II. Pennsylvania's Policy Decision to Limit the Growth of the Nursing Home Industry
In 1982, administrators of Pennsylvania's Medical Assistance (Medicaid) program determined that in order to save costs, they would need to slow the expansion of nursing homes in the state. Between fiscal years 1975-76 and 1982-83, the state's nursing facility costs had risen from 2.4% to 4.5% of the State General Fund Budget. Nursing facility care is an entitlement under federal Medicaid law, which means that the state must pay for the institutional care of anyone who meets financial and status requirements and can prove that they need the services of a nursing home, irrespective of the state or federal government's appropriation of funds. State officials operated under the belief that nursing home operators could find someone to fill virtually any new nursing facility and that Medicaid would eventually end up paying for most of the residents when their money ran out. If those officials could neither meet nor reduce the demand for nursing home care, they felt that perhaps they could limit costs by controlling the bed supply.
State officials decided to impose a moratorium on capital cost reimbursement for new nursing home beds. In July 1982, the Pennsylvania Department of Public Welfare (“DPW”), which administers the state's Medicaid program, promulgated regulations denying Medicaid payment for depreciation or interest (i.e., capital costs) on nursing home beds unless a Certificate of Need (“CON”) for the project was issued prior to September 1, 1982.
Pennsylvania law at the time required nursing home developers to obtain a CON from the Pennsylvania Department of Health before new beds could be licensed. The CON process operated as the only government-imposed safeguard against unnecessary facility expansion.
The moratorium made economic sense to state officials, since at the time, the Medicaid program was spending approximately $50 million per year just for nursing home depreciation and interest. Medicaid pays for at least part of the cost of two *1165 thirds of nursing facility residents in Pennsylvania, as in other states. The moratorium made far less sense to the poor, frail, and elderly of Philadelphia. It exacerbated financial incentives, already existent in the state's Medicaid reimbursement system, for nursing home operators to seek out a greater share of private-paying customers. This meant moving to the more affluent suburbs, where applicants for admission could likely afford to pay private rates for a longer period of time before “converting” to Medicaid.
The nursing home industry has maintained a historical love-hate relationship with Medicaid. Medicaid typically pays the lowest rate of any payer, and by federal law cannot pay nongovernment facilities more than Medicare would pay, which makes it an unattractive payment option from a facility's perspective. By contrast, facilities can charge privately paying residents whatever the market will bear. Medicare provides very limited coverage for long-term care, and few people carry long-term care insurance, leaving residents and their families along with Medicaid as the primary payment sources for most nursing home care. While it is in a nursing facility's financial interest to maximize private payments, the funds of many private-paying customers will run out if they live long enough. If they believe that a nursing home will throw them out when they can no longer pay private rates, they won't enter the nursing home in the first place. To assure an adequate supply of applicants, nursing facilities participate in Medicaid in overwhelming numbers (eighty-one percent of facilities statewide, accounting for ninety-three percent of beds in 1997), and two-thirds of residents in participating nursing homes have Medicaid as their payment source. Medicaid law protects nursing home residents who become impoverished by prohibiting facilities from discharging residents who convert to Medicaid when their funds run out. The law has been interpreted to further prohibit facilities from playing a shell game by decertifying Medicaid beds in order to claim that there is no bed available for a converting resident.
Allowing time for the impact of the moratorium to be felt (i.e., for expansion of facilities that obtained CON approval prior to September 1, 1982), it is revealing to compare changes to the nursing home bed supply in Philadelphia against changes in its most affluent suburban counties between 1985 and 1988. During this period, Montgomery, Chester, and Bucks counties in suburban Philadelphia--the three *1166 counties with the highest per capita income in the state --experienced increases in Medicaid certified nursing home beds of eighty-five, fifty-four, and forty beds respectively. Over the same span, Philadelphia lost 806 Medicaid beds.
The percentage of the white population over age sixty-five, compared to the total population over sixty-five, in the three suburban counties in 1985 was much higher than in Philadelphia. In Montgomery, Chester, and Bucks counties, the white population over age sixty-five in 1985 represented 96.4%, 94%, and 98.3%, respectively, of the total population over age sixty-five. In Philadelphia, the white population over age sixty-five was 72.4% of the total population of the same age. Thus, the county with the substantial non-white population lost resources, while counties with overwhelmingly white populations gained resources.
Today, Philadelphia stands in stark contrast to bordering Montgomery County. In 2008, there were 1,359 fewer Medicaid nursing home beds in Philadelphia County than in 1985. By contrast, Montgomery County had 2,433 more Medicaid beds than in 1985. Philadelphia, with an estimated population of 1,447,395 had 7,356 Medicaid beds. Montgomery County, with an estimated population of 778,048 had 6,535 Medicaid beds. Philadelphia thus had one Medicaid bed for every 196 persons, while Montgomery County had one bed for every 118 persons. The rate of Medicaid beds to adults age sixty-five or over receiving Medicaid jumped to one bed for every 1.3 persons in Montgomery County as compared with one bed for every 5.7 persons in Philadelphia.
*1167 The population of Montgomery County was 8.6% black according to the 2008 census data. Philadelphia's population was 44.8% black. A comparison of the quality of care delivered in facilities in the two counties is beyond the scope of this Essay. However, David Barton Smith et al. have recently demonstrated that nationally, predominantly black nursing facilities deliver poorer quality care.