A $12 billion budget deficit is forcing California to end its nascent Skilled Nursing Facility Workforce and Quality Incentive Program after just two years — a fate similar programs in other states could face as federal Medicaid cuts loom.

State officials on June 30 notified nursing homes and other stakeholders of the early end for the  program, through which state leaders had planned to pay out $280 million in workforce, clinical quality and equity incentives through 2026.

“Providers use these essential resources to invest in staff training, adopt new technologies, implement data-driven care strategies, and [in] other vital ways to ensure quality care,” Corey Egel, director of public affairs for the California Health Care Association, told McKnight’s Long-Term Care News. “Without WQIP funding, facilities will have to find ways to remedy these gaps while also absorbing rising operational costs … ultimately undermining the state’s own goals for a higher standard of quality care.”

California and Pennsylvania were among the most recent states to add incentive payments to their Medicaid programs, joining 24 that already had them by 2022, according to a report published by the Center for Health Policy Evaluation in Long-Term Care.

Such programs have been praised for introducing extra dollars into the reimbursement system, popular among providers and investors for the stability they bring, especially in states that significantly underfund Medicaid base rates.

Increasingly, states have used incentive pay to push nursing homes to voluntarily increase their staffing levels. Earlier this year, the National Academy of State Health Policy highlighted such efforts in Illinois, Maine, New Jersey, and Ohio.

In the dark days ahead, incentive programs could be low-hanging fruit for lawmakers and Medicaid offices that have to identify cuts to their programs.

A panel of experts at KFF, a nonprofit health policy organization, said on Wednesday that voluntary programs and services would be among the first targeted in state-level reform discussions. 

Optional nursing home and long-term care services may be cut or reimbursement pared back just to make a dent in losses projected to top $100 billion in states like California and New York.

Lawmakers could raise revenue by increasing local taxes, cut spending in other high-cost areas such as education, or make changes to their Medicaid programs, said Robin Rudowitz, KFF vice president and director of its Program on Medicaid and the Uninsured. 

Discretionary or newer spending within Medicaid itself could be an easy target.

“With limitations on states’ ability to use provider taxes to help finance their state share, that means they need to come up with other dollars to replace the lost dollars,” Rudowitz said. “That has to come from somewhere else. I think there are a lot of things that could be at risk.”

While it’s too early to know how states will react to federal changes — at least one state is considering a special session to work through implications of the Big Beautiful Bill – provider payment reductions are almost certain, according to the Congressional Budget Office.

Not all states would find substantial savings by eliminating incentive programs. In New York, for example, the state’s 611 providers self-fund the Nursing Home Quality Initiative. They poured in $50 million last year, and only those who scored in the top three quintiles out of five received payment.

It’s budget-neutral but costs the state’s lowest-performing nursing homes, said Stephen Hanse, president and CEO of the New York Health Care Facilities Association. Those with the highest Medicaid roles often struggle to improve, he added, noting that they are underpaid $56 per day for each Medicaid patient.

Should other states try to save their incentive programs by switching to a similar model, he warned, the states would actually be taking money out of their current payment system to do so.

“It is critical to have new dollars put in the system and not money pulled away from providers who are already facing underfunding in Medicaid,” Hanse said.

Marc Zimmet, CEO of Zimmet Healthcare Services Group, sees an equalizing opportunity for providers should quality incentives be rolled back. His firm has worked closely with nursing home associations as states convert their Medicaid payment systems to use case-mix-based calculations. Many have added new payment levers in that process.

Overall rate reductions might make it important for states to do away with incentive programs and get more money into a pot that’s accessible to all nursing homes.

“Providers can’t expect more funding, so reimbursement discussions going forward are most likely premised on redistributing fixed Medicaid funds,” he told McKnight’s. “States must direct Medicaid dollars to where they are needed most. Most quality incentive programs do the opposite — they are regressive and counterproductive.”

He said his firm’s data show quality payments are highly correlated to a facility’s Medicare census, echoing Hanse’s concerns that providers with mostly Medicaid census can’t compete.