Nursing homes

PEOPLE live longer. Their children have moved away. Those living nearby don't want or haven't room for their parents. Often the elderly cannot receive the prescribed medical care in their children's home. Increasingly, state and federal programs pay for their care in nursing homes. These services are expensive; it costs taxpayers over $8,000 per person for care each year. The Illinois Department of Public Aid provides food and medical care for approximately 42,000 elderly in nursing homes across our state at a cost of around $236 million per year to taxpayers through both federal and state payments. This does not include the 7,500 elderly who are in nursing homes without special medical care whose costs are covered by social security and federal welfare payments. A frustrating cycle
Responsibility is the key to future costs, both in terms of children making room for their parents in their homes, and in terms of efficient operation of nursing homes. The first part of this article (April 1977) explained how the restriction and specialization of the welfare caseworker's duties dulls incentive and diminishes the caseworker's feeling of responsibility for what happens to recipients. The same trend toward a lack of responsibility can be observed in managers of nursing homes. As safety standards and operating costs for nursing homes escalate, reimbursement rates are held down, and more safety regulations and cost controls are placed on nursing homes by the state. The increase in controls and regulations diminishes owners' feelings of responsibility for their performance. Sooner or later the owner concludes that Washington and Springfield are running things.

Frustration is the best way to define the situation. Attempts to control costs through increased controls lead to both less desire and less ability to control costs by individual managers and owners. This encourages more state cost restrictions, which in turn lead to feelings of impotence by the owner. This continues until nursing homes are public institutions in everything but name.

How can the state purchase the needed quality and quantity of care at the lowest cost, or even at a reasonable cost? An answer was developed in the 1960's when Hap Swank was director of the Department of Public Aid. The state set a price that seemed fair and then purchased services from licensed nursing homes which wanted to sell their services. The more services provided, the higher the price. State officials then monitored the contracts to ensure that the stipulated quality and quantity of care was provided. Such contract supervision was difficult and never really satisfactory. But this purchase procedure created an arms-length relationship between the state and nursing homes and placed responsibility for providing care squarely on the owners and operators.

If nursing homes throughout the state provided less than the required number of places needed for the elderly, the state raised the price paid for these services. If, on the other hand, the state obtained the required number of places it needed, the price was then assumed to be at the right level. In the latter case, if a particular nursing home could not make a profit at the going price, while other nursing homes could, that home could be considered inefficient. The poor management skills of owners were not, gene rally, a concern of the state. Although there were difficulties with this approach, it placed responsibility for providing economical quality care on the private sector. Under this philosophy, the government was a buyer of services, not a manager of nursing homes. Government payment plan
The federal government has stated that by next January each state must pay nursing homes on a basis that is related to their costs. Illinois must then justify the price it pays by demonstrating that it covers the operating costs of nursing homes. But which nursing homes, high cost or low cost, efficient or inefficient? Thus, a useful opportunity is presented to revamp current payment procedures to better serve the elderly and the taxpayers.

A look at hospitals, which according to the Medicaid law must be reimbursed for their actual costs, will help to illustrate the values, choices and consequences that are involved in the upcoming revision of payment procedures for nursing homes. The hospital payment formulas used today generally do not strengthen the hospital's feeling of responsibility. Until recently, in fact these payment formulas have invited cost carelessness because hospitals were told "the government will pay whatever costs you incur." Not surprisingly, the states and the federal government are now scrambling to find ways to stem the upward trend of hospital care costs which have been increasing at 15 per cent per year. The average cost for one day in a hospital is now about $160 com- pared to $48 in 1966. The average stay in a hospital now costs over $1,000.

16 / June 1977 / Illinois Issues

In private industry, outside the large monopoly sectors, competition forces inefficient and poor quality producers out of business. Costs must be kept down or else. But in the Medicaid and Medicare programs, virtually all costs incurred by hospitals are reimbursed by the government. Inefficient and efficient hospitals, in short, are treated the same. Moreover, hospitals which overexpand their bed capacity are still compensated for these wasteful expenditures. A variety of cost control measures are now being tried including: state certification programs to control admittance and the length of stay of patients in hospitals, government approval of construction of new hospitals and expansion of existing ones, and the purchase of expensive equipment like the new body scanners. In addition, efforts have been made to use cost ceilings and prospective budgeting in which the state and the hospital agree at the start of the year which costs will be reimbursed and up to what level. President Carter announced in mid-February that the Department of Health, Education and Welfare will explore methods of placing a ceiling on Medicaid and Medicare payments to hospitals.

The irony is that in many of these schemes of control, the controllers are the ones who are controlled. By setting up detailed cost accounting systems, the government becomes deeply involved in management decisions — on construction and purchase, on lengths of stay, on lease provisions, on malpractice protection, on labor contracts. The desire to control costs from the outside leads irreversibly to more and more regulation. The end result is that the manager of the hospital becomes an agent of the state.

Should Illinois seek to control costs for nursing homes in a similar fashion? While there may be no other way to control hospital costs because of the relatively small number of hospitals and the lack of competition, this is not the case with nursing homes. Illinois could pioneer in finding ways to keep responsibility for nursing homes "out there" in the private sector. That will not happen if the predictable response of many state officials is followed — to control costs by issuing more regulations. Illinois is now developing a cost accounting framework that could be used for an all-embracing, cost-related reimbursement system. It could also be used for an arms-length, purchase of services, reimbursement system.

An arms-length system could operate on the pattern developed by Hap Swank. The price for services would be set on the basis of the costs of a nave rage nursing home giving good quality care. Subsequently, the price would be adjusted up or down to obtain the quantity of services (beds, medical care, etc.) needed by the state then and in future years. All licensed nursing homes could decide to sell their services to the state. If they could not make a profit at the set price but needed the state business, they would have to find ways to reduce costs or they might go out of business. It would be their decision and their responsibility. Entrepreneurs who build new nursing homes would do so at their own risk, a risk based on the expectation that there would be adequate private and public call for the additional services. Presently, the new federal law setting up the Health Services Agencies requires state approval for construction of new nursing homes. An exemption for this requirement would be needed.

Alternatively, if the state chooses the negotiated and detailed cost control and reimbursement system, the situation for owners will be quite different. Owners will be required to enter into a series of agreements with the state encompassing a detailed cost accounting system which would be used to determine payments to the home. As is presently the case, a certificate of need from the state would be required to expand or build a new home. Detailed and comprehensive rules will be required for all foreseeable eventualities. What rental could be paid on land owned by a relative of the owner of the home, or by a doctor who is a part owner? What rates could be paid for insurance and for labor? If this system is adopted, the state will find itself seeking to close loopholes as fast as they are discovered. Opportunities for evasions and payoffs will be numerous. Competition or regulation
Perhaps more important is the question of who would really be responsible for providing care to the elderly? The state would point to the owner of the nursing homes. The owner would point to his state certification to build, and to the host of federal and state regulations, and to the accounting system he had to work within for reimbursement. An owner might be able to understand the dissatisfaction of Mr. Doe or Mrs. Roe with certain aspects of the home, but finally, the owner could say that he had no choice. He was boxed in. Complaints would be referred to the Department of Public Aid in Springfield. Responsibility requires the soil of choice to grow in.

Changing the metaphor, some say that quality care can not grow in the soil of competition. They argue that profit and concerned care do not mix. Thus regulated, not-for-profit nursing homes are the only way to provide good care. This is too large an issue to dismiss summarily, suffice to say that the real choice is between market regulation and government regulation, not between for-profit and not-for-profit homes. Finally, it seems more plausible to expect nursing home owners to provide good care under competitive market conditions than to expect the state to efficiently operate a string of nursing homes that provide quality care.

Under a regulated system the necessity of more and more control by the state would eventually result in state responsibility for nursing homes. The problems of the individual nursing home owner would become the problems of the state. Citizens would become conditioned to look for better care for their parents from Springfield, instead of from the nursing home manager two blocks down the street. 

Did state cheat on payments? THE NURSING home industry is seeking some $50 million from the state in a suit filed early in April in U.S. District Court in Chicago. Filed by the Illinois Health Care Association, the suit (No. 77C 1109) claims the state has been shortchanging nursing homes with public aid residents by a rate of $5 million a month since last July 1. Budget Director Robert Mandeville said the fiscal 1978 budget contains no provision for retroactive increases and the fiscal 1977 budget has no surplus for deficiency appropriations. 

June 1977 / Illinois Issues / 17

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