Financing and Reimbursing
• Financing is the mechanism by which nursing home clients pay for the services. Payers
determine the method and amount of reimbursement, except for private-pay rates that are
established by the facility.
• Private financing includes out-of-pocket payment for services and coverage under private
long-term care insurance. Several factors should be taken into account in establishing privatepay rates.
• Medicare is a federal program that is uniform across the United States. It covers three
categories of people. Services for eligible people in a Medicare-certified skilled nursing facility
(SNF) are covered under Part A on a postacute basis and are limited to a maximum of 100
• Medicare Part B does not pay for skilled nursing care, but certain services are covered while
the patient is in a long-term care facility. Beneficiaries enrolled in Part C obtain all health care
services, including skilled nursing care, through a managed care plan.
• Medicare reimburses certified nursing homes according to a case-mix-based prospective
payment system. Assessment plays a critical role in determining a facility’s case mix.
• Medicaid is a welfare program for the indigent. Those who have assets must spend down to
the state-established threshold levels to qualify. Unlike Medicare, the program varies from
state to state. Medicaid has no limit on the number of days a person may stay in a nursing
• The PACE program aims to provide long-term care in community settings to those who risk
being placed in a nursing home. Money is pooled from Medicare, Medicaid, and private
sources to provide a capitated rate to the PACE organization.
• Managed care organizations are active players in Medicaid and Medicare. Reimbursement
is based on capitation. The nursing facility must manage the cost of providing services within
the capitation amount.
• The Affordable Care Act is driving changes within the health care system, which will require
collaborations between hospitals and postacute providers. Contracting with the Veterans
Health Administration (VHA) also provides opportunites to nursing homes.
• Fraud and abuse is prosecutable under the Health Insurance Portability and Accountability
Act (HIPAA) and the False Claims Act. The Affordable Care Act has boosted the government’s efforts to prosecute fraud. The False Claims Act includes the qui tam provision that
encourages whistleblowers to confront fraud and abuse through the legal system.
Financing and reimbursement are critical for sustaining internal facility operations. Research
shows that reimbursement has ramifications for nursing home quality. For example, Mor and
colleagues (2011) found that increases in Medicaid payment to nursing homes have achieved
improvements in some measures of clinical quality. For the most part, health care financing is
governed by external factors, notably politics, social changes, the economy, competition, and
changes in the broader health care delivery system.
Much of the information covered in this chapter is of value to more than just nursing home
corporations and administrators. Social workers and patient accounts managers should also
have a clear understanding of financing so they can furnish advice and assistance to current and
prospective patients, families, and the community. Department heads involved in quality of care
must become familiar with the fraud and abuse laws, which are increasingly affecting nursing
home finances when heavy penalties are imposed for delivering substandard quality of care.
Financing is the means by which patients receiving services in nursing facilities pay for those
services. Institutional LTC is expensive. According to research by the Mature Market Institute of
MetLife (2013), the national average cost for a private room in a nursing home in 2012 was $248
per day ($687 in Alaska); it was $222 for a semiprivate room ($682 in Alaska). The monthly base
rate in an assisted living facility was $3,550 ($5,933 in Washington, DC and $5,800 in Alaska).
Few patients or their families can afford such costs if they pay with their own funds. Although
individual LTC insurance has grown, it is not widely popular. Hence, public financing, mainly
Medicaid and Medicare, remains the predominant source of financing nursing home care.
Sources of financing for nursing home care are illustrated in Figure 6–1.
Trends in nursing home financing show that people’s ability to pay for LTC from private sources
has declined. In 1990, private sources of payment financed almost 50% of nursing home care
nationwide. By 2000, the proportion of total private payments declined to 43%. Recently,
private payments have accounted for roughly 37% of nursing home costs; the remainder is paid
through public sources.
Figure 6-1 Sources of Financing Nursing Home Care (Nonhospital-based facilities), 2010
Out of pocket
9% Reimbursement covers two aspects of financing: (1) the method used by a payer to determine
the amount of payment and (2) the amount that is actually paid to a facility on behalf of a patient. To restrain escalating expenditures, both state and federal governments have been
trying to place some limitation on the amount of reimbursement to providers. Also, the
government has escalated its efforts to prosecute long-term care providers and recover
damages for fraud and abuse.
The Centers for Medicare and Medicaid Services (CMS) establishes Medicare reimbursement
rates, whereas each state sets its own rates for Medicaid payment. The actual rate-setting
methodologies are quite complex.
Of the two main types of private financing, direct out-of-pocket payment is the most common.
The other type, presently much smaller in size, is private LTC insurance (see Figure 6–1).
Out-of-pocket financing may come from cash savings, stocks, bonds, or annuities. For some
people, such resources may provide adequate income to pay for nursing home care. In most
instances, however, assets may have to be sold to generate cash.
A home is often the largest asset that most people have. In some situations, reverse mortgaging
could provide cash against the built-up equity in a home without having to sell the property. But
the owner has to continue to live in the home, which makes this option unavailable for nursing
home care. Reverse mortgaging is more commonly used for in-home medical and assistive
services. It can also be used to purchase private LTC insurance.
Private-Pay Rate Setting
Long-term care facilities are free to establish their own private-pay rates or prices. For
noncertified beds, a facility may label its services as “skilled care,” “intermediate care,”
“personal care,” or “residential care.” A facility can establish its own criteria for determining its
different levels of services and how much it will charge for those services. Because of
certification rules, however, when private-pay patients are placed in a section of the facility that
is certified as SNF or NF, administrators must be careful when setting private-pay rates. They risk
having the Medicare and Medicaid rates reduced if the all-inclusive private-pay rate happens to
be lower than what the public programs are paying. Private-pay rates can be lower as long as
the services are provided in noncertified beds.
Even though private-pay rates may be set at any level, they are governed by market forces and
competition. Additional factors such as amenities that a facility offers should also be taken into
account. Patients and their families who have sufficient private funds available are often willing
to pay extra for a better living environment. A facility with a reputation for providing highquality care can also charge its private-pay clients a premium. When private-pay patients are admitted to Medicare/Medicaid certified beds, these patients
cannot be provided better quantity or quality of services for clinical needs that are similar to
those of patients on public assistance. For example, certified beds occupied by private-pay
patients cannot have extra staffing or extra amenities such as a more exclusive menu because
these extra services would be construed as discriminatory against patients on public assistance
if they do not get these extra services. For these reasons, many facilities have a separate
noncertified section to care for private-pay patients because the facility can then deliver extras
and charge for them.
The general industry practice is to charge a basic room-and-board rate, which includes nursing
care, meals, social services, activities, housekeeping, and maintenance services. Charges are
then added for ancillaries such as pharmaceuticals; supplies such as catheters, dressings, and
incontinence pads; and services such as oxygen therapy or rehabilitation therapy. The basic
rates and the charges for ancillary products and services are spelled out in a contract between
the facility and the patient.
General health insurance plans sponsored by employers may have limited coverage for LTC
services. Some retirees may also have similar limited coverage available under their company’s
health insurance plan for retirees. In most instances, however, people have to buy their own LTC
policies sold by various private insurance companies.
To be eligible for benefits, the insured person must meet the criteria for disability specified in
the plan. Such criteria may include cognitive dysfunction or inability to perform certain activities
of daily living (ADLs). Other criteria may be more loosely stated, such as medical necessity. In
almost all instances, medical need for LTC must be certified by a physician.
When admitting patients with private insurance coverage, the facility’s business office manager
should carefully review the coverage, such as the type of services covered by the insurance
plan. Plans generally have restrictions on the length of coverage, amount the plan will pay each
day, coverage for ancillaries such as supplies and therapies, and elimination period during which
insurance does not pay.
Medicare—also called Title 18 of the Social Security Act—is a federal program that is uniform
across the United States. It finances medical care for three categories of people: (1) persons
who are age 65 and over, (2) disabled individuals who are entitled to Social Security benefits,
and (3) people who have end-stage renal disease. The program is operated under the
administrative oversight of the CMS. Medicare has limited benefits for skilled nursing care. The
Medicare program consists of Part A, Part B, Part C, and Part D.
Part A of Medicare Part A—also called Hospital Insurance (HI)—includes hospital inpatient benefits as well as care
in a facility certified as a SNF. Medicare does not pay for services provided in facilities that are
not certified as SNFs, such as assisted living facilities. Part A also covers home health services for
intermittent or part-time skilled nursing care and hospice care in a Medicare-certified hospice.
SNF Coverage in a Benefit Period
Medicare does not meet the needs of people who require care for a long period of time. The
maximum coverage in a SNF-certified facility is for 100 days. Few people, however, qualify for
the full 100 days of coverage. Medicare benefit for SNF is a postacute program; it requires prior
hospitalization for at least 3 consecutive nights, not counting the day of discharge. The patient
must be in need of skilled nursing care as certified by a physician and be admitted to a SNF
within 30 days after discharge from the hospital. The 30-day period begins on the day following
discharge from the hospital.
Inpatient benefits in a hospital or SNF fall within a benefit period. A benefit period begins when
a patient is hospitalized for a particular spell of illness and ends when the beneficiary has not
received care in a hospital or SNF for 60 consecutive days for that particular spell of illness. Four
key criteria determine a benefit period:
• A spell of illness or principal condition for which a patient is hospitalized. Different spells of
illness can trigger new benefit periods.
• If a spell of illness for which a patient is hospitalized subsequently requires skilled nursing
care in a SNF, the benefit period continues.
• A benefit period associated with a given spell of illness ends when the patient remains out of
the hospital or SNF for 60 consecutive days.
• Readmission to a hospital or SNF within the 60 days is considered the same benefit period.
The number of benefit periods a patient can have is unlimited.
At the time of admission, the facility’s business office manager should determine eligibility for
Part A coverage by finding out whether the patient is enrolled in Part A, whether he or she had
a hospital stay of at least 3 consecutive days, whether the patient is being admitted within 30
days of discharge from the hospital, and the number of SNF days that may already have been
used up in the benefit period. Medicare rules on inpatient SNF care are quite complex. For
details, refer to the Medicare Benefit Policy Manual (see Web link in For Further Learning
Part A Deductibles and Copayments A deductible is the amount the patient must first pay when a benefit period begins. Medicare
starts paying only after the patient has paid the required deductible ($1,216 per benefit period
in 2014). In almost all instances, however, the deductible requirement is met during the 3-day
hospitalization before a patient comes to the SNF.
A copayment is the amount an insured patient must pay out of pocket each time a particular
type of service is used. Medicare fully pays for just the first 20 days of SNF care in a benefit
period. From days 21 through 100, the patient must pay a copayment ($152 per day in 2014).
Medicare pays nothing after 100 days, even if the patient’s condition may justify the need for
ongoing services in a nursing facility. The copayments as well as payment for services that may
be needed beyond the 100 days must be paid either privately or by Medicaid, provided the
patient meets the eligibility criteria for Medicaid coverage (discussed later). It is illegal for
nursing facilities to attempt to recover from patients any payments that exceed the applicable
deductible and copayments for services covered under the public programs.
Part A Services: Skilled Nursing Care
The definition of skilled nursing care, as it applies to SNFs under the Medicare program, includes
subacute care services. Hence, the same rules govern skilled nursing care and subacute care.
According to Medicare law, skilled nursing care may include skilled nursing or skilled
rehabilitation services. It has specific characteristics, summarized here:
• The services must be ordered by a physician.
• The care furnished must be for treating conditions for which the patient was hospitalized, or
for conditions that arose while the patient was receiving care in a SNF but were related to the
condition for which the patient was hospitalized.
• Skilled nursing services must be needed and must be provided 7 days a week, except for
skilled rehabilitation, which must be needed and provided 5 days a week.
• The services must require the skills of, and must be furnished directly by or under the
supervision of, registered nurses (RNs), licensed practical (or vocational) nurses (LPNs or LVNs),
physical therapists, occupational therapists, or speech pathologists.
“Under the supervision of” means that some of the actual hands-on care can be provided by
paraprofessionals, such as certified nursing assistants, physical therapy assistants, and
occupational therapy assistants. Skilled services are inherently complex and are required for
medical conditions that can be treated safely and effectively only by the personnel just
Examples of complex nursing services include intravenous or intramuscular injections, enteral
feeding (delivery of liquid feedings through a tube), nasopharyngeal aspiration (suctioning
through the nose and pharynx), tracheostomy (direct opening into the windpipe for breathing), insertion and irrigation of urinary catheters, dressings for the treatment of infections, treatment
of pressure ulcers or widespread skin disorders, heat treatments, start of oxygen therapy, and
rehabilitation nursing. Examples of skilled rehabilitation include assessment of rehabilitation
needs and restorative potential (probability of functional improvement), therapeutic exercises
or activities, gait training, range-of-motion exercises, maintenance therapy that requires the
skills of a professional therapist, ultrasound treatment, short-wave treatment, application of hot
packs, infrared treatments, paraffin baths, whirlpool treatments, services needed for the
restoration of speech or hearing, and therapy for swallowing disorders. The skilled care criteria
do not require that a potential for restoration be present. Even if recovery or improvement is
not possible, preventing further deterioration is a sufficient justification for providing skilled
care. If a SNF contracts with a rehabilitation company to provide therapeutic services to its
patients, the service company cannot bill Medicare directly for Part A services. The facility is
responsible for paying that company.
A patient who requires only custodial care—such as assistance with ADLs—does not qualify for
Part A coverage. Additional examples of custodial care include administration of routine oral
medications, eye drops, or ointments; general maintenance of colostomy (attachment of colon
to a stoma) and ileostomy (attachment of the small intestine to a stoma); routine maintenance
of bladder catheters; dressings for noninfected conditions; care of minor skin problems; care for
routine incontinence; periodic turning and positioning; and other routine and basic nursing
Part A Incidental Services Besides skilled nursing care and rehabilitation, postacute services
provided in a SNF include certain incidental services that are part of a person’s nursing home
• Lodging and meals in connection with the furnishing of nursing care. Medicare pays for
semiprivate accommodations. However, Medicare will pay for a private room if the patient’s
condition requires clinical isolation or if the SNF does not have semiprivate accommodations
• Medical social services, which include services such as assessment and treatment of social
and emotional issues, adjustment to the facility, and discharge planning.
• Prescription drugs, biologics (medical preparations—serums, vaccines, etc.—made from living
organisms), supplies, appliances, and equipment. Medicare pays for these items during the
inpatient stay. To facilitate a patient’s discharge from the facility, Medicare pays for only a
limited supply of the drugs and equipment that the patient must continue to use after leaving
Part A benefits in a nursing home do not cover services that only a hospital can provide. Also,
Medicare does not pay for services of a private-duty nurse or attendant.
Part B of Medicare Part B of Medicare—also called Supplementary Medical Insurance (SMI)—covers outpatient
services. In general, these services include physician services, X-rays, laboratory tests, and other
services listed in Exhibit 6–1. These services are generally delivered by providers other than
SNFs, and the providers bill Medicare directly for the services.
Medicare Part B requires voluntary enrollment and payment of a monthly premium. Effective
2007, the premium became income based. The standard premium in 2014 was $104.90 per
month. Premiums are higher for single people earning more than $85,000 and for married
couples earning more than $170,000 and filing joint tax returns. Because Part B premiums are
heavily subsidized by general taxes, 95% of the Medicare beneficiaries have chosen to purchase
Part B coverage. At the price the elderly pay to purchase Part B coverage, they will not be able
to buy a similar plan in the private insurance market. For those who also qualify for Medicaid,
the state pays the Part B premiums.
Unlike Part A, Part B benefits are based on an annual basis, not on a benefit period basis. Hence,
annual deductibles and copayments apply. The annual deductible for 2014 was $147.
Copayments are paid according to an 80:20 coinsurance, meaning that after the deductible has
been paid, Medicare pays 80% of the costs and the beneficiary pays the remaining 20%.
Part B Services
Although Part B does not include SNF services, certain services are paid under Part B while the
patient is receiving SNF services under Part A. An example is physician services that are billed
under Part B by the patient’s attending physician. Similarly, diagnostic services and outpatient
mental health care are covered under Part B. Other services, such as therapies, can be covered
under Part B even after a patient’s Part A benefits expire, and the patient may continue to stay
in the nursing home as a private payer or as a Medicaid beneficiary. Preventive health
screenings and immunizations are also included in Part B. Exhibit 6–1 summarizes Part B
Part C of Medicare
Medicare offers its beneficiaries the choice to either remain in the original Medicare fee-forservice program or enroll in Part C. Part C is also called Medicare Advantage. A beneficiary who
chooses to enroll in Medicare Advantage must receive all Medicare benefits through a managed
care plan that has contracted with Medicare. The managed care plan in turn contracts with
various providers to deliver services to those enrolled in the plan.
Part D of Medicare
Part D, the prescription drug program, was added to the existing Medicare program under the
Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 and was fully
implemented in January 2006. The program is available to anyone, regardless of income, who has coverage under Part A or Part B. Like Part B, the program is voluntary because it requires
payment of a monthly premium, which varies from plan to plan. For 2014, the average premium
was estimated to be $32.42 per month, plus an income-based adjustment (CMS, 2013). For
Medicare beneficiaries receiving services in a SNF under Part A, Part D does not apply because
prescription drugs are included in the reimbursement that nursing homes receive. Medicaid
beneficiaries receive drugs under the state’s Medicaid program. Those who have both Medicare
and Medicaid (dual eligible), however, must get their prescription drugs through Part D.
Exhibit 6-1 Covered Benefits and Noncovered Services Under Medicare Part B
Main Covered Benefits
Emergency department services
Diagnostic tests and laboratory services
Outpatient physical therapy, occupational therapy, and speech therapy*
Outpatient mental health services
Limited home health care under certain conditions
Artificial limbs and braces
Blood transfusions and blood components
Medical equipment and supplies
Rural health clinic services
Annual physical exam
• Annual physical exam • Preventive services (as medically needed): alcohol misuse screening and counseling, bone
mass measurement, mammography, cardiovascular screening, Pap smears, colorectal cancer
screening, depression screening, diabetes screening, glaucoma tests, HIV screening, nutritional
counseling for diabetes and renal disease, obesity screening and counseling, prostate cancer
screening, sexually transmitted infections screening, shots (flu, pneumococcal, Hepatitis B), and
tobacco use cessation counseling.
Eyeglasses (except after cataract surgery)
Services not related to treatment or injury
*As of September 1, 2003, Medicare placed limits on how much it would cover for outpatient
physical (PT), occupational (OT), and speech (SLP) therapy. For 2014, the limits are $1,920 per
calendar year for PT and SLP combined and $1,920 per calendar year for OT. After the patient
has met the Part B deductible, Medicare pays 80% of the cost up to the maximum limits.
Data from Centers for Medicare and Medicaid Services.
Medicare Prospective Payment System
Section 4432(a) of the Balanced Budget Act of 1997 required Medicare to develop a prospective
payment system (PPS) to reimburse SNFs. When it was implemented in 1998, the PPS replaced
the retrospective cost-based reimbursement system. The new method provides for a per-diem
rate based on a facility’s case mix. The rate is all inclusive, which means that it is a bundled rate
that includes payment for all SNF services that a Medicare recipient is eligible to receive under
The former retrospective, cost-based system reimbursed, with some limitations, the actual costs
for routine services, ancillary service costs, and cost of capital. These same costs are now