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October 09, 2019

Goodbye, RUGS! Hello, PDPM: Fundamental Changes to SNF Medicare Payment

By Mark A. Johnson, Esq. Hooper Lundy & Bookman, PC, San Diego, CA; Matthew I. Lahana, Esq. Hooper Lundy & Bookman, PC, San Diego, CA; Michael Lesnick, Axiom Healthcare Group, Roseville, CA


On October 1, 2019, Medicare payments to Skilled Nursing Facilities (SNFs) began to be reimbursed under a new payment methodology called the Patient Driven Payment Model (PDPM).1  This is the first truly significant change to SNF Medicare payment methodology in more than 20 years.  The last time the Centers for Medicare & Medicaid Services (CMS) changed the reimbursement methodology for SNFs, from a cost-based model to the Prospective Payment System (PPS), nearly 11 percent of all SNF providers went into bankruptcy.2

Any transition, especially one of this magnitude, requires providers to prepare for the change by gaining an understanding of how the new system will work, including the technical and mechanical aspects of the new system.  More importantly, providers need to understand what has to happen on a day-to-day basis at the “ground level” to avoid the types of serious problems the last major transition caused for this profession.  This article aims to point SNFs in the right direction. 


The Past and Present: The Prospective Payment System from RUGs to PDPM

In 1998, CMS changed the Medicare reimbursement methodology for SNFs from a cost-based methodology, where SNFs were paid based on what they spent, to the PPS,3 where payments were based on patient characteristics instead of cost.  This change was expected to reduce program costs while maintaining or improving patient care.  Under the PPS, providers would complete a series of assessments for each patient, called the Minimum Data Set (MDS), and those assessments were used to determine which category (payment level) each patient was assigned to.  The categories were called Resource Utilization Groups (RUGs).4 Under the RUGs category system there were effectively only two areas of the patients’ clinical needs assessed: therapy and nursing.  Further, the overwhelming emphasis was placed on delivering therapy services to patients.  Once a patient received enough therapy, even a very modest level of therapy, nothing else mattered.  In other words, once the patient received the minimum level of therapy required to be assigned to a “Therapy RUG,” none of the other clinical criteria captured in the MDS data had any significant influence on how much Medicare would pay for that patient’s care.

Under PDPM the profession will see dramatic changes in how patients are assigned to payment categories.  Therapy, although still an essential part of care for most patients, is deemphasized, and the more clinically complex needs of  patients (nursing, non-therapy ancillary (NTA) services, diagnosis and other complex services) become the primary drivers for payment.

Adding to the discussion, under the old RUGs model there was only one consideration regarding placement in a therapy category: the volume of therapy delivered: how many minutes of therapy delivered to each patient.  The minutes of therapy were captured in the MDS assessment tool (along with over 100 other elements of care).  But only the number of therapy minutes determined how a patient would be classified into a Therapy RUG category.  This created an incentive to deliver therapy to  patients, and the overwhelming majority of providers focused on the delivery of therapy services.

In fact, in recent years, 90 percent of Part A covered SNF days are paid using a Therapy RUG category, and only a small fraction of payment is influenced by non-therapy conditions (i.e., nursing needs).5  The PPS’s overutilization of therapy services under the RUGs model has been roundly criticized by many groups, including CMS,6 the Department of Health and Human Services’ Office of Inspector General7 and the Medicare Payment Advisory Commission (MedPAC).8

In an attempt to address the overemphasis on therapy services, CMS introduced the Resident Classification System, Version 1 (RCS-1) in 2017.9  The RCS-1 proposed rule called for the   use of the same MDS assessment tool as the RUG-IV system with some modifications and additions.  RCS-1 attempted to align payments with resource use instead of therapy-related financial incentives.  To accomplish this, RCS-1 classified patients into separate groups for each of the four case-mix adjusted components: (1) physical therapy/occupational therapy (PT/OT); (2) speech-language pathology (SLP); (3) NTA services;10 and (4) nursing.  Each of the four categories has its own case-mix indexes and per diem rates, with the per diem rates for PT/OT and NTA services variable based on changes in a patient’s resource use over a stay.  The SLP and nursing component per diem rates would be added to the PT/OT and NTA services component variable per diem rates to arrive at the full per diem.  Instead of a consistent rate throughout an assessment period, rates are highest at the beginning of a patient’s stay and decrease over time.

While RCS-1 was never implemented, it did not disappear.  In May 2018 it was significantly revised and reintroduced11 as the PDPM.12

The Future: Patient-Driven Payment Model

PDPM considers a much broader range of clinical characteristics, patient diagnoses and overall medical needs when assigning patients to payment components. 

Clinical Components Under PDPM

An MDS assessment will be used to identify a classification for each of the five following clinical components:

·         Nursing - The identification of medically complex conditions that require more nursing services;

·         NTA services;

·         PT;

·         OT; and

·         SLP.

Each of these five components has its own set of categories and payment rates that correspond to those categories.  The following shows the number of categories each clinical component will have:

Clinical Component                      # of Categories

Nursing                                                     25

NTA services                                             6       

PT                                                              16

OT                                                             16

SLP                                                           12

PDPM attempts to limit the emphasis on delivering more therapy minutes by reducing the financial incentives to deliver more minutes of therapy present in the RUGs model.  PDPM also aims to provide more accurate reimbursements for medically complex patients through its emphasis on a much broader range of characteristics, including the non-therapy medically complex needs that require more nursing services.  PDPM removes therapy minutes as the basis for payment, and instead replaces it with mutually exclusive patient groups based on patient characteristics and additional adjustments.  Under PDPM, there are now five unique areas of clinical need assessed.  The therapy component, previously driven under PPS only by the number of minutes delivered, is separated into three parts under PDPM, each of which is driven by patient clinical characteristics.  The clinical characteristics pointing to the needs for specific types of therapy, not minutes delivered, are assessed in deciding how much to pay for therapy services.  

“Non Case-Mix” Components Under PDPM

In addition to the clinical components, there is one rate component — the “non case-mix” component — which pays providers for the non-clinical resources, or “overhead,” needed to deliver care to patients. These include dietary services, housekeeping, laundry, administration, medical records, rent and facility maintenance.

Calculating the Per Diem Rate

The corresponding payment rates for each of the clinical components are summed up and added to the “non-case mix” component to determine the full per diem payment rate for each patient.  With five separate case-mix adjusted components that will be combined to arrive at the actual payment rate, there will be far more "categories" (possible combinations) under PDPM than under RUG-IV, where there were 66 categories. Under PDPM there are literally thousands of possible combinations.  However, it is anticipated that any given provider will probably see only a few hundred of the possible combinations.

Further, the initial payment amount will decrease over the length of stay, which is different from  the  RUGs model.  For the therapy components (PT, OT and SLP), the rate for each discipline will be reduced by two percent each week after day 21.  For NTA services the amount paid in the first three days of the stay will be increased by 300 percent.  This 300 percent increase in the first three days for the NTA component reflects the significant additional costs incurred at the beginning of the stay for patients with medically complex conditions.  The reductions in payment over time are expected to have some impact on the average length of stay because they reduce the financial benefit (the payments to providers).

MDS Assessments Under PDPM

One of the major changes in the transition from RUGs to PDPM is the reduction in the number and frequency of the MDS assessments.  Under RUGs, providers were required to complete a series of MDS assessments at various points in the patient’s stay.  For any individual patient there could be five or more separate assessments during the course of the patient’s stay.  Under PDPM there is only one assessment required, and it is at the beginning of the stay.

This reduction is not an indication that the MDS assessment becomes less important or less meaningful.  The MDS assessment actually becomes more important than ever before.  This is  because all of the elements of the MDS matter now:  They all will contribute to the categories the patients are assigned to, and therefore the amount Medicare will pay the SNF.  Under the old system, even though there were a series of MDS assessments, the only component  that mattered for the overwhelming majority of patient assessments was the number of therapy minutes delivered, because that ultimately determined the reimbursement rate.  Providers will need to place significantly more focus on the MDS assessment under PDPM because the per diem rate is set by an individual patient’s clinical characteristics, and not the minutes of therapy services delivered.

CMS has indicated that it believes providers will save money as a result of the decrease in the number of required MDS assessments, about 183 hours per provider per year, which translates to $12,092.13 That is not necessarily the case.  Rather, providers will need to place more focus on the MDS process, and failure to do so can result in potentially costly problems including under/over payments.

Volume of Therapy Services Under PDPM

As noted above, since PDPM deemphasizes the focus on the volume of therapy services delivered to patients, the number of therapy minutes will not determine how much a SNF will be paid by Medicare.  However, the number of minutes of therapy will still be reported in the MDS, and CMS will still be monitoring the volume of therapy delivered to patients in order to compare the number of therapy minutes delivered under PDPM to the number of therapy minutes previously delivered under RUG-IV.

PDPM In Practice

MedPAC acknowledges that the transition to PDPM will require “considerable changes” to the SNF profession, but those changes have the potential to be very positive for SNFs, therapy service providers, Medicare, and most importantly,  patients.  Specifically, because a patient’s per diem will be higher at the beginning of the stay, and less as time passes, patients should have a shorter length of stay because facilities are incentivized to increase the efficiency of rehabilitation and therapy services.14 Only time will tell whether the belief MedPac expresses will be realized.

Moreover, changing the payment incentives from an almost exclusive focus on the number of therapy minutes delivered to a broad range of clinical characteristics will provide additional incentives for SNFs to develop the capabilities and programs necessary to care for more medically complex patients, which means more options for those patients.  The addition of NTA services as a component should also increase reimbursement for patients with medically complex conditions and encourage providers to admit more of those types of patients.  The same is likely true for the increased focus on nursing services, i.e., the clinical characteristics that point to the need to more nursing time.  All parties are interested in whether these changes to nursing and NTA services will be enough to motivate providers to care for more medically complex patients. 


Although the shift to PPS 20 years ago resulted in significant unintended consequences, the transition to PDPM has been more methodical.  Financially, the transition to PDPM is supposed to be budget-neutral.15 Additionally, CMS intends to continue providing the annual market basket increase (inflating the rates).  Whether any individual SNF performs better or worse financially depends on many factors, and success requires preparation and a forward focus on the areas that will help ensure success under PDPM.  With proper planning, there is opportunity for all stakeholders to benefit.

  1.  Centers for Medicare & Medicaid Services,
  2.  Laura A. Dummit, United States General Accounting Office, Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies, (finding Medicare’s SNF payments under PPS as “sufficient” while analyzing the factors that led to 1,800 of the nation’s 17,000 SNFs to file for bankruptcy protection).
  3.  Centers for Medicare & Medicaid Services, (providing information on PPS).
  4.  RUGs have gone through four iterations, with the most recent revision in 2010, which is referred to as RUG-IV.  (See 74 Fed. Reg. 40288 (Aug. 11, 2009),
  5.  82 Fed. Reg. 20980 (May 4, 2017), 20982,
  6.  82 Fed. Reg. 20980 (May 4, 2017), 20982-20983,
  7.  Dep’t Health & Human Servs. Office Inspector Gen. (OIG), Questionable Billing by Skilled Nursing Facilities (Dec. 2010),; OIG, Inappropriate Payments to Skilled Nursing Facilities Cost Medicare More Than a Billion Dollars in 2009 (Nov. 2012),; OIG, The Medicare Payment System for Skilled Nursing Facilities Needs to be Reevaluated (Sep. 2015),
  8.  Medicare Payment Advisory Commission (MedPAC), Report to the Congress: Medicare Payment Policy, Chapter 8, page 200 (Mar. 2017), (MedPAC is a nonpartisan legislative branch agency that provides Congress with analysis and policy advice on the Medicare program.).
  9.  82 Fed. Reg. 20980 (May 4, 2017),
  10.  NTA services primarily consist of laboratory services, radiology, wound care, and drugs, including costly IV services.
  11.  CMS.Gov, SNF PPS Payment Model Research,
  12.  83 Fed. Reg. 21018, 21034-21080 (May 8, 2018),
  13.  83 Fed. Reg. 21018, 21093 (May 8, 2018
  14.  MedPAC, Report to the Congress: Medicare Payment Policy, Chapter 8, page 195 (Mar. 2019),
  15.  MedPAC, Report to the Congress: Medicare Payment Policy, Chapter 8, page 199 (Mar. 2019),; compare, 83 Fed. Reg. 21018, 21023, Tables 4, 5 (May 8, 2018),, with 21040, Tables 12, 13 (showing nearly identical reimbursement rates under RUGS and PDPM); 84 Fed. Reg. 38728, 38734 (August 7, 2019),

About the Authors

Mark A. Johnson is the Managing Partner of the San Diego office of Hooper, Lundy & Bookman, P.C. and a member of the firm’s Board of Directors.  He has spent 22 years advising post-acute providers and suppliers on Medicare and Medicaid reimbursement issues, regulatory compliance matters, including the Anti-Kickback Statute and the False Claims Act, survey and certification matters and provider operations.  Mr. Johnson is the current chair of the American Bar Association Health Law Section’s Post-Acute Care Continuum Task Force, and he has been recognized by Best Lawyers for work in the healthcare legal field.  Mr. Johnson was awarded a Distinguished Service Award from the California Association of Health Facilities in recognition of his excellent service and outstanding dedication to the long-term care profession in California.  He is a frequent national speaker on compliance, fraud and abuse and reimbursement matters in healthcare.  He may be reached at [email protected].  

Matthew I. Lahana
is an associate of the San Diego office of Hooper, Lundy & Bookman, P.C.  His practice areas include advising post-acute providers, as well as complex civil litigation, medical staff operations, and fraud and abuse defense.  Prior to joining the firm, he was a Deputy Attorney General in the Health, Education and Welfare section of the California Department of Justice.  He may be reached at [email protected]

Michael Lesnick
has over 35 years’ experience in the healthcare profession and has served in a wide range of  long-term care providers and professionals throughout the country.  He has a comprehensive knowledge of and broad perspective on the issues and challenges providers face in the current environment.  Mr. Lesnick provides services in a number of areas including finance and accounting, operations, reimbursement and regulatory issues. He is the author of the book Skilled Nursing Facility Management - Cost Reporting  published by McGraw Hill and was deeply involved in the transition from cost-based reimbursement to the prospective payment system for SNFs 20 years ago.  Mr. Lesnick now helps SNFs understand and navigate the transition to PDPM, the next evolution of SNF reimbursement. He is currently the owner of the  Healthcare consulting firm Axiom Healthcare Group. He may be reached at [email protected].