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). 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. 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. 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. 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. 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.