Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Nursing Home Resident Assessment 
Resource Utilization Groups 
JUNE GIBBS BROWN 
Inspector General 
JANUARY 2001 
OEI-02-99-00041  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of

Inspector General.  It conducts short-term management and program evaluations (called

inspections) that focus on issues of concern to the Department, the Congress, and the public.  The

inspection reports provide findings and recommendations on the efficiency, vulnerability, and

effectiveness of departmental programs. 

OEI's New York regional office prepared this report under the direction of John I. Molnar,

Regional Inspector General, and Renee C. Dunn, Deputy Regional Inspector General.  Principal

OEI staff included:

REGION  HEADQUARTERS

Danielle Fletcher, Lead Analyst  Susan Burbach, Program Specialist

Lucille Cop  Barbara Tedesco, Mathematical Statistician

Vince Greiber  Linda Moscoe

Steve Shaw  Brian Ritchie

* All staff in the New York Regional Office participated in this inspection. 
To obtain copies of this report, please call the New York Regional Office at 212 264-2000. 
Reports are also available on the World Wide Web at our home page address: 
http://www.hhs.gov/oig/oei  E X E C U T I V E  S U M M A R Y  
PURPOSE 
To provide an initial review of the integration of the prospective payment system with the 
resident assessment. 
BACKGROUND 
The Office of Inspector General undertook a series of nursing home inspections examining 
the quality of care in nursing homes. This report is a part of that series. A companion 
report, Nursing Home Resident Assessment, Quality of Care, provides a more detailed 
analysis of the components of the minimum data set. 
The Nursing Home Reform Act mandates that nursing facilities use a clinical assessment 
tool known as the Resident Assessment Instrument to identify residents strengths, 
weaknesses, preferences, and needs in key areas of functioning.  The assessment is an 
integral part of the residents medical record.  It is designed to help nursing facilities 
thoroughly evaluate residents and provides each resident with a standardized, 
comprehensive, and reproducible resident assessment. Upon completion of the assessment, 
the information guides the team to prepare individualized care plans for each resident. The 
minimum data set (MDS) is a component of the resident assessment which contains a 
standardized set of essential clinical and functional status measures. 
The prospective payment system for a Medicare Part A skilled nursing facility stay was 
phased into nursing homes between July of 1998 and January of 1999.  This has raised a 
new dimension of issues and concerns and changed the significance of the resident 
assessment.  Under the prospective payment system, skilled nursing facilities are required 
to classify residents into one of forty-four Resource Utilization Groups (RUGs-III) based 
on assessment data from the resident assessment. 
This inspection is based on information gathered from three different sources: a medical 
review of nursing home medical records for a sample of 640 nursing home residents, a 
self-administered survey of 64 nursing home MDS coordinators, and a telephone survey of 
64 nursing home administrators. 
FINDINGS 
Coding differences exist: both upcoding and downcoding 
The RUGs flow from the MDS and drive Medicare reimbursement to nursing homes 
under the prospective payment system.  Residents are initially assigned to one of seven 
i 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  major categories of RUGs and then are further classified into 1 of 44 minor RUG 
categories based on a MDS assessment.  For 46 percent of the residents the nursing home 
coded the resident in a RUG that was higher than our reviewer.  For the remaining 30 
percent, the nursing home coded the residents in a RUG that was lower than our reviewer. 
We tested the potential effect on reimbursement; it was not statistically significant. 
Therapy minutes and activities of daily living are keys to RUG differences 
There are 108 MDS elements that are used in developing the RUG category for each 
Medicare resident.  The minutes of therapy given to the residents is a key driver of the 
RUG reimbursement.  The nursing home completes the MDS by recording the time the 
beneficiary spent receiving therapy.  The therapy log includes both the time the beneficiary 
spent receiving therapy and other related activities.  Our reviewers compared the number 
of minutes on the MDS to the time in the therapy logs and determined a difference to exist 
when the therapy time did not match.  Thus, some difference is anticipated between the 
log and the MDS.  One would expect the log to be higher than the MDS.  However, we 
found that in most cases the MDS is higher.  The nursing home more often coded the 
resident with more therapy minutes on their copy of the MDS than the therapy logs 
indicate.  More specifically, we found that minutes of both occupational and physical 
therapy given in the last seven days show rates of difference between 39 and 46 percent 
respectively.  Thirty-one percent of the occupational therapy records and 34 percent of the 
physical therapy records were coded in the MDS with more minutes. 
Further, Section G of the MDS, Physical Functioning and Structural Problems has a 
higher total rate of difference (37 percent) than any other section used to develop RUGs. 
Each field in Section G used in the RUG computation has a difference rate of at least 28 
percent. 
Concerns were raised regarding PPS training and additional staff responsibility 
Ninety-three percent of MDS coordinators and 98 percent of nursing home administrators 
report that the introduction of PPS has given additional responsibilities to existing staff. 
However, about 40 percent of administrators and MDS coordinators note that new staff 
has been hired to handle PPS. 
Almost all MDS coordinators and nursing home administrators state that the staff received 
initial PPS training.  However, 28 percent of MDS coordinators and administrators feel 
that their staff were inadequately trained about the Medicare PPS.  Some cite that there 
was confusion and misunderstanding in the initial training sessions and express a need for 
additional training.  Twenty-seven percent of MDS coordinators note that they receive on-
going training and 60 percent of administrators say they have plans for additional PPS 
training sessions. 
ii 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  RECOMMENDATIONS 
This is an early alert raising concerns about the accuracy of the RUG codes.  The fact 
that coding differences are both higher and lower indicates confusion or difficulties in 
implementing the MDS rather than an effort to upcode the RUGs to increase Medicare 
reimbursement.  However, such a practice cannot be ruled out and our study demonstrates 
how vulnerable Medicare is to such a practice. 
There are apparently differences in how people perceive the MDS.  Some see it as a 
primary document that does not need to be validated by medical documentation.  Others 
feel it must be consistent and validated with the medical record.  Clearly, there are 
variations in interpretation in the way people are using the system.  We believe any 
inability to validate the resident assessment through the medical record would expose the 
Medicare program to billing abuses.  For these reasons, we recommend that HCFA: 
<  more clearly define MDS elements, especially section G; 
<	 provide enhanced and coordinated training to nursing homes to be sure that 
similar and accurate MDS and RUG information is being disseminated; and 
<	 require that nursing homes establish an audit trail to validate the 108 MDS 
elements that drive the RUG code from other parts of the medical record, paying 
particular attention to therapy minutes and activities of daily living. 
The problems we describe in this report will require continuing attention.  We plan to 
revisit the prospective payment system in nursing homes after it has been implemented for 
a while. 
AGENCY COMMENTS 
We received comments from the Health Care Financing Administration.  They concur with 
the first two recommendations and describe a number of important steps they are taking to 
improve understanding and implementation of resident assessment, particularly the MDS. 
However, HCFA does not concur with our third recommendation to establish an audit 
trail to validate the 108 MDS elements.  Instead, they plan to fund a Program Safeguard 
Contractor (PSC) to undertake the auditing and verification of MDS reports.  They hope 
to combine data validation and program integrity approaches. 
We are certainly open to approaches other than the one used in this study to validate the 
iii 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  RUG codes and are ready to work with HCFA in analyzing any such alternate methods. 
However, for the time being we see no alternative to relying on a medical record review, 
not just the MDS, to assure correct reimbursement for SNF services. 
We appreciate HCFAs thoughtful consideration of our report.  We wish to emphasize 
again that our work was intended to be an early look to identify potential vulnerabilities 
and issues for further work. 
The Health Care Financing Administration also provided technical comments which we 
have incorporated in the report. The full text of the comments is provided in Appendix G. 
iv 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  T A B L E   O F   C O N T E N T S 
PAGE

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  i

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

FINDINGS 
Coding differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Therapy minutes and ADLs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Concerns with PPS training and staff responsibilities  . . . . . . . . . . . . . . . . . . . . . . . . . . 11

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

APPENDICES 
A: RUG Classification  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

B: Confidence Intervals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

C: RUG payment statistical test  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

D: Chi-square . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

E: RUG Rates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

F: Minimum Data Set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

G: Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

v 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  I N T R O D U C T I O N 
PURPOSE 
To provide an initial review of the integration of the prospective payment system with the 
resident assessment. 
BACKGROUND 
The Senate Special Committee on Aging held hearings in the summer of 1998 following 
reports by the Health Care Financing Administration (HCFA) and the General Accounting 
Office (GAO) of serious concerns about nursing home residents' care and well-being. 
Subsequently, the Office of Inspector General (OIG) undertook a series of nursing home 
inspections examining the quality of care in nursing homes.  They include trends in 
reported abuse among residents, the role of the ombudsman in protecting residents, the 
capacity of the State survey and certification program, the trends in the Online Survey 
Certification and Reporting System (OSCAR) data, the access of nursing home survey 
results, and access to nursing homes. This report is a part of that series.  A companion 
report, Nursing Home Resident Assessment Quality of Care, has a more detailed 
analysis of the components of the minimum data set (MDS). 
Generally a nursing home is a residential facility which offers daily living assistance to 
people who are either physically or mentally unable to live independently.  Residents are 
provided rooms, meals, assistance with daily living, and, in most cases, some medical 
treatment for those residents who require it. 
Medicare Part A can help pay for skilled nursing facility (SNF) care for up to 100 days in 
a benefit period when a beneficiary meets certain conditions.  These conditions include a 
requirement of daily skilled nursing or rehabilitation services, a prior three consecutive day 
stay in a hospital, admission to the SNF within a short period of time after leaving the 
hospital, treatment for the same condition that was treated in the hospital, and a medical 
professional certifying the need for daily skilled nursing or rehabilitation care.  In 1990 
Medicare paid $1.7 billion to nursing homes.  In 1998 this amount had increased to $10.4 
billion1.  Medicare pays only a small portion of the nations nursing home bills.  Most bills 
are paid by personal funds, purchased long-term care insurance, and Medicaid. 
Medicaid coverage varies among States.  Medicaid eligible beneficiaries who require 
custodial care such as help with eating, bathing, taking medicine and toileting, as well as 
1
U.S. Department of Health and Human Services, Health Financing Administration, Office of the Actuary, National 
Health Statistics Group: http://www.hcfa.gov/stats/nhe-oact/tables. 
1 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  those who require skilled care may have a nursing home stay paid by Medicaid.  Medicaid 
payments to nursing homes in 1996 totaled $40.6 billion.  Despite the increase in Medicare 
and Medicaid payments, concern remains about the quality of care in nursing homes. 
In 1986 the Institute of Medicine conducted a study on nursing home regulation and 
reported prevalent problems regarding the quality of care for nursing home residents and 
the need for stronger Federal regulations.  In 1987, the GAO reported that over one-third 
of nursing homes were operating under the Federal minimum standards. This report, along 
with widespread concern regarding nursing home conditions, led Congress to pass the 
Omnibus Budget Reconciliation Act (OBRA 1987).  As a part of OBRA 1987, Congress 
passed the comprehensive Nursing Home Reform Act (P.L. 100-203), expanding 
requirements that nursing homes have to comply with prior to Medicare or Medicaid 
certification. 
The Resident Assessment 
The Nursing Home Reform Act mandates that nursing homes use a clinical assessment 
tool known as the Resident Assessment Instrument (RAI) to identify residents strengths, 
weaknesses, preferences, and needs in key areas of functioning.  The RAI is designed to 
help nursing homes thoroughly evaluate residents and to provide each resident with a 
standardized, comprehensive, and reproducible assessment. With consistent application 
of item definitions, the RAI ensures standardized communication both within the facility 
and between facilities.  Basically, when everyone is speaking the same language, the 
opportunity for misunderstanding or error is diminished considerably.2 
The RAI was developed by a research consortium under contract with the HCFA and 
consists of three key components: the Minimum Data Set (MDS), Triggers and Resident 
Assessment Protocols (RAPs), and Utilization Guidelines.  Most States required nursing 
homes to begin implementing the RAI in 1991. It was intended that the RAI be a dynamic 
tool, and HCFA began developing version 2.0 of the RAI in early 1993 which is now in 
use.  The HCFA is committed to continuous reviews and updates. 
The RAI is intended to be completed by an interdisciplinary team of nursing home staff 
who gather facts about the residents strengths and needs. The interdisciplinary team 
should ideally include dieticians, speech, physical and occupational therapists, social 
workers, pharmacists, and nurses. The attending physician is also an important participant 
in the RAI process providing valuable input on sections of the MDS and RAPs.  Federal 
regulations require each individual who completes a portion of the RAI to sign, date, and 
certify its accuracy.  Regulations also require that a registered nurse sign and certify that 
2
U.S. Department of Health and Human Services, Health Care Financing Administration, Long Term Care Resident 
Assessment Instrument Users Manual Version 2.0 October, 1995. 
2 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  the assessment is complete.  Upon completion of the assessment, the information guides 
the team to prepare individualized care plans for each resident. 
The Minimum Data Set 
The MDS 2.0, a component of the RAI, contains a standardized set of essential clinical 
and functional status measures.  It must be collected on every resident in the nursing home 
at regular intervals during their nursing home stay regardless of the method of payment. 
Nursing homes are required to conduct initially and periodically a comprehensive, 
accurate, standardized, reproducible assessment of each residents functional capacity. 3 
All residents must be completely assessed in the first 14 days after admission, promptly 
after a significant change in their physical or mental condition, and at least once every 12 
months.  Additionally, all MDS assessments must be reviewed at least every 3 months to 
assure continued accuracy.  Since the implementation of the prospective payment system 
there is a more frequent MDS schedule for those residents reimbursed by Medicare Part 
A. 
Resource Utilization Groups and the Prospective Payment System 
A new dimension of issues and concerns was layered upon the resident assessment with 
the advent of the prospective payment system.  Effective June 23, 1998, nursing homes 
participating in the Medicare and Medicaid programs are required to electronically submit, 
at least monthly, MDS data to the State for all assessments conducted during the previous 
month.  Under the prospective payment system for a Medicare Part A skilled nursing 
facility (SNF) stay, SNFs are required to classify residents into one of 44 Resource 
Utilization Groups (RUGs-III) based on assessment data from the MDS.  Each SNF must 
complete the assessments according to a schedule designed for Medicare payment.  This 
schedule requires residents, upon admission to a SNF, be assessed on the 5th, 14th, 30th, 
60th, and 90th days of the residents stay. 
Under the new prospective payment system, SNFs will know in advance how much HCFA 
will pay for each Medicare patient. The prospective payment system was phased into 
nursing homes in July of 1998, and all nursing homes were expected to comply with the 
new system in January of 1999.  Some States are currently using a PPS system for 
Medicaid reimbursement, while others are considering adopting it in lieu of their existing 
systems. 
The RUG-III classification is based on residents resource needs and is divided into seven 
major categories: rehabilitation, extensive services, special care, clinically complex, 
impaired cognition, behavior problems, and reduced physical function.  Payment rates are 
3
U.S. Department of Health and Human Services, Health Care Financing Administration, Long Term Care Resident 
Assessment Instrument Users Manual Version 2.0 October, 1995 
3 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  further differentiated between and within the seven major categories.  Facility differences 
in case-mix and for geographic variations in wages are also incorporated into the payment 
rates.  The HCFA conducted a demonstration project to determine the appropriate 
payment rates. 
In a memorandum released in May 1999, HCFA gives instructions to the fiscal 
intermediaries which outlines the process to be used for medical record review for PPS 
claims.  All fiscal intermediaries are to review Medicare SNF PPS claims.  The goal is to 
identify inappropriate payments.  It states that the Medicare bill must be supported by the 
appropriate provider documentation including the MDS, the medical record including 
physician, nursing, and therapy documentation, and the beneficiarys billing history. 4 
This requirement is reinforced by another memorandum released in March 2000 which 
refers to proper documentation including hospital discharge summaries and transfer 
forms; physician orders and progress notes; patient care plans; patient assessment 
instrument (MDS); nursing and rehabilitation therapy notes; and treatment and flow charts 
and vital sign records; weight charts and medication records. 5 
MDS Coordination 
When Medicare reimbursement became linked to resident assessments, the role of the 
MDS coordinator became more vital to nursing homes.  MDS coordinators are generally 
registered nurses who oversee the assessments and paperwork in order to guarantee 
proper completion.  The MDS coordinators are able to mesh a combined effort of an 
interdisciplinary staff to produce the written and electronic documents necessary for 
Medicare reimbursement.  The MDS coordinator is also responsible for ensuring that each 
residents MDS is coded accurately so that the nursing home is financially able to provide 
all necessary services. 
In addition, MDS coordinators affect the quality of care of the residents.  Completing a 
thorough and accurate comprehensive assessment enables the nursing home to provide 
appropriate plans of care for each resident.  The MDS coordinators can provide a global 
picture of each resident and can spot weaknesses in their plans of care. 
Prior Studies 
The Research Triangle Institute completed a study in 1995 entitled Evaluation of the 
Nursing Home Resident Assessment Instrument that examined the effect of the resident 
assessment instrument on quality of care in nursing homes.  One finding suggested that 
4
Program Memorandum Intermediaries, transmittal No. A-99-20. Department of Health and Human Services, Health Care Financing
Administration, May 1999. 
5
Program Memorandum Intermediaries, transmittal No. A-00-08. Department of Health and Human Services, Health Care Financing
Administration, March 2000. 
4 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  administrators and directors of nursing positively accepted the RAI and believed it helped 
individualize the plans of care.  Another key finding suggested that overall quality of care 
and care planning improved in nursing homes when the RAI was implemented.  In 
addition, the study indicated that the RAI significantly reduced hospitalization rates and 
improved resident outcomes in certain areas. 
However, recent reports by the Office of Inspector General6 and another researcher7 found 
that the failure to provide comprehensive assessments was among the 10 most frequently 
cited deficiencies in nursing homes.  A 1996 study for HCFA reported that between 25 
and 30 percent of nursing homes were deficient in their development of comprehensive 
assessments and/or comprehensive care plans. 
METHODOLOGY 
This inspection is based on information gathered from three different sources: a medical 
review of nursing home medical records from a sample of 640 nursing home residents, a 
self-administered survey of 64 nursing home MDS coordinators, and a telephone survey of 
64 nursing home administrators. We conducted our field work between June and August 
1999. 
Sample Selection 
We selected Medicare, Medicaid, and private pay nursing home residents using a three-
stage stratified, cluster sample.  First, we selected a stratified sample of eight States to 
include the four States with the most certified nursing home beds (California, New York, 
Texas, and Illinois), two States randomly selected from the four currently using a 
prospective payment system for Medicaid reimbursement in a HCFA demonstration 
project (Mississippi and Maine),  and two States randomly selected from the remaining 40 
States (Connecticut and Virginia). 
Skilled nursing facilities refers to nursing homes that participate in Medicare.  Nursing 
facilities refers to nursing homes certified to participate in Medicaid.  For the purposes of 
this study, we will refer to Medicare, Medicaid, and private pay facilities as nursing homes 
because we included all payor types for the sample selection. 
Next, we randomly chose eight nursing homes in each of the eight sample States, 
excluding nursing homes with a bed count of less than 60 to ensure a sufficient number of 
residents who fit the selection criteria.  Finally, we randomly selected 10 residents in each 
6 
Department of Health and Human Services, Office of Inspector General, Office of Evaluations and Inspections, 
Nursing Home Survey and Certification: Deficiency Trends OEI-02-98-00330, March 1999. 
7
Charlene Harrington, Ph.D. The Regulation and Enforcement of Federal Nursing Home Standards, 1991-1996 University of
California, Department of Social and Behavioral Sciences, March 1998. 
5 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  nursing home for a total of 640 residents.  This selection was made from all nursing home 
residents who were in the 64 sample nursing homes in December 1998, regardless of 
payment source.  These residents were admitted to the nursing home between July 1998 
and December 1998.  We selected the 14 day admission assessment completed for the 
resident from July to December 1998 and reviewed all the medical records prior to this 
assessment.  Data for all samples were weighted and projected to the universe. 
Medical Review and Analysis 
Comparison with the medical record.  We obtained the services of a medical review 
contractor who employed nurses with experience in completing the MDS in nursing homes 
and in consulting and training on the MDS process to conduct the review.  These nurses 
visited each nursing home and completed a 14 day assessment based on the residents 
medical record for the same 14 day time period.  In doing so, our reviewers did not refer 
to the original MDS during their review nor did they contact the residents or the staff to 
complete their assessments.  They were instructed to complete each field of the 
assessment only if there was sufficient and reliable information in the medical record to 
warrant a determination.  Subsequently, we made a comparison of the results for each 
field.  In this way, we were able to determine if the nursing homes resident assessment 
was consistent with the rest of the medical record. 
Nine residents did not fit our selection criteria, thus leaving a sample of 631 residents.  All 
but three completed copies of the MDS were forwarded to us by the nursing home.  The 
nurses were unable to complete some fields in the MDS due to lack of information in the 
medical record8.  Most of these fields required information that was inappropriate for a 14 
day assessment.  All other fields had sufficient information for our reviewers to complete 
the MDS. 
The methodology is useful to identify differences between what our reviewers would have 
entered in the MDS based on a review of the other medical records, versus what the 
facility nurses observed in the actual physical assessment of the patient.  Our method does 
not permit a specific determination of why the differences occurred -- e.g., an error in the 
MDS review by the observing nurse, an error or omission in the medical record, or simply 
an honest difference of opinion given a similar set of facts.  However, overall such 
differences might highlight the need to take steps to ensure greater consistency. 
Generation of RUGs.  In addition, the reviewers generated a RUG based on their 
prepared MDS to compare to the RUG generated by the facility.  Because we included all 
payer sources in our sample, we were able to compare RUGs for 228 beneficiaries.  The 
remaining 403 beneficiaries had no RUG information on the copy of the MDS forwarded 
to us.  Medicaid and private pay residents are not required to be grouped in a RUG.  In 
8
These fields include B6, C7, E3, E5, G3a, G9, H4, I3, K3, N5a, R1a, R1b, and R1c.
6 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041 addition, some nursing homes had yet to begin using PPS for reimbursement.  In order to 
compare differences in reimbursement rates between our reviewers and the nursing home, 
we calculated RUG rates of our reviewers and the nursing homes based on case-mix 
adjusted Federal rates for northeast, urban nursing homes. 
Surveys 
We sent a self-administered questionnaire to each MDS coordinator in the 64 nursing 
homes in our sample and asked questions regarding the implementation of the resident 
assessment and plans of care. We had a 100 percent response rate from the MDS 
coordinators. We obtained information regarding the characteristics, training, and 
coordination of the staff who complete the assessments and plans of care.  In addition, we 
looked at the structures and processes the staff use to perform the resident assessment and 
their satisfaction with the process. 
Interviews 
We conducted structured telephone interviews in July 1999 with nursing home 
administrators in each of the 64 sample nursing homes.  We had a 100 percent response 
rate.  We asked them questions regarding the implementation of the resident assessment 
and plans of care.  During these interviews, we also obtained information from them 
regarding the characteristics, training, and coordination of the staff who complete the 
assessments and plans of care. We also looked at the structures and processes the staff 
used to fulfill the resident assessment instrument requirements and their satisfaction with 
the process. 
Limitations 
The results of this analysis are limited by the information available in the medical record. 
In some cases, the nursing home completes the MDS based on observation of or 
discussion with the resident about which there may not be any other information in the 
medical record. 
For Section P: Special Treatment and Procedures, which includes minutes of occupational 
and physical therapy given in the last 7 days, the reviewer compared the therapy logs to 
the MDS.  In some cases, the logs were kept in units of 15 minutes.  The reviewers 
converted the units to minutes. 
This inspection was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and Efficiency. 
7 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  F I N D I N G S  
Coding differences exist: both upcoding and downcoding 
Resource Utilization Groups, or RUGs, flow from the Minimum Data Set (MDS) and 
drive Medicare reimbursement to nursing homes under the Prospective Payment System 
(PPS).  A resident is initially assigned to one of the seven major categories of RUGs based 
on their clinical characteristics and functional abilities.  Upon completion of the MDS, 
Medicare residents are further classified into 1 of 44 minor RUGs categories. See 
Appendix A for a complete listing of RUGs. 
For 46 percent of the residents, the nursing home coded the resident in a RUG that was 
higher than our reviewer.  For the remaining 30 percent, the nursing home coded the 
residents in a RUG that was lower than our reviewer.  See Chart 1.  See Appendix B for 
confidence intervals. 
Chart 1 
RUG Coding 
24% 
46% 
30% 
Matching RUG 
Higher RUG 
Lower RUG 
Source: Medical Record Review 
8 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  In order to determine the potential effect of these differences on reimbursement, we

created a model based on assumptions.  We assumed that the prospective payment system

was fully implemented and all nursing homes in the sample were in the urban northeast. 

Using the case-mix adjusted Federal rates for the northeast, we found no statistically

significant effect.  See Appendix C. 

We looked at some characteristics that might explain the variation in coding.  Nursing 

homes that are not a member of a chain organization are more likely than those that are a

part of a chain organization to have RUG determinations different from our reviewers.

Eighty-two percent of non-chain nursing homes, compared to 72 percent of chain nursing

homes had differences between the nursing homes and our reviewers in the RUG codes.

There was not a significant difference between rural or urban nursing homes.  See

Appendix D.  Seven of the eight states in our sample had at least one nursing home that

coded all of their residents in a different RUG than our reviewer. 

Special rehabilitation, the largest of the 7 major RUG categories, is composed of 14 of the

44 RUGs.  Physical, speech, or occupational therapy are clinical indicators that identify

residents in the Special Rehabilitation category.  Each RUG is given a number value that

corresponds to the complexity of the diagnosis, symptoms, and treatment. 

Nursing homes are more likely than our reviewers to code the residents in the Special

Rehabilitation RUGs.  Thirty-seven percent of all residents coded in a higher

reimbursement level were assigned to the Special Rehabilitation RUG category. While the

remaining 9 percent of all other residents who were coded higher by the nursing home fell

into the remaining 6 major RUG categories: Extensive Care, Special Care, Clinically

Complex, Cognitively Impaired, Behavior Problems, and Reduced Physical Functions.

In addition to this RUG group being the largest and generating the highest payments,

Special Rehabilitation is notable because a previous OIG study found that nursing

homes prefer special rehabilitation patients9.  Discharge planners who were interviewed

said that patients who require rehabilitation therapy are easier to place.  They explained

that these patients generally have short stays and become independent in activities of daily

living quickly.  In another report, 46 percent of nursing home administrators report that

special rehabilitation patients such as physical, occupational, or speech therapy recipients

are more likely to be admitted for care 10.  

9 
Department of Health and Human Services, Office of Inspector General, Office of Evaluations and Inspections, 
Early Effects of the Prospective Payment System on Access to Skilled Nursing Facilities (OEI-02-99-00400), August 1999 
10 
Department of Health and Human Services, Office of Inspector General, Office of Evaluations and Inspections, 
Early Effects of the Prospective Payment System on Access to Skilled Nursing Facilities: Administrators Perspective (OEI-02-
99-00401), October 1999 
9 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  Therapy minutes and activities of daily living are keys to RUG 
differences 
Minutes of therapy given to the residents is a key driver of the rehabilitation RUG 
reimbursement.  Minutes of both occupational and physical therapy given in the last 7 days 
are two fields that are included in Section P: Special Treatment and Procedures.  The 
nursing home completes the MDS by recording the time the beneficiary spent receiving 
therapy.  The therapy log includes both the time the beneficiary spent receiving therapy 
and other related activities.  Our reviewers compared the number of minutes on the MDS 
to the time in the therapy logs and determined a difference to exist when the therapy time 
did not match.  Thus, some difference is anticipated between the log and the MDS.  One 
would expect the log to be higher than the MDS.  However, we found that in most cases 
the MDS is higher.  The nursing home more often coded the resident with more therapy 
minutes on their copy of the MDS than the therapy logs indicate. 
More specifically, of the 39 percent difference rate in occupational therapy, 31 percent of 
the records were coded with higher rates than the therapy logs while only 9 percent were 
coded lower.  Of the 46 percent difference rate in physical therapy, 34 percent were coded 
higher with only 12 percent coded lower.  The overall difference rates of occupational and 
physical therapy are well above the 15 percent difference rate average of all 108 elements. 
See Appendix B for confidence intervals. 
A residents functional status is measured by an index of activities of daily living (ADLs) 
and the number and types of services used.  The ADL index is based on scores in MDS 
Section G, Physical Functioning and Structural Problems.  This includes bed mobility, 
transfer, eating, and toilet use. 
Section G has a 37 percent difference rate making it the highest difference rate of all 
sections used to develop the RUGs.  All seven fields in Section G used in the RUG 
computation have a difference rate of at least 28 percent.  Section G includes assessments 
for both self-performance and support.  The self-performance section assess the degree to 
which a resident can perform an activity independently.  The support assessment describes 
the nature and extent of the support provided.  Some specific examples include the self-
performance assessment of bed mobility which has a 36 percent difference rate and the 
support assessment of bed mobility which has a 33 percent difference rate.  The self-
performance difference rate for transfers is 40 percent, and the support difference rate is 
36 percent. 
Forty percent of the nursing home MDS coordinators report Section G is the most 
difficult to complete. When asked to indicate which section they would change, 20 percent 
report they would change Section G.  Some explained that the staff views capabilities 
differently [and the capabilities] remain subjective and they would like 
10 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  more well-defined levels. 
Concerns were raised regarding PPS training and additional staff 
responsibility 
Ninety-three percent of MDS coordinators and 98 percent of nursing home administrators 
report that the introduction of PPS has given additional responsibilities to existing staff. 
Further, about 40 percent of administrators and MDS coordinators note that new staff has 
been hired to handle PPS. 
Twenty-eight percent of MDS coordinators and administrators feel that the staff was 
inadequately trained about the Medicare PPS.  Some cite that there was confusion and 
misunderstanding in the initial training sessions and express a need for additional training. 
Twenty-seven percent of MDS coordinators note that they receive on-going training and 
60 percent of administrators say they have plans for additional PPS training sessions. 
Almost all MDS coordinators and administrators state that the staff received initial PPS 
training.  Most MDS coordinators include formal workshops outside the nursing homes as 
part of their initial training.  Other initial training includes informal on-the-job training, 
reading and referring to the manual, and formal training provided in the nursing home. 
Administrators and MDS coordinators state that they receive training from private 
consultants, corporate offices, HCFA, and the fiscal intermediary.  Eighty-seven percent of 
administrators feel that they have adequate resources available about PPS.  They cite 
corporate offices, consultants, the fiscal intermediary, and magazines and books as 
resources used when they have questions. 
11 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  R E C O M M E N D A T I O N S  
This is an early alert raising concerns about the accuracy of the RUG codes. The fact 
that coding differences are both higher and lower indicates confusion or difficulties in 
implementing the MDS rather than an effort to upcode the RUGs to increase Medicare 
reimbursement.  However, such a practice cannot be ruled out and our study demonstrates 
how vulnerable Medicare is to such a practice. 
There are apparently differences in how people perceive the MDS.  Some see it as a 
primary document that does not need to be validated by medical documentation.  Others 
feel it must be consistent and validated with the medical record.  Clearly, there are 
variations in interpretation in the way people are using the system.  We believe any 
inability to validate the resident assessment through the medical record would expose the 
Medicare program to billing abuses.  For these reasons, we recommend that HCFA: 
<  more clearly define MDS elements, especially section G; 
<	 provide enhanced and coordinated training to nursing homes to be sure that 
similar and accurate MDS and RUG information is being disseminated; and 
<	 require that nursing homes establish an audit trail to validate the 108 MDS 
elements that drive the RUG code from other parts of the medical record, paying 
particular attention to therapy minutes and activities of daily living. 
The problems we describe in this report will require continuing attention.  We plan to 
revisit the prospective payment system in nursing homes after it has been implemented for 
a while. 
AGENCY COMMENTS 
We received comments from the Health Care Financing Administration.  They concur with 
the first two recommendations and describe a number of important steps they are taking to 
improve understanding and implementation of resident assessment, particularly the MDS. 
However, HCFA does not concur with our third recommendation to establish an audit 
trail to validate the 108 MDS elements.  Instead, they plan to fund a Program Safeguard 
Contractor (PSC) to undertake the auditing and verification of MDS reports.  They hope 
12 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  to combine data validation and program integrity approaches. 
We are certainly open to approaches other than the one used in this study to validate the 
RUG codes and are ready to work with HCFA in analyzing any such alternate methods. 
However, for the time being we see no alternative to relying on a medical record review, 
not just the MDS, to assure correct reimbursement for SNF services. 
We appreciate HCFAs thoughtful consideration of our report.  We wish to emphasize 
again that our work was intended to be an early look to identify potential vulnerabilities 
and issues for further work. 
The Health Care Financing Administration also provided technical comments which we 
have incorporated in the report. The full text of the comments is provided in Appendix G. 
13 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX A 
14 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX B 
Confidence Intervals for Key Findings 
We calculated confidence intervals for the key findings.  The point estimate and 95 percent 
confidence interval are given for each of the following findings.  The point estimates and 
confidence intervals for the findings vary based on the standard error for each individual 
finding. 
KEY FINDINGS  POINT  CONFIDENC 
ESTIMATE  E INTERVAL 
Percent of matched RUGs  24%  +/-9% 
Percent of mismatched RUGs  76%  +/-9% 
NH coded higher and coded Special  37%  +/-14% 
Rehabilitation 
Difference rate of physical therapy  46%  +/-5% 
Difference rate of occupational therapy  39%  +/-11% 
Difference rate of 108 MDS elements  15%  +/-4% 
15 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX C 
Statistical Tests for RUG Payment 
It is not possible to make a precise dollar projection without using a model based on 
assumptions.  The prospective payment system for nursing homes is in transition until 
2002.  Currently, nursing homes are reimbursed using a mixed rate composed of part 
federal rates and part rates based on individual nursing homes previous cost base.  In 
addition, at the time we pulled our sample, December 1998, not all nursing homes had 
converted to PPS, and billing information was not widely available. 
In order to determine the potential difference in reimbursement, we constructed a payment 
model based on assumptions. We used urban, northeast case-mix adjusted federal rates for 
residents in all nursing homes and assumed that PPS was fully implemented for all of our 
nursing homes.  We then projected reimbursement based on the RUG and payment 
associated with that RUG.  See Appendix E for payment rates.  At the 95 percent 
confidence level, the difference is not statistically significant. 
Dollar  Dollar  Confidence Interval 
Projections of  Projection 
Coding 
Nursing Home  $27,388,79  $17,902,544 - $36,875,052 
8 
Our Reviewer  $25,005,87  $18,142,667 - $31,869,077 
2 
16 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX D 
Statistical Tests for Key Findings 
We computed Chi-square values for differences in urban and rural nursing homes and the 
differences in RUG determinations different from our reviewers.  We also looked at the 
differences between chain and non-chain nursing homes and the differences in RUG 
determinations.  As shown in the table below, some variables are statistically significant 
and some variables are not. 
Variable  Degrees  Chi-Square  Significant Difference 
of  in RUG coding 
Freedom 
Urban vs. Rural  1  .57  No 
Chain vs. Non-chain  1  8.50  Yes 
17 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX E 
RUG Rates: Case-Mix Adjusted Rates for Northeast 
Urban Nursing Homes 
RUG Category  Rate 
RUC  $384.21 
RUB  $345.90 
RUA  $327.28 
RVC  $296.15 
RVB  $286.30 
RHC  $271.53 
RMC  $267.34 
RVA  $261.12 
SE3  $252.91 
RHB  $249.64 
RMB  $238.87 
RHA  $228.84 
RMA  $224.64 
SE2  $218.97 
RLB  $212.95 
SE1  $194.88 
SSC  $190.50 
CC2  $189.41 
SSB  $181.74 
RLA  $179.01 
18 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  SSA  $177.36 
CC1  $175.18 
CB2  $166.42 
CB1  $158.75 
CA2  $157.66 
PE2  $153.28 
PE1  $151.09 
CA1  $148.90 
PD2  $145.62 
PD1  $143.43 
IB2  $142.33 
BB2  $141.24 
IB1  $140.14 
BB1  $137.95 
PC2  $137.95 
PC1  $136.86 
IA2  $129.19 
BA2  $128.10 
IA1  $124.81 
PB2  $122.62 
PB1  $121.53 
PA2  $120.44 
BA1  $119.34 
PA1  $117.15 
19 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX F 
Minimum Data Set 
In this appendix we have included a complete copy of the Minimum Data Set. 
20 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  21 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  22 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  23 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  24 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  25 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  26 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  APPENDIX G 
Comments on the Draft Report 
In this appendix, we present in full the comments from the Health Care Financing 
Administration. 
27 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  28 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  29 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  30 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  31 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041  32 
Nursing Home Resident Assessment:RUGs  OEI-02-99-00041