State Assisted Living Policy: 1998. Discussion


States face a number of major challenges in developing payment methodologies for assisted living and other residential care services, including: (1) defining and distinguishing types of services, (2) finding existing models to replicate or seeking new models for payment approaches, and (3) dealing with the unique challenges and opportunities of developing payment approaches for people with differing needs when Medicaid cannot pay for room and board.

The extent to which low-income older people will gain access to this important alternative to nursing homes depends in large part on the extent to which states cover services in assisted living facilities and on the willingness of facilities to accept the rates set by state Medicaid programs. States continue to work on developing methodologies for setting rates. No single approach has yet emerged, although the trend is toward methodologies that reflect variations among tenants. As the private assisted living market expands, state policy concerning rates will determine the extent to which residents with low-incomes have access to this residential option. Rates must be high enough to encourage facilities to contract with Medicaid yet lower than the cost of a nursing facility. The experience in New Jersey, Oregon, and Washington suggests that states can set rates to meet these criteria. As the supply expands, facilities may be more willing to contract with Medicaid in order to maintain acceptable occupancy levels.

Comparing rates across states is difficult because of significant differences in the definition of assisted living and admission/retention criteria among states. States that do not allow tenants who meet the nursing home level of care criteria to live in assisted living cannot develop rates that compare to Medicaid nursing facility rates. States that allow higher levels of care will need higher rates than states that limit the provision of health services.

Seeking New Models

States exploring assisted living reimbursement methodologies have no existing models to replicate. Nursing home methodologies include both room and board and service costs and generally have higher acuity residents than assisted living. Residential care facility models typically have been limited to SSI standards that cover room and board and limited service costs. Assisted living often provides more intensive services and a more home-like environment. Providing access to such services for older persons with low incomes will require enhancements to the services and room and reimbursements beyond those typically provided in other residential settings.

In terms of acuity levels and service utilization, the best comparable cost data may come from in-home services provided under home- and community-based waiver programs. Waiver programs require that participants meet the level of care criteria for placement in a nursing home. While expenditure data is available for state plan services, assessment data is not collected, and the population is not likely to be comparable to people in nursing homes. However, using in-home services as a model would have to recognize significant differences between payment approaches and utilization patterns under in-home services and assisted living. As described above, reimbursing for in-home service units may overstate the amount of service utilized by a tenant because of the time increments required. On the other hand, in-home utilization may be constrained by the times during which it is available, state funding limits, or the lack of in-home workers. Because staff are on-site at all times, assisted living is able to offer more intermittent services in smaller time increments. In addition, assisted living provides more services during the evening and weekends when in-home services are generally not available. Since the perfect system is not likely to emerge, these differences in utilization patterns and payment approaches may tend to offset one another. As long as the populations are comparable, utilization in traditional in-home services programs may be the best current source of comparable reimbursement data.

Separating Room-and-Board from Service Costs

States have a long tradition of dealing with incentives created by reimbursement policy. Some of that experience guides rate setting as new models emerge. States have set rates for nursing homes and prohibited facilities from collecting additional payments from residents or family members. Facilities complained that Medicaid rates were too low and forced them to charge higher rates to private pay residents. Rates in the private assisted living market currently range from under $1,500 to over $3,500 a month. The reimbursement approach adopted by states may determine how many facilities will be willing to contract with Medicaid.

Important differences between nursing homes and assisted living settings open up a number of alternative reimbursement strategies. Specifically, Medicaid pays both the room and board and service costs in nursing homes and hospitals but pays only the service costs in assisted living. Expenses for room and board are paid by assisted living residents. Separating the room and board from the service components of assisted living creates a number of reimbursement and rate setting possibilities. In general, states will have to develop different strategies for SSI beneficiaries and for those who are "spending down" their assets.

States using Medicaid 1915 (c) waivers have more flexibility. The typical room and board cost includes the development and real-estate costs, raw food, and meal service costs. Under the waiver, the cost of meal preparation and serving can be covered as a service, reducing the room and board that must be paid through the tenant's income. Waivers allow states to pay a greater percentage of the total cost than state plan services.

States deal with room and board in two ways. First, states can set a combined rate that includes room and board and service costs. The rate caps what can be paid to the facility. The resident pays the room and board and applies any excess income to services. Medicaid can pay the difference between the resident's payment and the maximum rate. Second, states set a rate only for assisted living services. The room and board charge is determined between the resident and the facility (e.g., Wisconsin). The former approach works best in states with lower development and capital costs since the Medicaid rate is more likely to be comparable to the actual room and board charge. The latter approach works better in states with high development costs and with residents whose income is sufficient to cover these higher costs that cannot be covered by Medicaid.

Rates for SSI and Medically Needy Beneficiaries

In general, states will have to develop different strategies for SSI beneficiaries and beneficiaries who are "spending down" their income and assets. The simplest approach for providing access for SSI beneficiaries or others with very low incomes would be to set a maximum rate for room and board for Medicaid recipients at the state's SSI payment standard. This approach would guarantee that Medicaid recipients could afford the room and board, while limiting Medicaid's payments for the services. Beneficiaries with incomes in excess of the SSI level would contribute that excess income, minus a personal needs allowance, to pay for services, and Medicaid would pay the difference. A major problem with this reimbursement method is that limiting room and board charges to the SSI rate may understate legitimate costs. As a result, facilities may choose not to accept Medicaid beneficiaries since no state requires that facilities accept SSI recipients or Medicaid beneficiaries.

States may want to consider separate policies that address SSI and non-cash assistance Medicaid beneficiaries. To increase access for SSI beneficiaries in areas with higher development costs, states could create a special SSI state supplement7 for assisted living in order to give beneficiaries enough income to pay for the room and board costs that cannot be covered by Medicaid. For example, Massachusetts has created a separate payment standard of $900 a month for assisted living compared to the community standard of $610 a month. No other state has adopted a new living arrangement for assisted living while maintaining other living arrangements and payment standards for board-and-care.

A different approach is needed to address the needs of older people who have too much income to qualify for SSI (and, therefore, under regular Medicaid eligibility) but too little income to pay for the private assisted-living rate. This group is sometimes referred to as "non-cash beneficiary" because they are not eligible for SSI yet they have medical expenses that reduce their income to the Medicaid income standard. Unable to afford alternatives, these individuals too often enter a nursing home and spend down in order to qualify eventually for Medicaid. This group accounts for the majority of Medicaid's long-term care spending for nursing home services. In 1995, Medicaid spent, on average, $2626 a year on long-term care services for SSI beneficiaries and $11,612 for "non-cash" beneficiaries.8 Serving frail older people through the special income option (under 300% of the federal SSI payment) makes assisted living affordable and can avert some nursing home admissions. It is also less cumbersome than the Medically Needy option.

The simplest strategy for serving this "spend down" population would be for states to pay for the services component of assisted living without any restrictions on what residents could spend for room and board. Under the special income option, states would reimburse services much as they do in-home services and allow beneficiaries to pay for room, board, and other supplemental services and amenities with their incomes.

States may wish to consider establishing a maintenance allowance that is higher than the SSI level that may be retained for room and board. Tenants would be required to apply excess income, after room and board payments and a personal needs allowance, to Medicaid service costs.

Reimbursement strategies for the "spend down" population may be especially relevant in states with higher land and construction costs which necessitate room and board charges significantly higher than SSI rates. As rate methodologies are developed, an assessment of the room and board and service components of market rate facilities would be helpful in setting appropriate rates. However, to do so requires judgements about the type of construction--"affordable" models or very high-income models--that would be examined. States will have to balance encouraging the use of assisted living with controlling Medicaid spending. This approach would create incentives for more facilities to contract with Medicaid, but the higher the allowance for room and board charges the less money there is available for the service component. Medicaid then must pay an increased amount of the monthly services fee. Since facilities themselves are unlikely to reveal financial data detailing actual room and board costs, discussions with state housing finance agencies and lenders may help formulate costs for prototype facilities from which fee structures may be devised.

State policy needs to address the differences in Medicaid's ability to pay for care in a nursing home and in a residential setting. In particular, the separation of services from room and board costs under assisted living creates an opportunity for state experimentation with a variety of reimbursement strategies. New rate-setting methodologies for assisted living can be expected to evolve in the coming years as more states cover services through Medicaid. Case mix systems for covering services and new approaches to separating service and room and board components are likely to be explored by states. Developments in this area warrant further discussion and research.

An important factor in state decision making will be the comparison between the net state cost for an individual in a nursing home and in assisted living. Using the special income option for people just over the income eligibility level and creating a special SSI state supplement, states can tailor a payment level that saves money compared to the nursing home rate and offers many consumers alternatives that they often prefer. Providing these options requires a higher state SSI supplement, in one instance, and less "excess income" applied to services in the second instance, but Medicaid still saves money when a consumer is able to receive services through assisted living rather than through a nursing home.

Some critics contend that expanding alternative services, even those costing less than a nursing home, add marginal costs by serving people in addition to those who enter a nursing home. There is some anecdotal evidence that the increased supply has resulted in lower nursing home occupancy rates, encouraging some nursing homes to close beds or convert to assisted living. Nebraska recently created a $40 million fund to facilitate conversions. Washington and Wisconsin have adopted occupancy penalties that reduce the nursing home per diem when occupancy drops. Facilities may de-license enough beds to raise their occupancy rate above the required threshold and receive the higher rate for occupied beds. As assisted living and in-home services expand, fewer nursing home beds assures that Medicaid can control institutional spending while expanding options that consumers and family members prefer.

  1. Many states have a state supplement for board-and-care facilities that may be too low to cover more intense services needs and higher capitol costs in assisted living settings.

  2. David Liska, Brian Broen, Alina Salganicoff, Peter Lory and Bethany Kessler. "Medicaid Expenditures and Beneficiaries: National and State Profiles and Trends--1990-1995." Kaiser Commission for the Future of Medicaid. Washington, DC. November 1997.

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