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In final rules setting out Medicare reimbursement rates for skilled nursing facilities (SNFs) for Fiscal Year (FY) 2012 (which starts October 1, 2011), the Centers for Medicare & Medicaid Services (CMS) reduced reimbursement by $3.87 billion, or 11.1%.[1]  The reduction was targeted, correcting the "unintended excess payments" that occurred in therapy-related reimbursement for FY 2011, but actually increasing rates for non-therapy categories.[2]  Despite the overall reduction, however, Medicare SNF rates remain high. In fact, the FY 2012 rates are 3.4% higher than FY 2010 rates.[3]  For FY 2012, as published in the Federal Register on August 8, 2011, the highest rates per resident per day will be $737.08 for urban facilities and $754.11 for rural facilities.[4]

Not surprisingly, following announcement of the rate reductions, the three national nursing home trade associations immediately reacted with alarm and argued that jobs would be lost and quality of care for residents would suffer.[5]  Alarm notwithstanding, Medicare remains the most highly profitable source of payment for SNF care.

Some background information is useful in understanding the targeted reductions made by CMS for FY 2012.  It has long been recognized by CMS, the Medicare Payment Advisory Commission (MedPAC), the General Accounting Office (GAO), and the Office of Inspector General that SNFs have been overpaid by billions of dollars.[6]  Even so, CMS is reducing some of the SNF reimbursement rates prospectively only; it is not requiring that any past overpayments be repaid.  Despite continued profitability, even with the announced rate reductions, advocates for residents should take steps to assure that facilities do not compromise quality of care for residents by cutting the staff, food, and supplies that are essential for resident care.

The remainder of this Alert describes how Medicare pays SNFs and how the overpayments, repeatedly documented, have made SNFs extremely profitable, but have not improved resident care.  The Alert also includes several suggestions for resident advocacy.

How Medicare Pays SNFs

In 1998, CMS implemented a prospective payment system (PPS) for Medicare SNFs, replacing the prior fee-for-service reimbursement system.  Under PPS, the Medicare program pays SNFs per day rates, which cover all routine services, ancillary services, and capital-related costs for a beneficiary's Part A stay.  The program pays different rates for residents according to case-mix adjustments, which are based on residents' assessments (looking at the severity of residents' medical conditions and skilled care needs).  The payment categories are called Resource Utilization Groups, or RUGs.

Medicare pays the highest rates for residents receiving rehabilitation services.  Approximately 92% of all Medicare residents are assigned to rehabilitation categories.[7]  SNFs assign residents to specific rehabilitation categories under RUGs based on the number of minutes of therapy they receive.  More minutes of therapy mean higher RUG categories and higher rates for SNFs. 

The Medicare program allows SNFs to bill for therapy in one of three ways: Individual Therapy (one resident – one therapist), Group therapy (one therapist working with multiple residents on the same therapy task), and Concurrent Therapy (one therapist working with multiple residents on different therapy tasks at the same time).  Historically, for each therapy method, the SNF would attribute the full amount of the therapist's time (i.e., the full number of therapy minutes) to each resident.  For example, four residents receiving group therapy for an hour would each be assigned 60 minutes of care for the therapy session. 

When PPS was originally implemented, Medicare used 44 resident assessment categories to adjust rates.  CMS expanded the number of RUGs from 44 to 53 in 2006 and from 53 to 66 in 2010.  CMS intended that the expanded number of assessment categories would be budget-neutral while reflecting a greater range of care needs.  As described below, however, SNFs' manipulation of the therapy classifications to which they assigned residents resulted in "excess payments"[8]  and multiple efforts by CMS to recalibrate Medicare rates.

SNFs Have Been Overpaid

Since Medicare implemented PPS thirteen years ago, many government reports have documented that Medicare payments have been overly generous.  Just last month, the Office of Inspector General (OIG) reported that Medicare payments to SNFs increased by $2.1 billion (1.6%) in the previous six-month period (from the last half of FY 2010 to the first half of FY 2011), in spite of the fact that beneficiaries' characteristics had not changed and that CMS had intended budget neutrality in reimbursement when it changed its rules for classifying concurrent therapy services.  OIG's Early Alert Memorandum (July 8, 2011) called on CMS to take "immediate action" to "adjust payment rates to address the significant increases in payments to SNFs."[9]

Although many reports documented that SNFs had been overpaid under the prior fee-for-service reimbursement system, overpayments continued when CMS introduced nine new resident assessment categories (RUG-III) in January 2006, increasing from 44 to 53 categories.[10]  CMS intended overall payments to be budget-neutral, despite the increased number of assessment categories, but many nursing homes changed their practices to assign residents to the categories yielding the highest reimbursement rates. 

CMS Recalibrates Rates

In May 2008, CMS proposed to recalibrate the rates, prospectively only, in order to achieve budget neutrality and prevent a projected overpayment of $770 million.[11]  By August 2008, when it published the final SNF rates for FY 2009, CMS projected that the overpayment had increased to $780 million.[12]  The Inspector General found that "from 2006 to 2008, SNFs increasingly billed for higher paying RUGs, even though beneficiary characteristics remained largely unchanged."[13]

The Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare policy, had reviewed SNFs' profit margins and operations and recommended in March 2008 that SNFs receive no update at all for FY 2009.[14]  Rejecting MedPAC's recommendation, CMS gave SNFs an increase of 3.1% in the "market basket," the annual adjustment to rates based on changes in the cost of living and inflation.  By declining to recalibrate rates and by including the market basket update, CMS's final rules led to a total overpayment for FY 2009 of $1.5 billion. 

CMS explicitly acknowledged that the nursing home industry's intense lobbying campaign to prevent recalibration had been successful.  While defending the merits of its proposed recalibration, which it had abandoned, CMS conceded:

[I]n view of the widespread industry concern that a recalibration could potentially have adverse effects on beneficiaries and SNF clinical staff, and could negatively affect the quality of SNF care, we believe that the most prudent course is to continue to evaluate these issues carefully before proceeding.[15]

The next year, 2009, CMS found that 28.26% of therapy in SNFs was concurrent therapy, with SNFs billing Medicare as if each resident received 100% of the therapist's attention.[16]  For FY 2010, CMS for the first time placed limitations on facilities' use of concurrent therapy, requiring allocation of concurrent therapy time between residents and limiting concurrent therapy to two residents.[17]  CMS also announced the expansion of the number of resident assessment categories from 53 to 66 (RUG-IV), effective in FY 2011.

Reporting that it estimated that expenditures for FY 2010 would be $1.05 billion higher than intended, CMS recalibrated the rates for FY 2010,[18] but only prospectively:

[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 payments levels on a prospective basis only, effective October 1, 2010.[19]

Although the recalibration reduced SNF Medicare rates by $1.05 billion (9.68%), CMS simultaneously increased the market basket by $690 million, offsetting the recalibration reduction and leading to a net result of a negative 1.1% ($360 million).[20]

In 2010, CMS implemented RUG-IV, the expansion of the number of resident assessment categories from 54 to 66.  The additional RUG categories were intended to reflect residents who require both rehabilitation services and intensive skilled nursing care. 

This year, CMS reported that SNFs had changed the therapy classifications they used following the FY 2010 limitations in billing for concurrent therapy.  In the first quarter of 2011, concurrent therapy (which required allocation of therapy time among residents) accounted for less than 5% of therapy services,[21] declining from 28.26% the previous year.  In the same time period, SNFs increasingly billed Medicare for group therapy (which did not require allocation of therapy time between residents) and individual therapy.  The result was the classification of residents into the highest paying RUG-IV therapy categories. 

In May 2011, CMS proposed recalibrating rates in the therapy RUG-IV groups to maintain budget neutrality following the expansion to 66 resident assessment categories.  However, the reduction of $4.7 billion would be offset by a market basket increase of $530 million (1.5%), resulting in a negative $3.94 billion (11.3%) decrease in rates.[22]  In the final rules for FY 2012, CMS changed the rules for group therapy (defining group therapy, for the first time, as involving four residents (not more and not fewer residents) and requiring allocation of the therapist's time among the four residents)[23] and recalibrated the rates.  CMS did not similarly adjust the non-therapy RUGs.  The final result was a $3.87 billion (11.1%) reduction, which CMS described as "correct[ing], on a prospective basis only, the unintended excess payment . . . observed for FY 2011."[24]  CMS did not propose "any action to recoup retroactively the excess expenditures already made to SNFs during FY 2011," but, instead, "limit[ed] the scope of the recalibration to restoring the intended SNF PPS payment levels on a prospective basis only effective October 1, 2011."[25]

SNFs Have Made Enormous Profits from Medicare

MedPAC reported in March 2011 that Medicare payments increased faster than Medicare costs, resulting in free-standing SNFs having average Medicare profit margins in 2009 of 18.1%, an increase from 10.9% in 2003.[26]

Table 7-6: Freestanding SNF Medicare Margins Continue to Increase
(From MedPAC, Medicare Payment Policy, Report to Congress, Chapter 7, page 158, Table 7-6 (March 2011)









Number of freestanding cost reports








Margin, by type of SNF:
































For profit
















In 2011, MedPAC reported that Medicare margins exceeded 10% for the ninth consecutive year.[27]  In March 2009, MedPAC reported that one-quarter of SNFs showed profit margins of at least 24.8%[28]

Residents Have Not Received Increased Care or Services from Overpayments

The GAO reported as early as 2002 that SNFs had shifted their assessment practices to assign residents to the rehabilitation RUG-III categories that gave them the most favorable reimbursement rates, often without actually providing residents with the number of minutes of therapy they required in order to be placed in those categories.[29]  In addition, the GAO reported that two years after the prospective payment system was implemented, "The 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."  Id. 3.  While reimbursement to SNFs increased, rehabilitation services for residents actually decreased.

Nurse staffing fared no better when reimbursement was increased.  Congress increased the nurse staffing component of the SNF rates by 16.66%, effective April 1, 2001, raising rates for SNFs by 4 to 12%.  Although the additional reimbursement focused on staff, the GAO found that SNFs' average nurse staffing increased by just 1.9 minutes per patient day.[30]

CMS also reported in August 2011 that staffing rates did not increase with the implementation of RUG-IV.[31]

Advocates Must Be Vigilant to Protect and Promote Quality of Care for Residents

CMS' reduction of overpayments to SNFs is one effort to bring down health care costs and to assure that payments are made to health care providers for services that are actually provided, but residents' advocates must assure that care for residents does not decline.  The opportunity for harm to residents is especially significant this year.

SNFs' expenses include expenses that must be paid – mortgage or rent, utilities, taxes – and expenses where SNFs may see flexibility – chiefly staffing, food, and supplies.  Staffing is particularly in danger because of the weak federal standards for nurse staffing.  Federal law requires SNFs, regardless of size, to have one registered nurse on the day shift and licensed and unlicensed nurses 24 hours a day that are "sufficient" to meet residents' needs.[32]  This vague standard is difficult to enforce, giving SNFs leeway to staff at low levels, a significant problem when CMS has already documented that more than 90% of facilities nationwide have too few staff to prevent avoidable harm to residents and to meet resident needs.[33]

Advocates may want to closely monitor SNFs' posted staffing levels.[34]  Under federal law, SNFs are required to post daily, at the beginning of each shift, the number of licensed nurses (registered nurses, licensed practical or vocational nurses) and unlicensed nursing staff (certified nurse assistants) who are "directly responsible for resident care" as well as the resident census.  Facilities must make the information available to the public in a readily accessible place, and on request,[35] and "must maintain the posted daily nurse staffing data for a minimum of 18 months, or as required by State law, whichever is greater."[36]

Advocates may file complaints with the state survey agency (generally located in the state health department) if staffing levels decline and residents are harmed or are in danger of harm as a result.  They may also encourage CMS to direct surveyors to give special attention to staffing.

[1] 76 Federal Register 48486 (Aug. 8, 2011),
[2] 76 Fed. Reg. 26364, at 36370 (May 6, 2011),
[3] Id.
[4] Id. 48501, Tables 4 and 5, respectively. 
[5] American Health Care Association (for-profit nursing homes), "CMS Issues Final Rule on Medicare Payments to SNFs; Federal Agency Disregards Calls for Phase-In, Drastically Reduces SNF Payments" (Press Release, July 29, 2011),; Leading Age (formerly known as American Association of Homes and Services for the Aging, not-for-profit nursing homes), "Medicare Rate Cuts: Shocking, Unfair and Punitive" (August 1, 2011),; Alliance for Quality Nursing Home Care (chain nursing homes), "New Medicare Cuts in CMS Final Rule a Clear and Present Danger to SNF Sector Stability, Quality Patient Care, Local Jobs" (Press Release, July 29, 2011),
[6] See  note 9, infra, for a list of some of the studies recognizing SNF overpayments.
[7] 76 Fed. Reg. 48486, at 48498 (Aug. 8, 2011).
[8] Id. 48497-48498.
[9] Office of Inspector General, "Early Alert Memorandum Report: Changes in Skilled Nursing Facilities Billing in Fiscal Year 2011," OEI-02-09-0024,  The Government Accountability Office also recently documented high profit margins for SNFs acquired by private investment firms.  GAO, Nursing Homes: Private Investment Homes Sometimes Differed from Others in Deficiencies, Staffing, and Financial Performance, page 34, Figure 11, GAO-11-571 (July 2011),
[10] 76 Fed. Reg. 48486, at 48497-48498 (Aug. 8, 2011) (discussing efforts to restore budget neutrality following transitions from 44 to 53 resident classifications and from 53 to 66 classifications).
[11] 73 Fed. Reg. 25918, at 25923 (May 7, 2008),
[12] 73 Fed. Reg  46416, at 46422 (Aug. 8, 2008),
[13] Office of Inspector General, Questionable Billing by Skilled Nursing Facilities, page 9, OEI-02-09-00200 (Dec. 2010),
[14] MedPAC, Medicare Payment Policy, Report to Congress, Section 2D, pages 142 (March 2008),
[15] 73 Fed. Reg. 46416, at 46424 (Aug. 8, 2008).
[16] 74 Fed. Reg. 40288, at 40315 (Aug. 11, 2009) (final rules),
[17]Id. 40315-40319.
[18] Id. 40295.
[19]Id. 40297.
[20] Id. 40298.
[21] 76 Fed. Reg. 26364, at 36370 (May 6, 2011),
[22] 76 Fed. Reg. 26364, at 26372 (May 6, 2011).
[23] 76 Fed. Reg. 48486, at 48511-48513 (Aug. 8, 2011).
[24] Id.  48496 (Aug. 8, 2011).
[25] Id.
[26] MedPAC, Medicare Payment Policy, Report to Congress, Chapter 7, pages 157-158, Table 7-6 (SNFs) (March 2011),
[27] Id. 158.
[28] MedPAC, Report to the Congress: Medicare Payment Policy, Section 2D (Skilled Nursing Facility Services), pages 160-161 (March 2009),
[29] GAO, Skilled Nursing Facilities Have Responded to Medicare Payment System by Changing Practices, GAO-02-841 (Aug. 2002),
[30] GAO, Skilled Nursing Facilities: Available Data Show Average Nursing Staff Time Changed Little after Medicare Payment Increase, page 3, GAO-03-176 (Nov. 2002),
[31] 76 Fed. Reg. 48896, at 48496 (Aug. 8, 2011).
[32] 42 U.S.C. §§1395i-3(b)(4)(C)(i).
[33] Health Care Financing Administration, Report to Congress: Appropriateness of Minimum Nurse Staffing Ratios in Nursing Homes, Phase II Final Report (Winter 2001).
[34] 42 C.F.R. §483.30(e).
[35] 42 C.F.R. §483.30(e)(2), (3).
[36] 42 C.F.R. §483.30(e)(4).



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