Most state Medicaid programs, in many cases the largest fundors of long term care, reimburse nursing homes or home health agencies on negotiated flat rates. However, several states have implemented or are planning to use reimbursement methods using case-mix indices to adjust for the different variable costs (e.g., resource utilization groups, RUGs) incurred in caring for different types of patients. Advocates contend that such methods can simultaneously help contain costs and enhance access by motivating the nursing home to keep costs below predetermined rates and mitigating providers' reluctance to admit “heavy care” residents. The numbers of such residents putatively have increased as a result of incentives in the Prospective Payment System for hospitals to more quickly discharge sicker patients. However, the potentially negative effects of case-mix reimbursement (CMR) on quality of care have not gone unnoticed, and the costs (as yet undetermined) of mechanisms to avert these effects likely are nontrivial.

This paper examines the effects of CMR on cost (to states and nursing homes), access and quality. A preliminary review of the available evidence seems to indicate mixed results; yet, CMR obviously appeals to some Medicaid programs and representatives of the nursing home industry. We suggest that the allure of CMR may be due to a mistaken belief that, to borrow from Brandon (1990), such “tech fixes” obviate irksome negotiation on the part of policy elites.

An alternate reimbursement policy is proposed: a negotiated prepayment, based on a facility's global budget, with periodic allocations and an end of period adjustment to compensate the provider for unanticipated costs.