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For many years, the Medicare Payment Advisory Commission (MedPAC) has reported that the Medicare program overpays skilled nursing facilities (SNFs) for rehabilitation services and underpays SNFs for certain residents needing specialized services and skilled nursing care. The Government Accountability Office (GAO) has similarly reported that the prospective payment system (PPS) significantly overpays SNFs for rehabilitation services for residents. Final regulations implementing Medicare payment rules for SNFs, published by the Centers for Medicare & Medicaid Services (CMS) in August 2009,[1] and based on long-standing MedPAC and GAO recommendations, make significant changes to Medicare payment policy and rein in wasteful spending and overpayments.[2]

Medicare Provides Free-Standing For-Profit SNFs with Excessive Profits

In March 2009, as in previous years, MedPAC recommended that Congress not increase Medicare SNF rates for fiscal year 2010.[3] MedPAC reported that "the aggregate Medicare margin for freestanding" skilled nursing facilities (SNFs) was 14.5% in 2007; that for the seventh consecutive year, the aggregate Medicare margins exceeded 10%; and a one quarter of SNFs show profit margins of at least 24.8%.[4]

How Medicare Overpays SNFs, and CMS's Response

Medicare's prospective payment system (PPS), implemented for SNFs in 1998, was intended to reduce the overpayments that occurred under the prior fee-for-service payment system.[5] PPS has not achieved this result, but has, instead, led to new and different SNF practices leading to overpayments. For example:

1. SNFs are paid for services they do not provide.

  • PPS pays SNFs a daily rate based on the assessed needs of the resident. Originally, PPS for SNFs used 44 different resident assessment categories, called Resource Utilization Groups (RUGs). The GAO found that while SNFs quickly shifted their assessment practices to assign residents to the rehabilitation RUGs-III categories that gave them the most favorable payment rates, many residents were not provided with the number of minutes of therapy they required in order to be placed into those assessment categories.[6] In addition, the GAO reported that two years after PPS was implemented, "[T]he patients categorized into the two most common (high and medium) rehabilitation payment group categories typically received 30 minutes less therapy during their first week of care, a 22 percent decline."[7] SNFs did not provide the amount of rehabilitation services they were paid to provide and rehabilitation services actually provided to residents under PPS decreased. In the August 2009 regulations, CMS revised the method of paying for therapy in order to ensure more accurate payment for therapy services that are actually provided.[8]
  • SNFs have been permitted to base resident assessment classifications on services provided solely during the resident's prior stay in the acute care hospital under the so-called "look-back" period. At least since 2005, CMS has been questioning the validity of the look-back period.[9] In the final regulations issued in August, CMS confirmed that the look-back period is not a proxy for medical complexity and that beginning in fiscal year 2011, it will pay only for services that are actually provided in the SNF.[10] Overpayments to SNFs for assessments using "look-back" over the past decade will not be collected.
  1. CMS intended that the expansion of resident assessment categories from 44 to 53 for fiscal year 2006, which was designed to account for the highest-cost residents needing both extensive nursing care and rehabilitation, would be budget-neutral. Instead, SNFs placed more residents in the (new) highest assessment categories, resulting in overpayments of approximately a billion dollars each year from fiscal years 2006 through 2009. CMS has now recalibrated the rates to achieve budget neutrality prospectively, beginning in fiscal year 2010 (October 1, 2009). CMS is not recouping the billions of dollars of overpayments from the previous four years.[11]

  2. SNFs have shifted from one-on-one therapy to "concurrent" therapy, a method by which one professional therapist works with multiple residents on different therapy tasks at the same time, but SNFs still bill Medicare as if each resident received 100% of the therapist's attention. For example, SNF Medicare reimbursement rules have allowed a therapist treating four patients concurrently during the course of one hour to bill Medicare for four full hours of therapy. CMS reports that more than a quarter (28.26%) of therapy provided in SNFs is now concurrent. CMS will close this loophole in fiscal year 2011, when it implements revisions to the Medicare SNF PPS, RUGs-IV, by requiring allocation of concurrent therapy time and by limiting concurrent therapy to two residents.[12] While changing payment policy prospectively, CMS is not recouping overpayments for the many past years of "concurrent therapy."

  3. When several large multi-state nursing home chains filed for bankruptcy protection in the late 1990s and (unfairly and inaccurately, according to the GAO[13]) blamed their bankruptcies on PPS, Congress responded by increasing Medicare reimbursement rates for SNFs in multiple ways.[14] Although Congress increased the nursing component of all SNF rates by 16.66%,[15] SNFs did not spend the billion-dollar rate increase on nurse staffing, as Congress intended but did not explicitly require. The GAO found, "in the aggregate, SNFs' nurse staffing ratios changed little after the increase in the nursing component of the Medicare payment rate took effect. Overall, SNFs' average nursing time increased by 1.9 minutes per patient day."[16]

  4. In the absence of a SNF-specific wage index, CMS uses the hospital wage index to adjust SNF rates annually. Use of the hospital wage overpays SNFs because, as confirmed by the federal Bureau of Labor Statistics, SNF salaries are lower than those paid to hospital workers. CMS is considering MedPAC's recommendation to develop a SNF-specific wage index.[17]

Health Reform Will Do More to Rein in Medicare Waste

The health reform bills passed by the three committees in the House of Representatives all address waste in the Medicare SNF payment system (PPS). If the House language concerning SNF reimbursement is enacted into law, Congress would freeze the market basket, as MedPAC recommended; incorporate productivity improvement; and change the recalibration factor to retain the budget neutrality that CMS intended when it expanded the number of resident classifications under PPS from 44 to 53. While making these reductions, the House bills also recognize the need for increased reimbursement, under certain circumstances. H.R. 3200 specifically recognizes the need for upward adjustments in non-therapy ancillary costs for certain very high-cost residents (such as those needing ventilators) and, for the first time in the SNF PPS, includes an outlier payment system for very high costs that exceed the existing payment scale.


CMS has taken strong steps to eliminate some of the waste and overpayments to SNFs that have been well-documented by MedPAC and the GAO for many years. In the final regulations published in August, CMS eliminated the look-back period; recalibrated the rates to maintain budget neutrality; revised the rules for concurrent therapy; and is considering development of a SNF-specific wage index. These changes and the changes included in H.R. 3200 should not result in reduced staffing and quality of care, as suggested by the nursing home industry. Instead, they will improve the integrity of the Medicare program by ensuring that SNFS are reimbursed accurately and fairly for the services they actually provide.

[1] 74 Federal Register 40,288 (Aug. 11, 2009), as corrected by 74 Fed. Reg. 48,865 (Sep. 25, 2009). The proposed rules, 74 Fed. Reg. 22,207 (May 12, 2009), were discussed in the Center’s Weekly Alert “Undoing Skilled Nursing Facility Overpayment and Abuse” (May 14, 2009),
[2]As discussed below, the health care reform bills passed by three Committees of the House of Representatives, H.R. 3200, would also address some of the MedPAC and GAO payment concerns.
[3]MedPAC, Report to the Congress: Medicare Payment Policy, Section 2D (Skilled Nursing Facility Services) (March 2009), (“The Congress should eliminate the update to payment rates for skilled nursing facility services for fiscal year 2010.”).
[4]Id. 160-161. See also MedPAC, A Data Book: Healthcare spending and the Medicare program, page 131 (June 2009), MedPAC reports that for-profit SNFs showed the greatest Medicare margins, ranging from a low of 13.9% in 2003 to a high of 19.9% in both 2001 and 2002; in contrast, not-for-profit facilities showed margins from a low of 1.5% in 2003 to a high of 10.3% in 2001.
[5] GAO, Skilled Nursing Facilities: Medicare Payment Changes Require Provider Adjustments But Maintain Access, GAO/HEHS-00-23 (Dec. 1999),; GAO, Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most but Not All Facilities, GAO-03-183 (Dec. 2002),
[6]GAO, Skilled Nursing Facilities Have Responded to Medicare Payment System by Changing Practices, GAO-02-841 (Aug. 2002),
[7]Id. 3.
[8] 74 Fed. Reg. 40,288, at 40,346-40,394 (Aug. 11, 2009).
[9]70 Fed. Reg.29,070, at 29,079-29,080 (May 19, 2005). CMS wrote that a public comment in 1999 had questioned the appropriateness of using the look-back period. 65 Fed. Reg. 41,644, at 41,668-41,669 (July 30, 1999).
[10]74 Federal Register 40,288, at 40,322-40,324 (Aug. 11, 2009).
[11]74 Federal Register 40,288, at 40,297 (Aug. 11, 2009), as corrected by 74 Fed. Reg. 48,865 (Sep. 25, 2009) (“[W]e have proposed to correct, on a prospective basis, an overpayment situation that has been in effect since January 2006. To avoid possible negative consequences, we have decided not to go back and recoup the excess expenditures made to SNFs ever since January 2006. Instead, we are limiting the scope of the recalibration to restoring the intended SNF PPS payment levels on a prospective basis only, effective October 1, 2009.”)
[12]74 Fed. Reg. 40,288, at 40,315-40,319 (Aug. 11, 2009).
[13]The GAO found that PPS was not the cause of facilities’ bankruptcies. GAO, Skilled Nursing Facilities: Medicare Payment Changes Require Provider Adjustments But Maintain Access, GAO/HEHS-00-23 (Dec. 1999),
[14], In the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), Congress raised daily rates by 20% for 15 high-cost resident categories, beginning in April 2000, Pub. L. No. 106-113, App. F, §101, 113 Stat. 1501, 1501A-324; and increased the daily rate for all facilities by 4% for fiscal years 2001and 2002. In 2000, Congress made additional revisions to SNF payments in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA); see note 16, infra. See GAO, Skilled Nursing Facilities: Available Data Show Average Nursing Staff Time Changed Little after Medicare Payment Increase at 6, notes 17-19,
[15]Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), Pub. L. No. 106-554, App. F, §312(a), 114 Stat. 2763, 2763A-498.
[16]GAO, Skilled Nursing Facilities: Available Data Show Average Nursing Staff Time Changed Little after Medicare Payment Increase, page 1, GAO-03-176 (Nov. 2002),
[17]74 Fed. Reg. 40,288, at 40,300-40,301 (Aug. 11, 2009).

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