Nursing Home Levels of Care: Reimbursement of Resident Specific Costs

The companion paper on nursing home levels of care (Bishop, Plough and Willemain, 1980) recommended a "split-rate" approach to nursing home reimbursement that would distinguish between fixed and variable costs. This paper examines three alternative treatments of the variable cost component of the rate: a two-level system similar to the distinction between skilled and intermediate care facilities, an individualized ("patient-centered") system, and a system that assigns a single facility-specific rate that depends on the facility's case-mix ("case-mix reimbursement"). The aim is to better understand the theoretical strengths and weaknesses of these three approaches. The comparison of reimbursement alternatives is framed in terms of minimizing reimbursement error, meaning overpayment and underpayment. We develop a conceptual model of reimbursement error that stresses that the features of the reimbursement scheme are only some of the factors contributing to over- and underpayment. The conceptual model is translated into a computer program for quantitative comparison of the alternatives.