Dealmaking In Nursing Homes: Bubble Will Burst As States Aim for Budget Neutrality During Medicaid Recalibration

In adjusting to new case-mix systems under the Patient Driven Payment Model (PDPM), the changes to reimbursement rates might be more widespread and large-scale than anticipated, posing financing threats to the nursing home sector because lenders are basing loans on rate projections that are expected to be scaled back.

The goal of budget neutrality – in which reimbursements should cancel out costs associated with care – especially when it comes to Medicaid rates, may come back to bite providers and investors in the nursing home space who are currently securing deals based on higher reimbursement projections.

That’s according to Marc Zimmet, CEO of Zimmet Healthcare Services Group. While budget adjustment factors are not a new phenomenon, what will be new is the scale to which states will be clawing back money after adjusting to new case-mix systems under PDPM.

Learning from Medicare adjustment

When CMS transitioned to PDPM, they looked at scores from assessments that were done when there was no PDPM – and providers weren’t “optimizing,” he said. Now, after the switch, providers are indeed trying to optimize reimbursement. Efforts to better capture depression is a good example, with assessment scores coming in much higher than Medicare had anticipated.

This resulted in 5% in overspending for the first year of PDPM, or $1.7 billion more than under RUGs, short for Resource Utilization Groups.

The Centers for Medicare & Medicaid Services (CMS) had intended to spend the same amount of Medicare money on nursing home care through PDPM as it had under the system it replaced.

“[CMS] comes in and says, we’re doing a recalibration, we’re taking the money back because it was supposed to be budget neutral. That happens all the time with Medicaid. When Medicaid does a transition, they model it based on old assessments,” said Zimmet.

What changes with the transition is provider behavior, he continued, as they start capturing everything that drives reimbursement.

“So then the [initial] rates don’t come in at $200, they come in at $250. The nursing homes are all psyched. [They think] they ‘re getting a windfall,” Zimmet said, using hypothetical numbers. But, just like what happens with Medicare rate adjustments, states notice that nursing homes are spending above budget and, because the transition is supposed to be budget neutral, they now “claw back the money,” said Zimmet, explaining the process by which the reductions to reimbursements are made on the state level.

The difference now, he said, is that this claw back is happening in dozens of states.

He calls it the “great transition,” since there are a large number of states changing their payment model. History tells us that when there’s a change of payment model, provider behavior changes, he said.

On paper, it’s going to look like facilities are getting big Medicaid rate increases, but history also tells us that states don’t come up with all that money. A budget adjustment factor, or recalibration, will pare back any reimbursement beyond what was accounted for in the state budget.

In the end, Zimmet expects the same operators that were good at optimizing under RUGS will continue to be good at optimizing under PDPM moving forward – net results will be the same.

Implications for dealmaking

As industry leaders keep track of Medicaid rate changes and budget adjustment proceeds at the state level, Zimmet said this will affect dealmaking as well – and already has.

He’s getting calls from banks who do underwriting for nursing home loans. They’re buying facilities and seeing that rates have gone up, and are now basing loans on these increased rate projections.

“The state is not all of a sudden going to come up with another $100 million dollars. There’s going to be a budget adjustment,” he said. “It’s a bubble. These loans are going to be made, are being made, and the rates are not going to be what they think they’re going to be on paper, they will be clawed back; you’re going to have [something] like the housing crisis.”

This scenario is unfolding in multiple states, he said, as banks are lending based on reimbursements that aren’t going to stay in place – they’re going to get clawed back.

State example

Some states have already started addressing the change between RUGS and PDPM in terms of Medicaid rates, Zimmet said, pointing to Pennsylvania and Colorado in particular.

For Colorado’s Medicaid nursing home rate, statewide average rates increased 10% starting in July, and another increase of 3% is anticipated for July 2024 and then no less than 1.5% in July 2025, according to Doug Farmer, president and CEO of the Colorado Health Care Association.

“Between now and July 1, 2025, there will be a process to determine the structure of our [Medicaid] rates moving forward. That rate methodology will be taking into account the interest of stabilizing the profession, ensuring access and working to address the increases in behavioral health needs in long term care settings,” Farmer said in an email to Skilled Nursing News.

Colorado moved away from RUGS and began using PDPM on July 1 2023, he said.

“For this first year, the state enacted a ‘hold harmless’ in rate setting, which ensured that no provider saw a rate decrease as a result of the change,” said Farmer. “That ‘hold harmless’ was used because providers did not have time to begin coding under the new PDPM-based requirement prior to the shift in methodology.”

Pennsylvania won a significant 17% increase in its Medicaid rate in 2022 after no increases for a decade. This year, the state approved a $16 million increase in Medicaid rates, about $10 million short of what associations had advocated for.

Looking ahead, there’s much volatility in the state when it comes to Medicaid rates, especially as new staffing requirements take effect requiring one nurse aide for every 12 residents during day shifts, according to a report from the Philadelphia Inquirer.

State lawmakers still have to agree on a budget for fiscal 2024, but Medicaid regulators warn that Pennsylvania nursing homes – nearly twice as many as last year – may face a 5% cut to their daily Medicaid rate, according to a report from the Philadelphia Inquirer in June.

To make matters even more confusing, less than half as many as last year could see their Medicaid rates go up 5% or more in the state.

Amy Stulick. (2023, December 4). Dealmaking In Nursing Homes: Bubble Will Burst As States Aim for Budget Neutrality During Medicaid Recalibration. Retrieved from