Changing SNF Reimbursement to Improve Quality and Reduce Overpayments

Kaitlin Lavin


Aegis Compliance and Ethics Center, LLP

Changing SNF Reimbursement to Improve Quality and Reduce Overpayments

This summer, the Centers for Medicare and Medicaid Services (“CMS”) simultaneously issued a Proposed Rule for FY 2018 SNF payments and an Advance Notice for Proposed Rulemaking (“ANPRM”) considering new payment methodologies to reduce overutilization and improve quality of care in skilled nursing facilities (“SNF”s). CMS recently published the Final Rule for FY 2018 and is considering submitted comments for a new payment model, the Resident Classification System (“RCS-I”).

Current Payment System

CMS reimburses SNFs under a Prospective Payment System (“PPS”), which pays a predetermined, fixed amount based on the classification of services and patient types. The rate of payment reflects historical costs and utilization data from cost reports and clinical assessments. The predetermined rates incorporate a provider’s “case-mix” – a classification which accounts for the relative resource utilization of different types of patients. Patients with more complex conditions usually require more care and cost more to treat.  CMS researches utilization patterns across different providers to develop case-mix group classifications and uses clinical assessment data to determine the applicable group for each patient.

In long-term care, Resource Utilization Groups (“RUG”) are rate codes providers use to bill for payment and represent case-mix groups or specific sets of patient characteristics. SNFs assign patients to RUGs, using software which analyzes data from Minimum Data Set (“MDS”)—data from clinical or functional assessments and screenings. CMS requires all Medicare-certified SNFs to collect and report MDS in compliance with the RAI Manual for all residents, regardless of payor type.

But there have been problems with the RUG system. CMS expects RUGS to document MDS in medical records, but in 2001—and again in 2006—the Office of Inspector General (“OIG”) issued reports finding a significant number of claims with RUG payment rates which were different from the payment rates generated based on evidence in medical records. These differences represent potential Medicare overpayments—as much as $542 million for fiscal year 2002 and $1.5 billion in 2009.

The OIG, the Medicare Payment Advisory Commission (“MedPAC”) and the American Health Association (“AHCA”) have expressed concerns about SNF payments. One of their main concerns has been the way in which Medicare reimburses SNFs for therapy. RUG categories divide patients by the level of service needed. According to CMS, the current payment method is based primarily on the amount of therapy SNFs provide, giving providers an incentive to provide more therapy than beneficiaries require. The OIG, MedPAC and the AHCA have urged CMS to change the method of payment to one based on an individual patient’s characteristics and care needs.

FY 2018 SNF PPS Final Rule

In addition to RUGs, the Quality Reporting Program (“QRP”) will soon influence SNF payments. The Improving Medicare Post-Acute Care Transformation (“IMPACT”) Act of 2014 established the QRP, requiring SNFs to submit more standardized data. Beginning FY 2018, CMS will reduce SNF payment by two percentage points to any SNF that does not comply with the reporting requirements. Quality measures will also be posted for the public on the Medicare Nursing Home Compare website.

The 2018 Rule finalized updates to the QRP program. The Rule changes the current pressure ulcer requirements beginning in 2020 and expands the measure to include new or worsened unstageable pressure ulcers like deep tissue injuries. CMS believes this will clarify reporting requirements for providers and help distinguish SNFs providing better quality care. Additionally, beginning in 2020, CMS will require standardized data for functional and cognitive status, special services, treatments and interventions, medical conditions and co-morbidities; and impairments. This information could inform SNFs about opportunities to improve care and provide support for SNF decisions to provide more therapy services.

The Protecting Access to Medicare Act (“PAMA”) established another SNF program in 2014 to improve quality of care—the Value-Based Purchasing (“VBP”) Program. The VBP Program is designed to reward providers with incentive payments for improving quality and reducing costs. The FY 2018 Rule addresses the VBP Program and explains that there will be a 2 percent reduction to SNF payments to fund the program. CMS will return 50-70 percent of that reduction based on their quality scores. But SNFs performing in the bottom 40 percent will not receive any VBP payments.

However, CMS expects SNF payments to increase by $370 million in FY 2018 due to another change in payment: The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”). MACRA requires an update to the market basket index, an inflation adjustment for the increase cost of SNF services over time and established a special rule for FY 2018 to increase payment by 1 percent from 2017.

Case-Mix Methodology Revisions

Although the Final Rule leaves the RUG system in place for FY 2018, CMS proposed a new method of payment and solicited comments via an ANPRM. The CMS proposal suggests completely replacing the RUG system with RCS-I, which could more accurately reimburse SNFs by changing the method for determining case-mix.

Under the RUG methodology, there are two case-mix components: the nursing component, based on various resident characteristics, and the therapy component, based on the intensity of therapy services provided. However, providers primarily use the higher-paying therapy component for the purposes of payment. RCS-I proposes a more resident-centered payment adjustment with four different components, including physical and occupational therapy, speech-language pathology, nursing, and non-therapy ancillaries. The four new components would be based almost exclusively on objective resident characteristics, RCS-I would rely on each component to determine per-diem payments to SNFs.  Further, RCS-I would limit group and concurrent therapy to ensure that individuals receive at least half of their therapy individually. RCS-I would also front-load payments to reduce payments for physical/occupational therapy and non-ancillary components over time, consistent with research demonstrating that the costs of those services decreases over the course of residents’ stays. CMS also proposed altering the process for collecting MDS by changing the requirements for SNF assessments. More specifically, CMS is considering an assessment schedule that replaces multiple assessment with a 5-day assessment to identify more stable resident characteristics (e.g., diagnosis) and using that assessment for the duration of a resident’s stay.  CMS would still require a discharge status assessment and allow providers to reclassify residents using a Significant Change in Status Assessment in cases where the criteria for a significant change—as defined in the RAI Manual—are met.


SNF providers should be aware that CMS and the OIG have concerns about upcoding for therapy services and should keep up with the changes in reimbursement payments. The updates will be important to consider in developing new billing policies and procedures. Providers can expect more details about RCS-I in the FY 2019 SNF Rule.

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