Reforming Nursing Home Financing, Payment, and Oversight

More than 1.4 million people live in approximately 15,500 nursing homes throughout the United States. Though nursing homes care for some of the most vulnerable members of society, providing safe, affordable, equitable, high-quality, person-centered care in these facilities has rarely emerged as a national priority.

The last major attempt to reform nursing home care was spawned by a 1986 report from the Institute of Medicine,¹ which followed decades of reports identifying grossly inadequate care and abuse of nursing home residents. The 1986 report recommended regulatory policies and procedures to ensure that nursing home residents receive adequate care and outlined complementary strategies, such as collecting detailed resident-assessment information, making inspection findings publicly available, and strengthening the ombudsman program. The report’s recommendations provided the basis for Congress to enact major reforms to nursing home regulations in the Nursing Home Reform Act, which was part of the Omnibus Budget Reconciliation Act of 1987.

The Nursing Home Reform Act established requirements for individualized care plans and numerous rights for nursing home residents, including the right to dignity and freedom from abuse. To enforce these requirements, the Act relied heavily on regulatory monitoring by means of nursing home surveys and certification. It also instituted a range of possible sanctions to address non-compliance by facilities, including denial of payment for new admissions and civil monetary penalties, in addition to termination from Medicare and Medicaid.

By some measures, the Nursing Home Reform Act has been successful. The use of physical restraints declined, and residents’ physical functioning improved. Yet more than 30 years after Congress passed the law, we are still failing to protect nursing home residents and provide them with high-quality care. Inadequate governmental oversight and cases of nursing home abuse and neglect are regularly reported,² and stories of owners seeking profits at the expense of care are all too common. Most recently, tragedy unfolded in U.S. nursing homes during the Covid-19 pandemic, as hundreds of thousands of residents and staff members died from the disease.³ These events provide a sobering reminder that further reforms are sorely needed in nursing homes.

To examine these challenges, the National Academies of Sciences, Engineering, and Medicine convened an ad hoc committee, on which we served. The resulting consensus study report, The National Imperative to Improve Nursing Home Quality,⁴ provides an alternative vision for nursing home care and the policies that shape it. Although the 1986 report spurred transformational reforms, we recognized the need for a broader set of strategies that included regulation but placed it within the full context of financing, organization, and payment.

The standards of care outlined in the Nursing Home Reform Act remain salient today. Similarly, regulation and oversight remain vital to ensuring a minimum level of safety and quality in nursing homes, since these facilities often care for people who cannot advocate for themselves owing to medical conditions, physical limitations, or cognitive impairment. There are strategies for making monitoring and enforcement of these standards more effective, including adding resources and ensuring accountability. Still, regulation generally focuses on compliance with minimum standards, providing little incentive to improve clinical quality and residents’ quality of life.

The nursing home market has become increasingly complex in recent decades. Postacute care has grown into a large and lucrative part of the sector, and a larger share of long-term care has moved out of facilities and into people’s homes. An ever-shifting landscape of nursing home ownership and payment has made the market increasingly difficult to monitor and regulate effectively. To realize meaningful and lasting change, we believe we should focus efforts on three key areas: long-term care financing, nursing home payment, and transparency and accountability in funding and payment.

First, we believe we need a more robust, coordinated, and sustainable funding system for long-term care provided across a range of home- and community-based and congregate settings, including nursing homes. The United States’ current approach to financing nursing home care has evolved over time in a piece-meal fashion to fill the largest gaps. Medicaid is the dominant payer for long-term care, but that program is subject to state budget constraints and arguably does not cover the costs of providing high-quality nursing home care. Medicare revenues from postacute care play a disproportionate role in the financial sustainability of nursing homes. Private insurance coverage for nursing home care is rare, and few people can pay out of pocket for extended stays. All these factors result in an inequitable, flawed, and underfunded financing system in which site-specific payments result in patients receiving care that’s fragmented across payers and providers. We believe that any comprehensive nursing home reform must include the establishment of a federal long-term care benefit that would expand access and advance equity for all people who need long-term care, whether or not it’s nursing home care.

Second, the payment structure also requires reform. In most cases, nursing homes are paid per diem for both long-term and postacute care. Services such as hospice and care in other clinical settings, including emergency departments and hospitals, are paid for separately, so nursing homes have little incentive to coordinate or integrate the care of their residents. The outcome is fragmented care, with unnecessary and burdensome transitions, and increased costs. We believe that care for long-stay residents in nursing homes should be paid for under alternative payment models that use global capitation or other payment mechanisms that hold nursing homes accountable for both quality and the total costs of care. At the same time, current bundled-payment initiatives for short-stay postacute care in nursing homes could be extended to all conditions, in order to hold hospitals financially accountable for postacute care spending and patient-centered outcomes.

Improving the financing and reforming the payment for nursing home care would go a long way in aligning the industry’s financial incentives with the goal of delivering high-quality, person-centered care. However, the sector is understandably short on consumer trust and troubled by questions about whether additional resources will go toward providing high-quality care to residents. Although previous reforms have attempted to improve transparency, data on nursing homes’ ownership and financing, including how much facilities spend on direct care, remain incomplete and difficult to use. The challenges of monitoring spending are exacerbated by the increasing complexity of nursing home ownership practices, which makes it all but impossible to understand where and how facilities spend their resources, including whether they are paying themselves for marked-up services such as rent, management, nursing, or therapy by contracting with related-party organizations (organizations owned by the nursing home’s owners). Thus, third, in conjunction with financing and payment reforms, we need increased transparency of the finances, operations, and ownership of all nursing homes if we are to increase accountability and ensure and improve the quality of care.

It has been more than three decades since the Nursing Home Reform Act was enacted. Its failure to solve the nursing home crisis underscores the need for bold solutions that will fundamentally reform the sector. We believe the new recommendations from the National Academies could lead to comprehensive, multifaceted, and much-needed reform, but their success will depend on all elements being implemented — the financing and payment reforms coupled with increased accountability and the complementary reforms described in the report.⁴

The time is ripe to make these changes. They will be both expensive and politically challenging, but policymakers can no longer ignore the harms of continuing with the status quo.