How Nursing Homes Get Paid and Why That Matters to LTC Pharmacy

Many of you may be well acquainted with nursing home payment models – but a short primer can refocus us on important facts or familiarize colleagues newer to the industry. Let’s review how nursing homes get paid – and especially how that affects how pharmacies get paid for serving their residents. Roughly 80 percent of all nursing home services in the U.S. are paid for by public benefit programs, such as Medicare and Medicaid.

The Medicaid program covers roughly 60 percent of nursing home costs, while Medicare accounts for about 20 percent. Most facilities rely more heavily on Medicaid than Medicare. Nursing homes have long complained, with justification, that Medicaid reimbursement is inadequate, covering only 60 to 80 percent of the costs incurred for caring for residents. Medicare pays much better but covers fewer residents and only for short periods of time, usually following inpatient hospitalization.

Read on to learn about how nursing homes get paid and how that payment model affects your LTC pharmacy practice.

Medicare Part A

Nursing home payments under the Medicare program are covered under a prospective payment model, known as the Patient-Driven Payment Model (PDPM), where the facility is paid based on a formula that includes money required to cover the basics of room and board and variables that consider how much the resident’s condition will cost to care for.

The variable part is called case-mix adjustment and is intended to closely match resources with expected costs based on resident diagnosis and limitations.

The PDPM has five components that are case-mix adjusted: Physical Therapy, Occupational Therapy, Speech/Language Pathology Services, Non-Therapy Ancillary (NTA) Services, and Nursing. The document for calculating the score is derived from the Minimum Data Set (MDS).

Drugs are included in this payment and the drug payment component is found in the NTA calculation.

The case-mix adjustment for NTA is related primarily to diagnosis, which generally predicts the cost of providing medications for treatment.

The daily rate of payment for the individual resident is the cumulative payment rate of all five components of the PDPM. The pharmacy bills the facility for Medicare Part A residents based on a rate agreed upon in the pharmacy’s service agreement.

The PDPM tends to reward efficiency. For example, if a consultant pharmacist is skillful at managing the drug regimen to arrive at the best outcome for the lowest cost, the facility comes out ahead financially. This is true of all the components of the PDPM.


Medicaid is the primary payer for nursing home care in the U.S. Nearly 60 percent of nursing home revenue comes from residents enrolled in Medicaid. The program becomes the terminal payer as residents deplete their assets, spending down into Medicaid eligibility. As noted earlier, Medicaid is a fairly stingy payer.

Drugs, however, are paid for under different programs, depending on the eligibility status of the resident. For a Medicaid-covered resident who is not on Medicare, the Medicaid program is responsible for paying for drugs. As you probably already know, Medicaid generally pays for prescription drugs at acquisition cost, plus a dispensing fee.

A decreasing percentage of Medicaid prescription drugs are reimbursed at the fee-for-service rate as Medicaid Managed Care Organizations (MCOs) continue to assume more responsibility for drug coverage. The PBMs that manage the drug spend in Medicaid MCOs are generally free to engage in spread pricing, reimbursing pharmacies less than they pay for drugs dispensed.  

The House of Representatives also recently passed the Lower Costs, More Transparency Act. The bill imposes transparency requirements on PBMs, primarily those serving Medicaid and Medicare populations, including prohibiting spread pricing in Medicaid contracts.

Pharmacy organizations have been seeking reform from states on their Medicaid MCOs payment policies to achieve more transparency in this area.

Dual Eligibility

Residents who are dually eligible for Medicare and Medicaid who are not covered for their current care by Medicare have their prescriptions covered under the Medicare Part D program. The majority of long-stay residents are in this classification and pharmacies bill Medicare directly for drugs.

Staying Current

Both nursing homes and LTC pharmacies are dependent on public health insurance programs for the bulk of their revenue. Although coverage is different for prescription drugs, your nursing home administrator will appreciate your understanding of how the facility is paid. Consider it a way to make your pharmacy “sticky” by creating a bond that immunizes your customers from your competitors.

Nursing Home Reimbursement – The Takeaways  

Key takeaways:  

  • Become familiar with Medicare and Medicaid payment policy.
  • If you haven’t already, begin a conversation about Medicaid and Medicare reimbursement with your nursing home administrator. What are their pain points? Areas of efficiency?
  • Keep up with CMS and (importantly) state Medicaid policies that affect you and your facilities.

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Written by:
Paul Baldwin
Baldwin Health Policy Group
Paul Baldwin

Paul’s pharmaceutical industry experience in public and government affairs led to becoming Executive Director of the Long Term Care Pharmacy Alliance, helping lead the industry through the Medicare Modernization Act and creation of the prescription drug benefit. Paul was VP of Public Affairs for Omnicare before founding Baldwin Health Policy Group.

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