DEPARTMENT  OF  HEALTH  & HUMAN  SERVICES  
Centers  for  Medicare  &  Medicaid  Services  
7500 Security  Boulevard,  Mail  Stop  S2-26-12  
Baltimore,  Maryland   21244-1850  
                SMD# 22-005  
RE:  Guidance on Nursing Facility 
State Plan Payment and Upper  
Payment Limit Approaches in  
Medicaid  Relying on the Medicare  
Patient-Driven Payment Model  
 
 
September 21, 2022   
 
Dear State Medicaid Director:  
 
This  letter  provides  guidance to states as they consider transitioning from  the  Resource  
Utilization Groups  (RUGs)  to the  Patient-Driven Payment Model (PDPM) to pay Medicaid 
nursing facilities, as well as  incorporating PDPM payments  as the basis for nursing facility upper 
payment limit (UPL)  demonstrations. The guidance herein is important for states,  since  CMS  
will no longer support the Medicare RUGs systems after October 1, 2023,  as CMS is ending 
support for RUG-III  and RUG-IV on federally required assessments for patients residing in 
Nursing Facilities and Skilled Nursing Facilities  as of October 1, 2023.  The ending of this  
support was previously communicated in a 2018 Medicaid Informational Bulletin1  which had 
signaled that this support would end  on October 1, 2020, however, as a result of the COVID-19 
Public Health Emergency, the end date was delayed to provide stakeholders additional time to 
make necessary systems changes.  
In an  August  2018  Medicare final rule, the Centers  for Medicare  & Medicaid Services (CMS)  
announced that  the  RUG-IV case-mix classification model used under the  Medicare  skilled 
 
1  https://www.medicaid.gov/federal-policy-guidance/downloads/cib120618.pdf   Page  2    State Medicaid Director  
nursing facility (SNF) prospective payment system (PPS) was being replaced with the  PDPM 
case-mix classification model  beginning  on October 1, 2019.2  CMS designed implementation of 
PDPM to be budget neutral relative to total payments that would have been made under RUGs, 
had it continued.  
 In accordance with 42 C.F.R.  447.272, Medicaid payments for nursing facility services  are  
limited in the aggregate by provider ownership category,  as specified  in 42 C.F.R. 447.272(a), to 
a reasonable estimate of the amount that would be paid for the services furnished by the group of 
facilities under Medicare payment principles. The Medicaid UPL is  calculated on an aggregate  
basis, and described in  an annual  demonstration submitted by states for each of the following 
categories of provider:  state government-owned or operated, non-state government-owned or 
operated,  and privately-owned and operated facilities.  Within Medicaid UPL  demonstrations, 
most states historically used  the RUGs categories and the Minimum Data Set (MDS) data for all  
SNF residents to categorize Medicaid patients and calculate the Medicare-equivalent  payment  
amount. The MDS is part of the federally mandated process for clinical assessment of all 
residents in Medicare- and Medicaid-certified nursing homes. This process provides a  
comprehensive assessment of each residents functional capabilities and helps nursing home staff 
identify health problems.3   
 
In light of the transition from RUG-IV  to PDPM, states will need to consider whether to 
transition Medicaid payments to nursing facilities to PDPM, and whether to transition the  
Medicaid UPL calculations to the PDPM  methodology.  
 
Background  
In establishing  the  PDPM  system  in the August 2018 Medicare SNF PPS final rule, CMS  
clarified  that  it  distinctly recognizes  the nursing, therapy, and ancillary care  that  patients are  
 
2  Medicare  Program;  Prospective  Payment  System  and  Consolidated  Billing  for  Skilled  Nursing  Facilities  (SNF)  
Final  Rule  for  FY  2019,  SNF Value-Based  Purchasing  Program,  and  SNF  Quality  Reporting  Program, 83 FR 39162  
(August 8,  2018); the final rule is available at: https://www.govinfo.gov/content/pkg/FR-2018-08-08/pdf/2018-
16570.pdf.  
3  https://www.cms.gov/Research-Statistics-Data-and-Systems/Computer-Data-and-Systems/Minimum-Data-Set-3-0-
Public-Reports   Page  3    State Medicaid Director  
likely to receive  during SNF  stays, and that the provision of those services is based upon the  
specific  needs  of an  individual patient. Under RUGs, the nursing and therapy components were  
linked together by one RUGs code per resident, resulting in payment rates that did not  
necessarily recognize the  distinction between providing therapy and nursing services in the  SNF. 
In the  August 2018 Medicare SNF PPS  final rule, CMS  characterized the differences between 
RUGs and PDPM by saying:   
[while] the RUG-IV model utilizes a host of service-based metrics (type and amount of 
care the SNF decides to provide)  to classify the resident into a single RUG-IV group, the  
proposed PDPM would separately identify and adjust for the varied needs and 
characteristics of a residents care and combine this information together to determine  
payment.  We stated we believe the  proposed PDPM would improve the SNF PPS by 
basing payments predominantly on clinical characteristics rather than service provision, 
thereby enhancing payment accuracy and strengthening incentives for appropriate care.4   
 
The PDPM rate is based on six components that determine the payment rate: nursing, physical  
therapy (PT), occupational therapy (OT), speech-language pathology  (SLP), non-therapy 
ancillary (NTA), and non-case-mix  related expenses (e.g., room and board, capital cost, 
overhead).  The  non-case-mix-related component is the only rate component that  is not dependent  
upon resident characteristics or services  received. Through the MDS clinical assessment, a case-
mix value is calculated and assigned for each  individual  rate component  for a patient,  which is 
then added together to determine  the overall payment  amount Medicare will make to the facility  
for the patient day. PDPM accounts for payments for a maximum length of stay of 100 days for 
each Medicare patient based on the length of stay limit of the Medicare SNF benefit. In addition 
to the case-mix assigned to each of five  case-mix payment components based on the residents 
MDS  clinical assessment form, a variable per diem adjustment is further applied to the  PT, OT, 
and NTA  components to account  for how long the resident has been in the facility (e.g., for 
therapy, days  1-20  are paid at a factor of 1.0, while days 21-27 are paid at a factor of 0.98, and 
later days are paid at a still lower factor). Under the RUGs system, an individual is assigned one  
case-mix  group,  which informs the amount of payment for both nursing and therapy services. 
 
4  83 FR  39162  at  39194  (August 8,  2018); available at:  https://www.govinfo.gov/content/pkg/FR-2018-08-
08/pdf/2018-16570.pdf.   Page  4    State Medicaid Director  
Under PDPM, the patient  is  assigned to a PDPM group for each  of  the  five  case-mix  
components, each of which affect the payment rate for therapy and nursing services separately.  
CMS  indicated in the  August 2018 Medicare SNF PPS final rule  that PDPM would be budget  
neutral  relative to payments that would have been made under the SNF PPS were it not for the  
implementation of PDPM. Moreover, given that payments under RUG-IV were weighted heavily 
toward therapy services, CMS indicated that, when developing the PDPM case-mix weights, this  
would cause a shift in payments from the therapy component to the nursing component. In other 
words, given that the shift to PDPM was not intended to raise or lower total SNF PPS payments, 
shifting payments from therapy to nursing meant higher nursing CMIs, relative to those under 
RUG-IV,  and lower therapy CMIs, relative to those under RUG-IV.   
Conversely, the  Medicaid nursing facility services benefit is nursing services-focused,  with 
patients often living in the facility well after any rehabilitation  or other  therapy interventions  
show improvement for the patient. As a  result, a  large portion of the Medicaid patient population 
would fall into that non-rehabilitation  case-mix  distribution. By virtue of the differences in the  
patient populations and covered benefits  between the two programs,  the  Medicaid population 
often would not  be expected to receive  the same scope of services  as the  Medicare  population 
and would be expected to have  much longer lengths of stay than  the Medicare  benefit allows.  To 
arrive at a reasonable estimate of what Medicare would pay for the  same services, the PDPM  
rates  may  need to be adjusted to account for different utilization of the five  case-mix  components  
by Medicaid beneficiaries.5  
 
Differences in Medicare Skilled Nursing and Medicaid Nursing Facility Benefits  
The  scope of services  in the Medicare program under the  SNF benefit  defined in  section 1819(a) 
of the Social Security Act (the Act) is typically  different from  a states  Medicaid nursing facility 
benefit under section 1905(a)(4)(A) of the Act. Under the Medicare program, the SNF benefit  
includes both nursing care and rehabilitation services provided in the facility  and pays for those  
services as  one comprehensive benefit,  with these benefits being limited to a 100-day length of 
stay  for a given benefit period. As such, the Medicare  SNF  payment methodology includes  most  
 
5  See  Appendix   Page  5    State Medicaid Director  
of the services provided to an individual  residing in the  SNF, with only a limited set of services  
excluded from SNF consolidated billing.  
Conversely, the Medicaid nursing facility services  benefit  specifically describes  the nursing care  
component  provided in the nursing facility. Physical therapy  and related services  and 
rehabilitation  services,  are defined separately  from nursing facility services as  Medicaid benefits  
under section 1905(a)(11) and 1905(a)(13) of the Act, respectively. There is no defined limit to 
the nursing facility services benefit in Medicaid. While this distinction does not preclude a state  
from defining the  nursing facility benefit  similarly  to Medicare  (i.e.,  as a comprehensive state  
plan benefit that covers and pays for nursing, therapy and rehabilitation services), it  provides  
states with the option to pay for each component benefit separately. Nothing in this guidance  
precludes  states from continuing their preferred practice under their state plans.  However, based 
on this flexibility, this guidance acknowledges that  states payment methodologies for the care  
provided within nursing facilities may vary significantly depending on how the  state has  defined 
the scope of the  nursing facility benefit.  
 
PDPM as a Payment System in  the  Medicaid  State Plan  
While states have broad flexibility to establish Medicaid payment rates and methodologies,  the  
state plan must comply with section 1902(a)(30)(A) of the Act, including that payments must be  
consistent with efficiency, economy, and quality of care, as well as sufficient to enlist enough 
providers to meet the statutory access standard for Medicaid beneficiaries.  It follows that  
payment rates  for services must  be consistent  with  how  the  state has defined the relevant  benefit  
under the Medicaid  state plan. As discussed above, states have the flexibility to define their 
nursing facility benefit to either include or exclude therapy services  and rehabilitation  services  
provided in the nursing facility,  and the states nursing facility payment methodology must be  
reflective of the services  the state has chosen to include  under the benefit  category. For example, 
it would not be economic and efficient for a state to provide for Medicaid payments  to nursing 
facilities that are calculated based on payment amounts that  include payment for physical therapy 
services, if physical therapy services are not included in the nursing facility benefit (and instead 
are paid separately).   Page  6    State Medicaid Director  
As discussed above, the Medicare  PDPM rate is based on six components that determine the  
payment: nursing, PT, OT, SLP, NTA, and non-case-mix-related expenses. This means that  
PDPM as a potential Medicaid state plan payment methodology presents options to states for rate 
setting  that  aligns  with how  the state  defines  its  Medicaid nursing facility benefit. For states that  
define the Medicaid nursing facility benefit to include only a portion of the benefits paid under 
the  Medicare  PDPM rate (e.g.,  the  state defines its Medicaid  nursing facility benefit only  to  
include nursing services,  and the state plan separately covers and pays for therapy services  and 
other services included within the Medicare PDPM rate), the state  would not adopt the  
unadjusted Medicare PDPM rate, and would  instead need to adjust the  Medicare  PDPM payment  
to account for the differences  between state plan nursing facility  benefit  and Medicare SNF  
benefit definitions. Such an  adjustment is necessary because  it would not be economic and 
efficient  as required by section 1902(a)(30)(A) of the Act  for the state to use  the  full  Medicare  
PDPM rate  when  the state  plan only covers  the  nursing care  component and separately covers  
and pays for therapy services  and other services included within the Medicare PDPM rate. 
Paying the full  Medicare  PDPM rate in addition to making separate payments for therapy 
services  and other services included within the Medicare PDPM rate (but not within the states  
Medicaid nursing facility benefit)  would duplicate payments for Medicaid-covered services. 
Simply put:  state Medicaid payment rates for nursing facility services should reflect the services  
that the facility is expected to provide under the  approved Medicaid state plan benefit categories.  
As states consider changing their nursing facility payment methodologies  to  be based on  the  
Medicare  PDPM, states should be mindful  that all of the relevant state plan submission rules  
apply under 42 C.F.R.  part  430,  subpart B. The state plan is a comprehensive written statement  
submitted by the agency describing the nature and scope of its Medicaid program and giving  
assurance that it will be administered in conformity with the specific requirements of title XIX, 
its implementing  regulations in 42 C.F.R.  chapter IV, and other applicable official issuances of 
the Department  of Health and Human Services. The  state plan must contain all information 
necessary for CMS to determine whether the plan can be approved to serve as a basis for federal  
financial participation in the state program.  States must determine the Medicaid services that are  
included in the state plan nursing facility benefit package, and establish payment rates  
accordingly. States have  broad  discretion in establishing their state plan payment methodologies  
and are not required to use  a methodology based on Medicare  PDPM as their payment   Page  7    State Medicaid Director  
methodology for Medicaid services.  However, the absence of CMS support for RUGs-based 
payment systems going forward will mean that any states  that continue using RUGs-based 
payment methodologies in their Medicaid programs  will have to maintain appropriate  data  
systems  and claim  pricing processes  separately, apart from that which has been previously 
supported by the Centers for Clinical Standards and Quality within CMS.  States may already 
have the appropriate systems in place to do so, in which case those states may continue to use  
their current Medicaid payment methodologies for nursing facility services.  
 
Using PDPM  as the  UPL  Demonstration Methodology in Medicaid  
Similar to the section above related to state plan payment  methodologies  for Medicaid nursing 
facility services, a states  UPL  demonstration  methodology must align with  the services provided 
under the Medicaid state plan  nursing facility benefit definition. As  noted above and  described in  
regulations at  42 C.F.R. 447.272, the  UPL is a reasonable estimate of the amount that would be  
paid for the services furnished by the group of facilities under Medicare payment principles  in 
[42 C.F.R. chapter IV, subchapter B]. The term services furnished by the group of facilities  is  
limited to those services that the facilities provide under the Medicaid state plan  benefit  
definition,  not the Medicare package of services available under section 1819(a) of the Act.  As 
such, states, in  their Medicaid nursing facility UPL demonstrations, account  for (1) the amount  
that would be paid under Medicare payment principles in [42 C.F.R. chapter IV, subchapter B] 
to reflect  only  the Medicaid services  defined under the  states Medicaid  nursing facility benefit,  
and  (2)  the  amounts Medicaid pays for those services under the  associated payment rates and 
methods  under the approved state plan.   
A state  that  provides a nursing  facility  services benefit and payment rate for the nursing facility  
that fully  aligns with  the Medicare scope of benefits included in PDPM  would  not  need to adjust  
the Medicare PDPM rate in performing its  Medicaid nursing facility UPL demonstration. This is  
because the coextensive set of services under the Medicaid and Medicare benefit definitions  
already would result  in an apples-to-apples comparison. To align with the Medicare benefit  
and PDPM methodology, the  Medicaid nursing  facility  services payment methodology in 
Attachment 4.19D  of the Medicaid state plan must comprehensively describe a payment rate   Page  8    State Medicaid Director  
methodology that  includes nursing services, PT, OT, SLP, NTA, and non-case-mix-adjusted 
overhead,  to be paid to the facility under the nursing facility benefit of the state plan.      
Conversely, a state that provides  less than the full scope of Medicares SNF benefit as its  
Medicaid nursing facility benefit  as specified in Attachment 4.19D of the Medicaid state plan 
would only use the matching components of the Medicare PDPM payment system in its  
Medicaid nursing facility UPL methodology to create a reasonable comparison to the amount  
that Medicare would have paid for the applicable Medicaid services provided under the state plan 
benefit definition. UPL methodologies that are not designed to produce an apples-to-apples 
comparison of Medicaid and Medicare payment for the same set of services would distort the  
UPL demonstration, potentially resulting in a significant overstatement of the Medicare payment  
estimate and artificially inflating the Medicaid UPL. For example, if a state only provides and 
pays for Medicaid nursing services and non-case-mix overhead in the approved Medicaid 
payment rates for the nursing facility services benefit of the state plan, it would not be reasonable  
to include the full scope of the benefits for which Medicare PDPM pays (including nursing 
services, PT, OT, SLP, NTA, and non-case-mix-adjusted overhead) as a reasonable estimate of 
what Medicare would have paid for the same services. In that case, the estimate of what  
Medicare would have paid would be for a significantly expanded suite of services beyond what  
the state includes in its Medicaid nursing facility services benefit definition.  
To provide an illustration,  see the table below. In this scenario,  a facility provides Medicaid 
nursing facility services in a state in which the nursing facility benefit is limited to nursing 
services, NTA services, and non-case-mix related expenses. Other types of therapy services  (i.e., 
PT, OT, and SLP services)  included in the Medicare SNF services  definition and PDPM rate  are  
covered, paid, and claimed on the Form CMS-64 under other, non-NF  benefit  categories under  
the Medicaid state plan.   
    Page  9    State Medicaid Director  
Example A  
PDPM Rate Components   State  Medicaid  Rates    Medicare   
   
Nursing, NTA, and   Nursing, NTA, 
Non-Case-Mix    and Non-Case-
Only   Mix   
Only  
Nursing   $ 135.00   $ 149.27  
PT (Not covered as NF  service  in State Plan)   N/A   N/A  
OT (Not covered as NF  service in State Plan)   -  - 
SLP (Not covered as NF  service in State Plan)   -  - 
NTA (Covered as NF service in State Plan)   $ 50.00   $ 88.28  
Non-Case-Mix   $ 85.00   $ 96.85  
Total   $ 270.00   $ 334.40  
 
Example B  
PDPM Rate Components   State Medicaid Rates    Medicare  
   
NF-only w/  Non- Full  PDPM  
State Plan  Services  
Added  
Nursing   $135.00   $ 149.27  
PT (Not covered as NF  service  in State Plan)   $ 45.00   $ 62.25  
OT (Not covered as NF  service in State Plan)   $ 45.00   $ 58.69  
SLP (Not covered as NF  service in State Plan)   $ 35.00   $ 41.33  
NTA (Covered as NF service in State Plan)   $ 50.00   $ 88.28  
Non-Case-Mix   $  85.00   $  96.85  
Total   $ 395.00   $ 496.67  
 
Examples A and B illustrate two processes for demonstrating that the Medicaid NF payment  
does not exceed the UPL.  
In example A, when the benefits  actually covered under the  Medicaid nursing facility benefit  and 
the corresponding elements of the  Medicare  SNF benefit  are  accurately aligned, the result is a  
UPL gap of $64.40  ($334.40 minus  $270.00). The state has appropriately calculated the UPL and 
demonstrated that the NF payment is within the UPL.   Page  10    State Medicaid Director  
Example B, however, illustrates  that  counterfactual  Medicaid services  have been added in to 
match the services included in the Medicare SNF benefit definition, with corresponding amounts  
paid under Medicare PDPM, even though these services (identified in italics) are not included in 
the states Medicaid nursing facility benefit definition and are not paid under the Medicaid 
nursing facility rate.  Here, we see a UPL gap of $226.67 ($496.67 minus  $270.00), if the states  
UPL demonstration methodology were to compare the full Medicare PDPM payment estimate to 
the amount actually paid by Medicaid. Alternatively, if the states UPL demonstration 
methodology attempted to create an apples-to-apples comparison by adding to the Medicaid 
payment the amounts Medicaid would have paid for Medicaid services covered under other 
benefit categories  (which, as non-NF services, should not be included in the NF UPL  
demonstration), we would see a UPL gap of $101.67 ($496.67 minus  $395.00).  In both examples  
A and B, the same services are provided to a Medicaid beneficiary by the  nursing  facility, which 
received Medicaid payment of $270.00  under the state plan. Yet, the  resulting UPL gap for 
example B could be  approximately $101  or even $226.67, depending on the states UPL  
demonstration methodology, in comparison to the $64.40 gap that results from a true apples-to-
apples comparison. The  effect occurs when therapy  and other rehabilitation services are  covered  
and paid outside of the  state plan  nursing facility  benefit,  but  the UPL  demonstration  assumes  
that  all of the  Medicare  PDPM component services are covered and paid under the Medicaid 
program as a comprehensive nursing facility service payment.   
In summary, the  states  UPL may include all services  and rate components  in the  Medicare  
PDPM rate  so long as the state covers and pays for all of those same services under Medicaid 
nursing facility benefit  and so specifies  in Attachment 4.19D of the Medicaid state plan. To the  
extent that the state provides a nursing  facility  services benefit that  is different  in scope  from  
Medicare  SNF benefit, the state  must make  necessary adjustments to the Medicare  PDPM rate  to 
ensure that the  adjusted amount used in the Medicaid UPL demonstration reflects a Medicare  
payment estimate corresponding only to the suite of services covered and paid under the  
Medicaid nursing facility services benefit.  
 
Other Adjustments to PDPM in Medicaid  Payments  and UPL Demonstration Methodology  
Acuity Adjustments    Page  11    State Medicaid Director  
Consistent with other state plan payment  methodology and UPL  demonstration guidance, states 
should make  acuity adjustments to account for the  characteristics of the states  Medicaid 
population to reflect  differences in the services provided to Medicaid beneficiaries and Medicare  
beneficiaries.6  Our  historical policy related to the Medicaid NF UPL allows  states to calculate a  
case-mix index differential to account for the differences in acuity  reflected in the RUGs score  
between the Medicare population and the Medicaid population. These case-mix indices are  
indicative of the level of services provided to patients in the facilities. The  resulting  adjustments  
amount to a percentage increase or decrease to the Medicare payment side of the Medicaid NF  
UPL calculation,  depending upon whether the Medicaid population had a higher or lower 
average patient acuity than the Medicare population.  
 
Length-of-Stay Adjustments  
As noted in the  Background section, PDPM includes a number of variable rates that decrease  
over the course of a patients length of stay in a facility. The  variable per diem adjustments  are  
only applied to the  PT, OT, and NTA components  of the PDPM rate. To the extent any of the  
components of PDPM used by the state are adjusted by patient length of stay, CMS requires that  
the state use  the PDPM rate at day 100 as the states starting point within the Medicaid UPL  
calculation. The reason for this adjustment is  two-fold. The first is due to the fact that the  
Medicare SNF benefit does not cover or pay for services after the 100th  day of a patients stay in 
the  SNF, with most Medicare stays ranging from 27 to 31 days.7  Medicaid patients often reside  
in  nursing  facilities well beyond the 100-day limit,  and this approach would reflect a reasonable  
proxy for the amount that Medicare would pay for those patient days, which eventually would 
outweigh the first 100 days for the many Medicaid beneficiaries with extended nursing facility 
stays.8  The second is  that  Medicare  PDPM assumes that the initial intake of the patient and the  
initial volume of PT, OT, and NTA services the patient receives will be quite high and will  
decrease over the course of a Medicare patients stay due to the rehabilitation-intensive  nature of 
 
6  Medicaid  Nursing  Facility  UPL  guidance  document.  Available  at:  https://www.medicaid.gov/medicaid/financial-
management/downloads/nursing-facility-upl-guidnce-2022.pdf  
7  Medicare  Payment  Advisory  Commission.  Report  to  the  Congress:  Medicare  Payment  Policy,  March  2021.  
Chapter  7.  Available at:  https://www.medpac.gov/wp-content/uploads/2021/10/mar21_medpac_report_ch7_sec.pdf  
8  White,  A.  and  Zheng,  Q.  Comparison of  Nursing Facility Acuity Adjustment  Methods.  November  2020.  Page  10.  
Available  at:  https://www.macpac.gov/wp-content/uploads/2020/11/Comparison-of-Nursing-Facility-Acuity-
Adjustment-Methods.pdf    Page  12    State Medicaid Director  
the  Medicare  SNF benefit under section 1819(a) of the Act. We do not anticipate that the  
Medicaid population  typically will have  the same  therapy  needs  as the Medicare population. 
Likewise, we do not anticipate  that  up-front intake activities  (involving, e.g., a potentially high 
volume of PT, OT, and NTA services) necessarily will be paid for by Medicaid,  as a large  
portion of Medicaid beneficiaries residing in nursing  facilities are also enrolled in Medicare, 
which pays for the early part of the nursing facility stay before the Medicare SNF benefit is  
exhausted and Medicaid becomes the beneficiarys primary payer.   
 
Services for  Which Medicaid is not the Primary Payer  
Longstanding CMS policy  recommends that states exclude cross-over claims, for which 
Medicare  or another third-party payer is the primary payer, from the UPL calculation.9  The UPL  
requirements in 42 C.F.R.  447.272 state that the UPL refers to a reasonable estimate of the  
amount that would be paid for the services furnished by a group of facilities under Medicare  
payment principles in [the Medicare program].  Where a  states payment obligation for those  
claims is governed by the states third-party liability policies rather than the  states  primary 
Medicaid nursing facility  payment  methodology,  it is difficult to  develop an estimate  for those  
particular claims that would reasonably compare to a  Medicare-equivalent  payment amount to 
Medicaids paid co-insurance and deductible amounts, which we expect would be the Medicaid 
payment in this circumstance, without  overstating  the UPL.   
 
Other  Adjustments,  as  Needed  
There may be other adjustments that are necessary as CMS reviews  states UPL  demonstration  
methodologies  based on PDPM payments, to ensure that the UPL  demonstrations reflect  a 
reasonable estimate of the amount that Medicare would pay for the applicable Medicaid services. 
For example, CMS has  considered state-proposed volume adjustments when  there have been 
drastic increases or decreases in expected patient care  volume from one  year to the next.  To the  
extent that the state has proper documentation or justification, this type of adjustment may be  
considered in the states  UPL  demonstration methodology.  Other adjustments could be  
appropriate based on expansion of service delivery  through managed care in the state, changes in 
 
9  Medicaid  Nursing  Facility  UPL  guidance  document.  Available  at:  https://www.medicaid.gov/medicaid/financial-
management/downloads/nursing-facility-upl-guidnce-2022.pdf   Page  13    State Medicaid Director  
the Medicare SNF PPS, or other factors.  CMS is available to provide technical assistance to 
states with questions about their Medicaid payment and UPL demonstration methodologies  
through the Medicaid UPL resource mailbox, identified below.    
 
Timeline for Implementation and Alternative Methodologies  
CMS has indicated  in the  recent  interim final rule with comment, Medicare and Medicaid 
Programs,  Basic Health Program, and Exchanges;  Additional Policy and Regulatory  Revisions in 
Response to COVID-19 Public Health Emergency  (85 FR 27550, 27596  (May 8, 2020)),  that  
CMS will transition away from supporting the MDS data associated with the RUGs system for 
SNFs  and, shortly after the public health emergency for COVID-19 ends, plans to work with 
stakeholders to develop a mutually agreeable timeline for releasing the updated MDS that  
provides sufficient time for SNFs to incorporate the updated version into their operations.  Based 
on this transition, states should consider  whether adjustments  in their Medicaid payment  and 
UPL  demonstration  methodologies  are  necessary.  
As noted above, CMS is ending support for RUG-III and RUG-IV on federally required 
assessments for patients residing in Nursing Facilities and Skilled Nursing Facilities as of 
October 1, 2023.  As noted in the 2018 Medicaid Informational Bulletin, additional resources are  
available for states to continue to use RUGs for an additional two-years after the  October 1, 2023 
date.  States that  wish to continue to use RUG-III or RUG-IV after October 1, 2023, for either 
state plan payment methodologies or UPL demonstrations,  will need to implement a new process  
called Optional State Assessments or OSAs  to gather the needed assessment  data  which will  
allow the states to calculate a RUGs payment amount for the services provided to the Medicaid 
beneficiaries.  States that are interested in pursing the use of OSAs should direct their questions  
to  the OSA resource mailbox at  OSAMedicaidinfo@cms.hhs.gov.   
As discussed above, while there is no requirement  for states to  pay nursing facilities  based on 
Medicare  PDPM in their  Medicaid programs, the data limitations associated with the ending of 
the data infrastructure supporting the RUGs system  may  present issues  for states  in calculating 
RUGs-based payments. Absent  available  RUGs MDS  data  from CMS, states will  likely  have to 
consider collecting data  independently from providers to support RUGs  state plan payment  
methodologies. States may  also consider trending available  RUGs  data to a  current  payment   Page  14    State Medicaid Director  
period to establish state plan payment rates. However,  this  approach should  only  be  used as  an 
interim  measure for  UPL methodologies,  since CMS generally expects  UPL demonstrations to 
use data that  are  no more than two years old in order to present a reasonable estimate.10 
Conclusion  
As stated at the beginning of this letter, CMS will no longer support the Medicare RUGs systems  
after October 1, 2023.  CMS is  available  to assist states  as Medicare RUGs transition to PDPM. 
Initial  readiness determinations should be made by the states  in collaboration with their provider 
communities. States that decide to transition to PDPM for purposes of Medicaid payment  and  
UPL demonstrations should  carefully  review  their  currently approved state plan benefits and 
payment methodologies, as well as their  UPL demonstration methodology for nursing facility 
services. States  that include references to RUGs in the state plan and wish to change their 
payment methodologies to be based on Medicare  PDPM  or a different payment system  must  
conduct public process and notices in accordance with statute and regulation and submit a state  
plan amendment to CMS for approval.  
For technical assistance, please contact Andrew Badaracco, Acting  Director for the Division of 
Reimbursement Policy at  Andrew.Badaracco@cms.hhs.gov, or the Medicaid UPL resource  
mailbox at  MedicaidUPL@cms.hhs.gov.  
 
 
              Sincerely,  
 
 
 
Daniel Tsai 
               
Deputy Administrator and Director 
               
   
 
10  Medicaid  Nursing  Facility  UPL  guidance document.  Available at:  https://www.medicaid.gov/medicaid/financial-
management/downloads/nursing-facility-upl-guidnce-2022.pdf   Page  15    State Medicaid Director  
Appendix  
 
Why is PDPM so much different for Medicaid if PDPM was supposed to be budget 
neutral?  
 
This is one of the central questions we have considered, and the answer can be found in the  
Medicare final rule for PDPM:  
83 FR 39258  
Most Common    Medicare National   % Change in   One   States  
Therapy Levels   Case Distribution   Payment Rate   Medicaid  
Percentage   from RUG to  Case  
PDPM   Distribution  
Percentage*  
RU  (Highest Rehab   58.40%   -8.40%   0.34%  
RUG)  
RV   22.40%   11.40%   1.97%  
RH   6.80%   27.40%   4.84%  
RM   3.30%   41.10%   18.63%  
RL  (Lowest Rehab   0.01%   67.50%   0.73%  
RUG)  
Non-Rehab   9.10%   50.50%   73.49%  
* This state was selected based on the availability of data sufficient to enable the Medicaid case  
distribution breakout necessary for this example.  
 
The largest portion of Medicares  SNF  population falls into the RU RUG category, which is  
the highest  therapy RUG in the RUG methodology: 58.4% of the national Medicare population 
falls into this category. When calculating the PDPM payment rate for a patient previously 
classified into an RU  group  Medicare reduced the payment rate  by -8.4%. This price reduction  
only affected 0.34% of the sample states Medicaid population. Likewise, the largest Medicaid 
NF population in the sample state falls into the Non-Rehab population, which is the population  Page  16    State Medicaid Director  
that largely receives nursing services and little, if any, rehabilitation. When calculating the  
PDPM payment for a patient previously classified into a non-rehab group under RUG-IV, 
Medicare increased the  payment rate  by 50.5%. This was done to maintain the budget neutrality 
which Medicare set out to achieve by shifting some of the 8.4% reduction  in therapy payments  to 
the other components of the  PDPM  rate.  
 
This illustrates how  the budget neutrality design for PDPM was tailored specifically to the  
Medicare population, for which budget neutrality  effectively  was  achieved, while  potential  
consequences for Medicaid upper payment limit calculations were not considered in the  
Medicare rulemaking.