The Financial Health of the California Nursing Home IndustryThe California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improving California’s

The Financial Health of the California Nursing Home Industry

May 2003

prepared for The California HealthCare Foundation by

Shattuck Hammond Partners LLC

Authors

Herbert J. Horowitz Keith Dickey, Ph.D. Cecilia C. Montalvo

ACKNOWLEDGMENTS This report is the result of a collaborative effort. Shattuck Hammond Partners enlisted two outside teams to assist with the research. Daniel Kessler, associate professor of Economics, Law and Policy, at Stanford University Graduate School of Business, and his colleagues provided an analysis of the California Office of State Health Planning and Development (OSHPD) financial data that forms the basis for this report. Ron Tinsley, the national director for Long Term Care at PricewaterhouseCoopers LLP, and his team assisted us with the secondary literature research and assessment of the California skilled nursing market. The contributions of both teams were invaluable.

The study also benefited greatly from the guidance and insight of our six advisory committee members.

Barry Crow President Brighton Health Care Alliance Spring Valley, CA

Janice Harshman Owner Wish-I-AH Care Center Auberry, CA

Jerry Levine CEO Emeritus The Jewish Home San Francisco, CA

Shawn Miyake President & CEO Keiro Senior HealthCare Los Angeles, CA

Stephen Reissman President & CEO Country Villa Health Services Marina del Rey, CA

Paul Tunnell Director of Operations for California Kindred Healthcare San Francisco, CA

Collectively these individuals represent more than 185 years of experience in the industry, and they were exceedingly generous in sharing their time and insights with us.

Several other individuals deserve acknowledgement and thanks for their assistance: Darryl Nixon, director of Reimbursement and Fiscal Programs at the California Association of Health Facilities, for providing research assistance and helping us to validate some of our findings; Anne Burns Johnson, CEO of the California Association of Homes and Services for the Aging (CAHSA), for inviting us to present our preliminary findings at CAHSA’s Public Policy Forum in February 2003; David B. Smith, professor of Healthcare Management at Temple University, for sharing his deep industry insight; and Michael Kassis, CIO, and Kenrick Kwong, manager at the Office of Statewide Health Planning and Development, for assisting us in obtaining and interpreting the OSHPD data.

Most importantly, we wish to thank the California HealthCare Foundation (CHCF) for inviting us to conduct this study, and Marianne Laouri, senior program officer at CHCF, for designing and guiding the project through all of its phases and contributing extensively to the final report.

ACKNOWLEDGMENTS, CONT. The California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improving California’s health care delivery and financing systems. Formed in 1996, our goal is to ensure that all Californians have access to affordable, quality health care. CHCF’s work focuses on informing health policy decisions, advancing efficient business practices, improving the quality and efficiency of care delivery, and promoting informed health care and coverage decisions. For more information, visit us online (www.chcf.org). ISBN 1-932064-48-6 Copyright 2003 California HealthCare Foundation

CONTENTS Executive Summary ...........................................................................................................................................4

I. Industry Overview ................................................................................................................................7

II. Industry Capacity, Facility Ownership, and Demographics...........................................................10 Total Facilities, Beds, and Occupancy...........................................................................................................10 Ownership Characteristics .............................................................................................................................10 Nursing Home Bed Supply and Demographic Trends...................................................................................11

III. Revenue and Reimbursement ............................................................................................................13 General Observations.....................................................................................................................................13 Medicare Reimbursement ..............................................................................................................................13 Recent Medicare Reimbursement Legislation ...............................................................................................14 Medi-Cal Reimbursement ..............................................................................................................................15 Self-Pay Residents .........................................................................................................................................17 Managed Care and Other Payers....................................................................................................................18 Payer Mix Trends...........................................................................................................................................18 Revenue and Reimbursement Trends.............................................................................................................20

IV. Operating Expense..............................................................................................................................22 Labor Costs and Nursing Skill Mix Trends ...................................................................................................25 Nursing Labor Shortage .................................................................................................................................29 Resident Acuity Shift .....................................................................................................................................30 General and Professional Liability Insurance ................................................................................................31 Workers’ Compensation Insurance Costs ......................................................................................................32 Aging Facilities ..............................................................................................................................................33

V. Net Income and Operating Margins..................................................................................................34

VI. Conclusions and Policy Implications.................................................................................................37

Appendix A: Sources of Data & Methodology .............................................................................................41

Appendix B: Definition of Ownership and Chain Status ............................................................................42

Appendix C: Data Definitions........................................................................................................................43

EXECUTIVE SUMMARY

California’s nursing home industry is at a critical juncture. The state’s budget deficit has created immense pressure for cuts in the state Medi-Cal rates paid to nursing facilities just as the federal government is cutting back on Medicare payments. At the same time, the costs of providing adequate skilled nursing care are rising, and legitimate concerns about the quality of care provided persist across the industry. This study seeks to provide an objective assessment of the financial performance of the skilled nursing industry in California. In so doing, we highlight some critical public policy issues and provide financial context for the decisions that industry leaders, policy makers, and patient advocates must make to resolve these challenges.

This study focuses on California’s freestanding skilled nursing facilities (SNFs). The analysis of the industry’s financial performance is based primarily on data from the mandatory cost and utilization reports filed with the California Office of State Health Planning and Development (OSHPD) and the Department of Health Services (DHS) for the five-year period ending December 2001. Other national and state sources of information, and additional data developed from a survey of the ownership status of facilities across the state were also incorporated. Findings in each of five areas studied are highlighted below.

Industry Capacity, Facility Ownership, and Demographics

• Despite significant upheaval in the financial and competitive landscape, skilled nursing facility capacity and occupancy has remained surprisingly stable over the five-year period. The number of freestanding skilled nursing facilities in operation declined only slightly (–1.5 percent) since 1997, to 1,148 facilities with 113,147 total licensed beds in 2001. Average occupancy also has remained nearly constant, declining just 0.5 percent from 1997 to 2001, from 87.1 to 86.6 percent.

• California’s supply of nursing home beds is among the lowest in the country, at 31 beds per 1,000 people 65 or older, compared to the nationwide ratio of approximately 49 beds per 1,000 elderly. Moreover, there is a striking imbalance in bed supply across counties within the state. The relative undersupply of beds and the imbalance in distribution are of particular concern, given that the state’s elderly population is projected to grow significantly over the coming decades. Projected population growth for the 65+ cohort suggests the need for 67,000 additional nursing home beds (nearly a 60 percent increase) by 2020.

• Although the total number of facilities has remained relatively constant, there were sizable shifts in ownership between 1997 and 2001. The number of national and regional chain-affiliated facilities dropped significantly from 43 percent of the total in 1997 to 37 percent of all facilities in 2001. Independent for-profits grew from 43 to nearly 50 percent of the total. Not-for-profits declined modestly in number. These trends suggest that the larger for-profit operators may be exiting the California market due to inadequate reimbursement and rising liability risks. In addition, we expect that a growing number of not-for-profit providers, facing increased costs and risks, will feel compelled to leave the SNF market and seek other ways of serving their communities. As of the end of 2001, 90 percent of all freestanding SNF beds in the state belonged to for-profit facilities.

Revenue and Reimbursement Trends

• Despite efforts by the state to promote long-term care insurance, the industry continues to rely heavily upon the government as the principal payer. In 2001, Medi-Cal and Medicare together represented approximately 75 percent of total net patient revenue to nursing homes. Meanwhile, the number of private, self-pay residents has declined. We attribute this to increased competition from other senior care alternatives, and self-pay residents’ greater sophistication in shielding or transferring assets, which enables them to qualify for Medi-Cal sooner. Because the rates that facilities charge self-pay residents are typically higher than what Medi-Cal pays, this trend represents a financial concern for the industry.

CALIFORNIA HEALTHCARE FOUNDATION 4

• National for-profit chain facilities rely to a greater extent on Medicare patients than do other facilities, though the lower-paying Medi-Cal program is by far the biggest payer of services for the industry. However, not-for-profit facilities have a much lower proportion of Medi-Cal residents (less than 46 percent of patient days, compared to 68 percent for the for-profits) and a much higher proportion of self-pay residents (44 percent self-pay patient days versus 17 percent among the for-profits).

• Medicare reimbursement, which historically helped subsidize state-controlled Medi-Cal rates, fell sharply from 1998 to 2000 (22 percent, after adjusting for inflation) due to the impact of the 1997 Balanced Budget Act, which included the implementation of a prospective payment system (PPS) for long-term care. Subsequent Medicare relief acts in 1999 and 2000 produced a modest 4 percent increase in Medicare revenue for 2001. Net revenue from Medi-Cal rose 23 percent per patient day, adjusted for inflation, from 1997 to 2001, due in part to a sizable rate increase effective August 2000. However, proposed Medi-Cal rate cuts of 15 percent in 2003 would roll back most of the funding increase from 2000 to 2002 at time when operating expenses are continuing to rise.

Operating Expense Trends

• Total operating expenses for the industry rose 7.5 percent, adjusted for inflation, from 1997 to 2001, driven by a 29 percent increase in routine service expense and a 17 percent increase in administrative costs. These increases more than offset a dramatic reduction in ancillary services expense (-43 percent), which was precipitated by the introduction of Medicare PPS. Not-for-profit facilities have the highest operating costs, averaging $25 per patient day higher than for-profit facilities. Furthermore, most nursing homes, whether for-profit or not, are caring for a more costly population, as the average acuity of California’s nursing home population continues to rise.

• Salary and wage expense, representing nearly half of total operating costs, rose 17 percent during the period, adjusted for inflation, driven by a 36 percent increase in the costs of both CNAs and LVNs. Median employee benefit costs rose 13 percent, after inflation. Temporary staff costs rose sixfold during the period, and, at an average of $1.21 per patient day in 2001, now equal more than a quarter of the average facility’s net income for the year. These trends will likely continue to escalate for skilled nursing facilities over the next several years.

• The costs of general and professional liability insurance have grown more than fourfold since 1999, according to one estimate. Workers’ compensation insurance represents another escalating cost for nursing homes, rising by 12 percent in 2000 and another 23 percent in 2001, to $3.70 per patient day.

• Eighty-four percent of California’s freestanding SNFs were built and licensed before 1975 and will soon require substantial renovation or wholesale replacement. Yet the current Medi-Cal reimbursement system provides no incentive for capital investment or new construction, and the large national and regional operators, who are best capitalized and therefore in the best position to take on new construction, appear to be retreating from the California market.

Net Income and Operating Margin Trends

• After three years of decline, mean net income for the industry improved substantially from $1.85 per patient day in 2000 to $4.27 per patient day in 2001, due largely to the 17 percent Medi-Cal rate increase that took effect August 1, 2000. For the five-year period, adjusted for inflation, revenue growth outpaced operating cost increases by 1.3 percent, despite Medicare rate cuts and a loss of self-pay residents.

• National for-profit chain facilities achieved a median total margin of 6.3 percent in 2001, while other for-profit facilities maintained median total margins of approximately 2 percent. Not-for-profit facilities, because of their higher cost structure, typically experienced 6–10 percent annual operating losses, and have subsidized those losses from their endowments, charitable contributions, or other operations.


• Positive median total margins among the for-profit ownership categories mask the fact that nearly one-third of the state’s for-profit facilities lost money in 2001. More than half of the not-for-profit facilities in the state lost money in 2001, even with endowments subsidizing their costs of operation.

Industry Outlook and Policy Considerations

• The California skilled nursing industry is unquestionably in a fragile financial state. Given the high proportion of facilities that sustained net losses in 2001, the industry will be hard-pressed to absorb proposed Medi-Cal rate cuts of 15 percent in 2003 on top of Medicare cuts that took effect in October 2002. In the absence of offsetting cost reductions, we estimate that 70 percent of facilities would experience net annual losses, nearly twice the percentage that had operating losses in 2001.

• The industry’s instability, due to sudden and dramatic changes in reimbursement compounded by unanticipated and unusually high cost increases, threatens the continued operation of many facilities. Moreover, this instability appears to have begun driving larger national and regional operators out of the California market, and has made access to capital and credit more difficult and expensive for existing operators.

• The state legislature has required California’s Department of Health Services to develop and implement a new long-term care rate-setting methodology by August 2004 that “reflects the costs and staffing levels associated with quality of care for residents in nursing facilities.” Yet public funding has never fully covered the costs of complying with state or federal government’s own definitions of quality care. Public policy makers should develop new funding mechanisms for nursing homes, as suggested below, and should consider mandatory long-term care insurance and limitations on transfers of wealth by those seeking publicly funded nursing home care.

• The new rate system should include: (1) incentives for capital investment and new construction to replace aging physical plants and accommodate design innovations in elderly care; (2) incentives for new construction in underserved markets; (3) a mechanism that insulates facilities from extreme reimbursement volatility caused by budgetary and economic cycles; (4) a reporting mechanism that accurately tracks the costs of providing care to Medi-Cal residents, and rates set, either prospectively or retrospectively, that adequately cover the costs of quality care; and (5) a means for private and third-party payments to be used in combination with publicly funded reimbursement.


I. INDUSTRY OVERVIEW

Nursing homes fill a vital mission in our society—caring for an increasingly frail population, especially for the indigent. About 98,000 mostly elderly Californians are cared for in more than 1,100 freestanding skilled nursing facilities (SNFs) at any given time. The state’s nursing homes operate at 87 percent occupancy on average, and the supply of beds relative to the size of California’s elderly population is among the lowest of any state in the country. In the face of state budget cuts, increased costs of care, and concerns about quality of care, pressures on these facilities are likely to grow.

SNFs in California vary widely in size, ownership, and communities served. In general, they provide convalescent care for people with chronic illness and for those recovering from acute illness. Beyond room and board, these facilities provide services ranging from basic care and supervision to sophisticated medical procedures such as ventilator care, infusion therapy, and dialysis. In addition, some offer rehabilitative care, dietary guidance, and social services.

However, skilled nursing facilities represent only one segment of a growing array of care programs and facilities for the elderly and infirm. These include continuing care retirement communities, assisted living facilities, specialized Alzheimer’s and dementia care facilities, independent living facilities, adult day care, and home health care programs. Even with these new options for care, skilled nursing facilities continue to be heavily utilized by those who need sophisticated, labor-intensive, 24-hour skilled nursing supervision.

The demand for such services will increase as baby boomers approach retirement age. California’s age 65-and-over population is projected to grow by nearly 140 percent between 2000 and 2030. The state’s 85+ population, which already increased 42 percent from 1990 to 2000, is expected to more than double by 2030 to more than one million residents.

With few exceptions, skilled nursing facilities are the only type of senior care facility eligible to receive payments for services from the federal and state government through the Medicare and Medicaid programs. So-called “Medicaid-waiver” programs exist in many states to allow the support of residents in assisted living facilities (California is currently working to implement such a program), but the number of publicly funded slots in assisted living facilities across the country, and the revenue they generate, is very limited. By contrast, Medi-Cal (California’s Medicaid program) accounts for two-thirds of all nursing home patient days and more than half of all facility revenues. In 2001, Medi-Cal payments to freestanding SNFs totaled $2.7 billion. In all, about 75 percent of revenues received by skilled nursing facilities are from government sources.

Because government is the dominant payer, the adequacy of government payments will largely determine the quality of care that these facilities can provide. For instance, government’s willingness to include capital reimbursement as a component of its rate-setting system influences the physical setting in which care is provided. Because expenditures for Medi-Cal represent a significant and growing portion of California’s budget, it is inevitable that such expenditures will receive close scrutiny from public officials, especially given the state’s current budget crisis.

Caring for frail elderly persons in a highly regulated and institutionalized setting is a difficult task and, for front-line staff, often a thankless one. Employee recruitment is difficult—many nursing homes must import foreign workers—and employee turnover is high. Most jobs are minimum- or low-wage positions, and salaries for registered nurses or other skilled care positions often are not competitive with salaries offered by hospitals or staffing agencies. Nurses in California are retiring at double the annual rate of new nursing graduates. The California HealthCare Foundation’s Medi-Cal Policy Institute reports that poor quality care in California’s nursing homes has been a persistent problem, echoing a 1998 report by the U.S. General Accounting Office (GAO); the GAO found that nearly one in three nursing homes in California had been cited by state inspectors for having “serious or potentially life-threatening care problems.” California nursing


homes had twice as many reported deficiencies in 1998 as the U.S. average.1 Furthermore, skilled nursing facilities are likely to come under additional stress in coming years. As private-pay residents, particularly those requiring less intensive custodial care, increasingly have chosen to move to newer assisted living facilities, nursing homes have experienced an “acuity shift” to sicker and frailer residents who require higher and more expensive levels of care.

Scope of Study

This study seeks to provide an objective assessment of the financial performance of the skilled nursing industry in California from 1997 to 2001—a period of tremendous change. It also highlights some of the pressing public policy issues that Californians must address in the face of state budget cuts, increasing costs of care, and legitimate concerns about the quality of nursing home care. Data are drawn from industry financial and operating reports filed with the state and other sources; details of sources and research methods appear in Appendix A. However, a brief outline of the industry’s history provides a useful context for the findings.

Industry History in Brief

Most nursing homes in California and throughout the country were constructed during the 1960s and 1970s, after Congress established the Medicare and Medicaid programs in 1965 (see Timeline, Figure 1.1) These two programs made health care available to people who previously had no health care coverage, namely the poor, elderly, and disabled. The Medicare program was funded entirely by the federal government and primarily provided coverage for hospital and physician care. Nursing home coverage under Medicare was limited to 100 days and only applied to patients discharged from a hospital directly to a nursing home.

Figure 1.1 California Nursing Home Industry Timeline

1 Lucy Streett, M.P.H., “Understanding Medi-Cal: Long-Term Care,” Medi-Cal Policy Institute, revised edition, September 2001, available at http://www.medi-cal.org/publications.


Medicaid was designed to provide adequate medical care for the indigent. The administration of the program was delegated to the states, which were given broad latitude to structure their programs and payment systems within federal guidelines. The federal government pays the states anywhere from 50 to 77 percent of their total Medicaid costs. (Most states, including California, are at about the 50 percent level.) Since its inception, Medicaid has been the primary payer for nursing home care. As a result, the nursing home industry has been tied to an ever-changing regulatory and financial environment. In the difficult economic climate of 1970s, many states, including California, tightened reimbursement rates and began limiting reimbursement for capital expenditures.

As part of the Omnibus Reconciliation Act of 1980, Congress passed the Boren Amendment, requiring states to provide “reasonable and adequate” reimbursement rates to meet the costs incurred by “efficiently and economically operated” skilled nursing facilities. Over the next few years, industry margins stabilized, rising nationally from 1.6 percent in 1988 to 3.7 percent in 1992. During this period of relative financial stability, nursing home operators began to improve their facilities and create specialty care units for subacute patients, who required services of higher intensity than traditional nursing home services. Often these patients were recovering from cardiac conditions, strokes, and fractures. Medicare reimbursement to nursing homes for these services was cost-based (unlike the diagnosis-based payments to hospitals) and generated attractive margins, particularly for therapies and other ancillary services.

The higher-margin subacute business was a timely benefit for the nursing home industry. During the 1980s and early 1990s, the assisted living industry and other elderly care alternatives emerged, particularly for seniors with less intensive, intermediate care level (ICF) needs. This ICF population had historically formed an important niche within the typical nursing home. But as the more affluent and less sick residents were drawn to assisted living and other residential care alternatives, nursing homes were quickly becoming higher acuity facilities, with increasingly older and frailer residents requiring more highly skilled care. By the late 1990s, as the costs of care for the elderly population grew, nursing homes, and their state funding sources, were again under financial pressure. As part of the Balanced Budget Act of 1997 (BBA 1997), Congress effectively repealed the Boren Amendment, freeing states to determine what funding level they would provide.

BBA included provisions that dramatically lowered Medicare reimbursement to skilled nursing facilities, as described in Section III. From FY 98 to FY 99, total Medicare payments to SNFs fell by 16.8 percent. Several large nursing home chains that operated in California, including Vencor, Mariner, Fountain View, and Lenox, declared Chapter 11 bankruptcy. In response, the federal government passed legislation in 1999 and again in 2000 that restored about $3 billion in previously announced cuts. However, these restored payment provisions included sunset provisions set for October 2002. They became known as the “Medicare cliff.” Congress did not extend these provisions when it adjourned in the fall of 2002, and the Bush Administration is unlikely to ask the new Congress to restore these funds. The net effect has been an additional 10 percent reduction in SNF revenues; in California that amounts to a reduction of more than $100 million. Additional sunset provisions scheduled for October 2003 will result in further Medicare cuts unless the federal government acts to extend these funding provisions this year.

Nursing home operators in California, as in many other states, have had to seek out higher-margin payers or higher-margin businesses, such as subacute care, to remain viable. But recent and proposed cuts to Medicare suggest that nursing home operators can no longer look to subacute services funded by Medicare to subsidize unprofitable services to the general Medi-Cal population. How long-term care will be funded in the future and who will pay for it represent key public policy issues facing California and the rest of the country.


II. INDUSTRY CAPACITY, FACILITY OWNERSHIP, AND DEMOGRAPHICS

Total Facilities, Beds, and Occupancy

In 2001, California had 1,148 freestanding skilled nursing facilities with a total of 113,147 beds, making it the third-largest nursing home market in the country, after Texas and New York. With an average occupancy of 86.6 percent, these facilities care for nearly 98,000 residents across the state. These facilities range in size from several hundred beds to as few as 19, with a median size of 97 beds.

Despite dramatic changes in the industry in the past five years, the number of skilled nursing facilities in operation has remained remarkably stable, declining by just 1.5 percent from 1997 to 2001. The total loss of nursing home beds was just 1.1 percent.

In the same five-year period, average occupancy has also remained nearly constant, declining only a half percentage point, from 87.1 percent to 86.6 percent. Given the stable supply of available nursing home beds in the state and the growing population of elderly, this slight decline in occupancy suggests that alternative care options—such as assisted living, adult day care, and home health care—have helped meet the growing need for senior care services in California, at least for the moment.

Ownership Characteristics

Independent for-profit facilities predominate, representing nearly half of all facilities in the state. Facilities belonging to national or regional for-profit chains account for 18 and 19 percent of the total, respectively, while not-for-profit facilities make up the remaining 14 percent (see Figure 2.1). The for-profit chain facilities tend to be slightly larger in size (with a median bed size of 99 versus 97 for all facilities), while the not-for-profit facilities average just 56 beds each.

Although the total number of freestanding SNFs across the state has declined only slightly since 1997, Figure 2.1 shows significant shifts in ownership over the five-year period, particularly among the for-profits. The number of independent for-profit facilities grew from 499 to 570 over the period, while the totals for the national for-profit chains and other for-profit chains fluctuated considerably from year to year, ultimately declining 11 and 20 percent, respectively over the period. In all, 86 percent of facilities and 90 percent of beds are owned by for-profit operators; not-for-profits’ share of the market declined modestly from 165 facilities in 1997 to 158 in 2001.

Figure 2.1: Number of Freestanding SNF Facilities by Ownership Category, 1997–2001 g g y p g y

165 160 162 162 158

499 474 494 506570

275 324 275 266219

227 198 234 229 201

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1997 1998 1999 2000 2001

Num

ber

of F

acilt

ies

All NP FP independent Other FP chain Nat. FP chain

1,166 1,156 1,165 1,1481,163


Nursing Home Bed Supply and Demographic Trends

California’s supply of nursing home beds relative to the size of its elderly population is among the lowest in the country, at 31 beds per 1,000 members of the population age 65 or older.2 Moreover, as Figure 2.2 illustrates, there are striking differences in capacity from county to county across the state.3 This distribution is not simply a reflection of differences in urbanization. For example, in 2001, San Francisco County had relatively few beds per 1,000 elderly residents (13 beds per 1,000); San Diego County had a moderate level of bed capacity (28 beds per 1,000 elderly residents); and Los Angeles County had a high level of capacity (more than three times the level of San Francisco County, at 40 beds per 1,000 elderly residents). This distribution has been roughly stable over the study period. For example, although Santa Clara County saw a reduction in beds per 1,000 elderly residents, the decline was moderate, from 35 per 1,000 in 1998 to 33 per 1,000 in 2001.

Figure 2.2: SNF Bed Supply by County, 1998 vs. 2001

San Diego Los Angeles

Fresno San Jose

San Francisco


Fresno

San JoseSan Francisco

Beds Per 1000 Elderly Residents, 1998 Beds Per 1000 Elderly Residents, 2001

0 - 17.89 (15)

17.89 - 27.26 (14)

27.26 - 34.18 (15)

34.18 - 49.70 (14)

0 - 17.89 (15)

17.89 - 27.26 (12)

27.26 - 34.18 (18)

34.18 - 49.70 (13)


Fresno San Jose

San Francisco


Fresno

San JoseSan Francisco

Beds Per 1000 Elderly Residents, 1998 Beds Per 1000 Elderly Residents, 2001

0 - 17.89 (15)

17.89 - 27.26 (14)

27.26 - 34.18 (15)

34.18 - 49.70 (14)

0 - 17.89 (15)

17.89 - 27.26 (12)

27.26 - 34.18 (18)

34.18 - 49.70 (13)

As noted above, California’s relatively low bed supply ratio is a concern, given the projected growth in the state’s elderly population (see Figure 2.3).4 The state’s population aged 65 and older is expected to increase from 3.7 million in 2000 to more than 6 million by 2020. Even more dramatic is the projected growth in the age cohort most reliant on SNF services, the frail elderly population (aged 85 years and older). This group is expected to grow from 450,000 in 2000 to more than 725,000 by 2020, and ultimately exceed 1.7 million people by 2040. These trends imply a theoretical need for more than 67,000 additional nursing home beds over the next two decades (nearly a 60 percent increase), assuming 100 percent occupancy of the existing facilities and no changes in the current utilization of nursing home care.

2 HCIA-Sachs, LLC and Arthur Anderson LLP, The Guide to the Nursing Home Industry, 2001, Appendix C. 3 Figures from 1998 are used (rather than 1997) because utilization data was not available to match to all of the reports contained in the calendar year 1997 financial data file. Utilization data for each SNF is matched with a corresponding financial report based on the number of days covered in a calendar year by the financial report, so some facilities in the 1997 financial data would have been matched to 1996 utilization if it were available. 4 Sonya Tafoya and Hans P. Johnson, Graying in the Golden State: Demographic and Economic Trends of Older Californians, Public Policy Institute of California, November 2000.


Figure 2.3: California Elderly Population Growth Projection

California Elderly (Age 65+)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

1990 2000 2010 2020 2030 2040

California Frail Elderly (Age 85+)

-

250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

1,750,000

2,000,000

1990 2000 2010 2020 2030 2040

Source: State of California, Department of Finance (Sacramento, December 1998)


III. REVENUE AND REIMBURSEMENT

General Observations

California’s nursing facilities receive reimbursement from four major categories of payers:

• Medi-Cal — California’s Medicaid program, jointly funded by state and federal government to assist lower-income individuals who generally cannot afford to fully pay for nursing facility services.

• Medicare — The federally funded government health care reimbursement program (eligibility requires discharge from a hospital).

• Other Third-Party Payers — These include private insurers and managed care programs.

• Self-Pay — Direct payment for services by the resident.

The interplay among California’s various funding sources is evident as nursing home residents move through the sequence of payers. The typical progression of coverage for a beneficiary begins with 100 days of coverage provided by Medicare (only 20 days of which are fully reimbursed). Once federal coverage is exhausted, the resident (or family) is responsible for payment for services until they have spent down their assets to the point where they would qualify for state assistance through Medi-Cal. Medi-Cal eligibility is extremely complicated, but generally encompasses two broad categories: (1) low-income individuals who receive cash assistance through public programs like CalWORKS or federal Supplemental Security Income (SSI), and therefore automatically qualify for Medi-Cal; and (2) those defined as “medically needy.”5 California’s Medically Needy program extends Medi-Cal eligibility to individuals with high medical expenses who may have too much income or property to qualify otherwise. Medically Needy beneficiaries may participate in the Medi-Cal program on a “spend down” basis, providing a “share of cost” equal to the amount that their individual income exceeds the usual income limit.

As detailed later in this section, provider reimbursement decreases as the typical resident progresses along this payment continuum; for example, in 2001, average net Medicare revenue per patient day amounted to $398.23 as compared to average Medi-Cal revenue of just $114.65 per day.

While the average Medicare resident is usually sicker and more costly to care for than a Medi-Cal resident, Medicare reimbursement has historically helped subsidize Medi-Cal reimbursement.

Medicare Reimbursement

The Medicare program, enacted in 1965, is a federal insurance program providing a wide range of health care benefits, through providers, such as hospitals and nursing homes, and suppliers, such as labs and clinics, participating in the program. This program covers most Americans older than 65, SSI beneficiaries under the age of 65 entitled to disability benefits, and individuals needing renal dialysis or renal transplantation. The federal government provides payment for these services through contracted fiscal intermediaries and carriers.

Section 1802 of the Social Security Act mandates the establishment of minimum health and safety standards that must be met by providers and suppliers participating in the Medicare and Medicaid programs. The Centers for Medicare and Medicaid Services (CMS; formerly the Health Care Financing Administration) administers the programs.

5 Medi-Cal Policy Institute, Understanding Medi-Cal: Long-Term Care, Revised Edition, September 2001.


Medicare consists of three parts:

• Hospital Insurance or Part A

• Supplementary Medical Insurance or Part B for physician services, outpatient care, and other medical services

• Medicare+Choice or Part C

Medicare+Choice allows beneficiaries to receive their Part A and Part B benefits through private HMOs, preferred provider organizations (PPOs), and fee-for-service plans. The Part A trust fund is financed primarily through payroll taxes assessed on employees and employers at a total rate of 2.9 percent. The Part B trust fund is financed through premiums paid by enrollees ($54 per month), general revenue, and interest on investments.

Medicare regulations require that a SNF resident must have at least a three-day hospital stay immediately prior to admission to a SNF to qualify for SNF coverage. Medicare pays all or a portion of the first 100 days of a qualified resident stay, with full payment for the first 20 days and 80 percent payment for the next 80 days. The remaining payment is due from the resident, private insurer, or another party.

Recent Medicare Reimbursement Legislation

A series of legislative acts since 1997 have significantly altered Medicare reimbursement and have had a direct impact on the financial performance of nursing homes.

The 1997 Balanced Budget Act

In 1997, the federal government, faced with the potential bankruptcy of the Medicare trust fund, enacted the Balanced Budget Act of 1997 (BBA) to contain federal health care expenditures. These expenditures were slated to be cut by more than $116.4 billion over five years, primarily through reductions in providers’ payment rates.

The SNF spending cuts mandated by BBA, aimed at reducing spending by $9.5 billion between 1998 and 2002, had a much deeper impact than anticipated. Recent estimates put the total of the spending cuts at around $15 billion.6 The federal government responded by passing two acts to restore some of these monies to the industry via “add-on” payments.

The immediate effects of BBA on the nursing home industry included the introduction of a prospective payment system (PPS) for Medicare. The former cost-based system ensured that nursing home operators would be reimbursed for their actual costs, plus, in many cases, an additional profit factor. The new payment system, by contrast, is “prospective”; it provides a set rate for each type of service, regardless of the SNF’s actual costs to provide the service. PPS was intended to promote a long-term care delivery system that ensured cost effectiveness as well as quality of care.

PPS required all services to be billed using a consolidated-billing approach. Formerly, therapy and ancillary services were billed separately by the providers of these services and, in many cases, helped to subsidize the general cost of nursing home care. Under PPS, all services are included in the prospective rate set for a resident’s Medicare SNF stay. The financial impact on nursing homes was dramatic. Reimbursement for the various SNF services, referred to as Resource Utilization Groups (RUGs), was not adequate to cover operating costs, according to financial analysts.7

6 HCIA-Sachs, LLC and Arthur Anderson LLP, The Guide to the Nursing Home Industry, 2001. 7 PricewaterhouseCoopers LLP, The Impact of PPS on Nursing Home Profitability and Debt Coverage, National Investment Center for the Seniors Housing and Care Industries, 2001.


Balanced Budget Refinement Act of 1999

In response to the financial distress of BBA for the health care industry, the Balanced Budget Refinement Act of 1999 (BBRA) was enacted. Among the effects of BBRA was a $2.7 billion restoration of funds to the SNF industry, primarily by mandating add-ons to the federal per diem rate. The add-ons included a temporary 4 percent increase in the overall Federal RUG rate through the end of fiscal year 2002. An additional 20 percent add-on was included for the 15 RUG categories defined as high-cost.

Benefits Improvement and Protection Act of 2000

As a follow-on to the BBRA, Congress enacted the Benefits Improvement and Protection Act of 2000 (BIPA) in December 2000. BIPA called for restoring $11.55 billion to the health care industry, including $350 million to the SNF industry, over a period of five years. BIPA temporary add-ons included a 16.7 percent increase in the nursing component of the Federal rate and a 6.7 percent increase in RUG payments for rehabilitation therapy. Additionally, the plan restored the BBA’s 1 percent reduction in the Market Basket Index for fiscal year 2001, with an increase subsequently applied to the 2002 rate updates.

The Impact of the “Medicare Cliff”

The temporary add-ons provided through BBRA and BIPA were scheduled to expire in October 2002.The American Health Care Association, representing 12,000 long-term care providers, estimated the total impact of the scheduled cuts for the skilled nursing industry at $2.89 billion. California, where the resulting payment reductions were estimated to exceed $240 million, or a reduction of $71 per patient day, would have been hardest hit.8

In April 2002, the federal government extended through FY 03 the 20 percent add-on provided for high-cost cases under BBRA and the 6.7 percent add-on for patients requiring intensive rehabilitation under BIPA. This decision saved the industry an estimated $1 billion.9 However, the remaining add-ons enacted under BBRA and BIPA expired, as scheduled, on October 1, 2002, resulting in a reduction of approximately $1.8 billion in funding for skilled nursing care for 2003. This represents an estimated 10 percent reduction in Medicare payments to SNFs or approximately $35 per Medicare patient day.10

Medi-Cal Reimbursement

The Medicaid program was established with Medicare in 1965 to assist the states in providing “adequate medical care to eligible needy persons.” Under the program, which is jointly funded by the federal and state government, each state: (1) establishes eligibility standards; (2) determines the type, amount, duration, and scope of services covered; (3) sets the rate of payment for services; and (4) administers the program under broad national guidelines established by the federal government.

Medi-Cal reimbursement for long-term care services is currently based on a flat-rate prospective payment system, as is Medicare reimbursement nationally. Although California is one of only four states to employ such a system, the methodology has been in place for approximately 15 years. Per diem rates for nursing facilities are established annually, effective August 1, for six peer groups according to bed size and region, based on DHS’s audit of provider cost reports.

8 American Health Care Association, New State-By-State Analysis of Nation’s Medicare Program, March 25, 2002. 9 American Association of Homes and Services for the Aging (AAHSA), Statement on HHS Decision to Extend $1 Billion in Medicare Payments, April 25, 2002. 10 American Health Care Association, Issue Brief: Stop the Medicare Cuts to Skilled Nursing Care for America’s Frail and Elderly, August 8, 2002.


Four cost components are used in projecting costs:

Fixed costs – not updated as they generally remain constant

Property taxes – updated at a rate of 2 percent annually Labor costs – updated annually based on reported costs All other costs – updated based upon the California Consumer Price Index11

The updated costs for each facility are then grouped into the six appropriate peer groups and the median cost (50th percentile) becomes the basis for the next year’s rate. The current rates per patient day, effective August 1, 2002, are shown in Table 3.1, and the trend in the weighted average rate since 1996 is shown in Figure 3.2. Table 3.1: Medi-Cal Freestanding Skilled Nursing Facility Rates

Region Number of

Beds

Rate Effective

8/1/01

Rate Effective

8/1/02 % ChangeLos Angeles County 1–59 Beds 100.67 104.39 3.70% Bay Area Counties 1–59 Beds 121.78 129.96 6.72% All Other Counties 1–59 Beds 109.53 113.98 4.06% Los Angeles County 60+ Beds 103.32 103.54 0.21% Bay Area Counties 60+ Beds 131.08 131.08 0.0% All Other Counties 60+ Beds 115.21 115.21 0.0% Weighted Average Rate, All Facilities 113.13 113.73 0.53% Source: LTC Rates, State of California, DHS, Medi-Cal Policy Division, Rate Development Branch, Long Term Care Reimbursement Unit, 2002

As Figure 3.2 illustrates, California’s SNFs have received a steady series of rate increases over the last six years, and now face proposed cuts for the first time.

In 1999, the FY 00 state budget mandated an increase in nurse staffing, effective January 1, 2000, to a minimum of 3.2 nursing hours per patient day. This mandate was funded by an increase in Medi-Cal rates of approximately $2.96 per patient day for freestanding nursing facilities.12 However, this was not adequate to fully fund the required increase in staffing levels, according to the California Association of Health Facilities (CAHF). In the wake of a congressional report issued in November 1999 that found less than 3 percent of Los Angeles nursing homes in full compliance with federal standards for health and safety, CAHF warned that without immediate substantial increases in reimbursement, the California nursing home industry would collapse. At the time, Medi-Cal ranked 46th in the nation for long-term care funding.

In response to industry lobbying efforts, at a time when California enjoyed a $12 billion budget surplus, the state legislature and governor increased Medi-Cal rates for nursing facilities, effective August 1, 2000. The weighted average increase for all freestanding nursing facilities amounted to a 16.9 percent increase over the January 1, 2000 rates. Since then, the weighted average rate increase in August 2001 amounted to 2.5 percent, and for August 2002, the increase equaled 0.5 percent.

However, in May 2003, faced with a $35 billion budget deficit, Governor Gray Davis proposed more than $20 billion in state spending cuts. This includes a proposed 15 percent reduction in Medi-Cal provider rates for FY 03–04.

11 Long-Term Care Reimbursement Unit, Methodology by Type of LTC Facility, California DHS Web site, http:/www.dhs.ca.gov/mcs/mcpd/RDB/LTC/ltcpage.htm 12 “State Medicaid Funding for Skilled Nursing Facilities: The Good, the Bad and the Ugly,” Materials prepared by Tellatin, Andreas & Short, Inc., for the 12th Annual NIC Conference (October 2002).


Figure 3.2: Weighted Average Skilled Nursing Facility Medi-Cal per Diem Reimbursement Rates g g g

$12

$11

$11

$91.32

$94.28

$113.73

$96.67

$112.93$110.27

$88.71

$82.81$83.12

$81.21

$70.00

$75.00

$80.00

$85.00

$90.00

$95.00

$100.00

$105.00

0.00

5.00

0.00

Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03

Source: LTC Rates, State of California, DHS, Medi-Cal Policy Division, Rate Development Branch, Long Term Care Reimbursement Unit

Proposed 15% Cut for FY2003-04

For nursing homes in many states, Medicare payments have historically helped subsidize less-than-adequate Medicaid reimbursement. A July 2002 study by the accounting firm BDO Seidman, LLP, prepared for the American Health Care Association, indicated significant shortfalls nationwide between Medicaid reimbursement to nursing home providers and allowable costs that nursing homes incurred.13 The report estimated Medicaid’s 2000 funding shortfall at $3.5 billion nationwide, or almost $10 per patient day for every Medicaid nursing home resident. For California, the disparity between Medi-Cal reimbursement and allowable costs was pegged at –$7.20 per patient day, resulting in a total shortfall for the state’s providers of more than $180 million in FY 2000. But this study was based on data prior to the sizable Medi-Cal rate increase that California’s nursing homes received in August 2000. That rate increase will have significantly reduced or even eliminated the shortfall for a time. But given the continued escalation of labor, insurance, and other operating costs (detailed in Section IV), combined with the October 2002 reductions in Medicare payments, the state’s nursing home industry will be hard-pressed to maintain financial stability and quality of care in the face of the proposed Medi-Cal rate cuts for FY 2003–04.

Self-Pay Residents

The most common payers for nursing home services after Medi-Cal are residents themselves—or at least those residents who are financially responsible for their own care and not covered by a third-party payer. These residents are often in the process of spending down their assets (which frequently follows a period of Medicare coverage). Ultimately, most residents qualify for Medi-Cal. In recent years, with the help of more sophisticated advice from estate planning and elder law attorneys, individuals have been able to protect or transfer assets and thereby qualify for assistance from Medi-Cal sooner.


13 BDO Seidman, LLP, A Briefing Chartbook on Shortfalls in Medicaid Funding for Nursing Home Care, Prepared for American Health Care Association, July 11, 2002.

Managed Care and Other Payers

Despite the long history and strong penetration in California of managed care (plans that deliver care through contractual arrangements with selected providers), managed care payers represent only a small proportion of the payer mix for most nursing homes in the state. For California’s freestanding nursing homes in 2001, managed care represented just 4.0 percent of all patient days and 6.5 percent of net patient revenues. These residents consist primarily of participants in Medicare+Choice programs, but they also include residents enrolled in Medi-Cal managed care programs and other programs, such as the Program of All-inclusive Care for the Elderly (PACE) offered in a few parts of the state. These plans typically pay skilled nursing facilities a negotiated per diem rate. Other third-party payers represent an equally small proportion of the payer mix, amounting to 4 percent of both patient days and net patient revenues for the industry. To mitigate the burden of long-term health care costs for the public, the state of California has sought to promote long-term care insurance for middle-income residents through the California Partnership for Long-Term Care (CPLTC).14 Under CPLTC, the state, in cooperation with several private insurance companies, has established a program to offer long-term care “partnership policies.” The policies, developed within strict guidelines, protect some assets if the policy holder exhausts his or her benefits but still needs care and must apply for Medi-Cal assistance. Further, under the federal Health Insurance Portability and Accountability Act of 1997 (HIPAA), premiums paid for tax-qualified policies qualify as medical expenses and can be deducted or excluded from taxable income. Nevertheless, consumer acceptance of long-term care insurance remains low.

Payer Mix Trends

In terms of both patient days and net patient revenues, Medi-Cal is the dominant payer in the industry, representing nearly two-thirds of all patient days in 2001 and more than half of the net patient revenues (see Figure 3.3). In terms of patient days, the relative mix of payers in 2001 did not change significantly from 1997. However, as Table 3.4 indicates, there has been an absolute decline in self-pay residents of 12 percent during the period, partially offset by an 8 percent increase in privately insured or managed care patients. Table 3.4 also shows a decline in Medicare days from 1997 to 1999, followed by a nearly full recovery by 2001, a trend presumably attributable to the unfavorable reimbursement changes in Medicare with the Balanced Budget Act of 1997 followed by the restoration of some funds through subsequent Medicare reimbursement relief acts (BBRA of 1999 and BIPA of 2000).

Figure 3.3: Payer Mix by Patient Days and Revenue

Net Patient Revenue by Payer, 2001

Medi-Cal53%

Medicare18%

Self-Pay19%

Managed Care6%

Other Payers4%

Total Patient Days by Payer, 2001

Medi-Cal66%

Medicare7%

Managed Care4%

Self-Pay19%

Other Payers4%

14 California Partnership for Long-Term Care, Consumer Information, 6/6/02, http://www.dhs.cahwnet.gov/cpltc/html/consumer.htm


Table 3.4: Patient Days by Payer15 1997 1998 1999 2000 2001 % change

All Payers 36,388,299 36,255,345 36,295,695 35,938,120 35,768,582 –1.7% Medicare 2,419,378 2,336,883 2,174,134 2,236,559 2,412,841 –0.3% Medi-Cal 23,351,911 23,291,271 23,504,095 23,248,780 23,499,589 0.6% Self-Pay 7,923,116 7,641,361 7,613,943 7,359,933 6,941,867 –12.4% Other Payers 2,693,893 2,985,829 3,003,523 3,092,849 2,914,285 8.2%

Looking at payer mix on the basis of facility ownership status reveals several distinctive differences in the markets served by each group (Figure 3.5). In 2001, Medi-Cal was the predominate payer among all for-profits, accounting for nearly 70 percent of patient days among independent and regional chain facilities and somewhat less (approximately 62 percent) for the national for-profit chain facilities; the national chains have a higher Medicare mix (9.2 percent versus 6.5 percent or less for other facilities). The not-for-profit facilities, by contrast, have a much lower proportion of Medi-Cal days (less than 46 percent), and a much higher proportion of self-pay residents than the for-profits (44 percent self-pay days versus 17 percent or less among the for-profits). These patterns have not changed significantly since 1997, although national for-profit chain facilities have slightly reduced their share of Medicare patients while all others have slightly increased their Medicare mix.

Figure 3.5: Payer Mix by Ownership Category, 2001

61.7%69.4% 69.9%

45.7%

16.8%

15.2% 17.1%

43.8%

12.3%

9.0% 6.6%6.0%

9.2% 6.5% 6.3% 4.6%

0%

20%

40%

60%

80%

100%

National FP Chains Other FP Chains Independent FPs Not-For-Profits

Medi-Cal Self-Pay Other Payers Medicare


15The Managed Care payer category is included in the Other Payer category in Table 3.5 due to the fact that the OSHPD data files did not report the two payer categories separately prior to 2001.

Revenue and Reimbursement Trends

Overall, California nursing home providers have experienced an 8.8 percent increase in net patient revenue per patient day, adjusted for inflation, from 1997 to 2000. However, those per diem revenues vary widely by payer type (see Table 3.6).16 The dramatic impact in Medicare reductions brought on by BBA (which took effect with each facility’s first cost-reporting period on or after July 1, 1998) is clearly evident in the $89.55 decline (18 percent) in Medicare reimbursement between 1998 and 1999. The average rate continued to fall in 2000 to $381.90 per Medicare patient day, before rising $16.33 in 2001 to $398.23, as the increases due to BBRA of 1999 took hold. The overall decline in the Medicare rate was more than offset by increases in the other payer categories, including the sizable increase in the Medi-Cal average rate over the study period. That increase, amounting to 23.4 percent, adjusted for inflation, accounted for most of the net gain in revenue per patient day.

The effects of these changes in per diem rates are evident in the industry’s total operating revenue. In 2001, total operating revenue exceeded $5.2 billion, up 7 percent from $4.9 billion in 1997, adjusted for inflation (see Table 3.7). This modest growth reflects changing levels of contribution from the various payers. Medi-Cal made up nearly 52 percent of the total revenue in 2001, compared with only 44 percent in 1997. At the same time, the self-pay share of revenue slipped (due to a 12 percent loss of self-pay residents), along with the share of Medicare revenue. The relative impact of these trends is evident when looking at the mix of revenue streams on a per-patient-day basis (see Table 3.8) 17

Table 3.6: Average per Diem Reimbursement by Payer (Constant 2001 Dollars)

Payer 1997 1998 1999 2000 2001 % change Medicare $477.97 $491.46 $401.91 $381.90 $398.23 –16.7% Medi-Cal 92.89 94.63 98.30 104.94 114.65 23.4% Self-Pay 134.66 135.51 136.78 136.55 141.62 5.2% Other Payers 175.74 179.78 173.94 183.38 194.42 10.6%

Table 3.7: Total Operating Revenue by Revenue Source ($ MM) (Constant 2001 Dollars)

1997 1997

Percent 2001 2001

Percent Percentage

Point ChangeRevenue Source ($MM) of Total* ($MM) of Total 1997–2001 Total Operating Revenue $4,885.18 100% $5,225.31 100% –

Medicare, Net 1,156.40 23.7% 960.87 18.4% –5.3% Medi-Cal, Net 2,169.27 44.4% 2,694.14 51.6% 7.2% Self-Pay, Net 1,066.96 21.8% 983.14 18.8% –3.0% Other Payer, Net 473.42 9.7% 566.59 10.8% 1.2% Other Operating Revenue 19.14 0.4% 20.58 0.4% 0%

16 This figure is calculated by dividing the net patient revenue from a given payer source by the number of patient days for that payer, as reported by OSHPD (e.g., net Medicare patient revenue divided by total Medicare patient days). These figures represent the blended average of all facilities and may not correspond to OSHPD’s published rates shown in Figure 3.2. 17 The figures in Table 3.8 are calculated by dividing net patient revenue for a given payer source by total patient days for all payers (as distinct from the figures in Table 3.6; see the prior footnote).


Table 3.8: Operating Revenue per Patient Day by Revenue Source (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % changeTotal Operating Revenue $134.25 $136.33 $131.37 $135.98 $146.09 8.8%

Medicare, Net 31.78 31.68 24.07 23.77 26.86 –15.5% Medi-Cal, Net 59.61 60.79 63.66 67.89 75.32 26.3% Self-Pay, Net 29.32 28.56 28.69 27.96 27.49 –6.3% Other Payer, Net 13.01 14.81 14.39 15.78 15.84 21.8% Other Operating Revenue 0.53 0.49 0.56 0.57 0.58 9.4%

All ownership categories with the exception of the national for-profit chain facilities have experienced net revenue growth for the five-year period (see Figure 3.9). The national for-profit chain facilities have had higher revenues than other facilities because of their greater historical reliance on Medicare patients. However, by the same token, these facilities, and to a lesser extent the regional for-profit chain facilities, suffered the greatest declines in revenue from 1998 to 1999, due to BBA. By contrast, the not-for-profit facilities were largely shielded from the effects of the Medicare cuts because of their much greater reliance on self-pay residents. The increase in revenues per patient day from 1999 to 2001 for all ownership categories is largely the result of improved Medi-Cal reimbursement, although the restoration of some Medicare funding under BBRA contributed to part of the increase from 2000 to 2001 as well.

Figure 3.9: Total Operating Revenue per Patient Day by Ownership Category (Constant 2001 Dollars)

$110

$120

$130

$140

$150

$160

$170

1997 1998 1999 2000 2001

Nat. FP Chain

Other FP Chain

FP IndependentAll NP


IV. OPERATING EXPENSES

California’s freestanding nursing facilities reported total operating expenses of $5.15 billion for 2001, or $144.06 per patient day. This represents a 7.5 percent increase in operating expenses per patient day since 1997, after adjusting for inflation. Total operating expenses as reported to OSHPD can be grouped into the following six expense categories:

• Routine Services — General or routine patient care, including all nursing services as well as consultation and evaluation services.

• Ancillary Services — All diagnostic and therapeutic services not part of the general or routine patient care. Charges for these services are customarily made in addition to routine charges and include patient supplies, pharmacy, laboratory, physical therapy, and home health services.

• Support Services — Non-nursing or ancillary services performed by specific departments of the long-term care facility, such as plant operations and maintenance, housekeeping, laundry and linen, dietary services, social services, activity programs, and in-service nursing education.

• Administration — Includes the overall management of the institution, general patient accounting, communication systems, data processing, patient admissions, public relations, professional liability and non-property-related insurance, licenses and taxes, medical record activities, and procurement of supplies and equipment.

• Property — Includes depreciation and amortization expense, leases and rental expense relating to the building and equipment, property taxes, property insurance, and interest incurred on mortgage notes, capitalized lease obligations, and other debt incurred for the acquisition of land, buildings, and equipment.

• Other Expenses — Includes interest incurred on debt not incurred for the acquisition of land, building, and equipment; and provision for bad debts.

Figure 4.1 illustrates how much each of these cost centers contributes to the total average operating expense per patient day. Routine and ancillary services together account for 52 percent of the total; support services, 22 percent; administration, 16 percent; property expense, 9 percent; and remaining expenses account for 1 percent.

Although total expenses per patient day have increased a modest 7.5 percent over the five-year period (adjusted for inflation), the swings in certain expense categories have been more extreme, as Table 4.2 shows. Routine services costs have climbed steadily since 1997 from $48 to $62 per patient day in real dollar terms—nearly a 28 percent increase. This reflects several factors, including a tightening nursing labor market that has driven up labor costs, escalating nurse registry costs, and an increase in average productive nursing hours per patient day. Ancillary services costs, by contrast, dropped 43 percent from 1998 to 1999—evidence that introduction of the Medicare prospective payment system accomplished one of its objectives, to eliminate financial incentive for facilities to provide excessive ancillary services. Administrative costs rose more than 17 percent during the period, presumably due in part to the increased cost of general and professional liability insurance (see the section on general and professional liability insurance, below).


Figure 4.1: Average Revenue and Expense per Patient Day for All Facilities, 2001

,

$62.33

$13.23

$31.43

$22.77

$12.83

$1.46 $2.03

$146.09

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

Routine Srvcs Ancillary Srvcs Support Srvcs Admin. Property Other Expenses Total Op.Revenue

Net fromOperations

Table 4.2: Operating Expenses per Patient Day (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % change 1997–2001

Total Operating Expense $133.96 $136.80 $131.65 $136.70 $144.06 7.5% Routine Services 48.44 49.74 51.53 57.04 62.33 28.7% Ancillary Services 23.14 23.35 13.41 12.87 13.23 –42.8% Support Services 29.25 29.56 29.78 30.23 31.43 7.4% Administration 19.42 19.94 21.07 21.44 22.77 17.2% Property 12.17 12.65 12.70 12.84 12.83 5.4% Other Expenses 1.53 1.57 3.16 2.27 1.46 –4.7%

Not-for-profit facilities as a group have had the highest costs per patient day (see Figure 4.3), despite having the lowest proportion of Medicare patients—typically the sickest and most costly patients to care for. Costs for these facilities have risen 10.1 percent, adjusted for inflation, since 1997, to $166.61 per patient day. National for-profit chain facilities, with their higher mix of Medicare patients, had the second-highest costs for the same period. However, as a group they were particularly adept at reducing ancillary costs in 1999 in response to PPS (see Figure 4.4), and have reduced their overall operating costs by 1 percent since 1997, to $147.26 per patient day in 2001. Regional for-profit chain facilities and independent for-profits were also able to reduce their operating costs in 1999 but have seen their expenses climb 5–7 percent each year since then.


Figure 4.3: Total Operating Expense per Patient Day by Ownership Category (Constant 2001 Dollars)

$100

$110

$120

$130

$140

$150

$160

$170

$180

1997 1998 1999 2000 2001

Nat. FP Chain

Other FP Chain

FP Independent

All NP

Figure 4.4: Ancillary Services Expense per Patient Day by Ownership Category (Constant 2001 Dollars)

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

1997 1998 1999 2000 2001

Nat. FP Chain

Other FP Chain

FP Independent

All NP


Labor Costs and Nursing Skill Mix Trends

Total employee salary and wages (excluding benefit costs and registry nurse or temporary staff expenses) averaged $68.32 per patient day in 2001, accounting for more than 47 percent of total operating expense. Salary and wage expense has grown 17.4 percent since 1997, adjusted for inflation, including 7 percent increases in each of the last two years. As Figure 4.5 shows, most of the increase can be attributed to the costs of licensed vocational nurses (LVNs) and nurse assistants (NAs), as both of the these categories have risen 36 percent over the period, including 10–14 percent increases in each of the last two years. Although salary and wage expense for supervisors and management represents only a small portion of total employee costs, the increase in this category has topped 19 percent for the period. Per patient day costs for registered nurses (RNs) have largely been held in check, rising just 3.7 percent over the period in real dollar terms. All other employee expense categories have risen a modest 2.1 percent since 1997.

Figure 4.5: Employee Salary and Wage Expense per Patient Day by Skill Level (Excluding Temporary Workers (Constant 2001 Dollars)

23.26 23.26 22.49 23.03 23.75

2.47 2.53 2.73 2.88 2.94

16.57 16.95 17.5720.06

22.48

8.42 8.63 9.1510.04

11.417.46 7.55 7.257.65

7.73

$0

$10

$20

$30

$40

$50

$60

$70

$80

1997 1998 1999 2000 2001

All Other Super. and Mgmt. NAs LVNs RNs

$58.18 $58.92 $59.19

$63.66$68.32

% Change 1997-2001

All Emps: 17.4%

RNs: 3.7%

LVNs: 35.6%

NAs: 35.7%

Sup&Mgmt: 19.3%

All Others: 2.1%

In 1997, national for-profit chain facilities had relatively high salary and wage costs—comparable to those of not-for-profits (see Figure 4.6). However, over the subsequent two years they were able to bring their expenses in line with other for-profit facilities. By 2001, not-for-profits had the highest salary and wage expense per patient day, at $77.46, while for-profit facilities’ employee expenses grouped closely together (ranging from $65.51 at regional for-profit chain facilities to $69.93 at the national chains).


Figure 4.6: Employee Salary and Wage Expense per Patient Day by Ownership Category (Constant 2001 Dollars)

$40.00

$45.00

$50.00

$55.00

$60.00

$65.00

$70.00

$75.00

$80.00

1997 1998 1999 2000 2001

Nat. FP Chain

Other FP Chain

FP Independent

All NP

Tables 4.7 through 4.9 examine the trends in median hourly wage rate by ownership category for RNs, LVNs, and NAs, respectively. Median wage rates for RNs have increased by 14.5 percent over the five-year period studied, but accounted for only a 3.7 percent increase in per-day employee costs over all (as shown in Figure 4.5). By contrast, median wage rates for LVNs (Table 4.8) and NAs (Table 4.9) increased at much lower rates (13.5 and 21.8 percent, respectively) than the increase in total costs per patient day for these employee groups (35.6 and 35.7 percent, respectively, as shown in Figure 6.5). Taken together, these and other findings suggest that facilities shifted their nursing-skill mix from RNs to more LVNs and NAs over the five-year period.

Table 4.7: Median Registered Nurses’ Wage Rate by Ownership Status (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % change 1997–2001

All Facilities $21.17 $21.37 $21.83 $22.97 $24.25 14.5% All For Profit 21.10 21.32 21.78 23.02 24.35 15.4%

Nat. FP Chains 22.46 22.65 22.71 25.14 26.24 16.8% Other FP Chains 20.61 20.97 21.44 22.62 24.06 16.7% FP Independents 20.76 20.91 21.47 22.40 23.70 14.2%

Not-for-Profits 21.73 21.93 22.20 22.56 23.51 8.2%


Table 4.8: Median Licensed Vocational Nurses’ Wage Rate by Ownership Status (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % change 1997–2001

All Facilities $16.23 $16.36 $16.56 $17.41 $18.42 13.5% All For Profits 16.19 16.31 16.54 17.43 18.52 14.4%


Not-for-Profits 16.48 16.68 16.76 17.37 17.93 8.8%

Table 4.9: Median Nurse Assistants’ Wage Rate by Ownership Status (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % change 1997–2001

All Facilities $7.86 $8.06 $8.38 $9.11 $9.57 21.8% All For Profits 7.75 7.98 8.31 9.08 9.47 22.2%


Not-for-Profits 8.66 8.75 8.92 9.41 9.96 15.0%

For RNs and LVNs, national for-profit chains had the highest median wage rates in 2001 and showed the largest increase in RN wage rates over the study period. For these same two labor categories, not-for-profit facilities in 2001 had uniformly lower median wage rates, and lower rates of growth in the wage rates, than did any type of for-profit facility. This represents a dramatic change from 1997, when not-for-profits had similar or higher wage levels than for-profits. This change in relative wage levels was most pronounced at the top of the skill distribution. National for-profit chain facilities experienced increases in the RN wage rate from $22.46 to $26.24, or 16.8 percent, compared to an increase from $21.73 to $23.51, or 8.2 percent, at not-for-profit facilities. However, these trends in wages may not accurately represent trends in total labor costs by ownership status and occupation, since these figures do not include employee benefits. Table 4.10 shows that not-for-profits have dramatically higher costs and growth rates in median per patient day employee benefits. Facilities do not report benefits expense by occupation to OSHPD, so it is not possible to calculate total labor costs by job category.

Table 4.10: Median Employee Benefits per Patient Day by Ownership Status (Constant 2001 Dollars)

1997 1998 1999 2000 2001 % change1997–2001

All Facilities 14.76 14.20 14.41 15.72 16.73 13.3% All For Profits 14.03 13.45 13.68 14.88 15.98 13.9%


Not-for-Profits 22.30 23.82 24.89 24.86 29.24 31.1%

The increases in average nurse wage rates and employee benefits are just two indicators of the increasingly tight nursing labor market in California. Perhaps even more indicative is the use and cost of temporary staff (registry nurses). Total temporary staffing hours increased fivefold, from 315,000 hours in 1997 to more than


1.6 million hours in 2001. While not a significant component of total operating cost in 1997 at $0.19 per patient day, this expense grew sixfold to $1.21 per patient day in 2001 (see Figure 4.11). This amount represents more than a quarter of the average facility’s net income per patient day in that year.

Figure 4.11: Temporary Staff Costs per Patient Day by Skill Level (Constant 2001 Dollars) g y p y y

$0.19

$0.31

$1.21

$0.78

$0.43

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

1997 1998 1999 2000 2001

Total Temp. Staff Costs Temp. RNs Temp. LVNs Temp. NAs

That California facilities have tried to mitigate wage and salary increases by shifting their nursing mix from RNs to lower-cost LVNs and NAs is further supported by Figure 4.12. As shown, while overall nursing hours per patient day increased by approximately 10 percent during the five-year period (from 2.86 to 3.13 nursing hours per day), California nursing facilities decreased utilization of RNs by 9 percent since 1997 and increased their use of LVNs and NAs during the same period by 14 and 11 percent, respectively. Figure 4.12: Median Productive Nursing Hours per Patient Day, All Facilities

Hou

r

0.31 0.31 0.29 0.30 0.28

0.52 0.52 0.54 0.57 0.59

2.03 2.02 1.992.12

2.26

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1997 1998 1999 2000 2001

s

RN Hours PPD LVN Hours PPD NA Hours PPD

2.86 2.852.99

2.83

3.13


National for-profit chain facilities altered their skill mix to the greatest extent, reducing RN hours per patient day by 24 percent and increasing LVN and NA hours by 29 and 9 percent, respectively (see Table 4.13). Other for-profit chain facilities followed this strategy to a lesser extent. The independent for-profit facilities and the not-for-profits also increased their utilization of LVNs and NAs, but held their use of RNs roughly constant across the time period.

Table 4.13: Median Productive Nursing Hours by Ownership Category, 1997 vs. 2001

National For-Profit Chains 1997 2001 % change Other For-Profit Chains 1997 2001 % change RN Hours 0.38 0.29 –24.0% RN Hours 0.30 0.27 –7.5% LVN Hours 0.46 0.59 29.2% LVN Hours 0.49 0.57 15.9% NA Hours 1.98 2.17 9.3% NA Hours 1.97 2.23 13.6% Total Hours PPD 2.82 3.05 8.1% Total Hours PPD 2.76 3.08 11.7% Independent For-Profits 1997 2001 % change Not-For-Profits 1997 2001 % change RN Hours 0.27 0.27 1.3% RN Hours 0.33 0.32 –0.9% LVN Hours 0.55 0.59 8.0% LVN Hours 0.57 0.63 9.8% NA Hours 2.02 2.27 12.9% NA Hours 2.33 2.47 6.1% Total Hours PPD 2.83 3.13 10.8% Total Hours PPD 3.23 3.42 6.1%

Nursing Labor Shortage

California is in the midst of a severe nursing labor shortage that poses challenges to both the quality and cost of care. Although California ranks first in the number of registered nurses at 201,070 in 2001, it ranks second-lowest in terms of registered nurses per 10,000 population, with 58 RNs per 10,000 people compared to 79 RNs per 10,000 for the country as a whole.18 Factors driving the shortage include population increases, an aging population, an aging nursing work force, increased nurse-staffing ratios, low wages compared to cost of living, poor working conditions, and inadequate nursing education capacity. California’s nursing facilities experienced a 22 percent vacancy rate for staff RNs and a 16 percent vacancy rate for LVNs in 2001, and turnover rates exceeded 55 percent for all categories of nursing staff, according to a recent trade association survey.19 The California Employment Development Department (EDD) projects a demand for 109,600 additional RNs and 25,400 LVNs by 2010 for all segments of care.20

A variety of government-sponsored and private initiatives are underway to address the problem, including Governor Davis’ three-year, $60 million Nursing Workforce Initiative to expand nurse training and retention. While these efforts should help ease the shortage over time, they alone will not be sufficient to close the gap cited above by the EDD.

Nursing home operators are at a particular disadvantage in competing for trained staff. Employees in the long-term care industry consistently earn less than their counterparts in acute-care settings. In 2000, nurses in nursing homes earned 8 percent less than nurses in acute-care hospitals.21 Mean earnings of full-time nurse

18 Kaiser Family Foundation, State Health Facts Online (www.statehealthfacts.kff.org), based on Bureau of Labor Statistics retrieved December 2002. 19 American Health Care Association (AHCA), Health Services Research and Evaluation, “Results of the 2001 AHCA Nursing Position Vacancy and Turnover Study,” 7 February 2002. 20 The California Nursing Work Force Initiative, “Planning for California’s Nursing Work Force: Phase III Final Report,” September, 2002. Available at http://www.ucihs.uci.edu/cspcn. 21 Ernell Spratley, “The Registered Nurse Population,” March 2000, Health Resources and Services Administration, Bureau of Health Professions, Division of Nursing (Department of Health and Human Services): 62.


http://www.statehealthfacts.kff.org/

aids in a nursing home were 17 percent lower than in hospitals and the median annual salary was 20 percent lower.22 The implementation in California of minimum nurse-to-patient ratios for hospitals, effective January 1, 2004, will presumably only compound the problems of recruitment and retention for the state’s long-term care providers. When fully implemented, the new ratios will require California’s hospitals to hire an estimated 5,000 additional licensed nurses, many of whom probably will be drawn away from the long-term care industry.

Resident Acuity Shift

Today’s nursing home residents are far frailer, sicker, and more costly to care for than they were when the industry emerged in the 1960s and 1970s. The person who 30 years ago would have sought nursing home care is now more often cared for at home or in an assisted living facility, while today’s nursing home residents often have medical needs that would have required hospitalization in 1970. This shift occurred largely in the late 1980s and early 1990s, after implementation of the Medicare prospective payment system for hospitals in 1983. With the advent of prospective payment, hospitals sought to shorten acute inpatient length of stay and discharge Medicare patients to lower-cost settings as soon as possible. Today, the shift in the average acuity of nursing home residents continues, particularly as healthier (and often private-pay) residents have been drawn away from the nursing home market to alternative care settings.

One quantitative measure of nursing home residents’ relative acuity is the ACUINDEX.23 This index is based on data drawn from Centers for Medicare and Medicaid Services (CMS)’ Online Survey Certification and Reporting (OSCAR) database for every Medicare and Medicaid certified nursing facility. This rating reflects the proportion of residents requiring assistance in various activities of daily living (such as bathing, eating, or dressing), combined with a weighted value for the proportion of residents receiving certain special treatments, such as respiratory care, intravenous therapy, or suctioning. As Figure 4.14 illustrates, average resident acuity as measured by this index has risen since 1996 both for California and for the U.S. as a whole. The average acuity level of California’s nursing home residents is substantially higher than the nationwide average. California ranked tenth-highest among the 50 states, according to this measure.

22 William Scanlon, “Nursing Workforce: Recruitment and Retention of Nurses and Nurse Aids Is a Growing Concern”, U.S. General Accounting Office testimony before the Committee on Health, Education, Labor and Pensions, U.S. Senate, 71 May 2001: 23-24. 23 C. McKeen Cowles, 2001 Nursing Home Statistical Yearbook, 2002, and prior annual editions.


Figure 4.14: Resident Acuity Index Average Trend, 1997–2001

10.000

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10.400

10.500

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1996 1997 1998 1999 2000 2001

Res

iden

t A

cuit

y In

dex

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ue

(AC

UIN

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)

United States California

Assessing the cost impact of this changing patient profile is beyond the scope of this study, but it is a trend that has contributed to the growth of nursing home expenses ahead of inflation. Clearly, caring for a sicker population carries increased risks for facility operators. The health status of such residents can deteriorate rapidly, requiring substantially increased care and resources. Yet, the current Medi-Cal reimbursement system pays the facility the same per diem rate regardless of resident acuity.

General and Professional Liability Insurance

One expense that is not reported separately in the OSHPD public data files, but is rapidly escalating, is the cost of general and professional liability insurance. The trade association California Association of Health Facilities reports that annual premiums for its members have risen from roughly $300 per bed in 1999 (or $0.94 per patient day, assuming 87 percent average occupancy) to $1,350 per bed for 2002–2003 ($4.25 per patient day), and are expected to more than double, to $3,000 per bed, by 2006 in the absence of legal reforms.24

One factor driving the premium increases in California and across the country has been the rising number of claims, along with larger jury awards and claim settlements. According to a recent actuarial analysis conducted by Aon Risk Consultants, Inc. for the American Health Care Association, average annual general and professional liability loss costs for long-term care providers in California have increased at an annual rate of 16 percent, from $970 per occupied bed in 1995 to $2,320 per occupied bed in 2001.25 Aon estimates that litigation costs—lawyers’ fees and other legal expenses—account for 47 percent of the total claims costs of the long-term care industry nationwide. Florida and Texas have seen the highest liability costs in the country, but the report singles out six other states, including California, with higher-than-average costs. California’s Elder Abuse and Dependent Adult Civil Protection Act (EADACPA), passed in 1991, provides considerable latitude in the range of penalties for professional negligence. Although the state has passed tort reform in the 24 Thomas Peele, “California Nursing Home Industry Leaders Plan Campaign for Legal Reforms,” Contra Costa Times, November 9, 2002. 25 Aon Risk Consultants, Long-Term Care General Liability and Professional Liability Acutarial Analysis, March 3, 2003


form of the Medical Injury Compensation Reform Act of 1975 (MICRA), which sets a $250,000 cap on non-economic damages awarded in medical malpractice suits, the State Supreme Court has held that the more severe penalties available under EADACPA can apply to nursing home providers found to be negligent. Thus, “reasonable attorneys’ fees may be awarded without any specific limitation and pain and suffering may be awarded even after the death of the elder.”26

But liability loss costs have not been the only factor driving up premiums. Some of the increase in premiums reflects the underwriting cycle of the insurance industry and the economic challenges that the insurers themselves have faced. Prior to the current recession, many insurers were willing to underwrite at a loss to gain market share, and subsidized those operating losses from investment income generated by their investment portfolios. But with the downturn in the stock market, that strategy was no longer tenable, forcing insurers to pass on dramatic premium hikes to their customers. In addition the impact of the September 11th terrorist attacks significantly raised the cost of reinsurance for the industry, also contributing to premium increases. 27 Moreover, these economic factors have forced many insurers to exit the market. The resulting consolidation has also contributed to higher premiums.28

Escalating liability costs and insurance premium increases have begun to drive nursing home providers out of several markets around the country. In early 2002, Beverly Enterprises, citing skyrocketing costs for patient-care liability, exited the state of Florida, selling four assisted-living facilities and all 49 of its nursing facilities in the state. The company also expressed concerns about higher-than-anticipated claims costs in California, Alabama, Arkansas, and Mississippi, and may be considering divesting facilities in those states for the same reason. Both Kindred Healthcare and Genesis Health Ventures have since followed suit, divesting of facilities in Florida.29 Because of steep premium hikes, many operators in California have been forced to reduce coverage or “go bare”; the California Association of Health Facilities (CAHF) estimates that one-fourth of the state’s facilities either cannot get an insurance company to sell them a policy or cannot afford it.30

In response to these pressures, CAHF has proposed assessing its association members $60 per bed over the next two years to fund an $8 million lobbying campaign for legal reforms that would limit lawsuit awards and restrict trial evidence. Patient-advocacy groups and elder-care lawyers counter that the industry has brought this liability insurance crisis upon itself because many facilities provide inadequate care. A recent policy report prepared for the California HealthCare Foundation found that only 23 percent of all facilities were in full or substantial compliance with federal regulations, while 15 percent of facilities had very serious deficiencies that caused or had the potential to cause serious harm, immediate jeopardy, or death to residents.31 The same report also found that 42 percent of the state’s nursing facilities did not meet the minimum state staffing standards in 2000 of 3.2 nursing hours per resident day.

Clearly, quality of care remains a major issue, and facility operators must be held accountable for the quality of the care they provide. But by the same token, the potential destabilizing effect of nursing-home operators’ rising liability insurance rates must not be understated.

Workers’ Compensation Insurance Costs

Workers’ compensation insurance represents another escalating cost component for nursing homes. According to OSHPD data, average workers’ compensation insurance expense per patient day has shown

26 Foley and Lardner, Enhanced Remedies of Elder Abuse Act Not Precluded by MICRA, Law Watch, Volume 99, Number 15, March 17, 1999. 27 Charles Kolodkin, 2002 Medical Professional Liability Insurance Renewals, IRMI.com, April 2002. 28 Andy Gotlieb, Insurance Crisis Widens, Philadelphia Business Journal, March 4, 2002. 29 Julie Piotrowski, “Heading for the Exit: Amid Torrent of Liability Litigation, Kindred Healthcare Starts to Divest in Florida,” Modern Healthcare, October 28, 2002. Julie Piotrowski, “Genesis Divesting in Florida,” Modern Healthcare, February 10, 2003. 30 Nancy Weaver Teichert, “Nursing Homes Want to Limit Lawsuit Awards,” The Sacramento Bee, February 18, 2003. 31 Charlene Harrington, Ph.D., et al., “California Nursing Home Search: A Policy Paper,” California HealthCare Foundation, October 2002, available at http://www.calnhs.org/research.


dramatic swings over the five-year period, dropping 15 percent from 1997 to 1998, and then jumping 12 percent from 1999 to 2000, followed by a 23 percent increase over the next year to $3.70 per patient day in 2001.

These swings reflect the volatile history of the workers’ compensation insurance market in California.32 In 1993, the legislature overhauled the workers’ compensation system, repealing the state’s 80-year old minimum rate law and replacing it with an open-competition system of rate regulation that took effect in 1995. This market reform spurred considerable competition among insurers, driving premiums down throughout the latter half of the 1990s. However, by 1997, industry-wide loss costs were exceeding premiums, and a number of insurers exited the state, ceased writing workers’ compensation insurance, or merged with other insurers, leaving only a small number of large national carriers and the State Fund insuring the bulk of the market. The combined loss and expense ratio peaked in 1999 at 170 percent of earned premium, and the market has hardened dramatically every year thereafter, compounded by carriers’ portfolio investment losses in the last two years and the impact of the September 11 terrorist attacks on the costs of reinsurance. The California insurance commissioner approved premium rate increases of 18.4 percent for 2000, 10.1 percent for 2001, 10.2 percent for 2002, and 10.5 percent for 2003. The pressure on premiums will likely continue for several years, in part because of the impact of Assembly Bill 749, which became effective January 1, 2003. This legislation mandated an increase in the maximum weekly benefit for injured workers from $490 to $602 for 2003, followed by two more increases to $728 in 2004 and $840 in 2005.33 According to a report issued by the California Workers’ Compensation Insurance Rating Bureau (WCIRB), the new law will increase the annual cost of benefits paid to injured workers by as much as 17.8 percent when fully implemented in 2006.34

Aging Facilities

Eighty-four percent of California’s freestanding SNFs were built and licensed before 1975. Data limitations preclude an accurate assessment of the capital improvements made to these aging facilities over the decades. However, because the current reimbursement system provides no incentives for capital investment or new construction, many facility owners have avoided further investment in their physical plants unless they deem it necessary to remain competitive. Even minor renovations can often trigger the need to meet new code requirements, which require significant additional capital expense that is not reimbursed.

Over the next decade, many of these aging facilities will have to be replaced. Without incentives for companies to invest in new construction, the financial impact on nursing home operators—especially smaller regional and independent operators who now predominate and have limited access to capital—is likely to be substantial.

32 California Commission on Health and Safety and Workers’ Compensation, “Background Paper: State of the Workers’ Compensation Insurance Industry in California,” April 2002. 33 Howard Fine, “New Laws Drive Up Employer Costs, Insurance Premiums,” Orange County Business Journal, January 13, 2003. 34 Workers’ Compensation Insurance Rating Bureau of California, “Cost Evaluation of Assembly Bill 749 as Enacted,” July 24, 2002.


V. NET INCOME AND OPERATING MARGINS

In 2001, California’s freestanding skilled nursing facilities collectively made approximately $153 million in net income on $5.2 billion of net patient revenue (2.9 percent total margin), which amounts to $4.27 per patient day, on average. This represents an increase of $1.50 per patient day over 1997 and an increase of $2.42 per patient day over 2000 in constant 2001 dollars. Table 5.1 shows the various components contributing to net income for the five-year period. The substantial improvement from 2000 to 2001 is the result of a $10.11 increase in total operating revenue per patient day compared with an increase of only $7.36 in operating expenses.

Table 5.1: Revenue, Expense, and Net Income per Patient Day (Constant Year 2001 Dollars)

1997 1998 1999 2000 2001 % change Total Operating Revenue $134.25 $136.33 $131.37 $135.98 $146.09 8.8%

Medicare 31.78 31.68 24.07 23.77 26.86 –15.5% Medi-Cal 59.61 60.79 63.66 67.89 75.32 26.3% Self-Pay 29.32 28.56 28.69 27.96 27.49 –6.3% Other Payer 13.01 14.81 14.39 15.78 15.84 21.8% Other Operating Revenue 0.53 0.49 0.56 0.57 0.58 9.4%

Operating Expense 133.96 136.80 131.65 136.70 144.06 7.5% Net from Operations 0.29 –0.47 –0.28 –0.72 2.03 589.8% Non-health Revenues minus Expense, Income Taxes, and Extraordinary Items

2.48 2.59 2.18 2.57 2.24 –9.5%

Net Income $2.77 $2.12 $1.90 $1.85 $4.27 54.1%

Figure 5.2 shows the wide variance in median total margin, calculated as net income over total operating revenue, among ownership groups within the industry. National for-profit chain facilities currently have the highest median margin (6.3 percent), having recovered sharply since 1999, when the effects of BBA had depressed their median margin to below 1 percent. The regional for-profit chain facilities and the independent for-profits have had slim margins of 2 percent or less across all five years, although 2001 marks a general improvement. The performance of the not-for-profits as a group has deteriorated since 1997, with a total margin of near 0 percent in 1998 and 1999, followed by net losses in both 2000 and 2001. The loss of 1 percent in 2000 was driven by operating expense increases in excess of the modest revenue growth that year, combined with a 27 percent drop in non-health care revenue, which includes charitable contributions, among other items. Not-for-profit facilities typically operate at a loss of 6-10 percent before adding in non-health care revenue, and rely heavily upon donations and endowment funds to subsidize their losses from operations. It is unclear why this drop in contributions occurred in 2000. The following year, a partial recovery in the subsidy, combined with improved reimbursement rates, allowed the not-for-profits as a group to reduce their net loss.


Figure 5.2: Median Total Margin by Ownership Category g g y p g y

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1997 1998 1999 2000 2001

Nat. FP chain Other FP chain FP independent Non-Profit

What the median values shown above don’t reveal is the relatively high proportion of facilities that lose money each year, and not just among the not-for-profits. As Table 5.3 shows, even among the for-profits, nearly a third of all facilities had a negative operating margin in 2001, down from a high of 40 percent in 1999 and 2000.

Table 5.3: Percent of Facilities with Negative Operating Margins

1997 1998 1999 2000 2001 All Facilities 42% 43% 45% 46% 38%

All For-Profits 37% 37% 40% 40% 32% National for-Profit Chains 22% 29% 47% 41% 24% Other for-Profit Chains 45% 39% 44% 46% 41% Independent for-Profits 39% 40% 35% 36% 31%

Not-for-Profits 75% 76% 75% 82% 80%

These results barely change in terms of total margins, with the exception of not-for-profit facilities (Table 5.4). But even with the benefit of their endowments and/or charitable contributions, 51 percent of not-for-profit facilities recorded negative total margins in 2001—a 10 percentage point increase from 1997.


Table 5.4: Percent of Facilities with Negative Total Margins

1997 1998 1999 2000 2001 All Facilities 36% 38% 38% 40% 34%

All For-Profits 35% 36% 37% 38% 31% National for-Profit Chains 21% 29% 47% 40% 22% Other for-Profit Chains 44% 38% 39% 44% 40% Independent for-Profits 37% 37% 31% 34% 31%

Not-for-Profits 41% 49% 46% 53% 51%

Given the persistently high proportion of facilities with negative margins, it is surprising that more facilities have not closed. Certainly these findings help explain why so many facilities have changed hands in recent years, and why the operators of national and regional chain-affiliated facilities appear to be pulling away from the California market. Unquestionably, the California skilled nursing industry is in a financially fragile state, and it is difficult to see how it can sustain the Medi-Cal rate cuts proposed for 2003. Our study did not allow for a detailed analysis of the impact of proposed cuts. Nevertheless, an estimate based on 2001 OSHPD data is illuminating. If each skilled nursing facility’s reported 2001 Medicare net patient revenue were reduced by 10 percent to reflect the impact of the Medicare provisions that expired in October 2002, and if the Medi-Cal net revenue were reduced by 15 percent to reflect the proposed rate cuts for 2003, then the average total margin for the industry drops from the 2001 figure of +2.9 percent to –7.4 percent, and the proportion of all California’s SNFs that would have a negative total margin jumps from 34 percent to over 72 percent. And this “what-if” scenario takes no account of projected operating cost increases. If one assumes that operating expenses continue to grow through 2002 and 2003 at the rate they increased from 2000 to 2001 (7.7 percent before adjusting for inflation), then 97 percent of all facilities would lose money. Although these estimates are hardly definitive, we believe the proposed Medi-Cal rate cuts would force many operators out of business and be detrimental to the elderly population they serve.


VI. CONCLUSIONS AND POLICY IMPLICATIONS

The data and analyses presented here depict a volatile industry threatened by regulatory and financial uncertainty. Dramatic and sometimes sudden changes in Medicare and Medi-Cal payment levels impede facility operators’ ability to provide high-quality care. These changes have resulted in bankruptcy filings during this study period, particularly by the larger chain operators who had come to rely heavily on Medicare prior to the prospective payment system (PPS), when the margins on that business were most attractive. These operators became most vulnerable to the Medicare reimbursement cuts that ensued. SNFs attracted more Medicare residents because they offered hospitals a lower-cost setting for “short-stay” rehabilitative and recuperative services. At a time when nursing homes were losing higher-paying private-pay residents to assisted living and other new care alternatives, this new Medicare volume helped subsidize historically low Medi-Cal payments. The federal cuts in Medicare payments occurred abruptly and effectively eliminated this cushion. In 1999 and 2000, the federal government restored some of the earlier cuts made in the switch to a prospective payment system. However, Congress failed to enact legislation in 2002 to maintain significant portions of these restored funds, subject to “sunset” expiration in October 2002. A further loss of funding may occur again in 2003, when additional add-on provisions expire.

For its part, the state of California also has sought to upgrade historically low reimbursement levels with Medi-Cal rate increases in 2000 and 2001, to support higher care standards and pay raises for care personnel. But these rate increases are being eroded by unusually high cost increases over the past three years for professional liability and workers’ compensation insurance, as well as higher labor costs required to meet the mandated staffing standards and to keep salaries competitive. If the Governor’s 2003 proposed budgets cuts are implemented, including the proposed 15 percent cuts in Medi-Cal reimbursement for long-term care providers, the continuing viability of the state’s skilled nursing facilities could be in question.

In general, the bankruptcy filings that occurred after the federal government’s implementation of Medicare’s PPS for nursing home care in 1997 have not resulted in facility closures in California. However, under many reorganization plans, creditors and investors have suffered huge losses and many lenders have pulled back from the skilled nursing facility market. The cost of capital and credit has increased substantially. Publicly traded nursing home companies saw their stock prices rise when those that had been in bankruptcy emerged under their plans of reorganization. However, that brief bump has receded in the face of new Medicare funding problems, increasing litigation threats, a lack of affordable liability insurance, and threatened budget cuts in state Medicaid programs. In this environment the public equity markets are essentially closed to the nursing home industry.

California’s nursing homes historically have relied on private-pay residents, Medicare, managed care payments, and other ancillary service revenue sources to subsidize low Medi-Cal reimbursement levels. After two years of stepped-up Medi-Cal payments, the industry is again struggling to maintain its narrow margins. In 2001, more than a third of all facilities experienced net losses. California’s “flat-rate” reimbursement system pays the same rate to facilities that have similar size and regional characteristics, regardless of differences in the average acuity level of a facility. As noted, increased costs for labor, litigation, and workers’ compensation also are squeezing SNF operators.

Tom Scully, administrator of the Centers for Medicare and Medicaid Services (CMS), the federal agency in charge of the Medicare and Medicaid programs, summed up the Bush Administration’s approach to long-term care funding during his keynote speech in October 2002 at a national senior-living conference in Washington:

“The fact is that we are vastly overpaying for Medicare and we’re happy to [in order to compensate for inadequate Medicaid payments] for a while. But we need to have a real serious public debate about the financing of long-term care and who’s paying for it and what the margins are… Industry lobbying efforts should be focused at the state level, because Medicaid is under-funded and the states set Medicaid reimbursement levels.”


Mr. Scully’s expectation that state government can increase funding for long-term care is puzzling given the recent economic downturn. California is just one of 29 states that have already announced dramatic cuts in their proposed budgets. And it is worth noting that President Bush’s economic message of January 2003 included no proposals for federal aid to alleviate these state budget shortfalls.

The question Scully poses is, however, the essential public policy issue. Who will pay for the subacute and long-term care services that will be required by our growing elderly population? Answers to this question will not be easy or quick in coming. It appears that the federal government is losing its appetite for subsidizing Medicaid/Medi-Cal’s long-term care programs with Medicare funds. And, in any case, perpetuating a system in which one program relies on cross-subsidies from another can only delay a lasting solution. In a sense, California faces the same problem it and most other states had in the late 1990s in complying with the Boren Amendment: The state appears unable to fund mandated levels of care. Under Assembly Bill 1075, passed in October 2001, Department of Health Services (DHS) is required to develop and implement by August 2004 a facility-specific Medi-Cal rate-setting system that “reflects the costs and staffing levels associated with quality of care for residents in nursing facilities.” On the one hand, California seems committed to paying adequate rates for the care of Medi-Cal residents. On the other hand, it is difficult to see how the state can fulfill this commitment in the face of the current budget crisis and the competing demands of other social programs for limited state resources.

Part of the solution, at least in the short term, may include a reassessment of Medi-Cal eligibility requirements. At its inception in 1965, Medicaid was designed to address the health needs of the sickest, neediest, least insurable U.S. residents; it was not originally intended to be the primary financing mechanism for the nation’s long-term care system. Today, however, in California, many middle-income residents have successfully transferred assets to their heirs in order to qualify for Medi-Cal. Policy makers must decide whether the state can afford to continue this system. Longer-term, third-party payers should be brought into the system to take some of the burden off the government as the primary funding source of long-term care. California has made a start through its promotion of the California Partnership for Long-Term Care program, but the state and nation should redouble efforts to encourage or perhaps mandate long-term care insurance.

With regard to operating costs, the industry has been the unfortunate victim of a host of factors that have collectively driven up expenses. Some of these appear to be short-term, such as the recent spike in utility costs. Others, however, are more systemic and long-term issues that require public policy attention. Certainly, the current nursing shortage is more than a problem of the moment and will require ongoing attention and resources to resolve. The liability insurance crisis perhaps represents a mix of both cyclical and systemic problems. Increased litigation and claims costs are a key component driving up premiums, and arguably represent a systemic problem requiring tort reform or other public policy response. But some portion of the recent rise in premiums simply reflects the underwriting cycle of the insurance industry, as the carriers play catch-up with premiums that can no longer be subsidized by double-digit annual returns on portfolio investments. Nevertheless, whether short- or long-term, these unanticipated increases represent real challenges for an industry that is reimbursed prospectively on a fixed-rate basis.

A number of additional public policy questions also emerge from the data presented in this report. These include:

How can the skilled nursing industry be insulated from the extreme volatility of recent years? Without question, the kind of roller-coaster ride that the industry has experienced with Medicare and Medi-Cal reimbursement over the last seven years, even when it brings an up-tick in rates, is detrimental both to the industry and its patients. Unpredictable service requirements and funding sources are driving some operators out of the state, making it increasingly difficult and expensive for others to access the capital markets, and hampering the ability of all to plan and administer a stable program. In designing a new rate-setting methodology for Medi-Cal long-term care, the state needs to consider ways to more effectively shield facilities from extreme and unanticipated changes in reimbursement. History suggests that public monies will always be insufficient to pay for the state or federal government’s own definition of quality care. This


suggests that public policy should make a priority of developing funding streams that combine third-party and private resources with available public funds. Mandatory long-term care insurance and limitations on transfers of wealth by those seeking publicly funded nursing home care are ideas ripe for public debate.

Will nursing homes continue to be needed or can other forms of care replace some or all of their current missions? The emergence over the last two decades of alternate care settings for the elderly, such as assisted living, home health care, and adult day care, prompt the question of whether nursing homes are an outmoded form of care. A number of nursing home critics have proposed that all long-term care could be provided in better settings than nursing homes. Indeed some states, most notably Oregon, have banned construction of new nursing home and moved instead to promote the development of assisted-living facilities and other care alternatives. However, these efforts have had limited success, at best, and alternative public funding has not been made available to provide access to such facilities for people who cannot afford private-pay rates. Additionally, as noted earlier, many of today’s nursing homes have taken on a new mission—that of providing subacute care more efficiently than can be provided in hospital settings. Some nursing homes are also seeking to move away from traditional highly institutional settings toward a physical plant that incorporates recent architectural innovations for senior care settings, and that share more of the amenities of an assisted-living facility. The high occupancies of California’s nursing homes, the growing number of subacute, chronically ill, and disabled patients, and the lack of alternative long-term care for people who cannot afford private-pay programs, suggest that despite all the problems and alternatives, California’s skilled nursing facilities are still filling a critical need. Policy makers must, at a minimum, ensure that sufficient resources are available to this sector to support the mandated standards for quality of care.

Who will operate nursing care facilities in the future? The trends in facility ownership outlined in this report suggest that the larger, better-capitalized national and regional operators are beginning to leave the California skilled nursing market, and are being replaced by smaller operators that may lack the resources to provide cost-effective care and weather the ongoing volatility of the industry. Not-for-profit owners represent only a small and modestly declining percentage of industry capacity, and the mission for many of these facilities is to serve their own religious or ethnic communities rather than the Medi-Cal population at large. In short, Californians should not take for granted that there will always be quality facilities available.

What kind of payment system should Medi-Cal or other governmental payers use to reimburse nursing homes for the care they provide? Would replacement of California’s flat-rate reimbursement system provide better incentives to meet public policy objectives? As the state and other industry constituents work toward a new reimbursement model for nursing facilities, they should consider a few key principles suggested by this study. The new rate system should include: (1) incentives for capital investment and new construction to replace aging physical plants and accommodate design innovations in elderly care; (2) incentives for new construction in underserved markets; (3) a mechanism that insulates facilities from extreme reimbursement volatility caused by budgetary and economic cycles; (4) a reporting mechanism that accurately tracks the costs of providing care to Medi-Cal residents, and rates, either prospectively or retrospectively set, that adequately cover the costs of quality care; and (5) a means for private and third-party payments to be used in combination with publicly funded reimbursement.

We believe the first two of these points—providing incentives to replace aging facilities and to expand into underserved markets—deserve special attention. The current system provides no reimbursement for capital costs and has effectively eliminated incentives for new construction.

What can California do to ensure that nursing homes and other elder care programs have sufficient, well-trained staff? The demographics in California, and throughout the country, clearly indicate the need for substantially increased numbers of trained personnel to care for the elderly. Public policy areas to be addressed include immigration policy, higher education and other adult education programs, and ongoing in-service training programs. These programs must be sustained and coordinated to ensure that sufficient numbers of capable workers—both professionals and para-professionals—are available. Many operators we spoke to cited the need for more training resources as their highest priority.


How can California balance an operator’s responsibility to provide responsible care with the undue risk of frivolous litigation? Tort reform is critical to senior living providers, in California and elsewhere. The cost of litigation has further drained scarce resident care resources from a system already straining to meet minimum funding requirements. Public policy needs to hold operators accountable for the operation of their facilities, but such accountability must be cognizant of the structural problems created for operators in an industry so highly dependent on government reimbursement levels.

In summary, this study has sought to inform public policy by analyzing industry data on finances, utilization, and operations of California’s stand-alone skilled nursing facilities. At the same time, we have tried to provide a broader historical context for viewing this data and thus a better understanding of the critical issues facing the industry. The issues we have raised here require debate and resolution so that the state can continue to serve the needs of the 100,000 frail Californians, and their families, who depend on these facilities.


APPENDIX A: SOURCES OF DATA & METHODOLOGY

This report focuses on the financial performance of California freestanding skilled nursing facilities for the five-year period from 1997 to 2001, the most recent years for which data were available. The primary data sources for this report are financial and operating data drawn from the Long-Term Care Facility Annual Financial Data files of the California Office of Statewide Health Planning and Development (OSHPD).35 Unless otherwise noted, all figures and charts presented in this report are based on these data.

The OSHPD data are based on mandatory yearly cost and utilization reports filed by all skilled nursing, intermediate care, and congregate living health facilities licensed by the California Department of Health Services (DHS). Hospital-based skilled nursing units as well as intermediate care and congregate living facilities were excluded from analysis for this report. The OSHPD facility-level data files are available for five separate annual periods from 1997 to 2001. These files contain data on the performance of the facility from each facility’s reporting period ending during that calendar year, though not necessarily during the actual calendar year.36 For example, a facility’s report in the 2000 calendar year file with an end date of June 30, 2000 would reflect the performance of that facility from July 1, 1999 to June 30, 2000. However, since most facilities have fiscal years that coincide with the calendar year, the 1997 files generally provide information on financial performance during calendar year 1997; the 1998 files, information on calendar year 1998; and so forth.

Data from four other sources have been matched to the OSHPD financial files:

• Mandatory annual utilization reports filed by all skilled nursing, intermediate care, and congregate living health facilities licensed by DHS.37 The data for these files are reported on a calendar year rather than fiscal year basis for every facility. We reformatted these data to make the time periods studied for a given facility comparable to those reported in the OSHPD financial data.

• US census data on the population, age distribution, and rural/urban status of each facility’s county in 2000.38

• Data from our survey of the ownership and chain status of individual facilities. Based on information in the OSHPD financial data files, we classified facilities as for-profit or not-for-profit39 and chain or non-chain.40 We further classified each for-profit facility as a member of a national for-profit chain, another for-profit chain, or an independent facility. The approach to ownership and chain classification is described in more detail in Appendix B.

• Data on the Consumer Price Index from the US Bureau of Labor Statistics used to convert all dollar amounts to constant 2001 dollars.41

A definition for each of the variables used in the analysis is included in Appendix C.

35 Downloadable at http://www.oshpd.cahwnet.gov/HQAD/HIRC/ltc/finance/archive/index.htm. 36 When a facility’s reporting period was greater or less than 365 days, we standardized their reported values to a common reporting period of 365 days. In addition, we averaged facility information across reports for facilities with multiple cost reports in a single calendar year (which can occur because of a change in reporting period, or because of a change in ownership). 37 Downloadable at http://www.oshpd.cahwnet.gov/HQAD/HIRC/ltc/util/archive/index.htm. 38 Downloadable at http://quickfacts.census.gov/qfd/states/06000.html. 39 Seven types of ownership in the OSHPD data were combined to create our not-for-profit category: church-related, not-for-profit, state, county, city/county, city, and district. 40 For this variable, we used OSHPD’s “Related to Other Facilities” and “Parent Organization” variables to construct our own measure. Since we seek to capture whether a facility is part of a chain of SNFs (not simply part of chain of health care facilities in general), we investigated whether the name of a “related” facility’s parent organization appeared elsewhere in the fiscal year data file as the parent of another SNF. If it did, the facility was coded as being part of a SNF chain. 41 The values for the CPI are 1997: 160.5; 1998: 163.0; 1999: 166.6; 2000: 172.2; 2001: 177.0. These are 12-month averages. The 2001 CPI is an average of the first nine months (the most recent data available when our analysis was begun). Data are available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.


http://www.oshpd.cahwnet.gov/HQAD/HIRC/ltc/finance/archive/index.htm

http://www.oshpd.cahwnet.gov/HQAD/HIRC/ltc/util/archive/index.htm

http://quickfacts.census.gov/qfd/states/06000.html

APPENDIX B: DEFINITION OF OWNERSHIP AND CHAIN STATUS We classified facilities into four ownership and chain status categories, based on the Type of Control, Parent Organization, and Chain variables in the OSHPD data (described below in Appendix C), plus our own survey of facilities:

• For-Profit Independent — An investor-owned facility that does not have a parent company.

• National For-Profit Chain — Any facility with the following companies as its parent: Beverly, HCR Manor Care (includes data on facilities owned by Manor Care Health Services/Manor Health Care Corporation in 1996–97 and 1997–98), Lenox (includes data on facilities owned by First Health Care Corporation in 1996–97), Mariner (includes data on facilities owned by Grancare and GCI in 1996–97 and 1997–98), Summit Care (currently Fountain View, Incorporated), Sun (does not include data on facilities from 1996–97 that became part of Sun in 1997–98, or data on facilities from 1998–99 or earlier that became part of Sun in 1999–2000), or Kindred (includes data on facilities owned by Vencor in any year).

• Not-For-Profit — A facility with one of seven ownership designations in the OSHPD data files: church-related, not-for-profit, state, county, city/county, city, or district.

• Other For-Profit Chain — An investor-owned facility that does not have one of the seven firms mentioned above as its parent, but has a parent that is also the parent of another facility in the same fiscal year data file.


APPENDIX C: DATA DEFINITIONS

• Accumulated Depreciation — The accumulation to date of depreciation expense or that portion of the original cost of depreciable assets which has already been expensed. Accumulated depreciation relates to all depreciable assets, including land improvements, buildings and improvements, leasehold improvements, and equipment.

• Ancillary Services Share of Salary — Equal to the sum of compensation for ancillary services performed by health care employees divided by the sum of compensation for all services performed by health care employees of the facility.

• Beds per 1,000 Elderly Residents — The number of SNF beds per 1,000 elderly (age 65 and older) residents of the county.

• Chain — Denotes whether the facility is part of a chain, or is independent. A facility is coded as part of a chain if its parent is also the parent of another facility in the same fiscal year data file.

• Employee Benefits Expense – Expense incurred for vacation pay, sick leave pay, holiday pay, FICA, SUI, FUI, workers’ compensation insurance, group health insurance, group life insurance, plus pension and retirement costs.

• Employee Turnover Percentage — The number of times an employee is replaced during the reporting period. This is expressed as a percentage and is calculated by dividing the total number of people employed during the period by the average number of employees times 100, minus 100.

• Expense, Depreciation, and Amortization — Expenses recorded to spread the cost of a capital asset over its estimated useful life. Includes depreciation expenses for property, plant, and equipment, and the amortization of goodwill and other intangibles.

• Extraordinary Items — Revenue received or expenses incurred from events that will, in all likelihood, never occur again, e.g., a major casualty loss due to a fire. Items are generally recorded as expense (losses), so a negative amount indicates revenue (gain).

• Facility’s First Licensed Date — The year, month, and day a facility was first licensed as a SNF.

• Geographic Region Indicator — Denotes which Medicaid reimbursement rate region a facility is in: Los Angeles county, Bay Area (Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, and Sonoma counties), and All Other Counties.

• Health Care Net Revenue from Medicare, Medi-Cal, Self-Pay, Other Payers — For each payer, the total charges at the facility’s full established rates for the provision of routine and ancillary services for a particular payer, minus any contractual adjustments or deductions from revenue.

• Licensed Beds (Average) — The average number of licensed beds at the end of each month during the reporting period.

• Licensed Vocational Nurses’ Wage Rate — Compensation for care provided by Licensed Vocational Nurses divided by productive hours worked by LVNs.

• Net from Health Care Operations — Total health care revenue less total health care expenses. This is the net income resulting from providing health care services during the reporting period, exclusive of non-health care revenue and expenses.

• Net Income — The amount of income from health care operations less non-health care revenue net of non-health care expenses, provision for income taxes, and extraordinary items. A negative value indicates a net loss.


• Non-health Care Revenue and Expenses, Net — Revenue and expenses for services that are not directly related to the provision of health care services. Examples of non-health care items include residential care services, unrestricted contributions, and interest income and gains from investments.

• Nurse Assistants’ Wage Rate — Compensation for care provided by Nurse Assistants divided by productive hours worked by NAs.

• Occupancy Rate — The percentage of licensed beds occupied during a reporting period. Occupancy rate is calculated by dividing the number of patient (census) days by the number of bed days. Bed days is calculated as the number of calendar days in the reporting period times the number of licensed beds.

• Occupied Beds per 1,000 Elderly Residents — Equals the occupancy rate divided by 100 and multiplied by the average number of beds in the facility, summed across all facilities in the county and then divided by the county elderly population in thousands.

• Operating Margin — Net income from health care operations divided by total health care revenue, times 100.

• Other Operating Revenue — Revenue generated by health care operations from non-patient care services to patients and others. Examples include non-patient food sales, refunds and rebates, and supplies sold to non-patients. Does not include interest income.

• Parent Organization — The parent organization of the facility, if any. Used to define the chain status of the facility.

• Patient (Census) Days Medicare, Medi-Cal, Self-Pay, Other Payers — For each payer, the number of days that patients spent in the facility during the reporting period for which the payer paid the significant portion of the bill.

• Patient (Census) Days Total — The number of days that all patients spent in the facility during the reporting period as counted at the census-taking time each day. Patient days include the day of admission, but not the day of discharge.

• Provision for Income Taxes — The sum of current and deferred income taxes incurred by the facility.

• Registered Nurses’ Hourly Wage Rate — Compensation for care provided by Registered Nurses divided by productive hours worked by RNs.

• Salaries and Wages (Total, Registered Nurses, Licensed Vocational Nurses, Nurse Assistants, Supervisors and Management, All Other) —Expenses for all remuneration for services performed by an employee (including bonuses), and the fair market value of services donated to the facility by persons performing under an employee relationship. This does not include registry nurses and other temporary staffing, independent contractors, or vacation pay, holiday pay, sick leave, and other paid time off.

• Temporary Staff Costs (Registered Nurses, Licensed Vocational Nurses, Nurse Assistants, All Other) — Total amount paid for those individuals who work at the facility, but are not paid through the facility’s payroll system. This includes registry nursing personnel.

• Total Health Care Expenses — Total costs incurred by revenue-producing and non-revenue producing cost centers for providing patient care at the facility. Excludes non-health care expenses, provision for income taxes, and extraordinary items.



• Total Health Care Revenue — Revenue earned for providing health care services to patients. Calculated by adding total gross routine services revenue and total gross ancillary services revenue, deducting total deductions from revenue, and adding other operating revenue from health care operations.

• Total Margin — Net income from health care and non-health care operations divided by total health care revenue, times 100.

• Type of Control – Denotes the type of ownership of a facility licensee. The following eight types of control are reported: Church-Related, Not-for-Profit, Investor-Owned, State, County, City/County, City, and District. Used to define the ownership status of the facility.

Documents

The Financial Health of the California Nursing Home IndustryThe California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improving California’s