Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

JANUARY 2001 

OEI-02-99-00041 

Nursing Home Resident Assessment 

Resource Utilization Groups 
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 
EXECUTIVE SUMMARY 

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 

Nursing Home Resident Assessment:RUGs i 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 ongoing training and 60 percent of administrators say they have plans for additional PPS 

training sessions. 

Nursing Home Resident Assessment:RUGs ii 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 

Nursing Home Resident Assessment:RUGs iii 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 HCFA’s 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. 

Nursing Home Resident Assessment:RUGs iv OEI-02-99-00041 
TABLE OF CONTENTS

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

Nursing Home Resident Assessment:RUGs v OEI-02-99-00041 
INTRODUCTION

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 nation’s 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. 

Nursing Home Resident Assessment:RUGs 1 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 User’s Manual Version 2.0 October, 1995. 

Nursing Home Resident Assessment:RUGs 2 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 resident’s 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 resident’s 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 User’s Manual Version 2.0 October, 1995 

Nursing Home Resident Assessment:RUGs 3 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 beneficiary’s 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 

resident’s 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. 

Nursing Home Resident Assessment:RUGs 4 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 threestage 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. 

Nursing Home Resident Assessment:RUGs 5 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 resident’s 

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.

Nursing Home Resident Assessment:RUGs 6 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 President’s Council on Integrity and Efficiency. 

Nursing Home Resident Assessment:RUGs 7 OEI-02-99-00041 
FINDINGS 

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 

Nursing Home Resident Assessment:RUGs 8 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 

Nursing Home Resident Assessment:RUGs 9 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 resident’s 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 selfperformance 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 selfperformance 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 

Nursing Home Resident Assessment:RUGs 10 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. 

Nursing Home Resident Assessment:RUGs 11 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 

Nursing Home Resident Assessment:RUGs 12 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 HCFA’s 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. 

Nursing Home Resident Assessment:RUGs 13 OEI-02-99-00041 
APPENDIX A 

Nursing Home Resident Assessment:RUGs 14 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 

ESTIMATE 

CONFIDENC 

E INTERVAL 

Percent of matched RUGs 24% +/-9% 

Percent of mismatched RUGs 76% +/-9% 

NH coded higher and coded Special 

Rehabilitation 

37% +/-14% 

Difference rate of physical therapy 46% +/-5% 

Difference rate of occupational therapy 39% +/-11% 

Difference rate of 108 MDS elements 15% +/-4% 

Nursing Home Resident Assessment:RUGs 15 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 

Projections of 

Coding 

Dollar 

Projection 

Confidence Interval 

Nursing Home $27,388,79 

8 

$17,902,544 - $36,875,052 

Our Reviewer $25,005,87 

2 

$18,142,667 - $31,869,077 

Nursing Home Resident Assessment:RUGs 16 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 

of 

Freedom 

Chi-Square Significant Difference 

in RUG coding 

Urban vs. Rural 1 .57 No 

Chain vs. Non-chain 1 8.50 Yes 

Nursing Home Resident Assessment:RUGs 17 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 

Nursing Home Resident Assessment:RUGs 18 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 

Nursing Home Resident Assessment:RUGs 19 OEI-02-99-00041 
APPENDIX F 

Minimum Data Set 

In this appendix we have included a complete copy of the Minimum Data Set. 

Nursing Home Resident Assessment:RUGs 20 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 21 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 22 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 23 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 24 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 25 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 26 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. 

Nursing Home Resident Assessment:RUGs 27 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 28 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 29 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 30 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 31 OEI-02-99-00041 
Nursing Home Resident Assessment:RUGs 32 OEI-02-99-00041