Health Care Industry Facing Crisis? Reduction in Medicare Fees May Be the Catalyst

Contributed by Blaire Cahn and Abigail Lerner
The federal government’s efforts to contain ever-rising healthcare costs sometimes seems like a broken record, but a recent article in the Wall Street Journal about Medicare reimbursement rates for services of skilled nursing care gave us an unmistakable sense of déjà vu.
As reported in the Wall Street Journal, on July 29, 2011, the Centers for Medicare and Medicaid Services announced a final rule which, effective next year, will reduce payments to skilled nursing facilities by an estimated $3.87 billion, a reduction of 11.1%.  Although a CMS proposal issued in April cited an 11.3% cut, the final ruling was unexpected by the industry.  The reductions are intended to correct flaws in the agency’s calculation of reimbursement rates.  Last October, Medicare implemented a new reimbursement system which grouped patients by the degree of services required.  While the intent was for Medicare payments to remain stable despite the calculation modification, payments in fact rose substantially.
In the late 90s, the federal government made a similar effort to reduce health care spending.  Pursuant to the Balanced Budget Act of 1997 and regulations promulgated by the Department of Health and Human Services, reimbursement under the Medicare program changed from a cost-based retrospective reimbursement system to a prospective-payment system for Medicare Part A services (i.e., hospital insurance).  The changes also resulted in caps on reimbursement for Medicare Part B therapy services (i.e., supplementary medical insurance).  When the rates under the prospective-payment system were published in May 1998, they were significantly lower than anticipated within the skilled nursing care industry.  In November 1999, Congress passed the Medicare Balanced Budget Refinement Act, which repealed the cap on Medicare Part B services, but the damage had been done and the changes drove a significant portion of the nation’s skilled nursing facility (SNF) operators into chapter 11.
Following the recent CMS announcement, the stock prices of several large SNF operators took big hits.  It is yet to be seen whether the recent reductions in reimbursement rates will cause the kind of financial distress seen in the SNF industry in the late 1990s.