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Contract for Quality Nursing Home Care


Despite large spending increases, the Texas Medicaid program still often pays poor-quality nursing homes to care for its clients. Texas Medicaid should make quality a prime consideration in its contracts with nursing homes that care for seniors and disabled Texans. Texas families should have improved access to information about the quality of nursing home care. Changes in the way the state pays for nursing home care for clients eligible for both Medicaid and Medicare would allow Texas to redirect funds to quality improvement programs. Liability insurance reforms and quality nursing home initiatives could help control escalating liability insurance costs.


In fiscal 2002, the Texas Medicaid program expects to spend $2.2 billion in state and federal funds to care for more than 64,000 nursing home residents.[1] In fiscal 2000, these Medicaid expenditures paid for more than 70 percent of all patients in Texas nursing homes.[2] From 1990 to 2001, Texas Medicaid spending per nursing home resident rose by nearly 50 percent after adjusting for inflation.[3] Despite large spending increases, though, Texas Medicaid continues to contract with nursing homes providing poor-quality care—care that places both patients and the nursing home industry itself at risk. In addition, poorly-organized and missing information on nursing home quality limits the ability of Texas families to make important decisions concerning the placement of family members.

Substandard nursing home care

Although Texas has many nursing homes that meet or exceed quality standards, a few bad nursing homes continue to provide substandard care for Medicaid patients. Such “bad apples” damage the industry’s reputation and drive up insurance liability costs for all nursing homes.

A substandard level of care, as defined by the federal government, arises when problems occur extensively or pose immediate jeopardy to residents’ health and safety. The Texas Medicaid program has seen many examples of such nursing home care, yet continues to pay for it.

The 1997 Legislature gave the Texas Department of Human Services (DHS), the agency that inspects and regulates nursing home care, authority to revoke a nursing home’s license for two to 10 years for instances of substandard care. In 2001, DHS imposed 454 administrative penalties against nursing homes for failing to meet federal and state standards of care, and stepped in to assume control of 21 nursing homes that were providing poor care. Nursing facilities were ordered to close their doors to new admissions 37 times in 2001 due to health and safety problems; only one, however, lost its state license.[4]

As of July 2002, a nursing-home quality reporting system created by the 1997 Legislature had identified recurring substandard levels of care in 13 Texas nursing homes during the 22 months it had been operating.[5] In August 2002, these 13 nursing homes received quality rating scores as low as six out of a maximum score of 100, with an average score of 48.[6] Of these 13 nursing homes, one improved conditions enough to comply with all regulations; another home “substantially complied.”[7] Yet all of these homes continued to provide care and receive state and federal tax dollars from DHS contracts.

Current regulatory process

State and federal regulatory and licensing processes have failed to eliminate some nursing homes that repeatedly fail to meet quality standards. DHS personnel inspect nursing homes to ensure that they meet state and federal regulatory and licensing requirements. When these inspectors identify violations, the nursing homes in question must prepare a corrective action plan to be verified by periodic follow-up inspections. Often, however, the next round of inspections finds the same problems or new ones; the process then begins all over again—and state payments continue all the while.

A 1999 federal study of nursing homes in 10 states including Texas found that 463 nursing homes, or 6 percent of all the homes studied, had been cited for the same problems in four successive quality surveys.[8] Since 1996, civil juries have found about 20 Texas nursing home operators negligent in the care of patients and have assessed multi-million dollar settlements in cases involving deaths due to negligence.[9] Such cases have prompted increasing public and legislative concern over these lawsuits and their impact on the cost and availability of liability insurance. These cases also indicate the failure of the state's contracting and regulatory efforts to ensure quality nursing home care.

DHS inspectors cite the failure to prepare and distribute food under sanitary conditions as the most frequent deficiency. This problem can lead to both mild and serious illness. Other problems can be even worse for overall nursing home quality; for example, in one nursing home in Tyler, Texas, DHS documented substantial instances of abuse and neglect, could not locate the home’s owners and found that the home had no permanent administrator.[10] In Garland, one nursing home’s administrators refused to recognize a group of family members who wished to improve conditions and substituted an alternate committee that barred families who demanded improved care.[11] Recent complaints on this home cited bed sores and other problems resulting from poor care.[12]

DHS can deny or refuse to renew licenses for nursing homes that repeatedly fail to comply with state regulations.[13] Yet DHS denied licenses to just four nursing home applicants in 2001, and, as noted above, has revoked the license of only one existing nursing home.[14]


At present, Texas has more nursing home beds than it needs. This is due at least in part to the expansion of programs that help seniors and disabled people receive home care, allowing more of them to remain in their own homes.[15]

In 2001, Texas had the second-lowest nursing home occupancy rate in the nation (72 percent versus a national average of 82.5 percent.)[16] Its total nursing home population fell from about 97,000 in 1997 to 92,000 in 2001.[17]

Declining nursing home occupancy hits their operators hard and makes it more difficult to maintain quality care. Regardless of its occupancy rate, any nursing home has certain fixed costs; it must provide the same level of care to fewer residents and continue to maintain the facility and meet various regulatory requirements. A nursing home operating with fewer residents also receives less Medicaid money, since this funding is based on the total number of patients and the severity of their illnesses.

This financial squeeze means that nursing home operators often must make difficult decisions about where to spend money—on mortgages, insurance, food, staffing or upkeep. Some are forced to close, as one in Grapevine did in 2001, because it could not attract new residents and had only half of its beds occupied.[18]

Consumer information

DHS provides data about Texas’ nursing homes through the Internet, but the information is not as user-friendly or as complete as it should be. The information on DHS’ current site comes from a federally mandated collection of data called the Minimum Data Set (MDS) and other sources.[19] These data include measures such as the number of client falls, the number of clients using nine or more medications and incontinence rates.[20] Texas nursing homes report MDS data, but neither the federal government nor Texas audits this information to make sure it is correct.[21] For more detailed information, consumers can contact DHS directly and receive information on a maximum of five nursing homes per request.[22]

DHS also inspects Texas nursing homes annually to ensure that they meet minimum federal and state criteria and that they have corrected any problems identified in previous visits. In addition, DHS must investigate any complaints about the care provided by a nursing home. The results of these inspections are made available on the DHS Internet site.

A recent survey by the Rhode Island Department of Health found that at least 20 states publish information on the quality of care in nursing homes. Some provide information that allows consumers to compare nursing homes; others publish the results of inspection or enforcement actions.[23] Indiana’s information tells consumers exactly what inspection enforcement actions were taken and when the nursing home came back into compliance.[24]

In November 2002, the U.S. government began providing quality information on all of the nation’s nursing homes in English and Spanish on the Internet. This information, which can be accessed on the Internet at, has been hailed by the National Citizens’ Coalition for Nursing Home Reform as “extremely important.” The data include 10 quality indicators for nursing homes based on information collected during inspections and investigations.[25] The federal data, however, are unaudited and do not include historical information on compliance actions or ownership.

At present, Texas consumers have no access to data such as changes in the ownership of nursing homes, nursing home name changes, audited data on compliance actions, number of current residents and other items routinely included in other states’ Internet sites on nursing home quality.

Contracting standards

The 2001 Legislature directed the Texas Department of Insurance (TDI) to prepare a list of practices nursing homes should adopt to reduce the likelihood of lawsuits. These practices focus on the most frequent causes of liability insurance claims such as falls, abuse and pressure sores, as well as nutrition and water intake. Adherence to these recommended practices can reduce the number and minimize the severity of claims against nursing homes; they also are prime indicators of the quality of care.[26] These indicators could form the basis for determining which nursing homes receive Medicaid contracts. Such indicators should be clear, direct and easily understood by the general public.

Liability costs

Escalating costs for professional and general liability insurance have exhausted nursing home revenues and shifted their resources away from direct care of patients. A recent survey conducted by the Texas Association of Homes and Services for the Aging found that liability insurance premiums for its members have increased from $328 annually per nursing home bed in 1998 to nearly $3,000 per bed in 2002.[27] The 2001 Legislature appropriated funding that would allow each nursing home carrying liability insurance to receive an additional $2.40 per patient per day to help pay the costs of liability insurance.[28] DHS is asking the Legislature for another $136.1 million in state and federal revenue to provide nursing homes with additional funding for liability insurance for fiscal 2004 and 2005.[29]

Liability insurance costs have risen at least partly because liability claims have risen. One recent study of Texas nursing home liability claims found that liability losses per nursing home bed rose from $1,000 in 1995 to $5,460 in 2001.[30]

Of course, liability issues affect Texas doctors and hospitals as well as nursing homes. All of these interests want liability reform along the lines of what California implemented in 1975. California’s Medical Injury Compensation Reform Act (MICRA) limits non-economic damages in medical negligence claims to $250,000, and limits attorneys’ contingency fees. A recent federal government report stated that insurance premiums in California have risen 167 percent in the 25 years since MICRA went into effect, while those in the rest of the country rose by an average of 505 percent.[31]

A July 2002 malpractice insurance rate survey conducted by the Medical Liability Monitor indicates that 19 states have capped non-economic damages in medical malpractice suits.[32] Without some legislative action on liability issues, Texas nursing homes—and Texas taxpayers who fund a good portion of nursing home care—will continue to be forced to shift resources to pay for state-required liability insurance.

Rewarding quality care

Several states have created grant programs for nursing homes that demonstrate a commitment to high-quality care. For example, Michigan appropriated $10 million in state and federal funding to establish such a program.[33] Massachusetts, California, Maryland, Oregon, Minnesota, Oklahoma, Florida and Colorado have enacted similar programs.[34]

The 2001 Texas Legislature created a competitive grant program for nursing homes that was intended to award funds to those with a demonstrated need for “improvements” (a goal left undefined).[35] The Legislature did not fund the program, however, and in any case it did not target homes that have demonstrated the ability to provide high-quality care.

Contracts designed to require higher-quality care should include provisions enabling DHS to make arrangements to relocate residents away from substandard homes and thus minimize the impact on them and their families. Some residents might relocate back to their own homes with the aid of home- and community-based Medicaid programs. Planning an orderly transition to home or another Medicaid-approved nursing home would be preferable to emergency relocations caused by the closure of homes due to financial problems; family members of residents in the Grapevine nursing home mentioned above had less than a month to find a new nursing home when it closed.[36]

The quality of care offered by Texas nursing homes could be improved by adopting existing quality models such as the Eden Alternative model. Eden Alternative nursing homes provide home-like environments for nursing home residents. Direct care staff tailor care to individual needs with residents and family members participating in the decision making. Residents care for pets, have gardens and enjoy visitors from the community who bring life and vitality into the institutional setting. [37]

According to some studies, Eden Alternative homes enjoy reduced medication rates for patients, lower staff turnover and lower rates of patient infection. For example, the Texas Long Term Care Institute in San Marcos studied six Eden Alternative nursing homes from 1996 to 1998. These homes reported a 60 percent decrease in resident behavioral incidents; a 57 percent decrease in the beginning stages of pressure sores; a 25 percent decrease in the number of residents confined to their beds; an 18 percent decrease in the use of restraints; a 48 percent decrease in staff absenteeism; and an 11 percent decrease in employee injuries.[38]

At this writing, Texas has 10 Eden-certified facilities. DHS offers them no special incentives or recognition.[39] Other states such as New Jersey, Michigan, North Carolina, and Tennessee have adopted the Eden Alternative model and other quality improvement programs for nursing homes, awarding small grants to help homes adopt such programs.[40]

Redirecting Medicaid payments

Texas Medicaid pays a portion of the Medicare deductibles and co-payments of nursing-home residents who qualify both for Medicare and Medicaid (called “dual eligibles”).

The federal Balanced Budget Act of 1997 allows states to limit these payments. State Medicaid programs can choose to pay an amount that, when added to the amount paid by Medicare, equals the total Medicare rate (that is, the Medicare payment plus the patient co-payment and deductible). Alternatively, states can choose to pay only what they would have paid if the patient were Medicaid-eligible only. In most cases, Medicaid would pay less than regular Medicare rates.

In some instances, when the Medicare-paid portion for the service exceeds the Medicaid rate, no state payment for co-insurance will be made. In other cases, the state’s co-insurance payment will be only the amount that would bring the payment up to the total that Medicaid would have paid. This approach is called the “repricing” of Medicare claims. Providers must consider these amounts as payment in full; clients are not liable for any additional charges.

The Texas Medicaid program has followed this strategy for dual-eligible clients receiving inpatient hospital care since 1998. The state has not, however, done so for Medicare skilled nursing facility claims.

In 2002, Texas Medicaid will spend about $65 million in state and federal funds for about 775,000 Medicare days of skilled nursing facility care. An average weighted daily skilled nursing facility rate under Medicare is about $195, of which Medicare pays about $93. The state’s Medicaid program picks up about $85, while beneficiaries cover about $17.[41]


A. State law should be amended to create an ongoing nursing home quality assurance team composed of health care professionals, nursing home advocates and nursing home representatives to develop minimum quality contracting standards for the state Medicaid nursing home program.

The team should consist of two physicians and one registered nurse with expertise in long-term care, three industry representatives and three nursing home advocates not connected with the nursing home industry. The governor, lieutenant governor and speaker of the Texas House each should select one representative for each of the three categories of team members, with the chair to be designated by the governor. The Texas Health and Human Services Commission should provide administrative support for the team. A portion of savings from recommendation E could be used as support for the team.

B. State law should be amended to direct the Texas Department of Human Services (DHS) to use minimum quality contracting standards to determine which nursing homes should receive Medicaid contracts and to report results to each Legislature.

Most nursing homes would keep their Medicaid contracts, but those with long track records of substandard care would lose theirs. The risk factors already identified by Texas Department of Insurance (TDI) could be used as the basis for contract standards. Whatever system is used should contain appropriate accountability standards and should be clear, direct and easily understood by the general public. The reports should include recommended improvements in nursing home quality information; the accountability standards in use and the status of their implementation; and nursing homes’ performance under the new quality contracting standards.DHS should insure the accuracy of quality indicator data used to develop contract standards.

C. State law should be amended to direct the nursing home quality assurance team to recommend improvements in the type and amount of information available to consumers and in the data system that compiles quality and inspection data.

Additional information would give consumers a better view of how a nursing home operates and help them decide whether they should place their relatives in it. DHS should expand its Web site to include other useful data.

D. State law should be amended to adopt liability reforms including limits on non-economic damages, limits on attorney contingency fees, binding arbitration for future disputes and related measures.

These changes would be similar to those enacted by California.

E. State law should be amended to require Texas Medicaid to pay the same amount for the Medicare skilled nursing facility payment claims of dual-eligible clients as it would if the client were eligible for Medicaid only.

DHS would no longer pay more for dual-eligible recipients than for Medicaid-only recipients. DHS would have to make automation changes to accomplish this recommendation.

F. State law should be amended to require DHS to redirect a portion of the savings obtained in Recommendation E to implement a competitive grant program for nursing homes that provide high-quality service and can serve as models for others.

Grants should be awarded to encourage nursing homes to become Eden Alternative sites or adopt other quality programs.

Fiscal Impact

This estimate employs the current methodology used by DHS to calculate Medicaid nursing home rates. The bulk of the savings from Recommendation E could be used to award competitive grants to selected nursing homes for approved quality in programs. DHS could enhance its Internet-based quality reporting system within existing resources; a portion of the savings from Recommendation E could be used to guarantee the accuracy of data used to develop quality contracting standards.

Applicable Medicaid rates of approximately $139 per day are about $56 per day less than the Medicare rate of $195 per day. Recommendation E would decrease Medicaid costs for skilled nursing facilities for about 775,000 bed days by about $43.2 million per year in state and federal funds. First-year savings assume a startup date of March 1, 2004 and automation system costs of $1.5 million for the automation changes needed to change the way the agency makes Medicaid payments for dual-eligible clients.

Fiscal Year Savings to General Revenue Savings to Federal Funds (Cost) to General Revenue (Cost) to Federal Funds Net Savings/(Cost) to General Revenue Net Savings/(Cost) to Federal Funds
2004 $ 7,842,000 $12,230,000 ($ 7,842,000) ($12,230,000) $0 $0
2005 $17,185,000 $25,961,000 ($17,185,000) ($25,961,000) $0 $0
2006 $17,185,000 $25,961,000 ($17,185,000) ($25,961,000) $0 $0
2007 $17,185,000 $25,961,000 ($17,185,000) ($25,961,000) $0 $0
2008 $17,185,000 $25,961,000 ($17,185,000) ($25,961,000) $0 $0


[1]Texas Department of Human Services, Final 2002 Operating Budget (Austin, Texas, July 20, 2001), pp. 5 and 12.

[2]Texas Health and Human Services Commission, Texas Medicaid in Perspective, Fourth Edition (Austin, Texas, April 2002), pp. 4-19.

[3]Texas Comptroller of Public Accounts, Unpublished data, November 2002.

[4]Texas Department of Human Services, Fiscal Year 2001 Long Term Care Regulatory Annual Report (Austin, Texas, October 2001), pp. 2-9, 11, 15, 60.

[5]Tex. H.B. 1, 75th Leg., R.S. (1997).

[6]Texas Department of Human Services, “Nursing Facility Level Information,” Austin, Texas, August 6, 2002 (computer spreadsheet); and Texas Department of Human Services, “Long Term Care Quality Reporting System,” (Last visited August 19, 2002.)

[7]Texas Department of Human Services, “Medicaid- or Medicare-certified Nursing Facilities in Odessa,”; and “Medicaid- or Medicare-certified Nursing Facilities in Amarillo,” (Last visited November 6, 2002.)

[8]U.S. Department of Health and Human Services, Office of Inspector General, Nursing Home Survey and Certification: Deficiency Trends (Washington, D.C., March 1999), p. 2.

[9]Dan L. Schaap, “Nursing Industry in Critical Condition: High Insurance Premiums, Jury Awards are Crushing Blows,” Texas Lawyer (April 9, 2001), p. 21.

[10]Jacque Hilburn, “Tyler Nursing Home Ranked Lowest in State,” Tyler Morning Telegraph (September 9, 2002).

[11]Thomas Korosec, “Home Unsweet Home,” Dallas Observer (October 4, 2001).

[12]Texas Department of Human Services, “Medicaid- or Medicare-certified Nursing Facilities in Garland,” (Last visited November 6, 2002.)

[13]40 Tex. Admin. Code §19.214.

[14]Texas Department of Human Services, Fiscal Year 2001 Long Term Care Regulatory Annual Report, p. 60.

[15]Texas Department of Human Services, Self-Evaluation Report to the Sunset Commission, Special Review (Austin, Texas, September 2001), pp. 38-40.

[16]C. McKeen Cowles, Cowles Research Group, Nursing Home Statistical Yearbook, 2001 (Montgomery Village, Maryland, 2002), pp. 140-141.

[17]Texas Department of Human Services, Fiscal Year 2001 Long Term Care Regulatory Annual Report, p. 8.

[18]Mitch Mitchell and Romina Kim, “Area Nursing Home Will Close its Doors; 37 Residents Have Less Than a Month to Find a Place to Live,” Fort Worth Star-Telegram (June 13, 2001), p. 1.

[19]Texas Department of Human Services, “Provider FAQ,” (Last visited November 4, 2002.)

[20]Texas Department of Human Services, “QRS Quality Indicators,” (Last visited November 4, 2002.)

[21]Texas Department of Human Services, “Provider FAQ,” (Last visited November 4, 2002.)

[22]Interview with Dr. Leslie Cortes, Texas Department of Human Services, Austin, Texas, June 10, 2002.

[23]Rhode Island Department of Health, Nursing Home Quality: A National Overview of Public Reporting Programs (Providence, Rhode Island, January 2002), pp. 2-8.

[24 ]Indiana State Department of Health, Long Term Care Division, “Nursing Home Report Cards,” (Last visited November 4, 2002.)

[25]Associated Press, “Government Releases Data on Thousands of Nursing Homes Nationwide,” Houston Chronicle (November 12, 2002), (Last visited November 12, 2002.)

[26]Jose Montemayor, Texas Commissioner of Insurance, Legislative Briefing to the Long-Term Care Legislative Oversight Committee (Austin, Texas, February 20, 2002).

[27]Texas Association of Homes and Services for the Aging, Liability Insurance for Faith and Community-Based Nursing Facility Care in Texas (Austin, Texas February 2002), p. 1.

[28]Interview with David Thomason, Government Relations, Texas Association of Homes and Services for the Aging, Austin, Texas, January 21, 2002.

[29]Texas Department of Human Services, Legislative Appropriations Request, Fiscal Years 2004 and 2005 (Austin, Texas, August 16, 2002), Vol. 2, pp. 321-323.

[30]Theresa W. Bourdon and Sharon C. Dubin, Aon Risk Consultants, Inc., Long Term Care General and Professional Liability Actuarial Analysis (Columbia, Maryland, February 28, 2002), p. 17.

[31]U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, Update on the Medical Litigation Crisis: Not the Result of the “Insurance Cycle,” (Washington, D.C., September 25, 2002), p. 2.

[32]Medical Liability Monitor, “A Quick Look Inside the 2002 Rate Survey,” (Last visited November 8, 2002.)

[33]Citizens Research Council of Michigan, “Outline of Michigan Health Programs,” Livonia, Michigan, March 29, 2002, (Last visited October 19, 2002.)

[34]Comptroller’s survey of state laws, August 2, 2002.

[35]Tex. Health & Safety Code Ann. Title 4, Subtitle B, §242.405.

[36]Mitch Mitchell and Romina Kim, “Area Nursing Home Will Close its Doors; 37 Residents Have Less Than a Month to Find a Place to Live,” Fort Worth Star Telegram (June 13, 2001), p. 1.

[37]The Eden Alternative, All About Eden subdirectory, “Our 10 Principles: The Heart of the Eden Alternative,” (last visited October 19, 2002); and Chuck Salter, “(Not) the Same Old Story,” Fast Company (February 2002), pp. 78-86.

[38]Southwest Texas State University, College of Health Professions, Institute for Quality Improvement in Long Term Care, Eden Alternative: The Texas Project, by Sandy Ransom (San Marcos, Texas, May 2000), pp. 24-31.

[39]Memorandum from Chris Traylor, Texas Department of Human Services, Austin, Texas, March 26, 2002.

[40]Colleen Diskin, “Nature and Nurture: Nursing Homes Try a New View on Improving Quality of Life,” The Record of Bergen County, New Jersey (May 21, 2001), p. L1; and Action Pact, Culture Change Now, “State of Michigan Opens Doors to Culture Change,” (Last visited June 4, 2002.)

[41]E-mail communication from David Cook, Texas Department of Human Services, Austin, Texas, July 25, 2002.