Exclusive: Operators Meet the Feds - The Cost of Being a Cost Center

Why skilled nursing needs to change the conversation about value-based care.

Last week, I moderated an informal discussion between Abe Sutton, director of the Center for Medicare and Medicaid Innovation (CMMI), and two dozen skilled nursing operators. It was candid, but not hostile; he and his team listened and asked questions that showed genuine intent of purpose.

But the meeting accomplished little other than measure how differently the federal government and nursing facility operators view the economics of healthcare.

CMMI has a clear responsibility: develop and test innovative payment and delivery models that reduce Medicare and Medicaid expenditures while improving quality. Its leadership is charged with identifying opportunities to improve efficiency, applying data to evaluate results, and determining which approaches show promise for broader adoption.

From that perspective, the results can be compelling. Accountable Care Organizations (ACOs) are rewarded for reducing unnecessary spending. Medicare Advantage plans are expected to manage care more efficiently than traditional Medicare. Physicians and hospitals participate in arrangements that reward efficient management of care. SNFs, meanwhile, are often on the other side of the equation from the incentivized party. SNFs represent a cost to be managed – a stain on the ledger with little to show for it.

The Backfill Promise

SNF utilization was clearly going to suffer under the new models. The industry was sold on the promise of making up those losses through preferred network status and shared savings. That hasn't materialized as promised. Instead, operators face fewer admissions, less revenue, greater administrative expense, and increasingly complex patients requiring more resources over fewer days.

One anecdote tells much of the story. Shortly after PDPM took effect, but before the pandemic lockdown, I participated in a meeting between a large ACO and its dependent post-acute providers. The hospital ACO expressed disappointment with a SNF's performance. The operator came equipped with data to dispute the claim: length of stay and readmission rates were down. The ACO responded, "Yes, but your average billing rate has increased significantly."

The SNF delivered the outcomes the ACO wanted, but its reimbursement structure made it appear more expensive. Medicare had increased the county’s Area Wage Index (AWI), which increased base payments, and PDPM frontloaded reimbursement, resulting in higher per diem rates for shorter stays. The problem wasn't necessarily performance. It was how performance was being measured.

For an ACO, fewer SNF admissions and shorter stays can represent meaningful savings. For Medicare Advantage, lower reimbursement rates and tighter utilization management accomplish much the same thing. Independent physician organizations can earn substantial shared-savings payments as part of the deal, while nursing facilities that help produce those savings are often not even aware their “partners in care” are being rewarded with dollars that had effectively been theirs. 

Reducing unnecessary utilization using financial incentives is an effective strategy, but there's something incomplete about evaluating those savings without understanding who generates them, who benefits, and who bears the consequences.

Savings for Whom?

One of the more revealing aspects of last week's discussion was how differently the participants understood the financial relationships developing around them.

Medicare Advantage presents another dimension of the problem. Lower Medicare spending doesn't necessarily mean lower healthcare spending. When patients exhaust covered benefits, require additional custodial care, or experience changes in access to services, the financial consequences extend beyond Medicare.

For dual-eligible beneficiaries, Medicaid frequently becomes part of that equation. State Medicaid programs and nursing facilities may absorb costs that aren't apparent when the analysis is limited to Medicare expenditures.

Not every reduction in Medicare spending shifts costs to Medicaid. But we need to understand when it does, how much, and who ultimately pays. Some savings represent genuine efficiency. Others may reflect reduced reimbursement, costs shifted to another payer, or financial pressure absorbed by providers. An expenditure eliminated from one payment system isn't necessarily a cost eliminated from the healthcare system.

Leverage

Physicians, health systems, and insurance companies have gained significant leverage over local healthcare markets. In fact, it’s not uncommon for them to be part of the same corporate machine. They control referral patterns, temper utilization, and exert downward pressure on SNF revenue. Skilled nursing has a very different position. To the organizations managing Medicare expenditures, nursing facilities are often treated as costs to be managed rather than partners generating measurable value. Shared savings are paid to those with the leverage to generate them, not to the SNFs that must do more with less.

Our Responsibility to Change the Equation

I left the meeting convinced that this disconnect won't be resolved by asking CMMI to better appreciate the difficulties of operating a nursing facility. We need to give policymakers and participants in value-based care something more useful than descriptions of our challenges.

SNFs need to quantify the relationship between shorter Medicare stays, hospital readmissions, Medicaid utilization, clinical acuity, and the resources required to deliver care. They must distinguish genuine efficiencies from savings achieved through reimbursement reductions, reduced access, or shifting costs to another payer. Most importantly, programs must establish the financial value of what skilled nursing prevents, not simply the cost of what it provides. Successful providers should then be rewarded for their contributions.

That said, the SNF industry must responsibly present its case. We've spent years complaining about inadequate reimbursement, higher acuity admissions, and escalating operating costs. The problem, as I've been vocal about, is that these concerns are too often delivered in sound bites that become rhetoric. Repeating that operators are struggling is not the same as documenting why or demonstrating the consequences.

A major challenge is the misconception that all SNFs are created equal. As covered in my “Standard Set” series, even otherwise identical SNFs can deliver comparable clinical outcomes and experience entirely different financial results because of payer mix, reimbursement, and local market conditions. Payment models that overlook these differences risk confusing financial performance with clinical value.

An Opportunity, Not an Indictment

I appreciated Sutton's willingness to engage with operators and hear their perspective. CMMI is doing its job, and we shouldn't expect its leadership to approach that responsibility from the perspective of an individual provider sector. But models that reduce Medicare spending without fully accounting for their impact on all payers, providers, and patients may tell only part of the story.

SNFonomics is not a punchline. The First Law states that a SNF can only perform as well as its market allows. Yet the models governing our future are increasingly shaped by organizations that control utilization, reimbursement, and the distribution of shared savings.

The industry needs to move beyond documenting what care costs providers and begin quantifying what skilled care saves everyone else. Until we can demonstrate that value in terms policymakers and payers recognize, SNFs will continue to be measured as cost centers rather than recognized as major partners in creating the savings in the first place.

Marc Zimmet is the CEO of Zimmet Healthcare Services Group.