Liz: For those not familiar, what is PDPM, and why do you think CMS is pushing ahead with this change?

Fred: PDPM is the new reimbursement system model that Medicare will use to determine payments for SNFs starting on October 1, 2019. PDPM replaces the current Resources Utilization Groups (RUGs) model. The biggest change is moving away “therapy minutes” as a basis for payment toward factors that reflect the underlying complexity and clinical needs of a SNF’s patients. In addition, PDPM introduces adjustment factors that change payment rates based on the day of the SNF stay.

PDPM fits into a broader push by CMS toward “patient-centered” reimbursement models that match payment rates to the patients’ needs. It’s not a coincidence that CMS is moving forward with the Patient-Driven Groupings Model (PDGM) for home health providers. The same story is playing out across the industry to realign incentives around patient characteristics rather than running up the tab on the volume and intensity of services.

Liz: Do you believe PDPM will fundamentally change SNF economics?

Fred: Yes and no. Without question, the new method alters the profitability picture for SNFs—namely, the types of patients who are profitable and unprofitable for SNFs changes under PDPM. For instance, patients requiring a high degree of therapy were most profitable under the RUG-IV system, but clinically complex patients will be most profitable under PDPM.

However, for all that’s changing under PDPM, the new model is still a fee-for-service, per diem arrangement. This means that SNFs still have a powerful incentive to increase their volume. The types of patients that are most profitable will clearly change in the new system, but the core drivers of SNF profitability will remain the same.

Liz: You just alluded to the “core drivers of SNF profitability.” What are these factors?

Fred: At Avalere, we’ve conducted extensive analyses to isolate the key variables that impact SNF profits. Whether we’re in the RUGs model or PDPM, financial success will be tied to a facility’s occupancy rate and payer mix as well as its proximity to referral sources. Interestingly, one of the strongest drivers is the unemployment rate—the higher the unemployment rate, the lower the wage rate that SNFs need to pay to staff their buildings. This basic dynamic won’t change under PDPM.

Liz: What trends do you think SNFs are losing sight of in their rush toward PDPM?

Fred: While PDPM represents a large operational shift for SNFs, there are also broader industry changes that demand their attention—namely, the growth in Medicare Advantage (MA). SNFs need to evaluate their MA strategy to ensure they are capitalizing on the opportunities for partnership. This includes understanding the MA presence in their market, the major players, and how they can effectively engage with those players to benefit from the growing MA population.

Liz: How do you recommend SNF operators balance the focus on PDPM with larger shifts in Medicare?

Fred: In the near term, SNF operators will need to understand the operational changes necessary for PDPM, such as documentation changes and coding education. In addition, understanding the financial impact will be key for these facilities. CMS has done some financial modeling of the impact, but facilities will need to understand the reimbursement impact on a more nuanced level as they begin making operational adjustments.

On a parallel path, SNFs should begin assessing the MA landscape in their markets. This will include understanding MA enrollment trends in their markets, the population served, and the types of plans offered. SNFs should then begin considering ways to engage with these plans, strengths they could showcase to be an attractive provider partner, and potential innovative partnerships they could develop.

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