Skilled Nursing Facilities: Providers Have Responded to Medicare Payment System By Changing Practices
Published: 2002-08-23T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: In 1998, the Health Care Financing Administration implemented a prospective payment system (PPS) for skilled nursing facility (SNF) services provided to Medicare beneficiaries. PPS is intended to control the growth in Medicare spending for skilled nursing and rehabilitative services that SNFs provide. Two years after the implementation of PPS, the mix of patients across the categories of payment groups has shifted, as determined by the patients' initial minimum data set assessments. Although the overall share of patients classified into rehabilitation payment group categories based on their initial assessments remained about the same, more patients were classified into the high and medium rehabilitation payment group categories, and fewer were initially classified into the most intensive (highest paying) and least intensive (lowest paying) rehabilitation payment group categories. Two years after PPS was implemented the majority of patients in rehabilitation payment groups received less therapy than was provided in 1999. This was true even for patients within the same rehabilitation payment group categories. Across all rehabilitation payment group categories, fewer patients received the highest amounts of therapy associated with each payment group.

section_title: Letter
paragraphs: In 1998, the Health Care Financing Administration (HCFA) implemented a  prospective payment system (PPS) for skilled nursing facility (SNF)  services provided to Medicare beneficiaries. Mandated in the Balanced  Budget Act of 1997 (BBA), PPS is intended to control the growth in  Medicare spending for skilled nursing and rehabilitative services that SNFs  provide. Medicare pays SNFs a daily rate to cover most services provided  to a patient during each day of a covered SNF stay. Because each patient  differs in the amount of care required, the rate is adjusted for the patient’s  expected care needs and therapy based on information gathered by SNFs  using a uniform clinical assessment instrument known as the nursing  home minimum data set (MDS). Information from the MDS—such as a  patient’s diagnoses, the amount of rehabilitative therapy, and ability to  perform activities of daily living (ADL)—is used by SNFs to assign each  patient to a Medicare payment group.
Patients assigned to the same Medicare payment group exhibit similar care  needs, so Medicare’s daily payment rate is the same for each patient within  a group. The payment rate is based on the national average cost of  providing care to patients in each group, not the actual costs for any given  patient. As a result, a SNF profits when its costs are below the payment  rate and loses if its costs are above it. A SNF can control its costs by  treating less expensive patients within a group, providing care more  efficiently, or providing fewer or a less expensive mix of services  compared to the national average. A SNF can maximize its payments by  admitting patients who are likely to be classified into particular payment  groups or by modifying its patient assessment and documentation  practices to support higher payment group assignments.
The implementation of PPS raised providers’ concerns about whether  payments would cover their costs. Our work and the work of others  indicated that the payment groups may not adequately identify high-cost  patients and distribute payments accordingly. The Congress addressed  these concerns by increasing Medicare payments across all payment  groups. At the same time, the Congress mandated additional increases for  selected payment groups in response to concerns that payments for some  types of patients were too low. Payments were increased for some of the  payment groups for patients receiving primarily rehabilitation therapy and  all payment groups for patients requiring extensive or special care and for  clinically complex patients.
Given possible provider responses to PPS, you asked us to analyze   (1) shifts in the mix of Medicare beneficiaries across payment groups and  (2) the amount of therapy services provided to patients within payment  groups. To do so, we examined MDS data to determine the mix of patients  treated and the services that Medicare beneficiaries received across and  within payment groups for three points in time—early in PPS (January  through March 1999), 1 year later and 2 years later. (For more details, see  app. I, Scope and Methodology). We also interviewed staff from the  Centers for Medicare & Medicaid Services (CMS) responsible for SNF  payment policy and we reviewed regulations, literature, and other  documents relating to SNF PPS and MDS. We performed our work from  March 2000 through June 2002 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Generally, Medicare covers SNF stays for patients needing skilled nursing  and therapy for conditions related to a hospital stay of at least   3 consecutive calendar days, if the hospital discharge occurred no more  than 30 days prior to admission to the SNF. For qualified beneficiaries,  Medicare will pay for medically necessary services, including room and  board, nursing care, and ancillary services such as drugs, laboratory tests,  and physical therapy, for up to 100 days per spell of illness.
For more than a decade beginning in 1986, Medicare SNF spending rose  dramatically—averaging 30 percent annually. During this period, Medicare  payments to each SNF were based on the costs incurred by the SNF in  serving its Medicare patients. There was minimal program oversight,  providing few checks on spending growth. Although Medicare imposed  payment limits for routine services, such as room and board, it did not  limit payments for capital and ancillary services, such as therapy. Cost  increases for ancillary services averaged 19 percent per year from 1992  through 1995, compared to a 6 percent average increase for routine service  costs.
To curb the rise in Medicare SNF spending, BBA required a change in  Medicare’s payment method. HCFA began phasing in the SNF PPS on   July 1, 1998. Under PPS, SNFs are paid a prospectively determined rate  intended to cover most services provided to a patient during each day of a  Medicare-covered SNF stay. The SNF payment rate is based on the 1995  national average cost per day, updated for inflation. Because the costs of  treating patients vary with their clinical conditions and treatments, daily  payments for each patient are adjusted for the patient’s expected care  needs depending on the patient’s assignment into one of 44 different  payment groups, also called resource utilization groups (RUG). A RUG  describes patients with similar therapy, nursing, and special care needs  and has a corresponding payment rate.
The RUG classification system is hierarchical. The first distinction made is  whether the patient has received (or is expected to receive) at least   45 minutes a week of therapy (see fig. 1). For these rehabilitation patients,  further divisions—into ultra high, very high, high, medium, and low  therapy categories—are made based on the total minutes and type of  physical, occupational, and speech therapy provided over 7 days. Each of  these categories is defined by a range of therapy minutes and the type of  therapy provided. For example, patients in the very high category receive  between 500 and 719 minutes of therapy over 7 days. Each category is  further subdivided into RUGs, based on a patient’s dependency in  performing ADLs, such as eating, transferring from a bed to a chair, or  using the toilet. There are 14 rehabilitation RUGs, which account for three- fourths of Medicare-covered stays.
Among patients who have not received (or are not expected to receive)   45 minutes a week of therapy, the system distinguishes between patients  requiring extensive or special care or who are clinically complex   (12 RUGs) and those receiving custodial care (18 RUGs). The  classification system uses specific medical conditions (such as having  multiple sclerosis or being comatose) and special care needs (such as  requiring tracheostomy care or ventilator support) within the past 14 days  to group patients into extensive services, special care, and clinically  complex categories. Patient characteristics such as the ability to perform  ADLs, signs of depression, and conditions requiring more technical clinical  knowledge and skills are used to assign patients into RUGs within these  categories.
subsections: section_title: MDS Patient Assessments
paragraphs: Since 1991, SNFs have carried out a requirement to periodically assess and  plan for residents’ care using the MDS, which documents 17 aspects of a  patient’s clinical condition, including the amount of therapy provided or  planned, diagnoses, certain care needs, and the ability to perform ADLs at  the patient’s most dependent state. In addition to determining Medicare  payments, these data are used to measure patient needs, develop a plan of  care, and monitor the quality of care.
To gather the MDS, an in-house interdisciplinary team assesses each  patient’s clinical condition at established intervals throughout the patient’s  stay. The Medicare assessment schedule requires that the initial  assessment be performed during days 1 through 5 of a patient’s stay, but  may be performed as late as days 6 through 8, termed “grace days,” which  give staff additional flexibility in conducting the assessments. The initial  assessment is used to assign patients to a RUG that establishes payments  for the first 14 days of care. For patients staying longer than 14 days, a  second assessment must be conducted during days 11 through 14 that  determines the RUG assignment and payment rate for days 15 through   30 of the patient’s stay. An additional assessment is performed prior to the  30th day of care and every 30 days thereafter; each of these assessments  establishes the payment for the next 30 days up to the 100th day.
SNFs can classify patients primarily needing therapy into the high,  medium, or low rehabilitation payment group categories for the initial  assessment using either actual minutes of therapy provided or an estimate  of the amount that will be provided over the 2 weeks covered by the initial  assessment. If a patient is classified into one of these rehabilitation  categories using an estimate, but actually receives less than the amount of  therapy to qualify into that category, payments to the SNF for the initial  assessment period are not reduced. To classify patients into the very high  or ultra high payment group categories on the initial assessment, SNFs  must have already provided the minimum amount of therapy that defines  these categories when the assessment is done.
section_title: Possible SNF Responses to PPS Incentives
paragraphs: The accuracy and completeness of the patient assessment information are  critical to ensure appropriate categorization of patients into payment  groups. For example, to distinguish between different levels of assistance  required in performing ADLs, a SNF needs to document how often and  how much assistance was provided to a patient during the past 7 days. For  a patient receiving over 720 minutes of therapy a week (the ultra high  rehabilitation category), the difference between assessing a patient as  needing “extensive” versus “limited” assistance in performing one ADL,  such as eating, may result in an additional payment of up to $48 per day to  the SNF. (See app. II for a comparison of ADLs and payment rates for each  RUG.) Thus, a SNF might respond to the PPS by increasing the resources  devoted to completing the MDS.
This possible SNF response to the new payment system may be similar to  how hospitals responded to the inpatient hospital PPS. Under the inpatient  PPS, hospitals are paid a prospectively determined rate per patient stay,  which is adjusted for expected resource needs based on factors such as  patient diagnoses and treatment. After the implementation of the inpatient  PPS in 1983, hospitals expanded the number of diagnoses they reported to  describe patients. These changes in documentation resulted in some  patients being classified into higher payment categories, which increased  hospital payments.
A SNF also has an incentive to change the amount of care provided to  minimize its costs and maximize its payments. Because the amount of  therapy provided is key to classifying the majority of patients into RUGs, a  SNF benefits when it provides an amount of therapy on the low end of the  range of therapy minutes associated with that RUG. For example,  furnishing 1 additional minute of therapy a week could move a patient  from the very high to the ultra high category. The SNF would receive an  additional $63 or $99 more per day, depending on the patient’s ADL needs,  but there may not have been a proportionate increase in costs.
To ensure that its patients are grouped into the highest possible payment  groups, a SNF may adjust the timing of its initial patient assessments.  Grace days are intended to give SNFs the flexibility to delay care until  patients are ready to receive therapy, while ensuring that payments reflect  the treatment levels that are provided to the patient. SNFs may opt to use  grace days when conducting the initial assessment of patients who may be  grouped into the payment group categories that require actual minutes of  therapy (ultra and very high rehabilitation). Otherwise, if initial  assessments are done before the grace days, patients may not have  received enough therapy to reach the weekly threshold for placement into  one of these categories.
section_title: Refinements to the SNF PPS
paragraphs: Since the implementation of the SNF PPS, some nursing home chains have  claimed that payments are inadequate and that this has caused their  financial condition to erode. We have reported that total SNF PPS  payments are likely to be adequate and may be excessive given that the  payment rates include the costs of inefficient delivery, unnecessary care,  and improper billings. But the Medicare Payment Advisory Commission  and we have raised concerns that the payment rates for certain types of  patients may be inadequate because the patient classification system may  not appropriately reflect the differing needs of patients who require  multiple kinds of health care services, such as extensive or special care,  rehabilitative therapy, and ancillary services. We have also expressed  concern that the use of therapy minutes provided to patients as a way to  classify patients might encourage the provision of unnecessary services.
In response to concerns about the overall adequacy of Medicare payments  and their distribution across different types of patients, the Congress has  raised payments twice since the PPS implementation. These actions  increased payments across-the-board for all RUGs and, in addition, for  certain RUGs. The Medicare, Medicaid, and SCHIP Balanced Budget  Refinement Act of 1999 (BBRA) temporarily increased Medicare’s  payments for all RUGs by 4 percent, beginning in fiscal year 2001 through  the end of fiscal year 2002. In addition, BBRA increased payments for   15 RUGs (3 rehabilitation RUGs and all extensive services, special care,  and clinically complex RUGs) by 20 percent beginning in April 2000. The  Congress intended this increase to be temporary—until refinements to the  RUGs patient classification system were implemented. However,  refinements have not been implemented and the Congress again revised  the payment rates. The Medicare, Medicaid, and SCHIP Benefits  Improvement and Protection Act of 2000 (BIPA) temporarily increased the  portion of the payment related to nursing costs by 16.66 percent for all  payment groups, which raised the overall payment rates from   4 to 12 percent, depending on the RUG, beginning April 1, 2001, through  September 30, 2002. In addition, BIPA replaced the 20 percent BBRA  increase that applied to 3 out of the 14 rehabilitation RUGs with a   6.7 percent increase for all rehabilitation RUGs.
CMS has also responded to concerns about PPS. In July 2001, CMS  awarded a contract to determine the feasibility of refinements to PPS,  including alternatives to the RUGs patient classification system. To date,  this contract has not resulted in proposed refinements to the RUGs system  and the contractor’s preliminary report is not due until fall 2004. CMS has  also supported work to assess and verify the MDS data that underlie PPS.  However, we recently reported that CMS’s proposed on-site and off-site  review of MDS assessments may not be sufficient to ensure the accuracy  of MDS assessments in most nursing homes or to systematically evaluate  the performance of state efforts to do so. In September 2001, CMS  awarded a contract to determine if there are differences between the  documentation of patient care needs and actual patient care needs and to  detect irregularities in MDS assessments. The contractor began these data  monitoring activities in the spring of 2002, which include checking that the  RUGs reported on the Medicare claims match those on the MDS  assessments and examining the distribution of patients across the  payment groups.
section_title: Distribution of Patients Across Payment Categories Has Changed
paragraphs: Among patients primarily receiving rehabilitation care, more were  classified at their initial assessment into moderate rehabilitation payment  group categories and fewer into the intensive and low rehabilitation  categories since the implementation of PPS. Providers reported that the  payments for the moderate rehabilitation payment groups were more  favorable, relative to their costs, than other payment groups. Further, the  share of patients initially classified into the rehabilitation RUGs whose  payments were increased by BBRA provisions grew, while the share of  patients initially classified into most of the other payment groups declined  or stayed the same. Across patients initially assigned to the extensive,  special care, or clinically complex categories, more were classified as  requiring extensive services—the highest paying category—and fewer into  the special care or clinically complex categories. SNFs changed two  patient assessment practices that could have contributed to these shifts in  patients’ initial payment group assignments. First, SNFs increased their  use of estimated—rather than actual—therapy minutes to assign patients  to rehabilitation categories. Second, SNFs assessed patients later in their  stays, making it more likely that they received more therapy and therefore  would be classified into categories with higher payments.
subsections: section_title: More Patients Initially Categorized into Payment Groups with Payment Increases
paragraphs: Although the proportion of SNF Medicare patients initially classified into  rehabilitation payment group categories remained the same overall, the  distribution of patients within these categories changed considerably from  first quarter 1999 to first quarter 2001 (see table 1). By 2001, more  Medicare patients receiving therapy were initially classified into the two  moderate rehabilitation categories—medium (16 percent more) and high  (17 percent more), which made up about two-thirds of Medicare SNF  admissions. The share of patients initially classified into ultra high—the  most intensive rehabilitation category—decreased to comprise just   3 percent of all Medicare SNF patients at their initial assessment in 2001.  This shift is consistent with the industry’s assertions that the high and  medium categories have more favorable payments, relative to their costs,  than other categories. We do not know if this shift reflects a change in the  care needs of patients from 1999 to 2001.
Some of the shifts in the distribution across individual rehabilitation RUGs  paralleled changes in payment rates made by the Congress. Within the  high and medium rehabilitation payment group categories, the shares of  patients initially classified into RUGs that received congressionally  mandated payment increases in 2000 grew substantially more than the  shares of patients classified into rehabilitation RUGs that did not (see  table 2). For 8 of the 11 rehabilitation RUGs without this special increase,  the shares of patients at their initial assessment declined and only one  experienced an increase.
Among the patients initially classified into the extensive and special care  or clinically complex categories (all of which were increased 20 percent by  BBRA), the share of patients initially assessed as requiring the most  intensive care—those in the extensive services category—increased to  become about two-thirds of patients in these categories, while the share of  patients in the special care and clinically complex categories decreased.
subsections: section_title: Changes in Assessment Practices May Contribute to Different Classifications and Higher Payments
paragraphs: Since the introduction of PPS, changes in SNF patient assessment  practices have made it easier to classify patients into some categories with  higher payments. When performing their initial patient assessments, SNFs  have increasingly opted to use estimates of the amount of therapy they  expect to provide (rather than actual therapy given during the first week  of care) to categorize patients into the high, medium, and low therapy  categories for the first 14 days of care. Because payments are based on  these estimates, payments for some patients were higher than they would  have been if the payments were based on actual therapy provision.  Comparing the first quarters of 1999 and 2001, the practice of using  estimated therapy minutes, rather than actual therapy provided, to classify  patients into therapy categories increased more than 35 percent, becoming  the mechanism for classifying nearly two-thirds of all patients in high,  medium, and low rehabilitation categories. Of the patients who could be  evaluated, one quarter of the patients classified using estimated minutes  of therapy did not receive the amount of therapy they were assessed as  needing, while three-quarters eventually did.
SNFs increasingly performed initial patient assessments later in patient  stays, during the grace days, for patients in the highest paying therapy  categories—ultra high and very high. Because classification into these  categories is based on the actual amount of care provided, conducting the  patient assessments during the grace days allows additional time for more  therapy services to be provided, making it likelier that patients would be  classified into the ultra high and very high categories. To classify patients  into these categories, the use of grace days increased more than   40 percent from the first quarter of 1999 to the first quarter of 2001.
section_title: Since PPS, SNFs Provide Fewer Minutes of Therapy
paragraphs: In the 2 years following the implementation of PPS, SNFs provided less  therapy to almost two-thirds of all Medicare SNF patients—those in the  medium and high rehabilitation payment group categories. The typical  patient in these categories received 22 percent less therapy, at least   30 fewer minutes, per week during the initial assessment period between  the first quarters of 1999 and 2001. Indeed, in 2001 half of the patients  initially categorized in these two groups did not actually receive the  amount of therapy required to be classified into those groups, due in part  to the use of estimated therapy minutes for classification (see table 3).  Further, during their initial assessment period, fewer patients received  therapy near the higher end of the range that defines each category. For  example, to be assigned to the high rehabilitation category, patients are  assessed as needing between 325 and 499 minutes of therapy a week. In  1999, 20 percent of patients in the high rehabilitation payment group  category received 390 minutes or more of therapy per week during their  initial assessment period. Two years later, less than 13 percent received  this much therapy. In 1999, 5 percent of patients initially assessed in the  high rehabilitation payment group category received 480 minutes or more  of therapy per week. Two years later, only 2 percent of patients received  this level of therapy.
Across all therapy patients, the median amount of therapy provided during  the initial assessment period also declined from 1999 through 2001. The  declines in therapy service use and resultant reductions in costs were not  uniform across the rehabilitation payment group categories. Consequently,  payments for some categories of RUGs are likely to be higher than their  service costs, compared to other categories of RUGs. For patients in the  more intensive rehabilitation payment group categories, where estimated  minutes cannot be used to classify patients, median therapy minutes did  not decline.
section_title: Concluding Observations
paragraphs: Our work indicates that SNFs have responded to PPS in two ways that  may have affected how payments compare to SNF costs. SNFs have   (1) changed their patient assessment practices and (2) reduced the amount  of therapy services provided to Medicare beneficiaries. The first change  can increase Medicare’s payments and the second can reduce a SNF’s  costs. CMS’s ongoing efforts to refine the payment system are particularly  important in light of these provider responses to the PPS.
section_title: Agency Comments
paragraphs: In its written comments on a draft of the report, CMS agreed that ongoing  evaluations of PPS are important. CMS stated that our findings are  generally consistent with its analyses and with its expectations regarding  provider responses to the incentives of the PPS. CMS noted that it intends  to examine whether therapy provided is consistent with payment levels  and ADL coding accuracy through its program safeguard contractor  project. CMS stated that reporting the percentage change of relatively  small shares of patients across payment categories may overemphasize the  changes and is somewhat misleading. However, the percentage changes  reported in table 1 demonstrate that the shifts in shares of patients across  payment categories are consistent with the industry’s assertions that high  and medium categories have the most favorable payments, relative to  costs. In addition, the percentage changes reported in table 2 demonstrate  that the shifts among RUGs parallel the congressionally mandated  payment increases. CMS also provided technical comments, which we  incorporated as appropriate. CMS’s comments are in appendix III.
We are sending copies of this report to the Administrator of CMS,  appropriate congressional committees, and other interested parties. We  will also provide copies to others upon request. In addition, the report is  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions, please call me at (202) 512-7114.  Laura Sutton Elsberg, Leslie Gordon, and Walter Ochinko prepared this  report under the direction of Carol Carter.
section_title: Appendix I: Scope and Methodology
paragraphs: We used data from the 1998 Medicare cost reports to identify SNFs that  began participating in PPS on or before January 1, 1999. Facility  ownership and other characteristics were taken from HCFA’s end-of-year  Provider of Services file for 1999. We included in our analysis only those  SNFs that had transitioned to PPS before or during January 1999, were  active in 1999, and submitted Medicare MDS assessments in the three  periods used in this study. This cohort comprised approximately   80 percent of all SNFs that filed a 1998 cost report and was representative  of the universe of SNFs in terms of bed size, location (rural and urban),  and ownership characteristics.
For the SNFs in our sample, we analyzed data from the nursing home MDS  national repository to compare differences in patient classification and  therapy services across three points in time—early in PPS (January-  March 1999), 1 year later (January-March 2000), and 2 years later (January- March 2001). Data to examine the distribution of Medicare patients after  the implementation of BIPA-mandated changes (applied to services on or  after April 1, 2001) were not available in time for this analysis. Our sample  included over 350,000 MDS assessments for Medicare beneficiaries for  each time period. To examine the differences in patient classification, we  grouped patient assessments into 11 major categories—the 5 major  rehabilitation categories (ultra high, very high, high, medium, and low),   3 categories for patients requiring extensive or special care or who are  clinically complex, and 3 categories for patients requiring custodial care,  based on the RUG reported on the initial assessment.
To examine the differences in the provision of therapy services, we  aggregated the reported physical, occupational, and speech therapy  minutes for each assessment. We calculated the number of initial  assessments that had used estimated minutes to qualify patients into a  rehabilitation category by counting the number of first assessments that  reported actual therapy minutes below the minimum number of minutes  required in the three rehabilitation categories (high, medium, and low). To  determine the extent to which patients received the estimated therapies,  we calculated, for the patients who had a second assessment, the percent  who had received less than the minimum number of therapy minutes  required for the RUG reported on the initial assessment. We also  interviewed CMS staff responsible for SNF policy and we reviewed  regulations, literature, and other documents relating to SNF PPS and MDS.
section_title: Appendix II: Therapy Minutes, Activities of Daily Living, and Medicare Payment Rates to SNFs
paragraphs: Appendix II: Therapy Minutes, Activities of  Daily Living, and Medicare Payment Rates to  SNFs  Patients are classified into the custodial categories according to their need for nursing services and  assistance with ADLs. These patients typically do not meet the criteria for Medicare coverage  because they generally do not require skilled nursing care.
section_title: Appendix III: Comments from the Centers for Medicare & Medicaid Services