The nursing home industry as we know it today really sprang to life when the Medicare and Medicaid programs were established, since those programs created the first system of third party payments for nursing home care. Prior to 1965, the nursing home industry consisted primarily of county "poor farms" supported by tax subsidies for indigent older people who had no other resources; "mom and pop" operators who took older people into their homes or who created small group homes for those who could pay something toward their care; and charitable facilities, many religious, that drew operating income from donations and subsidies from affiliated organizations. After 1965, nursing homes could count on a dependable, recurring source of government income for people who had no money (Medicaid), as well as a generous payment system for Medicare recipients who needed more acute rehabilitative care. Not coincidentally, this was the time when many for-profit nursing home companies were established.
In the early years of the new Medicaid and Medicare systems, providers were generally reimbursed for their costs, no matter what those costs might be. They reported those costs to the government, and in most parts of the country they received a payment designed to ensure that they suffered no loss on the care of Medicaid or Medicare recipients in a system called cost-based reimbursement. Since those payments included some of the costs of the buildings, equipment, and administration of the facility, operators could use those payments to cover a large part of their fixed costs, then derive a profit from the residents who were not covered by Medicaid or Medicare. There was little or no regulation, nor any restriction on the construction of new facilities, and thousands of new nursing homes were built.
As the number of facilities grew, the number of people collecting Medicaid or Medicare payments for long term care exploded. In the meantime, the costs of care increased, partly due to inflation and partly due to the fact that facilities had no incentive to control costs when they had a guarantee that they would be reimbursed for them in full. The amount of money that the federal and state governments had to pay began to spiral upward at a dizzying pace as both the number of recipients and the cost per recipient increased.
State governments, who are responsible for about half of the cost of the Medicaid program, saw the cost of the Medicaid program explode, and a large part of their Medicaid costs were for long term care costs. As state governments dealt with fiscal problems and budget shortfalls, many reacted by reducing the reimbursement for Medicaid long term care or delaying payments to providers. For the most part, the new payment formulas that have evolved no longer provide full reimbursement for the cost of care provided to Medicaid recipients. After several years of budget surpluses, many state governments are again experiencing budget problems, so it is likely that the nursing home industry is in for another round of Medicaid reimbursement cuts.
The federal government was also has been experiencing budget problems. They are responsible for half of the cost of the Medicaid program and all of the cost of the Medicare program. They have tried a variety of methods to reduce those costs, many of which impacted the amount of money that nursing home providers could receive as reimbursement for Medicaid and Medicare residents. In an attempt to reduce the cost of the hospital Medicare program, hospital stays were reduced and patients were discharged "sicker and quicker." Many people who previously would have been in hospitals have ended up in nursing homes, and nursing homes have seen their costs increase even more as they care for these very ill residents at the same time their reimbursement for providing that care has declined.
Nursing homes have seen many other cost pressures, including litigation and exploding insurance costs due to that litigation, and new laws and regulations that increase operating costs, like those dictating higher staffing levels and pay scales. As a result of all these pressures, the nursing home industry is in a severe financial crisis. Many national nursing home operators have gone into bankruptcy in the last couple of years. So far, few nursing homes have actually closed their doors, but a number have changed ownership as stronger operators acquire or take over management of nursing homes that are in trouble.