June 15, 2018

Proposed Skilled Nursing Patient Driven Payment Model

Proposed Skilled Nursing Patient Driven Payment Model

In May 2017, the Centers for Medicare and Medicaid Services (CMS) released a proposal for a new payment model for Medicare patients staying in skilled nursing facilities. This payment model, Resident Classification System Version 1 (RCS-1), was set to replace the current Resource Utilization Group (RUG) payment system beginning October 1, 2018. However, due to the number of comments from stakeholders, CMS released a new Advance Notice of Proposed Rulemaking (ANPRM) in May 2018, introducing another new payment model called SNF Patient Driven Payment Model, or PDPM, which is set to be implemented on October 1, 2019. While PDPM is primarily based on RCS-1, it contains significant changes from the original RCS-1 model. Below we discuss why CMS has a strong initiative to change the current payment method and an overview of the PDPM and how it compares to the RCS-1 model.

CMS Outlook on Current Payment System

Current rate-setting methodology classifies residents by Resource Utilization Groups, or RUGs, which are based upon the type and amount of therapy provided to the resident. As a result, the more highly intensive therapy provided, the higher the Medicare rate is. However, with cost containment being one of CMS’s main goals over the next few years, a study was conducted by CMS to observe trends in therapy utilization. This study revealed two notable trends, wherein the number of residents classified as receiving Ultra-High therapy has steadily increased and the number of residents receiving 720 minutes of therapy, which is the minimum amount of therapy to surpass the Ultra-High and Very-High thresholds, increased from 5% in FY 2005 to 33% in FY 2013. Based upon these two trends, CMS concluded the therapies being provided were based more upon financial considerations than the actual needs of the residents. As a result, CMS is trying to create a new payment system that is more centered on resident needs than financial incentives.

Proposed Patient Driven Payment Model Overview

In order to more accurately tie Medicare rates to resident characteristics and needs, the new rate system is broken into (5) case-mix rate categories, which is one more category than the RCS-1 model included. The additional category separates physical therapy and occupational therapy, whereas the RCS-1 grouped them together. The categories are as follows:

  1. Physical Therapy.
  2. Occupation Therapy.
  3. Speech Therapy.
  4. Non-Therapy Ancillaries.
  5. Nursing.

This new model will also include a non-case mix category to cover the additional fixed costs associated with normal room and board for the residents, which was also the case in the RCS-1 model. The only difference from one provider to another for the non-case mix rate will be whether the facility is considered urban or rural.

Similar to the RCS-1 model, each of the above determinants will be case-mix adjusted to arrive at its own unique rate, based upon the characteristics of the residents. Once the rates for each category are determined, they will be added together with the non-case mix rate to arrive at the full Medicare rate for that resident.

CMS also concluded, through various studies, that the costs for physical therapy, occupational therapy, and non-therapy ancillaries are much higher in the beginning of a stay than upon discharge. As a result, CMS has included rate adjustments throughout the resident stay to account for reduction in costs in these categories.

Significant Changes from the RCS-1 Model

When the original RCS-1 proposed rule was published, numerous comments were submitted regarding the complexity of computing a rate due to all the different cost component groups included in the rate calculation. As a result, CMS has reduced the number of possible case-mix groups by nearly 80% in order to simplify the model.

While the rate adjustments noted above for physical therapy, occupational therapy, and non-therapy ancillaries were included in the original model, for PDPM the PT/OT adjustment will not begin until day 21 (the rate was reduced on day 15 for RCS-1). Additionally, the rate will be reduced on day 21 by 2% and thereafter every (7) days by an additional 2%, whereas RCS-1 reduced the rate by 1% every (3) days after day 15. The adjustment factor for the non-therapy ancillaries remains the same as in the RCS-1 model.

Another area of concern for stakeholders on the RCS-1 model was that the information used to set the rates was somewhat dated. The new model will include updates to the data used to create the base rates and will make greater use of other items already being prepared by facilities, such as the Quality Reporting Program.


CMS took the many comments received from stakeholders regarding the original RCS-1 payment model and tried to create a new payment model that not only helps contain costs in the future, but also pushes for more patient-centered care and lower lengths of stay. With the comment period for the new Patient Driven Payment Model closing on June 26, 2018, we will see if this method is here to stay and is actually implemented on October 1, 2019. Stay tuned for updates as things progress.

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