Federal officials say a plan to cut nearly $4 billion in Medicare funding to nursing homes is just a correction to curb unanticipated overspending. Critics say it’s a wrongheaded move that could force staff cuts and lead some homes to close. And even some experts who say the cut is justified worry about its consequences for patients.

If nothing else, the controversy over the cut is a lesson in unintended consequences and the difficulty of making fine-point changes in a complex health care system.

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One of four state nursing homes in the process of closing. The industry says planned Medicare cuts could hurt other facilities

The cut, which takes effect Oct. 1 at the start of the next federal fiscal year, is expected to reduce Medicare nursing home payments by 11.1 percent. It stems from a change made last October to the way nursing homes can bill for patients receiving physical, occupational and speech therapy.

The amount Medicare pays nursing homes for each patient is based on a variety of factors. For those receiving therapy, the payment levels depend in part on the number of minutes each patient spends in therapy in a week.

While some patients get individual or group therapy, nursing homes also provide “concurrent” therapy, in which two patients receive different treatments from one provider at the same time. In the past, two patients getting an hour of concurrent therapy would be considered to have received 60 minutes of therapy each. But as of this fiscal year, facilities must divide the time spent in concurrent therapy between the patients when making calculations for billing. Those two patients would now be considered to have gotten 30 minutes apiece.

The same change was not made for patients in group therapy, so four patients getting an hour of group therapy would still be considered to have received 60 minutes each.

The move was not meant to change payments to nursing homes, but the federal Centers for Medicare & Medicaid Services anticipated that it would lead to reduced billing for higher levels of therapy. So CMS raised the rates paid for each therapy level by between 32 and 49 percent, anticipating no effect on the overall budget.

Instead, Medicare payments to nursing homes rose by $2.1 billion in the first six months of this fiscal year compared to the final six months of the previous one. Of it, $1.8 billion was for patients receiving therapy, according to a July report by the inspector general of the U.S. Department of Health and Human Services. CMS had anticipated that concurrent therapy would account for about a quarter of the therapy provided, but it actually made up less than 1 percent. Nearly all therapy was provided to individuals or groups.

In its report, the inspector general’s office recommended that CMS adjust its payment rates.

Late last month, CMS announced that it would recalibrate its rates to eliminate the spike in therapy-related billing. Overall, it was projected to reduce nursing home payments by $4.47 billion, but other payment increases reduced the hit to $3.87 billion.

Even with the reduction, CMS noted, Medicare payments to nursing homes will be 3.4 percent higher in the 2012 fiscal year than they were in 2010.

“Because the recalibration is removing an unintended excess payment rather than decreasing an otherwise appropriate payment amount, we do not believe that the recalibration should negatively affect facilities, beneficiaries, or quality of care, or create an undue hardship on providers,” the agency said in the final rule containing the change.

But the nursing home industry, which lobbied against the move, has warned that the cut could produce significant challenges. In Connecticut, four nursing homes are in the process of closing because of financial problems, and another is in receivership.

“I just think a lot of nursing homes are going to go out of business,” said Tom Goldfuss, a longtime nursing home executive who serves as corporate director of reimbursement at Meriden-based Revera Health Systems.

Goldfuss, who was not speaking on behalf of his company, said the cut could amount to between $300,000 and $450,000 for each nursing home. CMS projected that in New England, the cut will mean a reduction of 11.1 percent for urban nursing homes and 9.3 percent for rural ones, although the effect on individual nursing homes could vary.

Matthew V. Barrett, executive vice president of the Connecticut Association of Health Care Facilities, an industry group, said that the size of the cut means that nursing homes will have to lower their staffing costs, either through layoffs or reducing hours.

“A cut like this undermines the care that is provided,” he said.

Barrett questioned the basis of the reduction. The industry had expected the cut to be smaller and wanted it to be based on a full year’s worth of data.

“We’re left to believe that it’s driven much more by the need to reduce health care costs than the suspect notion that we have been overpaid dramatically,” Barrett said.

He said Connecticut nursing homes have not experienced a dramatic increase in their payments this year, and said that he didn’t think Connecticut nursing homes have had the large Medicare margins attributed to nursing homes nationwide.

Medicare covers a small percentage of nursing home residents in Connecticut. The facilities rely most heavily on Medicaid, which foots the bill for close to 70 percent of nursing home residents. While Medicaid covers long-term care, Medicare limits its coverage to stays of up to 100 days at a time. In 2010, it covered 15 percent of Connecticut nursing home residents.

But Medicare’s significance to nursing homes goes beyond its relatively small patient share. The nursing home industry says Medicaid–a joint federal-state program–does not cover the full cost of care. Medicare, a federal program, pays more, allowing nursing homes to offset tight or negative Medicaid margins. Nationwide, in 2009, Medicare paid for 12 percent of total patient days at freestanding nursing facilities, but accounted for 23 percent of their revenue, according to the Medicare Payment Advisory Commission. That year, freestanding nursing homes made an 18.1 percent margin on Medicare, although the levels varied considerably between for-profit facilities (20.3 percent) and nonprofits (9.5 percent).

Toby S. Edelman, a senior policy attorney for the Center for Medicare Advocacy, said that if Medicare is needed to supplement lower Medicaid rates, the problem should be addressed through Medicaid, not Medicare.

But Edelman is concerned about the fallout from the payment cut. Many of the facilities’ costs are fixed, like mortgages and utilities, limiting the options for reducing costs to things like staffing and food.

“I think [nursing homes] should be able to do just fine. They’re still going to make a lot of money from Medicare,” she said. “But I’m still worried that the staff is going to be cut.”

Deborah Chernoff, spokeswoman for the New England Health Care Employees Union, District 1199, SEIU, said the possibility of a rate cut came up during contract negotiations with nursing home operators, although it was not clear at the time what would happen. She noted that the cut stems from investigations into waste, fraud and abuse.

“It’s a little tempting to say they sort of brought it on themselves because a lot of this was driven by some of the discoveries of upcoding by some of the big national chains,” she said.

That’s the big picture. “The smaller picture,” she said, “is that for the chains that have been billing honestly, it’s potentially a very big problem.”

A spokesman for CMS said that presumably, the facilities that were most heavily involved in the increased therapy billing could be the most directly affected by the rate change.

But CMS noted in the final rule that predicting the outcome of changes isn’t an exact science.

“The nature of the Medicare program is that the changes may interact and, thus, the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon [skilled nursing facilities],” it said.

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Arielle Levin Becker covered health care for The Connecticut Mirror. She previously worked for The Hartford Courant, most recently as its health reporter, and has also covered small towns, courts and education in Connecticut and New Jersey. She was a finalist in 2009 for the prestigious Livingston Award for Young Journalists, a recipient of a Knight Science Journalism Fellowship and the third-place winner in 2013 for an in-depth piece on caregivers from the National Association of Health Journalists. She is a 2004 graduate of Yale University.

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