Wall Street Journal Looks at How Medicare Change Brought Down Nursing Home ‘Empire’

In a front-page story on May 24, the Wall Street Journal profiles Integrated Health Services Inc., a nursing home "empire" that profited from a loophole in federal Medicare law but collapsed when the government made a "sudden and dramatic shift" in the way it reimburses care for the elderly. Founded by Dr. Robert Elkins in the late 1980s, IHS relied almost solely on Medicare reimbursements for what is known as subacute care -- turning nursing homes into "minihospitals" for seniors who would otherwise receive care in hospitals. The company filed claims through a Medicare rule allowing "reasonable costs" for providing additional care and was reimbursed like a hospital instead of a nursing home. The tactic allowed the nursing home chain to inflate its average Medicare reimbursement from $300 or $400 a day up to $600 or $700. IHS was also able to receive higher reimbursements from private insurers, who were eager to transfer patients to subacute facilities, where care costs half of that in a hospital. Hospitals, in turn, "loved" the system, as it shifted "costly patients out of their beds." The company "found a hole in Medicare policy through which one could drive a truck," former CMS Administrator Bruce Vladeck said. From 1991 to 1997, IHS' revenue grew from $202 million to about $2 billion. In 1998, however, Medicare "pulled the plug" on the payment loophole over fears that the entire nursing home industry was going bankrupt. Medicare began paying nursing homes a set rate per patient that varies based on a patient's health. As a result, the average reimbursement to nursing homes dropped 25%, but the decline was much steeper at IHS, which had "thrived" on the reasonable cost rule. The change also impacted patients, as care had to be reduced to meet the lower payments, the Journal reports. In 2000, IHS filed for bankruptcy protection. Soon after, Elkins was ousted and the company became the subject of a Medicare fraud investigation (Lagnado, Wall Street Journal, 5/24).