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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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.