June 14, 2021

Understanding the Parity Adjustment

By Maureen McCarthy, CEO and President, Celtic Consulting

Understanding the Parity Adjustment Healthcare

Many are familiar with the market basket and forecast error adjustment, but few may recall a parity adjustment, last seen during the transition from RUG-III to RUG – IV payment system in FY 2011. As the saying goes, what’s old is new again.

What is a parity adjustment?

The Centers for Medicare and Medicaid Services (CMS) released the interim final rule introducing PDPM parity adjustments to reduce overall spending to a budget-neutral amount. Adjusting the case mix indices (CMI) for each payment component will offset higher than anticipated spending.

The parity adjustment will utilize a factor calculated by comparing total payments in FY 17 against total payments expected under the Patient Driven Payment Model (PDPM) using the same FY 17 claims and Minimum Data Set (MDS). This methodology will effectively reduce reimbursement for each payment category across the board.

How will providers be impacted?

Parity adjustments will reduce the current rate components on average by $0.94 for SLP-A, up to $26.29 for Nursing ES3, significantly impacting all skilled nursing providers when the rate components are combined.

Providers who have based budgets on 2019 or 2020 reimbursement rates may be surprised to find a negative variance due to the parity adjustment.

Why are rates being adjusted?

CMS reviewed PPS rates both before and after implementing PDPM in October 2019. The review prior to PDPM used FY 17 data, and the review completed in 2020 used FY 18 data. The 2020 review resulted in an adjustment factor of 1.46, increasing CMI by 46%. Following this increase, the industry saw a reduction in the average number of therapy minutes from 91 minutes per resident per day to 62 minutes per resident per day, a 30% decrease. CMS cited multiple factors, a decline in therapy staffing and care directives, and the significant increase in the provision of concurrent and group therapy, respectively, from 1% to 32%, and 29%.

CMS observed therapy providers laying off staff in response to PDPM, and therapists were providing fewer treatment minutes, an average of 350-400 minutes under PDPM vs. 720 minutes under RUG – IV. The inability to provide rehabilitative therapy services to non-affected residents of the skilled nursing facility (SNF) during the COVID-19 pandemic also influenced the drop in therapy provision.

Consequently, workforce demand declined, and therapy costs lowered, but rates remained the same. The anticipated rate reductions achieved by a PDPM parity adjustment are a result of these findings.

Are there options for providers?

Skilled nursing providers can be proactive and develop a plan in response to anticipated rate reductions. Many providers entering the FY 2022 budgeting season may want to modify their budgeted revenue to accommodate the parity adjustment.

Providers should consider analyzing their PDPM data to identify missed opportunities, potential risk areas for non-compliance, and revenue recoupment. Review of PDPM data can target non-conforming issues for further investigation, allow for inclusion in the facility’s overall Quality Assurance and Performance Improvement (QAPI) plans, and routine monitoring for deviations.