By Matthew Hisrich
Guest columnist

Is Ohio paying for nearly 13,000 empty nursing home beds through Medicaid, or do nursing homes only get paid for actual people in their beds? As it turns out, sides of the debate may be telling the truth - state government does not literally pay for any empty beds, but that doesn't mean that nursing homes aren't getting money for having them. The issue boils down to how facilities ate reimbursed for the populations they serve, and how Ohio attempts to assist nursing homes with fluctuating occupancy.

For example, let's assume that a nursing home has 100 beds and 100 occupants. This facility is at full capacity, and gets funding through the state accordingly. The next day, one of the residents decides that she's not so happy there and leaves to go to another nursing home. Now there's an empty bed.

While Ohio only pays for full beds, it does pay more for a full bed if the bed next to it is empty. In this case, that means the nursing home's remaining 99 beds received a slightly higher rate of return from the state. This method of reimbursement was created to ease the transition of losing residents in a business that is not only capital intensive but faces a population that fluctuates significantly.

At issue, though, is whether allowing this subsidy to continue down to 85 percent for indirect costs, as opposed to, say, 95 percent, ends up giving the wrong incentives to nursing home operators. Since 1983, for example, the number of empty beds in Ohio has doubled. As well, with higher rates paid as occupancy drops to such a degree, the current system is biased against nursing homes that are at full or nearly full capacity.

The state should take a serious look at how nursing home reimbursement rates may distort decisions and lead to less efficient and more costly outcomes. If the occupancy floor had been set at 95 percent in 2001, for instance, the state would have saved roughly $8 million in capital costs and $35 million in indirect costs.

The Achilles heel of this cost-based system is that the rates are unrelated to the marginal cost of nursing home services. Whether the reimbursement system is cost-based or prospective in nature, it cannot efficiently determine what the fair price is for nursing home as well as other medical services. The only mechanism that can do this over time is a decentralized market. The use of cost-based reimbursement and/or arbitrary prospective payments by government renders the entire health care system very inefficient.

All subsidies in some way distort the market and this one is no different. It significantly masks the expense of empty beds and could prevent them from being taken out of service. The most efficient way to subsidize health purchases is to place the financing dollars in the hands of beneficiaries and let them purchase their health care directly from providers. Health care costs, and nursing home care costs in particular, are consuming a larger portion of the state budget. In light of the current funding crisis, reducing medical inflation is vital, and the only way to accomplish this is through increasing the efficiency of the system.

Matthew Hisrich is a policy analyst with The Buckeye Institute for Public Policy Solutions.