An official website of the United States Government —

Here’s how you know

Official websites use .gov

A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS

A lock ( ) or https:// means you've safely connected to the .gov website. Share sensitive information only on official, secure websites.

Advising the Congress on Medicare issues
MedPAC > News > Post-acute care > New report: Need for skilled nursing facility payment reform is urgent

New report: Need for skilled nursing facility payment reform is urgent

The Commission released a report today finding that Medicare’s payments to skilled nursing facilities (SNFs) for therapy and nontherapy ancillary services are the least accurate they have been since 2006, despite Medicare’s numerous revisions to the payment system during this period.

The report offers further evidence that the SNF payment system (PPS) encourages SNFs to provide rehabilitation therapy services and discourages them from providing drugs and other nontherapy ancillary (NTA) services. Put differently, the payment system contains incentives for facilities to admit rehabilitation patients. The report also provides evidence that the Commission’s alternative design for a SNF payment system would improve payment accuracy, and in turn dampen the incentive for SNFs to focus on furnishing intensive therapy.

How does the current SNF PPS get the incentives wrong? One of its key flaws is that it bases the therapy component of the SNF payment on the amount of therapy the SNF chooses to provide to a patient, rather than on the patient’s characteristics and clinical need for therapy (See our payment basics for a full description of the SNF payment system). The more therapy provided to patients, the more they can be classified as high or ultra-high therapy cases in the SNF payment system, which receive higher Medicare payments.

Of course, it makes sense to pay SNFs more for patients who receive lots of therapy, since they incur higher therapy costs. However, under the current system, program payments for therapy rise faster than the costs incurred by SNFs to provide therapy– meaning the system overpays for these cases. As a result, the highest therapy case-mix groups are the most profitable for providers. MedPAC found that freestanding facilities with the highest shares of ultra-high and very-high therapy have Medicare margins nearly seven times those of facilities with the lowest shares of these days (16 percent vs. 2.3 percent).

The other key design flaw is that the payment system ties payments for NTA services to nursing staff time. Yet, the costs of NTA services are not correlated with nursing costs. Because of this, providers do not receive higher payments for patients with high NTA costs. This could discourage providers from taking patients who are expected to have high costs for these services – such as patients who require expensive antibiotics. The combined incentives of overpaying for high cost therapy patients and underpaying for high NTA-cost patients encourages facilities to focus on admitting therapy patients and furnishing lots of therapy to them. Over time, the share of intensive therapy days has steadily grown.

In our latest study of the SNF payment system, we find that these payment inaccuracies have grown worse since 2006. During this period, Medicare has taken steps to enhance payments for medically complex care, but it has not revised the basic design of the PPS. As a result, these payment changes have not improved payment accuracy.

The Commission recommended an alternative SNF PPS design in 2008. Under the Commission’s revised PPS, therapy payments are based on patient characteristics (such as age, diagnoses, and mental and cognitive abilities), rather than the amount of therapy a patient receives. This design would also improve payment accuracy for NTA services because payments would be based on patient characteristics and their expected care needs. Improving payment accuracy would also improve the incentives in the PPS – providers would no longer benefit financially from focusing on therapy patients.

These changes would not reduce Medicare’s overall payments to SNFs, but would redistribute payments more equitably among providers. Most importantly, payments would shift from SNFs focused on intensive therapy patients to SNFs focused on medically complex patients. SNFs with the largest shares of therapy patients tend to be for-profit, freestanding facilities with high profit margins. 

The Commission discussed payments to SNFs as part of its annual payment update work at the December public meeting. Since 2009, MedPAC’s annual March Report chapter on SNFs has included a call for Medicare to reform the SNF PPS as discussed in this post.