An evaluation of current approaches to nursing home capital reimbursement

One of the more controversial issues in reimbursement policy is how to set the capital cost component of facilities rates. In this article we examine in detail the various approaches used by states to reimburse nursing homes for capital costs. We conclude that newer approaches that recognize the increasing value of nursing home assets over time, commonly called fair rental systems, are preferable to the methodologies that have been used historically in both the Medicare and the Medicaid programs to set capital rates. When properly designed, fair rental systems should provide more rational incentives and less encouragement of property manipulation than do more traditional systems, with little or no increase in state costs.