Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
T M P
HE  EDICARE  AYMENT 
 
 
S F S N
YSTEM  OR  KILLED  URSING 
 
 
F N T B
ACILITIES  EEDS  O  E 
 
R  
EEVALUATED 
 
Daniel R. Levinson   
Inspector General  
 
September 2015 
OEI-02-13-00610   
   
EXECUTIVE SUMMARY:  THE MEDICARE PAYMENT SYSTEM FOR SKILLED 
NURSING FACILITIES NEEDS TO BE REEVALUATED   
OEI-02-13-00610 
 
WHY WE DID THIS STUDY 
 
The Office of Inspector General (OIG), the Medicare Payment Advisory Commission, and 
other entities have raised longstanding concerns regarding Medicares skilled nursing 
facility (SNF) payment system.  These concerns focus on SNF billing, the method of 
paying for therapy, and the extent to which Medicare payments exceed SNFs 
costs. Medicare pays SNFs a daily rate for nursing, therapy, and other services.  The daily 
rate for therapy is primarily based on the amount of therapy provided, regardless of the 
specific beneficiary characteristics or care needs.   
 
Previously, OIG found that SNFs increasingly billed for the highest level of therapy even 
though key characteristics of SNF beneficiaries remained largely unchanged from 2006 to 
2008. OIG also found that SNFs billed one-quarter of all 2009 claims in errorprimarily 
by billing for higher levels of therapy than they provided or were reasonable or 
necessarywhich resulted in $1.5 billion in inappropriate Medicare payments.  This study 
provides further evidence that supports and quantifies these concerns. 
 
HOW WE DID THIS STUDY  
 
This study was based on several data sources, including Medicare Part A SNF claims, 
Medicare cost reports, and beneficiary assessments.  We used Medicare cost reports to 
compare Medicare payments to SNFs costs for therapy over a 10-year period.  We used 
claims to determine the extent to which SNF billing and beneficiary characteristics 
changed from fiscal years (FYs) 2011 to 2013. Finally, we determined the extent to which 
changes in SNF billing affected Medicare payments.   
 
WHAT WE FOUND 
 
We found that Medicare payments for therapy greatly exceeded SNFs costs for therapy.   
We also found that under the current payment system, SNFs increasingly billed for the 
highest level of therapy even though key beneficiary characteristics remained largely the 
same.  Increases in SNF billingparticularly for the highest level of therapyresulted in 
$1.1 billion in Medicare payments in FYs 2012 and 2013. 
 
WHAT WE RECOMMEND  
 
The findings of this and prior OIG reports demonstrate the need for the Centers for 
Medicare & Medicaid Services (CMS) to reevaluate the Medicare SNF payment system.  
Payment reform could save Medicare billions of dollars and encourage SNFs to provide 
services that are better aligned with beneficiaries care needs.  We recommend that CMS:  
(1) evaluate the extent to which Medicare payment rates for therapy should be reduced, (2) 
change the method for paying for therapy, (3) adjust Medicare payments to eliminate any 
increases that are unrelated to beneficiary characteristics, and (4) strengthen oversight of 
SNF billing.  CMS concurred with all four of our recommendations.  
   
   
TABLE OF CONTENTS 
 
Objectives.................................................................................................... 1 

Background ................................................................................................. 1 

Methodology ............................................................................................... 6 

Findings....................................................................................................... 7 

Medicare payments for therapy greatly exceed SNFs costs  

for therapy ....................................................................................... 7 

SNFs increasingly billed for the highest level of therapy even 

though key beneficiary characteristics remained largely the  

same   ................................................................................................ 9 

Increases in SNF billingparticularly for the highest level of 
 
therapyresulted in $1.1 billion in Medicare payments in 

FYs 2012 and 2013........................................................................ 10 

Conclusion and Recommendations ........................................................... 12 

Agency Comments and OIG Response......................................... 14 

Appendixes................................................................................................ 15 

A: 	Medicare Payment Rates per Day per RUG in FY 2013 ......... 15 

B: 	Detailed Methodology ............................................................. 17 

C: 	Changes in Key Beneficiary Characteristics From FYs 2011 to 
  
2013......................................................................................... 21 

D: 	Increases in the Use of Ultra High Therapy From FYs 2011 
  
to 2013, by Key Beneficiary Characteristic ............................ 23 

E: 	Estimates of Medicare Payments in FYs 2012 and 2013 

Resulting From Changes in SNF Billing ................................. 25 

F: Agency Comments  ................................................................... 26 

Acknowledgments ..................................................................................... 29 

 
 
   
   
OBJECTIVES 
1. 	 To compare Medicare payments to skilled nursing facility (SNF) costs 
for therapy.   
2. 	 To determine the extent to which SNF billing and key beneficiary 
characteristics changed from fiscal years (FYs) 2011 to 2013. 
3. 	 To determine the extent to which changes in SNF billing affected 
Medicare payments.  
BACKGROUND 
SNFs provide skilled nursing care, therapy, and other services to Medicare 
beneficiaries under the Part A benefit.  In 2012, nearly 2 million Medicare 
beneficiaries received these services.1    
The Office of Inspector General (OIG), the Medicare Payment Advisory 
Commission (MedPAC), the American Health Care Association (AHCA) 
the largest association of long term and post-acute care providersand 
other entities have raised longstanding concerns regarding Medicares SNF 
payment system.   
One concern about the SNF payment system is the extent to which 
Medicare payments exceed SNFs costs.  MedPAC has found that Medicare 
payments are substantially higher than SNFs costsspecifically, that 
Medicare margins have been above 10 percent since 2000and, each year 
during the last decade, has recommended that Congress decrease Medicare 
payments.2  Excessive Medicare payment rates are wasteful to taxpayers 
and could encourage SNFs to provide more therapy than beneficiaries need.   
Another concern about the SNF payment system is how Medicare pays for 
therapy.   The current method is, according to CMS, based primarily on the 
amount of therapy provided to a patient, regardless of the specific patient 
characteristics and care needs.3  A payment system that pays more as the 
volume of services increases creates a financial incentive to provide more 
____________________________________________________________ 
 
1 Centers for Medicare & Medicaid Services (CMS), The Medicare and Medicaid 
Statistical Supplement, 2013 Edition, Table 6.4.   Accessed at http://www.cms.gov/ 
Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ 
MedicareMedicaidStatSupp/2013.html on March 19, 2014. 
2 See MedPAC, Report to Congress:  Medicare Payment Policy, March  2015, ch. 8,  
pp. 195 and 203. Accessed at  http://www.medpac.gov/-documents-/reports on May 14, 
2015.  Medicare margins are a standard method for comparing payments and costs.     
3 CMS, SNF PPS Payment Model Research, http://www.cms.gov/Medicare/Medicare-Fee-
for-Service-Payment/SNFPPS/therapyresearch.html on May 4,  2015. 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   1   
   
services than the beneficiary may need.  The AHCA, for example, 
recognizes [the] concern surrounding therapy utilization and supports 
shifting Medicare away from paying providers based solely on their 
volume of services.4  In addition, OIG, MedPAC, and others have 
recommended changing the method of paying for therapy from one based 
primarily on volume to one based primarily on beneficiary characteristics.5   
Concerns also exist about SNF billing under the current system.  Notably,  
in December 2010, OIG found that SNFs increasingly billed for the highest 
level of therapy, even though key beneficiary characteristics remained 
largely unchanged.6 OIG also found that SNFs billed one-quarter of all 
2009 claims in error, resulting in $1.5  billion in inappropriate Medicare 
payments.7  For the vast majority of these claims, SNFs billed for higher 
levels of therapy than they provided or were reasonable or necessary.  Such 
billing can create quality of care concerns.  For example, a beneficiary 
who received hospice care before and after her SNF stayreceived 
physical therapy 5 days a week for 5 weeks, even though her medical 
records indicated that she asked that the therapy be discontinued.8    
In addition, OIG investigations have found problems with SNF billing.  For 
example, a SNF chain agreed to a $3.75 million settlement over allegations 
of fraudulent billing for medically unnecessary therapy.9   Another SNF 
chain paid $3.5 million to settle a case that involved allegations of 
____________________________________________________________ 
 
4 AHCA, AHCA Medicare Payment Reform Initiative:  SNF-Only Bundled Payment 
Model (Preliminary). The latter was accessed at 
http://www.ahcancal.org/solutions/download/medicare_concept_issue_brief.pdf on  
March 12, 2014. 
5 See, for example, OIG, Inappropriate Payments to  Skilled Nursing Facilities Cost 
Medicare More Than  a Billion  Dollars in 2009, OEI-02-09-00200, November 2012. 
6 OIG,  Questionable Billing by Skilled  Nursing  Facilities, OEI-02-09-00202, 
December 2010. 
7 Claims billed in error are upcoded  or downcoded or do  not meet Medicare coverage  
requirements.  See OIG, Inappropriate Payments to  Skilled Nursing Facilities Cost 
Medicare More Than  a Billion  Dollars in 2009, OEI-02-09-00200, November  2012.   
8 OIG,  Skilled Nursing Facilities Often Fail To Meet Care Planning  and Discharge 
Planning Requirements, OEI-02-09-00201, February 2013. 
9 Department of Justice (DOJ),  Two Companies to Pay $3.75 Million for Allegedly 
Causing Submission of Claims for Unreasonable or Unnecessary Rehabilitation Therapy 
at Skilled Nursing  Facilities, September  5, 2014.  Accessed at 
http://www.justice.gov/opa/pr/2014/September/14-civ-943.html on September 10, 2014.    
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   2   
   
medically unnecessary therapy and false reports of therapy being 
delivered.10  
This report provides policymakers with key information regarding the SNF 
payment system and SNF billing under this system.  This information is 
especially relevant now because the payments for emerging modelssuch 
as accountable care organizations and bundled paymentsare based on 
current fee-for-service payments.11   This report is a companion to another 
report that focuses on SNF billing for changes in therapy.12                   
The SNF Payment System 
The Medicare Part A SNF benefit covers skilled nursing care, therapy 
services (i.e., physical, occupational, and speech therapy), and other 
services.13   To qualify for the SNF benefit, the beneficiary must be admitted 
to the SNF within 30 days of an inpatient hospital stay that lasted at least 
3 consecutive days.14   
 
During a Part A stay, a SNF periodically assesses a beneficiary to classify 
him or her into a resource utilization group (RUG), which determines how 
much Medicare pays the SNF each day for the beneficiarys care.15  
Types of RUGs. CMS groups the 66 RUGs into 8 categories. Two 
categoriesRehabilitation and Rehabilitation Plus Extensive Servicesare 
for therapy RUGs; the remaining six categories are for nontherapy RUGs.  
Therapy RUGs are for beneficiaries who need physical therapy, speech 
therapy, or occupational therapy, typically to recover from an event such as 
a hip fracture or a stroke. Nontherapy RUGs are for beneficiaries who 
require skilled nursing care, but very little or no therapy.  
The therapy RUGs are divided into five levels:  ultra high, very high, high, 
medium, and low.  The SNF categorizes a beneficiary into one of these 
____________________________________________________________ 
 
10 DOJ,  New York Catholic Nursing Chain to  Pay $3.5 Million to  Resolve Allegations  
Concerning Claims for Rehabilitation Therapy, March  2, 2015.  Accessed at 
http://www.justice.gov/usao-ma/pr/new-york-catholic-nursing-chain-pay-35-million-
resolve-allegations-concerning-claims on March 13, 2015. 

11 See, for example, MedPAC and the Urban  Institute, The  Need to Reform Medicares 

Payments to  Skilled Nursing Facilities Is as Strong  as  Ever, January 2015, p 2.  

12 OIG,  Skilled Nursing Facility Billing for Changes in Therapy:  Improvements Are 
Needed, OEI-02-13-00611, June 2015. 

13 Social Security Act (SSA),   1812(a)(2)(A) and 1861(i); 42 U.S.C.   1395d(a)(2)(A) 
 
and 1395x(i).  

14 42 CFR  409.30(a)(1) and (b)(1).   

15 SNFs use an assessment known as the Minimum Data Set (MDS) to classify 

beneficiaries into RUGs.  The MDS is part of CMSs Resident Assessment Instrument 

(RAI).  CMS,  Long-Term Care Facility Resident Assessment Instrument  Users Manual, 

ver. 3.0  (RAI Manual 3.0), May 2013,  1.3. 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   3   
   
levels primarily on the basis of the amount of therapy provided during a 
7-day assessment period.16  For example, if a beneficiary received 45 
minutes of therapy during the assessment period, he or she is typically 
categorized into a low therapy RUG, whereas if a beneficiary received 
720 minutes, he or she is typically categorized into an ultra high therapy 
RUG. 
In addition, RUGs are generally divided by the amount of assistance a 
beneficiary needs with certain Activities of Daily Living (ADLs), such as 
eating. If a beneficiary needs high levels of assistance, he or she is 
categorized into a RUG with a high ADL score, whereas a beneficiary who 
needs less assistance is categorized into a RUG with a lower ADL score.   
Medicare Payment Rates for RUGs. Payment rates for therapy RUGs are 
typically higher than for nontherapy RUGs.  Payment rates typically 
increase as the level of therapy increases and as the ADL score increases.  
For example, the average daily payment rate for ultra high therapy RUGs 
was $620 in FY 2013, while the average rate for low therapy RUGs was 
$362. See Appendix A for the Medicare payment rate for each RUG in FY  
2013. 
For each RUG, the payment rate is the sum of three components:  nursing, 
therapy, and room and board.  Table 1 shows the base rate for each 
component in FY 2013.  For example, SNFs are paid a base rate of $123 a 
day to cover the costs of providing therapy to a beneficiary.   This rate is 
multiplied by a Therapy Index that varies with the level of therapy provided 
to the beneficiary.17 
 
 
 
 
 
 ____________________________________________________________ 
 
16 CMS, RAI Manual  3.0,  6.6. 
   
17 In FY  2013, the Indexes were 0.28  for low therapy,  0.55 for medium therapy,  0.85 for 
 
high therapy,  1.28  for very  high therapy, and 1.87 for ultra high therapy.   See 77  Fed. Reg. 

46214, 46220, Table 4 (August 2, 2012).  The base rate is also multiplied by a geographic 

factor to account for wage differences.  

The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   4   
   
Table 1: Base Rate for Each Component of Medicare 
Payments to SNFs, FY 2013  
Component   Base Rate per Day*  
Nursing  $164  
Therapy**   $123 
Room and board   $83 
* These rates are for urban SNFs; rural SNFs have somewhat different rates.  
** This is  the base rate for therapy RUGs.  The base rate for nontherapy RUGs is 
$16 and  covers, for example, SNFs costs for evaluating beneficiaries  to  
determine whether they need therapy. 
Source:  77 Fed. Reg. 46214, 46219, Table 2, (August 2, 2012). 
Changes to Medicare Payment Rates. CMS updates the base rates each 
year using a market-basket index that reflects changes over time in the 
prices of goods and services.18  In addition, CMS changed payment rates 
by changing the Therapy or Nursing Indexeswhen it made significant 
revisions to the payment system.19  After each significant revision, CMS 
readjusted rates because SNF billing, particularly billing for therapy, was 
substantially higher than CMS expected.20    
Case Mix Creep.  The SSA gives CMS the authority to adjust base rates to  
address case mix creepthat is, an increase in overall Medicare 
payments that is due to changes in SNF billing that do not reflect changes 
in beneficiaries characteristics.21  If CMS determines that case mix creep 
occurred, it can reduce rates to recoup Medicare payments that resulted 
from case mix creep.   
Although CMS has used a similar authority to adjust rates in the home 
health payment system,  it has not done so for SNFs.22 For home health, 
CMS has conducted data analyses of Medicare claims and beneficiary 
____________________________________________________________ 
 
18 SSA,    1888(e)(4)(E)  (ii)(IV), (5)(A), and (5)(B)(i).  Beginning in FY  2012, the Patient 

Protection and  Affordable Care Act, section 3401(b), required  that the market-basket 

index be reduced annually to account for increases in  provider productivity, such as  

through new technology.  See SSA,  1888(e)(5)(B)(ii). 

19 CMS made significant revisions in FY 2006, when it increased the number of RUGs  

from 44 to 53, and in  FY 2011, when it increased the number of RUGs to 66.  See 70 Fed. 
 
Reg.  45026, 45037-45040, Tables 4,  4a, 5, and 5a (August 4,  2005) and 75 Fed. Reg. 

42886, 42894-42900,  Tables 4A, 4B, 5A, and 5B  (July 22, 2010).
    
20 For the readjustment associated with the  FY 2006  revision, see 74 Fed. Reg. 40288, 

40298 (August 11, 2009) and 73 Fed. Reg. 46416, 46421-22  (August 8, 2008).  For the 

readjustment  associated with the FY 2011 revision, see 76 Fed.  Reg. 48486, 48493  and 

48500 (August 8, 2011). 

21  SSA,  1888(e)(4)(F). 
 
22  72  Fed.  Reg. 49762, 49832  and 49843 (August 29, 2007) (using  SSA,  
 
1895(b)(3)(B)(iv) to address home health case-mix creep). 

The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   5   
   
assessments to determine the extent to which increases in Medicare 
payments were due to case mix creep.  As a result, CMS decreased home 
health rates by 2.75 percent in 2008 through 2010 to account for case mix 
creep.23  
METHODOLOGY 
We based this study on an analysis of:  1) Medicare cost reports from SNFs 
covering a 10-year period; 2) paid Part A SNF claims from the National 
Claims History file; 3) Part A hospital claims from the hospital stays that  
qualified the beneficiaries for these SNF stays; and 4) MDS beneficiary 
assessments.24  See Appendix B for more detailed information about the 
methodology.     
Limitations 
This study assesses SNF billing and beneficiary characteristics based on an 
analysis of all Medicare Part A claims.  We did not determine the extent to 
which Medicare payments for specific SNF claims were appropriate, 
including whether services billed for were necessary. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency.   
____________________________________________________________ 
 
23  Ibid.  
24 We  excluded  swing beds that are used for both hospital and  SNF care.     
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   6   
   
FINDINGS 
Medicare payments for therapy greatly exceed SNFs 
costs for therapy    
Differences between Medicare payments for therapy and SNFs costs for 
therapy resulted in an average Medicare margin for therapy of 29 percent 
that is, on average, SNFs received $29 more than their therapy costs for 
every $100 in Medicare payments for therapy.25        
Medicare pays SNFs a daily rate for therapy that is primarily based on the 
level of therapy provided to the beneficiary.  In FY 2012, Medicare paid 
SNFs an average of $187 a day to provide therapy to a beneficiary.   
However, according to data that SNFs provided on Medicare cost reports, 
SNFs costs to provide therapy averaged $133 per day.    
The 29 percent Medicare margin for therapy is twice as high as the 
14 percent overall Medicare margin for SNF payments reported by 
MedPAC in FY 2012.  Each year during the last decade, MedPAC has 
reported that the overall Medicare margin exceeded 10 percent and has 
recommended that Congress decrease Medicare payments.26  
The difference between Medicare payments and SNFs costs for 
therapy, combined with the current payment method, creates 
an incentive for SNFs to bill for higher levels of therapy than 
necessary 
The difference between therapy payments and costs, combined with the 
current method of paying for therapy, creates a strong financial incentive 
for SNFs to bill for higher levels of therapy even when beneficiaries do not 
need such levels.27  In FY 2012, with a Medicare margin of 29 percent, 
SNFs received an average of $66 a day more than their therapy costs when 
they billed for ultra high therapy for a beneficiary.  In comparison, they 
received an average of $11 more than their therapy costs when they billed 
for low therapy.  See Table 2. 
   
 ____________________________________________________________ 
 
25 Medicare margins are a standard method for comparing payments and costs.  See,  for 
example, MedPAC, Report to Congress:  Medicare Payment Policy, March 2015, ch. 8,  
p. 195. 

26  Ibid. For over a decade, MedPAC has recommended that Congress eliminate the 

market-basket  updates to SNF payment rates and, since 2012,  has recommended  
decreasing the base rates. 
27  We  did not determine the extent to  which Medicare payments for specific SNF claims  
were appropriate, including whether services billed for were  necessary. 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   7   
   
Table 2: Average Payment and Cost for Therapy  per Day per 
Beneficiary,  by Level of Therapy, FY 2012  
Average  Average    Difference Between 
Level of Therapy  Payment Per  Cost Per  Average Payment and 
Day   Day  Cost Per Day  
Ultra high   $231  $165  $66 
Very high   $156  $111  $45 
High  $104  $74  $30  
Medium  $67  $48  $19  
Low  $37  $26  $11  
Source:  OIG analysis of SNF cost reports, 2015. 
Medicare payments have greatly exceeded SNFs costs for 
therapy for the past decade 
Medicare payments for therapy rose faster than SNFs costs for therapy 
from FYs 2002 to 2010.  In FY 2002, the difference between payments and 
costs resulted in a Medicare margin for therapy of 25 percent.  As shown in 
Table 3, the margin increased to 42 percent by FY 2010.  In FY 2011, the 
margin decreased; however, it remained near 30 percent.   
Table 3: Medicare Margin for Therapy, by Selected Fiscal Years 
Fiscal Year   Medicare Margin for Therapy  
2002  25%  
2004  34%  
2006  36%  
2008  40%  
2010  42%  
2011  31%  
2012  29%  
Source:  OIG analysis of SNF cost reports, 2015.  
Two factors accounted for increasing payments for therapy. First, SNFs 
increasingly billed for higher levels of therapy. Second, as required by 
statute, CMS increased the base payment rate each year by the market-
basket index, which is intended to reflect changes over time in the prices of 
goods and services. In FY 2011, overall payments for therapy decreased; 
however, they continued to greatly exceed SNFs costs for therapy.28 
SNFs also employed strategies to optimize revenues.  Specifically, SNFs 
increasingly provided the minimum number of therapy minutes for the 
____________________________________________________________ 
 
28 In FY  2011, CMS decreased the therapy payment rate by decreasing the Therapy 
Indexes.  Prior  to FY  2011, these Indexes ranged from 0.43 for low therapy to 2.25  for 
ultra high therapy.  Beginning in FY  2011, the Indexes ranged from 0.28 to  1.87.  Therapy  
payments are determined  by  multiplying the therapy base rate by the Therapy Index.   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   8   
   
higher levels of therapy. This practice increased from FYs 2011 to 2013.  
For example, SNFs must provide therapy for 720 minutes or more during 
the 7-day assessment period to bill for ultra high therapy, and SNFs 
increasingly provided exactly 720 minutes.  Notably, in FY 2011, SNFs 
provided exactly 720 minutes for 21 percent of ultra high therapy RUGs, 
which increased to 34 percent in FY 2013. See Table 4. 
Table 4: Percentage of  RUGs in Which SNFs Provided the Minimum Number of 
Required Therapy Minutes, by Level of Therapy and by Fiscal Year  
Percentage of RUGs in Which SNFs Provided the 
Minimum Number of Required Therapy Minutes  
Level of Therapy 
FY 2011   FY 2012   FY 2013  
Ultra high   21%  29%   34%  
Very high   12%  18%   22%  
High  10%  15%   18%  
Medium  7%  9%   10%  
Low    14%  13%   12%  
 
Source:  OIG analysis of MDS assessments, 2015. 
SNFs increasingly billed for the highest level of 
therapy even though key beneficiary characteristics 
remained largely the same 
From FYs 2011 to 2013, SNFs increasingly billed for ultra high therapy, 
even though key beneficiary characteristics remained largely the same.  As 
shown in Table 5, SNFs increased their billing for ultra high therapy RUGs 
from 49 percent of therapy days in FY 2011 to 57 percent in FY 2013.   
SNFs also increased their billing for other higher paying RUGs.  During 
this same time period, SNFs increased their billing for therapy RUGs from  
90 to 92 percent of days and their billing for high ADL RUGs from 34 to 
36 percent. Finally, SNFs increased their billing for higher paying 
nontherapy RUGs from 54 to 60 percent of nontherapy days.   
 
 
 
 
 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   9   
   
Table 5: Changes in SNF Billing from FYs 2011 to 2013  
Type of Billing Change   FY 2011   FY 2012   FY 2013  
Percentage of therapy days billed for ultra high therapy  RUGs   49%  53%  57%  
Percentage of days billed for therapy RUGs   90%  90%  92%  
Percentage of days billed for high ADL RUGs   34%  36%  36%  
Percentage of nontherapy days billed for higher paying RUG  
54%  58%  60%  
categories 
 
Source:  OIG analysis of SNF claims data, 2015. 
Increases in SNF billing were not due to changes in key 
beneficiary characteristics 
During the same time that SNFs increased their billing, key beneficiary 
characteristics remained largely the same.  From FYs 2011 to 2013, the 
average age of SNF beneficiaries stayed about the same79.5 and 
79.2 years, respectively.  In addition, the top 20 reasons for the hospital 
stays that qualified beneficiaries for SNF stays were identical.  The average 
length of the qualifying hospital stays changed minimally from 8.19 to 8.12 
days. The severity levels of the hospital stays also changed little.  
Appendix C provides more detailed information about beneficiaries  
characteristics in FYs 2011 and 2013. 
Moreover, SNFs increasingly billed for ultra high therapy across each of 
these beneficiary characteristics.  The percentage of days billed as ultra 
high therapy increased by at least 5 percentage points for each of the top 20 
reasons for beneficiaries qualifying hospital stays.  For example, for 
beneficiaries who were in the hospital for cellulitis prior to going to the 
SNF, the percentage of days billed as ultra high therapy increased from  
39 percent in FY 2011 to 49 percent in FY 2013.  SNFs also increased their 
billing for ultra high therapy across other beneficiary characteristics, 
including age, and length and severity level of the qualifying hospital stay.  
Appendix D provides more detailed information about billing for ultra high  
therapy.  
Increases in SNF billingparticularly for the highest 
level of therapyresulted in $1.1 billion in Medicare 
payments in FYs 2012 and 2013  
Medicare paid SNFs $53.1 billion in FYs 2012 and 2013; however, 
Medicare would have paid $52.0 billion if SNFs had not increased their 
billing for higher paying RUGs. As shown in Table 6, this increase in SNF 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   10   
   
billing resulted in $1.1 billion in Medicare payments in FYs 2012 and 
2013. Because the increases in SNF billing were not due to changes in key 
beneficiary characteristics, the increases in Medicare payments may be due 
to case mix creep.  CMS can reduce rates to recoup Medicare payments 
that resulted from case mix creep.  
Table 6: Medicare Payments Resulting From Increased Billing for Higher 
Paying RUGs, by Fiscal Year  
Actual   Medicare Payments Resulting 
Medicare Payments Based on 
Medicare  From Increased Billing  
Fiscal Year   Billing From  FY 2011* 
Payments  Since FY 2011  
(millions) 
(millions)  (millions) 
2012   $26,228  $26,026  $202 
2013   $26,888  $26,004  $884 
Totals   $53,116  $52,030  $1,086 
*  We calculated what Medicare would have paid in FYs 2012 and 2013 if SNFs had not increased billing for higher  
paying RUGsi.e., if the distribution of RUGs in these years were the same as  the distribution in  FY 2011. 
Source:  OIG analysis of SNF claims data, 2015. 
Increased billing for ultra high therapy accounted for the vast 
majority of the $1.1 billion in Medicare payments   
This shift toward ultra high therapy accounted for nearly $900 million, or  
approximately 80 percent, of the $1.1 billion in increased Medicare 
payments.  Other changes in SNF billing also contributed to the increased  
payments, but to a lesser extent than the shift to ultra high therapy.  
Appendix E provides more information about how changes in SNF billing 
affected Medicare payments.  
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   11   
   
CONCLUSION AND RECOMMENDATIONS 
The findings of this report provide further evidence that longstanding 
concerns about the SNF payment system must be addressed.  We found that 
Medicare payments for therapy greatly exceeded SNFs costs for therapy.  
Combined with the current method of paying for therapy, this large 
difference between therapy payments and costs creates a strong financial 
incentive for SNFs to bill for higher levels of therapy than necessary.  
Under this system, SNFs increasingly billed for the highest level of therapy 
even though key beneficiary characteristics remained largely the same.  
Increases in SNF billingparticularly for the highest level of therapy 
resulted in $1.1 billion in Medicare payments in FYs 2012 and 2013. 
The findings of this and prior OIG reports, which complement the work of 
MedPAC and others, demonstrate the need to reevaluate the Medicare SNF 
payment system.  Payment reform could save Medicare billions of dollars 
and encourage SNFs to provide services that are better aligned with 
beneficiaries care needs.  A reevaluation of the SNF payment system is 
also important because the payments for emerging modelssuch as 
accountable care organizations and bundled paymentsare based on 
current fee-for-service payments.     
We recommend that CMS: 
Evaluate the extent to which Medicare payment rates for 
therapy should be reduced 
As this report shows, Medicare payments for therapy greatly exceed SNFs  
costs and create an incentive for SNFs to bill for higher levels of therapy 
than beneficiaries need. To address this problem, CMS should reduce the 
base rate for therapy. We recognize that CMS may need additional 
statutory authority to make such a change.  CMS should analyze how to set 
an appropriate new base ratepossibly using SNF cost reportsand take 
steps to develop a legislative proposal, if necessary, to do so.  The proposal 
could also seek to eliminate the market-basket update.  
Change the method of paying for therapy   
As we have recommended previously, CMS should change the current 
method of paying for therapy.  CMS pays for therapy primarily based on 
the amount of therapy provided during the assessment period, rather than 
on beneficiary characteristics or care needs.  Under this system, SNFs 
increasingly billed for the highest level of therapy even though key 
beneficiary characteristics remained largely the same. 
CMS should accelerate its efforts to develop and implement a new method 
of paying for therapy that relies on beneficiary characteristics or care needs.  
In both March 2007 and April 2014, CMS issued a report that reviewed 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   12   
   
various payment methods.  CMS should publicly provide a timeline for 
completing the development and implementation of a new method of 
paying for therapy.   As CMS develops the new payment method, it will also 
need to develop controls to monitor SNF billing under the new system.      
Adjust Medicare payments to eliminate the effect of case mix 
creep  
CMS has the authority to adjust payment rates if it determines that overall 
payments to SNFs increased due to changes in billing that are unrelated to 
changes in beneficiaries characteristicsthat is, that are the result of case 
mix creep.  This report adds to the growing evidence that case mix creep is 
occurring. CMS should quantify the amount of creep that has occurred and 
adjust payment rates to eliminate the effect of case mix creep.  
Strengthen oversight of SNF billing  
CMS should take other actions to minimize increases in SNF billing that do 
not reflect changes in beneficiary characteristics.   These oversight activities 
should include increasing and expanding reviews of SNF claims and 
improving data analysis strategies.  For example, CMS should develop 
strategies for identifying SNFs that have increased their billing for higher 
paying RUGs and determining whether these increases reflect changes in 
the characteristics of their beneficiaries.  
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   13   
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
CMS concurred with all four of our recommendations.   
First, CMS concurred with our recommendation to evaluate the extent to  
which Medicare payment rates for therapy should be reduced.  CMS stated 
that additional statutory authority would be required for CMS to address 
this recommendation. CMS further noted that the FY 2016 Presidents 
budget included a legislative proposal requiring a reduction to the market-
basket updates for SNF payment rates beginning in FY 2016.  
Second, CMS concurred with our recommendation to change the method of 
paying for therapy.  CMS stated that it is conducting a project to study and 
evaluate SNF therapy payment options. It will use the results of this 
project to inform changes to the method of paying for therapy.    
Third, CMS concurred with our recommendation to adjust Medicare 
payments to eliminate the effect of case mix creep.  CMS stated that it will 
consider various approaches to adjust payments if it determines that 
changes in overall payments to SNFs were unrelated to beneficiaries  
characteristics. 
Finally, CMS concurred with our recommendation to strengthen oversight 
of SNF billing. CMS stated that it will work to monitor SNF billing and  
target SNFs that rarely bill for changes in therapy or frequently use therapy 
assessments incorrectly for education and claims review.  It will also 
consider the feasibility of refining the Fraud Prevention System to support 
the monitoring of SNF billings. 
For the full text of CMSs comments, see Appendix F.  
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   14   
   
APPENDIX A 
 
Medicare Payment Rates per Day per RUG in FY 2013  
Payment Rate 
RUG Category   RUG   Therapy Level   ADL Score  
per Day*  
Therapy RUGs  
RUX  Ultra high   11 to 16**   $751 
RUL   Ultra high   2 to 10   $734 
RVX  Very high   11 to 16**   $668 
RVL  Very high   2 to 10   $599 
Rehabilitation Plus Extensive 
RHX  High  11 to 16**   $605 
Services  
RHL   High  2 to 10   $540 
RMX  Medium  11 to 16**   $555 
RML  Medium  2 to 10   $509 
RLX  Low  2 to 16   $488 
RUC   Ultra high   11 to 16**   $569 
RUB  Ultra high   6 to 10   $569 
RUA  Ultra high   0 to 5   $476 
RVC  Very high   11 to 16**   $488 
RVB  Very high   6 to 10   $423 
RVA  Very high   0 to 5   $421 
RHC   High  11 to 16**   $425 
Rehabilitation 
RHB  High  6 to 10   $383 
RHA  High  0 to 5   $337 
RMC   Medium  11 to 16**   $374 
RMB  Medium  6 to 10   $351 
RMA  Medium  0 to 5   $289 
RLB  Low  11 to 16**   $363 
RLA  Low  0 to 10   $234 
Nontherapy RUGs  
ES3  2 to 16   $685 
Extensive Services  ES2     2 to 16   $536 
ES1  2 to 16   $479 
HE2  15 to 16**   $463 
HE1  15 to 16**   $384 
HD2   11 to 14**   $433 
HD1   11 to 14**   $361 
Special Care High    
HC2   6 to 10   $409 
HC1   6 to 10   $342 
HB2  2 to 5   $404 
HB1  2 to 5   $339 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   15   
   
Medicare Payment Rates per Day per RUG in FY 2013 (continued) 
Payment Rate 
RUG Category   RUG   Therapy Level   ADL Score  
per Day*  
Nontherapy RUGs (continued)  
LE2  15 to 16**   $420 
LE1  15 to 16**   $352 
LD2   11 to 14**   $404 
LD1   11 to 14**   $339 
Special Care Low    
LC2   6 to 10   $355 
LC1   6 to 10   $299 
LB2  2 to 5   $337 
LB1  2 to 5   $286 
CE2  15 to 16**   $375 
CE1  15 to 16**   $345 
CD2   11 to 14**   $355 
CD1   11 to 14**   $325 
CC2   6 to 10   $311 
Clinically Complex    
CC1   6 to 10   $288 
CB2  2 to 5   $288 
CB1  2 to 5   $267 
CA2  0 to 1   $244 
CA1  0 to 1   $227 
BB2  2 to 5   $258 
Behavioral Symptoms and  BB1  2 to 5   $247 
  
Cognitive Performance  BA2  0 to 1   $214 
BA1  0 to 1   $204 
PE2  15 to 16**   $345 
PE1  15 to 16**   $329 
PD2  11 to 14**   $325 
PD1  11 to 14**   $309 
PC2  6 to 10   $280 
Reduced Physical Function    
PC1  6 to 10   $267 
PB2  2 to 5   $237 
PB1  2 to 5   $227 
PA2  0 to 1   $196 
PA1  0 to 1   $188 
* These are the unadjusted urban rates. 
** We consider these ADL scores to be  high. 
Source:  77 Fed. Reg. 46214, 4622046221, Table 4 (August 2, 2012) and  CMS, RAI Manual  3.0,  6.   
 
 
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   16   
   
APPENDIX B 
Detailed Methodology 
Comparison of Medicare payments for therapy with SNFs costs 
for therapy    
We based this analysis on Medicare cost reports from SNFs.  We obtained 
the cost reports for every other year from FYs 2002 to 2010 and for every 
year from FYs 2010 to 2012.29  For each fiscal year, we used these reports 
to calculate therapy payments and costs.  
To calculate therapy payments, for each SNF and for each therapy level, we 
multiplied: the number of days reported for the therapy level on the cost  
report, the Therapy Index, the base rate for therapy, and the SNFs 
geographic factor.30   We then summed across the five therapy levels and 
across all SNFs to calculate total therapy payments for each fiscal year.  
Similarly, we determined SNFs costs for therapy by summing across the 
therapy costs reported by each SNF for each fiscal year.31    
We calculated the average therapy payment per day per beneficiary by 
dividing the total therapy payments by the total number of therapy days 
reported. We calculated the average therapy cost per day per beneficiary 
using the same method.  To determine the extent to which therapy 
payments exceeded costs, we calculated the Medicare margin for therapy 
by subtracting total costs from total payments and then dividing by total 
payments.       
Next, for FY 2012, we determined the extent to which the difference 
between the average daily payment and cost for therapy varied by therapy 
level. To do this, for each therapy level, we multiplied the average 
payment per day by the Medicare margin for therapy.32  
Lastly, we examined the factors that affected Medicare payments for 
therapy during the 10-year period. We determined the extent to which 
SNFs increasingly billed for higher levels of therapy by calculating the 
____________________________________________________________ 
 
29 Medicare cost reports are publicly available at:  http://www.cms.gov/Research-
Statistics-Data-and-Systems/Files-for-Order/CostReports/Cost-Reports-by-Fiscal-
Year.html. We analyzed reports from free-standing SNFs that had reporting periods of at  
least 10 months and no more than 13 months. 
30 These payments include beneficiary copayments. 
31  We  did not include cost reports with outlier therapy costs per day using a standard 
method.    
32  While SNFs report payment information by therapy level on the cost report, they do not  
report costs by therapy level.   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   17   
   
average Therapy Index billed by SNFs for each year.33 In addition, we 
reviewed how CMS changed the base rate for therapy and the five Therapy 
Indexes over this time period. 
Analysis of the therapy minutes provided by SNFs using MDS 
assessments 
For each beneficiary assessment, the therapy level is primarily determined 
by the minutes of therapy provided during the 7-day assessment period.34   
Under the current payment system, SNFs can minimize their therapy costs, 
which optimizes their revenues, by providing the minimum number of 
minutes required for each of the five levels of therapy.  For example, SNFs 
can provide exactly 500 minutes of therapy to beneficiaries in very high 
therapy RUGs. For FYs 2011 through 2013, for each therapy level, we 
calculated the percentage of RUGs for which the SNF provided the 
minimum number of required therapy minutes.  For ultra high therapy, at 
least 720 minutes are required during the 7-day assessment period; for very 
high therapy, 500 minutes; for high therapy, 325 minutes; for medium  
therapy, 150 minutes; and for low therapy, 45 minutes. 
Analysis of changes in SNF billing from FYs 2011 to 2013 using 
SNF claims 
We determined the extent to which SNFs shifted from lower to higher 
paying RUGs, or vice versa, from FYs 2011 to 2013.  Specifically, we 
determined the extent to which SNFs shifted their billing:  
	   from nontherapy to therapy RUGs;  
	   from lower levels of therapy RUGs to ultra high therapy RUGs; 
	   from lower paying nontherapy RUG categories to higher paying 
RUG categories;35 and 
 	  from lower ADL RUGs to high ADL RUGs. 
 ____________________________________________________________ 
 
33 For this calculation, we used  the five Therapy Indexes that were in place prior to 
FY 2011. 

34 SNFs separately report the minutes associated with each mode of therapyindividual, 

concurrent, and group therapy.  Beginning in FY  2011, SNFs were required to divide 
 
concurrent therapy minutes among beneficiaries when  determining each beneficiarys 

therapy  level; beginning  in FY 2012, SNFs were  also required  to divide group therapy 
 
minutes.  So, in FY  2012, for  example, the total minutes used to determine the therapy 

level included  all  minutes in individual therapy,  half  of the minutes in concurrent therapy,
  
and one-quarter of the minutes in  group therapy.  See CMS, RAI Manual 3.0,  6. 
   
35 The three higher  paying nontherapy categories are Extensive Services, Special Care 

High, and Special Care Low.  The three lower paying categories are Clinically Complex, 
 
Reduced  Physical Function, and Behavioral Symptoms & Cognitive Performance. 

The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   18   
   
For each of these types of billing changes, we determined the percentage of  
days billed in FYs 2011 to 2013.  For example, we determined how the 
percentage of therapy days billed as ultra high therapy changed during 
these 3 years. 
Analysis of key beneficiary  characteristics using SNF and 
hospital claims data 
We determined whether SNF billing changes were associated with changes 
in key beneficiary characteristics.  To  do this analysis, we used claims data 
to determine the following beneficiary characteristics:  1) the beneficiarys 
age, 2) the length of the hospital stay that qualified the beneficiary for the 
SNF stay, 3) the reason for the qualifying hospital stay, and 4) the severity 
level of the hospital stay.36    
We chose beneficiary characteristics related to the qualifying hospital stay  
because SNF services must be for the same condition that the beneficiary  was 
treated for in the hospital.37  In addition, some of the alternative methods for 
improving the SNF payment system that are being considered by  CMS rely  
on information from the beneficiarys hospital stay.38  
For each of these beneficiary characteristics, we determined how the 
distribution of SNF stays changed from FYs 2011 to 2013.39  For example, 
we determined the percentage of SNF stays associated with each of the 
top 20 reasons for the qualifying hospital stay.  In addition, we determined 
how the percentage of days billed as ultra high therapy changed across 
these beneficiary characteristics.   
Analysis of the extent to which changes in SNF billing affected 
Medicare payments   
Using the Part A SNF claims, we first determined total Medicare payments 
for FYs 2012 and 2013. Next, we determined the extent to which changes 
in SNF billing that occurred since FY 2011 affected Medicare payments.  
____________________________________________________________ 
 
36 The reason for the hospital stay and the severity level were derived from the Medicare 
severity Diagnosis Related  Group (MS-DRG) on the hospital claim.  For example, the 
reason associated with MS-DRG 470 is major joint replacement of the lower extremity 
and the severity level is low because this MS-DRG  is for beneficiaries without any major 
secondary conditions.  
37 42 CFR   409.31. Medicare also covers SNF services if the condition requiring such 
services arose when the beneficiary was receiving care in a  SNF for a condition treated 
during  the prior hospital  stay.   
38 See, for example, Acumen, SNF Therapy Payment Models Base Year Final Summary 
Report, April 2014, which Acumen completed under contract with CMS.  
39  We identified SNF stays from claims using SNF and beneficiary identifiers and 
admission dates.  We matched these SNF stays to  hospital claims using the qualifying  
hospital dates on the SNF claim and the beneficiary identifier.   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   19   
   
To do this, we calculated what Medicare would have paid in FYs 2012 and 
2013 if the distribution of RUGs in these years was the same as the 
distribution in FY 2011i.e., if SNFs had not increased or decreased 
billing for higher paying RUGs.40    
In addition, we determined the effect on Medicare payments of each of the 
four types of billing changes described above.  For each type of billing 
change, we estimated what Medicare would have paid in FYs 2012 and 
2013 if the change had not occurred. 
   
____________________________________________________________ 
 
40 For this analysis, we calculated Medicare payments from claim line items, rather than  
claims.  For less than  half of 1 percent of claims, we adjusted the payments associated with  
the line items to account  for minor discrepancies between the information on the claims  
and on the line items.  
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   20   
   
APPENDIX C 
Changes in Key Beneficiary Characteristics From FYs 2011 to 
2013 
Table C.1:  Percentage of SNF Stays, by Age Group and by Fiscal Year  
Percentage of SNF Stays  
Beneficiaries Ages at Admission   Percentage- 
FY 2011   FY 2013   Point 
Difference*  
Age < 65  9.5%   10.0%   0.5%  
65  Age < 70   8.7%   9.7%   1.0%  
70  Age < 75   11.3%   11.9%   0.6%  
75  Age < 80   15.1%   15.0%   -0.2%  
80  Age < 85   20.0%   18.8%   -1.2%  
85  Age < 90   20.2%   19.3%   -0.9%  
90  Age < 95   11.5%   11.7%   0.2%  
Age  95   3.7%   3.7%   0.0% 
   Totals*   100.0%   100.0%     
* Totals and percentage-point differences may vary due to  rounding. 
Source: OIG analysis of Part A SNF claims, 2015.  
 
Table C.2:  Percentage of SNF Stays, by Average Length of Qualifying 
Hospital Stay  and by Fiscal Year  
Percentage of SNF Stays  
Average Length of Beneficiaries  Percentage- 
Qualifying Hospital Stays   FY 2011   FY 2013   Point 
Difference*  
Less than 3 days   1.2%   1.0%   -0.2%  
3 days   19.8%   20.6%   0.8%  
4 days   14.5%   14.4%   0.0%  
5 days   11.4%   11.3%   0.0%  
6 or 7 days   16.5%   16.3%   -0.2%  
8 or 9 days   9.8%   9.5%   -0.2%  
10 to 19 days   17.1%   16.9%   -0.2%  
20 days or more   6.6%   6.4%   -0.1%  
Unknown**  3.2%   3.5%   0.3% 
   Totals*   100.0%   100.0%     
* Totals and percentage-point differences may vary due to  rounding. 
** In these cases, we  were unable to  identify the qualifying hospital stay. 
Source: OIG analysis of Part A SNF and hospital claims, 2015.  
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   21   
   
Table C.3:  Percentage of SNF Stays, by Reason for Qualifying Hospital Stay and 
by Fiscal Year   
Percentage of SNF Stays  
Top 20 Reasons for Beneficiaries Qualifying Hospital  Percentage- 
Stays   FY 2011   FY 2013   Point 
Difference*  
Major joint replacement of lower extremity  7.3%   7.6%   0.3%  
Septicemia  5.0%   6.0%   0.9%  
Heart failure and shock  4.1%   4.0%   -0.1%  
Other hip and femur procedures   4.0%   4.1%   0.1%  
Simple pneumonia and pleurisy  3.9%   3.9%   0.0%  
Kidney and urinary tract infections  3.9%   3.6%   -0.3%  
Renal failure   2.9%   3.1%   0.2%  
Intracranial hemorrhage or cerebral infarction  2.7%   2.8%   0.0%  
Rehabilitation  2.7%  2.9%  0.2% 
Chronic obstructive pulmonary  disease  2.3%   2.2%   -0.1%  
Respiratory infections and inflammations  2.1%   1.9%   -0.2%  
Nutritional disorders  2.0%   1.7%   -0.3%  
Degenerative nervous system disorders   1.5%   1.3%   -0.2%  
Gastrointestinal hemorrhage   1.5%   1.5%   0.0%  
Cellulitis  1.4%   1.4%   0.0%  
Medical back problems  1.4%   1.2%   -0.1%  
Irregular heartbeat  1.4%   1.4%   0.0%  
Acute myocardial infarction  1.3%   1.2%   -0.1%  
Digestive disorders  1.3%   1.2%   -0.1%  
Psychoses  1.2%   1.2%   0.0%  
Other  46.0%   45.9%   -0.1% 
   Totals*   100.0%   100.0%     
* Totals and percentage-point differences may vary due to  rounding.  The rows are sorted in descending order by the  
percentage of SNF stays in FY 2013. 
Source: OIG analysis of Part A SNF and hospital claims, 2015.  
 
Table C.4:  Percentage of SNF Stays, by Severity  Level of Qualifying 

Hospital Stay  and by Fiscal Year   

Percentage of SNF Stays  
Severity Level of Qualifying  Percentage- 
Hospital Stay   FY 2011   FY 2013   Point 
Difference*  
Low  31.4%   29.2%   -2.1%  
Medium  23.8%   23.3%   -0.5%  
High  34.0%   36.2%   2.2%  
Not applicable or unknown**   10.8%   11.2%   0.4% 
   Totals*   100.0%   100.0%     
* Totals and percentage-point differences may vary due to  rounding. 

** In  these cases, we  were unable to identify the qualifying hospital stay or the qualifying hospital stay was not 

associated with a severity level. 
 
Source: OIG analysis of Part A SNF and hospital claims, 2015.  

 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   22   
   
APPENDIX D 
Increases in the Use of Ultra High Therapy From FYs 2011 to 
2013, by Key Beneficiary Characteristic 
Table D.1:  Use of Ultra High Therapy, by Age Group and by Fiscal Year  
Percentage of SNF Days Billed as Ultra High Therapy   
Beneficiaries Ages at 
Percentage- 
Admission 
FY 2011   FY 2013   Point 
Difference*  
Age < 65  38%   45%   7%  
65  Age < 70   45%   53%   8%  
70  Age < 75   45%   54%   8%  
75  Age < 80   46%   54%   8%  
80  Age < 85   46%   54%   8%  
85  Age < 90   46%   54%   8%  
90  Age < 95   44%   52%   8%  
Age  95   39%   47%   8%  
* Percentage-point  differences may vary due to rounding. 
Source: OIG analysis of Part A SNF claims, 2015.  
 
Table D.2:  Use of Ultra High Therapy, by Average Length of Qualifying 
Hospital Stay  and by Fiscal Year  
Percentage of SNF Days Billed as Ultra High Therapy   
Average Length  of Qualifying  
Percentage- 
Hospital Stay  
FY 2011   FY 2013   Point 
Difference*  
Less than 3 days   39%   47%   7%  
3 days   47%   56%   9%  
4 days   45%   53%   8%  
5 days   44%   52%   8%  
6 or 7 days   43%   51%   8%  
8 or 9 days   42%   50%   8%  
10 to 19 days   44%   52%   8%  
20 days or more   46%   52%   6%  
Unknown  45%   52%   7%  
* Percentage-point  differences may vary due to rounding. 
Source: OIG analysis of Part A SNF and hospital claims, 2015.  
 
 
 
 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   23   
   
Table D.3:  Use of Ultra High Therapy, by Reason for Qualifying Hospital 
Stay and by  Fiscal Year  
Percentage of SNF Days Billed as Ultra 
High Therapy   
Top 20 Reasons for  Qualifying  Hospital Stay  
Percentage- 
FY 2011   FY 2013   Point 
Difference*  
Major joint replacement of lower extremity  59%   68%   9%  
Septicemia  36%   43%   8%  
Heart failure and shock  41%   49%   8%  
Other hip and femur procedures   49%   57%   8%  
Simple pneumonia and pleurisy  38%   46%   8%  
Kidney and urinary tract infections  41%   49%   8%  
Renal failure   41%   50%   9%  
Intracranial hemorrhage or cerebral infarction  61%   66%   5%  
Rehabilitation  64%  70%  6% 
Chronic obstructive pulmonary disease  40%   48%   9%  
Respiratory infections and inflammations  37%   44%   6%  
Nutritional disorders  42%   50%   8%  
Degenerative nervous system disorders   44%   50%   6%  
Gastrointestinal hemorrhage   38%   47%   9%  
Cellulitis  39%   49%   9%  
Medical back problems  49%   58%   9%  
Irregular heartbeat  43%   52%   9%  
Acute myocardial infarction  41%   49%   8%  
Digestive disorders  41%   50%   9%  
Psychoses  39%   45%   7%  
Other  43%   51%   8%  
* Percentage-point  differences may vary due to rounding.  The rows are sorted in descending order by the  
percentage of SNF stays in FY 2013. 
Source: OIG analysis of Part A SNF and hospital claims, 2015. 
 
Table D.4:  Use of Ultra High Therapy, by Severity  Level of Qualifying 
Hospital Stay  and by Fiscal Year  
Percentage of SNF Days Billed as Ultra High Therapy   
Severity Level of Qualifying 
Hospital Stay   Percentage-Point 
FY 2011   FY 2013  
Difference*  
Low  48%   56%   9%  
Medium  44%   52%   9%  
High  43%   51%   8%  
Not applicable or unknown   43%   50%   7%  
* Percentage-point  differences may vary due to rounding. 
Source: OIG analysis of Part A SNF and hospital claims, 2015. 
 
 
 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   24   
   
APPENDIX E 
 
 
Estimates of Medicare Payments in FYs 2012 and 2013 Resulting From 
Changes in SNF Billing 
Estimated Increased 
Medicare Payments 
 Type of Billing Change   Resulting From Changes in  
Billing Since FY 2011  
(millions) 
Increased billing for ultra high therapy RUGs, rather  
$879 
than lower levels of therapy RUGs 
Increased billing for therapy  RUGs, rather than 
$127 
nontherapy RUGs 
Increased billing for high ADL RUGs, rather than 
$63 
lower ADL RUGs  
Increased billing for higher paying nontherapy  
$51 
RUGs, rather than lower paying nontherapy RUGs  
Total*  $1,121  
* This sums to  $1,121 million, rather than $1,086 million (from Table 6), because these are  
estimates.  Our methodology measured each billing  change separately; it did  not take into account 
that these billing changes can occur simultaneously.    
Source:  OIG analysis of SNF claims data, 2015. 
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   25   
   
APPENDIX F 
Agency Comments 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)  26   
   
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)  27   
   
 
   
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)  28   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Jodi Nudelman, Regional 
Inspector General for Evaluation and Inspections in the New  York regional 
office, and Nancy Harrison and Meridith Seife, Deputy Regional Inspectors 
General. 
Judy Bartlett served as team leader for this study, and Rachel Bryan served 
as lead analyst. We would also like to acknowledge the contributions of 
other Office of Evaluation and Inspections regional office staff, including 
Michael Rubin and Marissa Baron.  Other Office of Evaluation and 
Inspections staff from the Baltimore regional office who supported the 
study include Berivan Demir Neubert.  Other OIG staff who provided 
support include Clarence Arnold, Heather Barton, Evan Godfrey, and James 
Korn. 
 
The Medicare Payment System for SNFs Needs to Be Reevaluated (OEI-02-13-00610)   29   
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issues.  These evaluations focus on preventing fraud,  waste, or abuse  and promoting  
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  
of fraud and misconduct  related to HHS programs, operations, and individuals.  With  
investigators working in all 50 States and the District of Columbia, OI  utilizes its resources 
by actively  coordinating with the Department  of Justice  and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to  criminal 
convictions, administrative sanctions,  and/or  civil monetary  penalties.  
Office of Counsel to the Inspector General 
The Office of Counsel to the  Inspector  General (OCIG) provides general legal services to 
OIG, rendering  advice and opinions on HHS programs and operations and  providing all  
legal support for OIGs  internal operations.  OCIG represents  OIG in all civil and 
administrative fraud and  abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In  connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program  guidance, publishes fraud alerts, and provides other  
guidance  to  the health care industry concerning the anti-kickback statute and other  OIG  
enforcement authorities.