Medicare Skilled Nursing Facility (SNF) Payments
Released: 2016-07-20T00:00:00

M edicare provides coverage for certain post-acute care services—health care following an inpatient acute-care hospitalization. Post-acute care can include services at other types of hospitals, such as long-term care hospitals (LTCHs) and inpatient rehabilitation facilities (IRFs), as well as home health care and outpatient care. Post-acute care also includes skilled nursing facility (SNF) care—the most common source of post-acute care for beneficiaries. In 2014, Medicare fee-for-service (FFS) spending for SNF care totaled $28.6 billion. SNF services include skilled nursing; bed and board; and physical, occupational, and speech and language therapies. The following sections provide greater detail on Medicare SNF eligibility, SNF services, and the SNF prospective payment system (PPS).

Eligibility for SNF Care

To be eligible to receive Medicare Part A SNF coverage, a beneficiary must have had an inpatient hospital stay of at least 3 consecutive calendar days (not including the day of discharge) and must be transferred to a participating SNF, usually within 30 days after discharge from the hospital. In addition, Medicare requires SNFs to provide services for a condition the beneficiary was receiving treatment for during his or her qualifying hospital stay (or for an additional condition that arose while in the SNF). The treatment must require reasonable and necessary skilled nursing care or skilled rehabilitation services on a daily basis. Additionally, a limited number of services (e.g., rehabilitation services) may be reimbursed under Medicare Part B for non-covered SNF stays, such as SNF stays of beneficiaries that have not met the three-day inpatient hospital stay requirement. For more information and recent developments on this requirement, see CRS Report R44512, Medicare's Skilled Nursing Facility (SNF) Three-Day Inpatient Stay Requirement: In Brief .

Overall, SNFs provide care to Medicare beneficiaries to treat a number of different diagnoses and conditions. Some of the more frequent hospital conditions of patients referred to SNFs for post-acute care are joint replacement, septicemia, kidney and urinary tract infections, hip and femur procedures not related to joint replacement, pneumonia, and heart failure.

Covered SNF Services and Providers

A Medicare beneficiary who qualifies for SNF coverage is entitled to up to 100 days of covered SNF care per spell of illness. Part A provides payment for daily skilled nursing, daily skilled rehabilitation, medical social services, drugs/biologicals, durable medical equipment, and bed and board when receiving such services, among other benefits. In general, nursing and rehabilitation services can be labeled skilled if they (1) require the skills of a health professional (e.g., registered nurse, physical therapist) and (2) are provided by or under the supervision of such personnel.

Two examples of services that are both skilled nursing and skilled rehabilitation services are

management and evaluation of the patient's plan of care, and observation and assessment of the patient.

A few examples of skilled nursing services are

intravenous injections, administration and replacement of catheters, administration of prescription medications, and supervision of bowel and bladder training programs.

Some examples of skilled rehabilitation services are

continuing assessments of a patient's rehabilitation needs, therapeutic exercises, and range-of-motion exercises.

SNFs are more commonly found within urban areas and within long-term care nursing facilities (referred to as freestanding SNFs ). Of the 15,005 SNFs that furnished covered SNF care in 2014, roughly 95% were freestanding. The remaining 5% of SNFs were located in hospitals (referred to as hospital-based SNFs ). Additionally, approximately 70% of SNFs are for-profit facilities, 24% are nonprofit facilities, and 5% are government-owned facilities.

SNF Prospective Payment System

The Balanced Budget Act of 1997 (BBA 97; P.L. 105-33 ) required most SNFs to be reimbursed under a prospective payment system (PPS) beginning on July 1, 1998. The SNF PPS reimburses providers a daily per diem amount after adjusting for urban or rural facility locale, case mix, and area wage differences (see Figure 1 ). Beginning April 1, 2013, through March 31, 2026, Medicare payments to SNFs will be reduced by 2% as a result of automatic spending reductions ( sequestration ).

The SNF PPS covers most costs of furnishing SNF services to Medicare beneficiaries (routine, ancillary, and capital-related costs). To be reimbursed under the SNF PPS, Medicare requires SNFs to use consolidated billing practices. Under consolidated billing, the SNF bills Part A for most of the SNF services the Medicare beneficiaries receive, regardless of whether the service was provided by an outside contractor (e.g., physical therapist contractor) or by SNF personnel.

In certain circumstances, consolidated billing does not apply and/or SNF services provided to the beneficiary are not billable to Part A. For instance, if an SNF resident were to exhaust his or her Part A benefits, coverage for some services, such as rehabilitation services, would still be provided under Part B for a beneficiary enrolled in Part B. Additionally, certain services are not reimbursed under the SNF PPS and may be separately billed to Part B.

For the first 20 days of a Medicare-covered SNF stay, no beneficiary copayment is required. For the 21 st through the 100 th day, a daily copayment, indexed annually at one-eighth (12.5%) of the current Part A inpatient hospital deductible, is required. The copayment is not adjusted geographically or based on the amount of Medicare SNF reimbursement. In 2016, the daily SNF copayment is $161.

The following sections explain in greater detail the SNF PPS formula depicted in Figure 1 , including the calculation of and update to (1) urban and rural base rates, (2) the case-mix classification system—Resource Utilization Groups (RUGs)—and (3) the wage index that is used to adjust payments for differences in area wages.

Urban and Rural Base Rates

The urban and rural base rates are the daily SNF reimbursement rates before any adjustments. Determination between an urban or rural base rate depends on whether the SNF is located within a core-based statistical area (CBSA). For SNF billing purposes, providers within CBSAs are reimbursed at an urban rate, while providers outside of CBSAs are reimbursed at a statewide rural rate.

As shown in the left portion of Figure 1 , the urban and rural base rates are broken down into four separate components: noncase-mix, noncase-mix therapy, nursing case-mix, and therapy case-mix. The noncase-mix component reflects the administrative and room-and-board costs of providing SNF care, whereas the noncase-mix therapy component reflects the costs for minimal therapy use (e.g., rehabilitation evaluations). The base rate's nursing and therapy case-mix components respectively reflect the national average costs of nursing and more intensive therapy for a one-day stay in an SNF. Breaking down the base rate into four rate components allows the PPS to adjust the base rate by RUGs, which classify beneficiaries by varying levels of expected nursing and therapy intensity. Every RUG has a noncase-mix component and nursing case-mix component and either a noncase-mix therapy component or therapy case-mix component.

The base rates were developed from FY1995 SNF cost reports and are updated annually for inflation by the percentage change in the SNF market basket index. The SNF market basket index is a composite of weighted price levels, based on FY2010 prices, which are estimated to capture an accurate picture of an average SNF provider's total costs. The change in the SNF market basket index from the prior year is referred to as the market basket update and is provided by IHS Global Insight, Inc. In the event actual cost report data shows the percentage change in SNF costs to be at least ½ percentage point greater than the market basket update, the base rate will receive an additional forecast error cor rection for the difference the following fiscal year. In addition to any forecast error correction, as required by the Patient Protection and Affordable Care Act of 2010 (ACA, as amended; P.L. 111-148 ), the market basket update is offset by a productivity adjustment rate that is equal to an average of the previous 10-year productivity rates in the broader economy. The SNF productivity adjustment began with the start of FY2012.

Resource Utilization Groups

The RUG classification system adjusts the urban or rural base rate for a beneficiary's expected SNF daily costs (i.e., nursing care, therapy care, bed and board, and drugs/biologicals). After admission to an SNF, a beneficiary is classified into a RUG, which can change over the course of his or her stay. The RUG is designed to be an accurate reflection of the beneficiary's SNF accommodation and service costs, given the beneficiary's medical conditions and current medical practices. The most recent version of the RUG classification system has 66 different groups within eight major categories: (1) Rehabilitation Extensive Services (Ultra High, Very High, High, Medium, Low); (2) Rehabilitation (Ultra High, Very High, High, Medium, Low); (3) Extensive Services; (4) Special Care High; (5) Special Care Low; (6) Clinically Complex; (7) Behavioral Symptoms and Cognitive Performance; and (8) Reduced Physical Function.

The information used to assign a beneficiary into a RUG is gathered from the Minimum Data Set 3.0 (MDS). The MDS is one of three parts of the Resident Assessment Instrument (RAI), which must be completed for all residents in Medicare- and Medicaid-certified nursing homes. The additional two parts are the Care Area Assessment (CAA) and RAI Utilization Guidelines. The RAI is designed to help with "gathering definitive information on a resident's strengths and needs, which must be addressed in an individualized care plan." The MDS portion of the RAI gathers data over 15 different criteria: (1) hearing, speech, and vision; (2) cognitive patterns; (3) mood; (4) behavior; (5) preference for customary routine activities; (6) functional status; (7) bladder and bowel; (8) active diagnoses; (9) health conditions; (10) nutritional status; (11) dental status; (12) skin conditions; (13) medications; (14) special treatments, procedures, and programs; and (15) restraints.

SNFs are required to complete the MDS for a beneficiary to receive reimbursement under Part A. The MDS assessments for Medicare payment are required to be completed on or about the 5 th day, 14 th day, 30 th day, 60 th day, and 90 th day of a patient's stay. For the most part, the MDS assessments' "look back" period, the time frame for gathering the patient's clinical information, is the seven days prior to the MDS payment assessment requirement dates. In addition to Medicare-required MDS assessments, federal law requires SNFs (as well as nursing homes) to complete the MDS and CAA for dual-eligible Medicare- and Medicaid-covered residents. These assessments must be completed near the beneficiaries' 92 nd day of stay, 366 th day of stay, and in the event of a significant change or correction in the beneficiary's status. Such assessments may be combined with the Medicare-required assessment dates when applicable.

The most recent version of the RUG classification system is RUG-IV, which replaced the RUG-53 system on October 1, 2010 (start of FY2011). There are 66 RUGs; each RUG has a nursing case-mix index, and some RUGs have an additional therapy case-mix index, together known as RUG weights. The RUG weights are used to adjust the federal base rate for different levels of expected nursing and/or therapy intensity provided to the beneficiary. The federal base rate adjusted for a specific RUG is referred to as the case-mix adjusted rate.

To create the case-mix adjusted rate, the relevant components of the urban or rural base rate must be added together. For each base rate, each RUG will have a noncase-mix component and a nursing component. The third and final component will be either a therapy case-mix component or a noncase-mix therapy component. The sum of all three components is the case-mix adjusted rate, which reflects the beneficiary's daily resource use before adjusting for area wage differences. The base rate's noncase-mix component is the same amount for every RUG. As shown in Figure 1 , the nursing component is determined by multiplying the base rate's nursing case-mix by the RUG-specific nursing case-mix index. Depending on the RUG, the third component will either be the base rate's non-casemix therapy amount, which is the same across RUGs, or the base rate's therapy case-mix multiplied by the RUG-specific therapy case-mix index, if applicable.

Wage Index

After adjusting for a beneficiary's case-mix, a share of the case-mix adjusted rate is adjusted for area wage differences. In order to calculate the area wage adjustment, the case-mix adjusted rate must be split into a labor-related share and a non-labor-related share. The labor-related share represents the amount of labor-related costs relative to total costs for providing SNF services to the average beneficiary. This labor-related share has historically been roughly 70% of the case-mix adjusted rate, with the remaining 30% allocated as the non-labor-related share.

As shown in Figure 1 , the labor-related share of the case-mix adjusted rate is multiplied by a hospital wage index specific to the location of the SNF to account for differences in area wages. The SNF wage index is calculated from a survey of wages and wage-related costs from acute care hospitals (because specific SNF wage data does not exist). For areas with no hospitals and wage-related data available, adjacent areas are used as a proxy measure for the missing cost information. The wage index is updated every year but receives an adjustment so the updated wage index does not increase or decrease aggregate Medicare SNF payments.

After the wage index number has been determined and multiplied by the labor-related portion, the product is added back to the non-labor-related share. Finally, as shown in Figure 1 , the global per diem rate is the sum of the labor-adjusted product and non-labor-related share. The global per diem rate is the final reimbursement rate of daily SNF care reimbursed through Part A. For the most part, the global per diem rate and the beneficiary's length of stay in the SNF determine the total reimbursement amount to the SNF for the stay.

Medicare SNF Expenditures and Payment Adequacy

The following provides a brief summary of total Medicare SNF expenditures and the Medicare Payment Advisory Commission's (MedPAC's) analysis on the adequacy of these payments and the potential implications of using SNF payments to subsidize Medicaid nursing facility payments.

In 2014, Medicare FFS spending on SNF care totaled $28.6 billion. SNF payments have grown as an overall share of Medicare spending for the past two decades. In 1990, Medicare payments to SNFs represented 1.8% of total Medicare FFS spending, increasing to 8.0% of total Medicare FFS spending in recent years.

In 2014, the for-profit Medicare margin and nonprofit Medicare margin were 14.9% and 3.9%, respectively, for freestanding SNFs. The total Medicare margin for freestanding SNF care in 2014 was 12.5%. While MedPAC has found that Medicare reimbursements appear to be well above costs for SNFs in the aggregate, Medicare contributes 21% of the median nursing care facility's total revenue, with Medicaid payments comprising the largest share of revenue. Therefore, MedPAC's analysis on the financial performance of Medicare payments for SNF care may capture only about a fifth of the financial picture of an average nursing facility.

However, Medicare margins are only one factor that MedPAC considers when assessing the adequacy of Medicare's payments and determining its annual payment update recommendation. MedPAC weighs other indicators, such as beneficiaries' access to care (the capacity and supply of providers and the volume of services rendered), quality of care, and providers' access to capital as well. After examining these factors, MedPAC recommended that Congress implement a 0% update to SNF payment rates for FY2017 and FY2018. MedPAC has recommended a 0% update to SNFs since March 2002.

Medicare SNF Rate-Setting Policy and Medicaid

The largest payer to all nursing facilities is the Medicaid program. When stratifying freestanding SNFs by percentage of total Medicaid patient days, in the median nursing facility, roughly 61% of its patient days were covered by Medicaid in 2014. Industry advocates insist that Medicaid does not cover the total costs of providing nursing facility services to its beneficiaries and that Medicare should subsidize Medicaid payments through its SNF reimbursements. Evidence suggests payments from non-Medicare payers do not cover the costs of their residents. In 2014, the non-Medicare margin (nursing facility payments from Medicaid, private, and other public payers less costs) was -1.5%. When including Medicare, however, the nursing facility industry's total margin was 1.9%.

MedPAC has examined potential implications of targeting Medicare SNF reimbursements to compensate for inadequate payments from other providers. According to MedPAC, this strategy results in poorly targeted subsidies. Facilities with high shares of Medicare payments—presumably the facilities that need revenues the least—would receive the most in subsidies from the higher Medicare payments, while facilities with low Medicare shares—presumably the facilities with the greatest need—would receive the smallest subsidies. MedPAC also states that if Medicare raises or maintains its high payment levels, states could be encouraged to further reduce their Medicaid payments and, in turn, create pressure to raise Medicare rates.

SNF Value-Based Purchasing Program

Section 215 of the Protecting Access to Medicare Act (PAMA; P.L. 113-93 ) requires the Secretary of Health and Human Services (the Secretary) to establish a Skilled Nursing Facility Value-Based Purchasing (SNF VBP) Program beginning on or after October 1, 2018. In general, VBP refers to the Centers for Medicare & Medicaid Services (CMS) initiative that rewards health care providers with incentive payments for the quality of care provided to beneficiaries. The intent of such a system is to reward quality of care and not just quantity of care. Similar VBP programs are already established within other Medicare provider payment systems (e.g., Hospital Value-Based Purchasing Program, End-Stage Renal Disease Quality Incentive Program).

Under the SNF VBP Program, an SNF's current Medicare per diem reimbursement may be increased or reduced to reflect its SNF VBP performance score beginning on or after FY2019. The Secretary is required to develop a methodology for determining such total performance score based on performance standards. Performance standards will be established by the Secretary and reflect either the attainment of a certain level or improvement from the prior period (whichever scores better for the SNF) across a performance measure.

The performance measure will be each SNF's all-cause, all-condition hospital readmission rate for Medicare SNF patients. In general, the hospital readmission rate will be the number of SNF residents readmitted to the hospital during their SNF stay in a given year divided by the total number of SNF residents. This all-cause all-condition hospital readmission rate measure will be replaced, when practicable, by an all-condition, risk-adjusted potentially preventable hospital readmission rate, which is to be further specified by the Secretary no later than October 1, 2016. The law does not require that these measures be endorsed by the National Quality Forum (NQF). Additionally, these measures do not have to be included in the pre-rule making selection process by NQF's Measure Application Partnership (MAP)—a multi-stakeholder group convened for the selection of quality measures pursuant to Section 1890A(a) of the Social Security Act. Further, beginning October 1, 2016, and every quarter thereafter, the Secretary will provide confidential feedback reports to SNFs on their all-cause hospital readmission performance and their risk-adjusted potentially preventable hospital readmission performance.

Under the SNF VBP Program, SNFs will be ranked based on the performance score from high to low. High-performing SNFs (that have attained relatively low hospital readmission rates or greatly improved [reduced] their hospital readmission rates) will receive a percentage add-on—a "value-based incentive payment"—in addition to their regular Medicare SNF per diem payments. SNFs ranked higher will receive a higher percentage add-on. Such percentage add-on may be zero, and SNFs ranked in the lowest 40% will receive a reduction in their Medicare SNF per diem payment rates. Payment adjustments for each SNF, either incentive payments or a reduction in the per diem for a fiscal year, will apply only to such fiscal year.

Value-based incentive payments awarded to high-performing SNFs will be funded through a portion of a 2% reduction in Medicare per diem payments applied to all Medicare-covered SNF days beginning in FY2019. Between 50% and 70% of the 2% reduction applied each fiscal year, subject to the Secretary's discretion, will be allocated for value-based incentive payments, while the remaining proportion will be retained as savings to the Medicare program. Information on the SNF VBP Program, including each SNF's performance score, which SNF was awarded incentive payments, and the total amount of incentive payments that had been provided, will be posted on the Medicare's Nursing Home Compare website.

Post-Acute Care Reform

Medicare SNF care has often been discussed in the context of other Medicare-covered post-acute care benefits. Observers have noted that there is wide geographic variation in Medicare payments and delivery of post-acute care (including SNF care). In response to such concerns, Congress passed the Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act; P.L. 113-185 ) on October 6, 2014, and the Center for Medicare & Medicaid Innovation (CMMI), established under the ACA, has tested alternative payment models for reimbursing post-acute care.

The IMPACT Act attempts to improve Medicare quality comparison and payment accuracy for post-acute care settings—LTCHs, IRFs, SNFs, and home health care—by gradually eliminating certain differences in post-acute care assessment instruments beginning on or after October 1, 2016. For SNFs, the IMPACT Act will result in changes to the MDS. The IMPACT Act will require the Secretary to provide feedback to post-acute care providers on quality measure and resource use measure performance beginning October 1, 2017. The Secretary will then create procedures for making quality measure performance and resource use measure performance publicly available beginning October 1, 2018. Following the public reporting stage, the Secretary will submit a report to Congress regarding alternative models for a post-acute care provider payment system that unifies payment across post-acute care settings including SNFs. This report will include recommendations on (1) a technical prototype of a post-acute care PPS, (2) methods to incorporate standardized patent assessment data, and (3) further clinical integration, among other recommendations. The report will be submitted no later than two years after the Secretary has collected two years of data on quality measures. Additionally, MedPAC is required to submit a report to Congress no later than June 30, 2016, that includes recommendations for a technical prototype for a post-acute care PPS that would satisfy the criteria submitted in the Secretary's report.

The CMMI was created for the purpose of testing innovative payment and service delivery models to reduce program expenditures while preserving or enhancing the quality of care. Under some of the CMMI Medicare models that affect post-acute care, providers are allowed to construct gainsharing agreements—agreements among providers (e.g., hospitals, post-acute care providers) to share monies—from increased efficiencies in delivering health care following a hospitalization. Incentive payments under gainsharing agreements can be available for reducing Medicare FFS spending for certain beneficiaries below a Medicare episode spending benchmark. For example, Model 3 of the Bundled Payment for Care Improvement Initiative allows post-acute care providers and other providers to collaborate and choose certain episodes (e.g., post-acute care following a pneumonia hospitalization) and certain episode lengths (e.g., 90 days of Medicare FFS spending after hospital discharge) to achieve such incentive payments. A similar payment model being tested at CMMI—the Comprehensive Care Joint Replacement (CJR) Model—provides a 90-day Medicare episode spending benchmark to participants who provide a lower-extremity joint replacement procedure to beneficiaries. For more information on the CJR Model, see CRS In Focus IF10310, The Comprehensive Care Joint Replacement Model .