid's notoriously low reimbursement). They compete based on their ability to keep government bureaucrats happy while they depend mostly on Medicaid which demands "Ritz-Carlton care for Motel 6 rates" ("The LTC Triathlon: Long-Term Care's Race for Survival," p. iv, http://www.centerltc.com/pubs/triathlon.pdf).
Q: What do you mean? Don't nursing homes compete based on quality?
A: Sure they do. But they compete based on the kinds and quality of care they can afford to deliver depending on their funding source. A few nursing homes take only private-pay residents. They're palaces because private residents have to pay half again as much as Medicaid pays for its recipients. Other nursing homes have a lot of Medicare patients for whom the government pays generously. They do well too. But most nursing homes depend primarily on Medicaid financing for custodial patients. Nearly 80 percent of all nursing home patient days are paid at the dismally low Medicaid rate. Medicaid pays nursing homes on average less than the cost of providing the care. So, the more Medicaid residents a nursing home has and the fewer private payers and Medicare patients, the more handicapped a nursing home is in the quality rankings.
Q: The ratings show that for-profit homes score lower than not-for-profit homes. Just another example of greedy capitalists taking advantage of careless government programs, right?
A: It's not that simple. Not-for-profit homes have fewer low-paying Medicaid residents. They have some philanthropic money too. Their residents tend to be higher in socio-economic status. For profit nursing homes are more heavily dependent on Medicaid which puts them at a distinct disadvantage in the quality competition.
Q: Sounds like a mess. What's really going on here?
A: Here's the real problem. Nursing home ranking systems are almost moot. The whole LTC service delivery and financing system has been structured for failure since it began in 1965. I'll explain in a nutshell, but you can find the full story in our "Articles, Speeches and Reports" link at www.centerltc.com.
Medicaid made nursing home care virtually free in 1965. That made nursing homes the dominant venue for long-term care. It crowded out a market for privately financed home and community-based LTC. And it impeded the development of private LTC financing alternatives like home equity conversion and long-term care insurance.
Over time Medicaid financed nursing home care became prohibitively expensive. Government tried to control costs by capping supply (CON). But that only forced up prices. So government capped Medicaid reimbursements. But that drove private-pay nursing home rates through the roof to compensate and led to private-payers seeking ways to qualify for Medicaid.
Bottom line today, America has a nursing-home-based, welfare-financed long-term care system in the wealthiest country in the world where no one wants to go to a nursing home, but the public is asleep about LTC risk and cost because government has always covered the biggest expenses.
It's a house of cards soon to collapse, because Medicaid's inadequate financing of most nursing home care (the real cause of quality problems the feds are trying to rank) can't possibly continue even at its current inadequate level.
Why? Three reasons:
(1) The current recession is killing states' ability to fund Medicaid LTC and this time no "bail out" is going to help enough to get them through the worst economic crisis since the Great Depression.
(2) Social Security props up Medicaid because Medicaid residents have to contribute most of their income to offset Medicaid's cost of care and Social Security income of people on Medicaid accounts for 13 percent of the entire cost of nursing home care nationally. But Social Security has a $16 trillion unfunded liability and can't continue this subsidy in full much longer.
(3) Medicare props up Medicaid financed LTC by paying very generously for the 17 percent of nursing home revenue it provides. That subsidy can't continue indefinitely either, because Medicare has an $86 trillion unfunded liability.
Q: So what's the bottom line for me as I seek the best nursing home for Mom?
A: Take the government's new "5-Star" rating system with a grain of salt. You could do better probably by asking each nursing home you consider what their "Medicaid census" is. The one with the lowest percentage of Medicaid residents will probably offer the best care.
Problem is, you won't be able to get Mom in unless she can pay privately. She'll need what the elder law attorneys call "key money." Their "Medicaid planning" clients, who self-impoverish to qualify, hold back key money so they can buy their way into the best nursing homes by paying privately at the higher rate for a while. Once they're in, the nursing homes can't kick them out when their source of payment changes to Medicaid. The tragedy is that poor people, for whom Medicaid is supposed to be a "safety net," don't have key money. They end up in mostly-Medicaid nursing homes which are the very ones that have the worst quality problems.
Q: The system sounds utterly corrupt.
A: It is, but don't blame the nursing homes. For the most part, they're struggling to provide the best possible care within a hopelessly flawed system that hobbles them with inadequate reimbursement and unreasonable quality demands. Blame instead the well-intentioned, but perversely counterproductive public policy that created this welfare-financed, nursing-home-based system and destroyed the markets for both private home and community-based care and the private financing alternatives like home equity conversion and long-term care insurance to pay for it.
Q: So, what's this mean for potential investors in the LTC marketplace?
A: It means be very careful short term as the mostly government-financed LTC system will struggle and ultimately collapse. Over the longer term, as government financing retrenches, people will start paying privately for care, turn to their home equity first, then buy private long-term care insurance in huge numbers. Consumers spending their own, or their insurance carriers money, will pump financial oxygen into the home and community-based sector of LTC service delivery which will boom. Nursing homes will continue to trend away from long-term custodial care funded inadequately by Medicaid and toward high-cost skilled nursing care funded by Medicare and increasingly by private insurance.
