The revised payment methodology from the Centers for Medicare and Medicaid Services’ (CMS) marks the agency’s latest push to convert Medicare reimbursement from a volume-driven, fee-for-service model to a patient-centered approach that more accurately reflects the patient’s condition and clinical needs.

PDPM replaces the Resource Utilization Group (RUG-IV), a case-mix classification system that relied primarily on the volume of therapy services, or therapy minutes delivered, to calculate payments. According to CMS, this emphasis on volume created an incentive for providers to deliver higher volumes of therapy.

While PDPM still relies on per-diem, fee-for-service reimbursement, it reduces inducements for excessive therapy and improves payment appropriateness by classifying patients into payment groups based on clinical needs and characteristics. In essence, PDPM is designed to more effectively align payment with underlying patient complexity and care requirements. CMS also attempted to reduce providers’ administrative burden by introducing streamlined reporting requirements in the new payment protocol.

 More Nuanced Reimbursement

Under the previous RUG-IV methodology, SNF payment was derived from a combination of 2 case-mix adjusted components (therapy and nursing). Within each component, RUG-IV assigned patients to payment classification groups (or resource utilization groups), based on clinical attributes and the type and intensity of therapy services provided.

Under PDPM, the number of case-mix adjusted components has been expanded from 2 to 5. The new components include:

1. Physical therapy (PT)
2. Occupational therapy (OT)
3. Speech-language pathology services (SLP)
4. Nursing services and social services
5. Non-therapy ancillary services (NTA)

Each component utilizes different criteria as the basis for patient classification. These components and corresponding criteria include:

• PT: Clinical category, functional score
• OT: Clinical category, functional score
• SLP: Presence of acute neurologic condition, SLP-related comorbidity or cognitive impairment, mechanically altered diet, swallowing disorder
• Nursing: Same characteristics as under RUG-IV
• NTA: NTA comorbidity score

PDPM also includes a Variable Per Diem adjustment that modifies the per diem rate over the course of the patient’s stay. For example, the NTA rates drop by two-thirds after the third day, and after 20 days, physical and occupational therapy rates decline by 2% every 7 days.

Sustaining Profitability

Given the magnitude of change PDPM represents, the new methodology is altering the path to profitability for SNFs. Under RUG-IV, for example, patients that required a high degree of therapy generally were the most profitable. However, with PDPM, it is expected that clinically complex patients will be the most profitable.

While the PDPM transition is still in its early stages, initial assessments of the methodology’s impact on payments suggest that the majority of SNFs will not see their daily rates decline, according to industry analysis and discussions with Avalere clients.

Operating effectively in the new paradigm will depend to a great extent on ensuring that staff fully understand the new case-mix approach and can accurately document and code appropriate care. CMS has provided numerous resources to help organizations understand the PDPM system.

The PDPM transition comes as many SNFs experience lower occupancy rates due to changing patterns of inpatient hospital care, including fewer hospital inpatient admissions and a greater number of observation stays, which result in fewer discharges to SNFs.

Closer Hospital Ties

Although strong hospital partnerships have always been essential for SNFs, stabilizing existing relationships and cultivating new partners will be critical as SNFs settle into the new PDPM reimbursement model. SNFs possess unique skills and specialized knowledge when it comes to post-acute care. By working more closely with acute care facilities, SNFs can share this information to help create a seamless continuum of care.

Ideally, closer collaboration also can lead to risk-sharing partnerships with hospitals. Both parties, for instance, might benefit if hospitals shift higher-acuity patients more quickly to a capable SNF; the hospital reduces length-of-stay and the SNF enhances reimbursement by effectively addressing the patient’s complex, post-acute needs. PDPM has the potential to help hospitals and SNFs better manage both the care hand-off and subsequent care for the duration of the post-acute experience.

Medicare Advantage Growth

Closer engagement with Medicare Advantage (MA) sponsors represents another important avenue for SNF sustainability, given the continued growth of MA plans, which now provide coverage to about 22 million people or about one-third of all Medicare beneficiaries. By 2029, the Congressional Budget Office projects the share of beneficiaries enrolled in MA plans will reach 47%.

SNFs should conduct a thorough assessment of MA activity in their markets, including populations served, plans offered, and available provider networks. Facilities should also look for ways to engage with these plans and identify strengths they can showcase to improve their value as a potential partner.

Medicare MA plans currently account for 13% of SNF revenue, up 5 percentage points from January 2012, according to the National Investment Center for Seniors Housing and Care.

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