Medicare’s Skilled Nursing Facility Primer:
Benefit Basics and Issues
Scott R. Talaga
Analyst in Health Care Financing
August 8, 2012
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Medicare’s Skilled Nursing Facility Primer: Benefit Basics and Issues
Summary
A Medicare skilled nursing facility (SNF) is an institution, or distinct part of an institution (e.g.,
building, floor, wing), that provides post-acute skilled nursing care and/or skilled rehabilitation
services, has in effect a written agreement to transfer patients between one or more hospitals and
the SNF, and is certified by Medicare. In general, “skilled” nursing and rehabilitative care are
services ordered by a physician require the skills of professional personnel (i.e., registered nurse,
physical therapist) and are provided under the supervision of such personnel.
The Medicare SNF benefit has drawn attention due to the rapid increase in SNF expenditures. In
2010, Medicare Parts A and B payments to SNF providers totaled $27.4 billion, having grown at
an average annual rate of 9.9% since 2000. SNF payment reductions have been recommended by
various deficit reduction groups. Some of the recommendations have included reducing the SNF
reimbursement rate and reducing or eliminating Medicare bad debt reimbursement.
Given the beneficiary has met certain requirements, a Medicare beneficiary is entitled to 100 days
of SNF care for each Medicare-covered SNF stay. To be eligible for SNF coverage, a Medicare
beneficiary must have been an inpatient of a hospital for at least 3 consecutive calendar days and
transferred to a participating SNF usually within 30 days after discharge from the hospital.
Beneficiaries must also receive treatment at the SNF for a condition they were receiving
treatment for during their qualifying hospital stay (or for an additional condition that arose while
in the SNF). For the first 20 days of SNF coverage, Medicare beneficiaries have no copayment.
Medicare beneficiaries have a daily SNF copayment for the 21st through the 100th day indexed
annually at one-eighth (12.5 percent) of the current Part A deductible. For 2012, the daily
copayment is $144.50.
SNFs are reimbursed under a prospective payment system (PPS), which began on July 1, 1998.
The PPS reimbursement is a per diem “per day” amount that covers most costs of furnishing SNF
services to Medicare beneficiaries. With the exception of certain high-cost ancillary services, the
SNF PPS bundles covered-SNF services into a single per diem reimbursement rather than
Medicare paying for each service individually.
This report describes the Medicare SNF benefit and the reimbursement system for SNF services.
In addition, this report describes recent issues, as well as congressional and other proposals
designed to slow the growth of Medicare SNF expenditures.
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Medicare’s Skilled Nursing Facility Primer: Benefit Basics and Issues
Contents
SNF Beneficiaries and Eligibility.................................................................................................... 1
SNF Services ................................................................................................................................... 2
SNF Providers.................................................................................................................................. 3
Medicare’s SNF Prospective Payment System ................................................................................ 4
Urban and Rural Base Rates...................................................................................................... 5
Resource Utilization Group....................................................................................................... 6
Wage Index................................................................................................................................ 7
Examples of a Per Diem SNF Reimbursement ......................................................................... 8
Medicare SNF Expenditures and Financial Performance........................................................ 10
Medicare SNF Rate-Setting Policy and Medicaid ............................................................ 11
Recent Developments.............................................................................................................. 11
Decline in Hospital-Based SNF Providers ........................................................................ 12
Shift in SNF Classification................................................................................................ 12
Medicare SNF Overpayments in FY2011 ......................................................................... 13
Issues for Congress ........................................................................................................................ 14
Deficit Reduction Options from Medicare SNF Payments ..................................................... 14
SNF Market Basket Update............................................................................................... 14
Medicare Reimbursement of Bad Debt for SNF Services................................................. 15
Concluding Observations............................................................................................................... 16
Figures
Figure 1. SNF Utilization................................................................................................................. 4
Figure 2. SNF Prospective Payment System Formula..................................................................... 5
Figure 3. FY2013 SNF Prospective Payment System ..................................................................... 9
Figure 4. FY2013 SNF Prospective Payment System ..................................................................... 9
Figure 5. Distribution of Covered SNF Days, by Rehabilitation RUG ......................................... 13
Tables
Table 1. Aggregate Freestanding SNF Medicare Margins ............................................................. 10
Acknowledgments ......................................................................................................................... 16
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edicare provides limited coverage for some post-acute care services, one of which is
skilled nursing facility (SNF) care. For the most part, SNF services include skilled
M nursing; bed and board; and physical, occupational, and speech and language therapies.
In 2010, total Medicare fee-for-service payments on SNF services were $27.4 billion, about 8.3%
of Medicare Parts A and B spending.1 Medicare expenditures to SNFs grew at an average annual
rate of 9.9% from 2000 to 2010,2 compared with 8.9% for all of Medicare spending.3 The
following sections provide greater detail to the SNF beneficiary population, SNF eligibility
requirements, SNF services, and differences in SNF utilization across states.
SNF Beneficiaries and Eligibility
Overall, SNFs provide services for Medicare beneficiaries across a number of different diseases
and conditions. A disease of the circulatory system (e.g., heart failure) was the most prominent
disease for admitted Medicare beneficiaries, with 13.4% of all diagnoses in 2010.4 Other common
conditions are pneumonia, bone fractures, muscular calcification, and hypertension. In 2010, the
average number of Medicare-covered SNF days for a beneficiary was 27.1.5
To be eligible for residence in an SNF, a beneficiary must have an inpatient hospital stay of at
least 3 consecutive calendar days and 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 their qualifying hospital stay (or for
an additional condition that arose while in the SNF). The treatment must require services to be
furnished on a daily basis that can only be provided by an SNF. In addition, some services may be
reimbursed under Medicare Part B for noncovered SNF stays. For instance, if the beneficiary did
not have a qualifying three-day inpatient stay, and does not have Medicare Part A, some or all the
services provided by the SNF can be covered under Medicare Part B.
Three-Day Inpatient Requirement and Hospital Outpatient Status
One of the requirements for Medicare SNF coverage is an inpatient hospital stay of at least three consecutive
calendar days. Outpatient observation services, which can occur within a hospital and extend over several days, are
not considered to be an inpatient hospital stay and therefore do not count toward a beneficiary’s three-day qualifying
hospital stay. Medicare began providing separate payments for observation services starting in 2002. Medicare
beneficiaries are receiving longer observation services as hospital outpatients on an increasing basis. Between 2006
and 2008, the average length of observation time increased from 26 to 28 hours and the number of claims with
observation services of more than 48 hours increased by 70%. The increase in observation services may be attributed
to regulatory changes and pressures for shorter inpatient stays from private insurers.6
According to patient advocates, the beneficiary may not realize that the care received in the hospital may not qualify
1 Centers for Medicare & Medicaid Services, Health Care Financing Review 2011 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, November 2011, Table 6.1.
2 Ibid.
3 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, Table V.B1, p. 203, http://www.cms.hhs.gov/reportstrustfunds/.
4 Centers for Medicare & Medicaid Services, Health Care Financing Review 2011 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, November 2011, Table 6.6.
5 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2012, p. 179,
http://www.medpac.gov/documents/Mar12_EntireReport.pdf.
6 Zach Gaumer and Dan Zabinski, Recent Growth in Hospital Observation Care, MedPAC, meeting transcript,
Washington, DC, September 13, 2010, http://www.medpac.gov/transcripts/observation%20sept%202010.pdf.
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as an inpatient stay, especially when that care extends over several days and “looks like” an inpatient stay. In the 112th
Congress, companion bills in the House (H.R. 1543) and Senate (S. 818) were introduced in April 2011 to amend the
Social Security Act to include days spent in outpatient observation status toward satisfying the three-day prior
inpatient hospitalization requirement for Medicare coverage of SNF services. The bills were referred to their
respective committees, and there has been no further congressional activity as of the cover date of this report.
SNF Services
A Medicare beneficiary who qualifies for SNF services is entitled to up to 100 days of skilled
nursing and skilled rehabilitation services per spell of illness.7 For beneficiaries who meet these
requirements, no copayment is required for the first 20 days, but a daily copayment is required for
the 21st through the 100th day. The daily copayment is indexed annually at one-eighth (12.5%) of
the current Part A deductible. For 2012, the daily copayment is $144.50.
For beneficiaries who qualify for SNF coverage, Medicare will provide payment for skilled
nursing, skilled rehabilitation, medical social services, drugs/biologicals, equipment, and bed and
board when receiving such services, among others. In general, nursing and rehabilitation services
can be labeled “skilled” if they are (1) ordered by a physician, (2) require the skills of
professional personnel (i.e., registered nurse, physical therapist), and (3) 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.
7 A spell of illness, also referred to as the “benefit period,” begins when a beneficiary is admitted for inpatient hospital
services and ends after 60 consecutive days when the beneficiary was neither an inpatient of a hospital nor a resident of
an SNF.
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SNF Providers
SNFs are more commonly found within long-term care nursing facilities (referred to as
freestanding). Of the 15,084 SNFs that furnished care in 2010, roughly 94% of SNFs were
freestanding. The remaining 6% of SNFs were located in hospitals (referred to as hospital-
based).8 While the number of hospital-based SNFs has fallen by 54% since 1999 (from 2,046
facilities in 1999 to 934 facilities in 2010), the number of freestanding SNFs has increased by
roughly 10% (from 12,868 facilities in 1999 to 14,150 facilities in 2010), leaving the total supply
of SNFs relatively unchanged.9
The supply of SNFs and the utilization of SNF services appear to be relatively greater in states
within the Midwest and North Atlantic regions (see Figure 1). In 2010, the number of Medicare-
covered SNF admissions per 1,000 Medicare Part A enrollees was highest in Connecticut (105),
followed by New Jersey (100) and Minnesota (98). The three states with the lowest rates of SNF
utilization were Alaska (19), Hawaii (28), and New Mexico (40). One explanation for the
disparity in utilization across states is the supply of SNFs compared with other similar post-acute
care providers (e.g., inpatient rehabilitation facilities and home health agencies). States with a
high SNF utilization pattern may also have a greater supply of SNFs located near referring acute
care providers.10
8 Centers for Medicare & Medicaid Services, Health Care Financing Review 2011 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, November 2011, Table 6.7.
9 Centers for Medicare & Medicaid Services, Health Care Financing Review 2001 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, April 2003, Table 43.
10 Melina Beeuwkes Buntin, Anita Datar Garten, and Susan Paddock et al., “How Much is Postacute Care Use Affected
By Its Availability,” Health Services Research, vol. 40, no. 2 (April 2005).
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Figure 1. SNF Utilization
Number of SNF Covered-Admissions per 1,000 Medicare Part A Enrollees, 2010
Source: CRS analysis of data from the Centers for Medicare & Medicaid Services, Health Care Financing Review
2011 Medicare and Medicaid Statistical Supplement, Baltimore, MD, November 2011, Table 6.3.
Medicare’s SNF Prospective Payment System
The Balanced Budget Act of 1997 required SNFs to be reimbursed under a prospective payment
system (PPS) beginning on July 1, 1998.11 The SNF PPS reimburses providers a daily amount
after adjusting for urban or rural facility locale, case-mix, and area wage differences (see Figure
2). 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 uses consolidated billing practices, which makes
the SNF responsible to bill Medicare Part A for most of the SNF services the Medicare
beneficiaries receive, regardless if the service was provided by an outside supplier. Rather than
Medicare paying for each service individually, the consolidated billing practice “bundles” the
beneficiary’s SNF care into a single predetermined daily payment.
11 The SNF PPS pricing method replaced the cost-based system for SNF services, which had been in use since the
inception of SNF coverage in the Medicare program. The prior “reasonable cost reimbursement” method paid SNFs
their actual costs of delivering care to Medicare beneficiaries subject to certain limitations. Under the reasonable cost
method, SNFs had few incentives to control costs, which was one factor leading to the development of a new SNF
payment system.
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In certain circumstances, consolidated billing does not apply and 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 is still provided under Part B for a beneficiary enrolled in Medicare Part
B. Certain non-therapy services and high-cost ancillary services are not reimbursed under the
SNF PPS and may be separately billed to Medicare Part B, such as diagnostic x-ray tests,
diagnostic laboratory tests, and prosthetic devices.
The following sections explain in greater detail the urban and rural base rates, the case-mix
classification system—Resource Utilization Group (RUG)—and the wage index that is used to
adjust payments for differences in area wages. In addition, this report includes mathematical
examples of SNF PPS reimbursement and a brief summary of total Medicare SNF expenditures
and the Medicare Payment Advisory Commission’s (MedPAC) analysis on the adequacy of these
payments.
Figure 2. SNF Prospective Payment System Formula
Source: CRS graphic of the SNF PPS formula.
Note: Not all resource utilization groups (RUGs) will have a noncase-mix therapy component or therapy
component.
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 rural rate. The
Office of Management and Budget classifies CBSAs in either metropolitan or micropolitan areas.
A metropolitan area is an urban cluster that consists of a county or counties that contain at least
50,000 people and has a high degree of social and economic integration to the surrounding
counties. Similarly, a micropolitan area is an urban cluster that consists of a county or counties
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that contain between 10,000 to 50,000 people and has a high degree of social and economic
integration.12
As shown in Figure 2, 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
two noncase-mix components reflect the administrative and room-and-board costs of providing
SNF care. The base rate’s nursing and therapy case-mix components respectively reflect the
national average costs of nursing and therapy for a one-day stay in an SNF. Breaking down the
base rate into four rate components allows the PPS to later adjust the base rate by varying levels
of expected nursing and therapy intensity to classify beneficiaries within Resource Utilization
Groups (RUGs). Every RUG will have a noncase-mix component and nursing component, but not
every RUG will have a noncase-mix therapy component or therapy component.
The base rates were developed from FY1995 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
composition of weighted price levels that 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 correction” for the difference the following fiscal year.13 In addition to any
forecast error correction, 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.14 The
SNF productivity adjustment began with the start of FY2012.
Resource Utilization Group
The RUG classification system adjusts the 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
12 Peter Orszag, Update of Statistical Area Definitions and Guidance on Their Uses, Office of Management and
Budget, Bulletin No. 10-02, December 1, 2009, p. 2, http://www.whitehouse.gov/sites/default/files/omb/assets/
bulletins/b10-02.pdf.
13 The ½ percent difference threshold was increased from ¼ percent difference beginning in FY2008.
14 A productivity adjustment is intended to cancel out the price increases (i.e., wage increases) associated with
productivity gains.
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RAI is designed to help “gather definitive information on a resident’s strengths and needs, which
must be addressed in an individualized care plan.”15 The MDS portion of the RAI gathers clinical
data over 14 different criteria: (1) hearing, speech, and vision; (2) cognitive patterns;
(3) behavior; (4) preference for customary routine activities; (5) functional status; (6) bladder and
bowel; (7) active diagnoses; (8) health conditions; (9) nutritional status; (10) dental status;
(11) skin conditions; (12) medications; (13) special treatments, procedures, and programs; and
(14) restraints.
With the exception of swing-bed SNFs,16 Medicare requires nursing homes and SNFs to complete
the MDS and CAA for a beneficiary’s 92nd day of stay, 366th day of stay, and in the event of a
significant change or correction in the beneficiary’s status.17 In addition, SNFs are required to
complete the MDS for a beneficiary to receive reimbursement under Part A Medicare. The MDS
assessments for Medicare payment are required to be completed on or about the 5th day, 14th day,
30th day, 60th day, and 90th day. For the most part, the MDS assessments’ “look back” period, the
time frame for gathering the patient’s clinical information, are the seven days prior to the MDS
payment assessment requirement dates.
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). RUG-IV created an additional 13 possible
groups for classifying beneficiaries, bringing the total from 53 groups under RUG-53 to 66
groups. These 66 groups each have a nursing case-mix index, and some groups an additional
therapy case-mix index, together known as RUG weights. The RUG weights 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 must be added together. As shown
in Figure 2, the nursing component and therapy component are created by multiplying the base
rate’s nursing case-mix by the nursing case-mix index and the base rate’s therapy case-mix by the
therapy case-mix index. Each RUG will have a nursing component and a noncase-mix
component. The final third component will be either a therapy component or a noncase-mix
therapy component. The sum of all relevant components is the case-mix adjusted rate, which
reflects the beneficiary’s daily resource use before adjusting for area wage differences.
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.
15 Centers for Medicare & Medicaid Services, Long-Term Care Facility Resident Assessment Instrument User’s
Manual, MDS 3.0, October 2011, p. 4.
16 A swing-bed SNF is a small rural hospital approved to allocate facility beds between hospital care and SNF care.
17 The Omnibus Reconciliation Act of 1987 (OBRA, P.L. 100-203) implemented this provision.
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As shown in Figure 2, 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, Figure 2 shows that the global per
diem rate is the sum of the labor-adjusted product and nonlabor related share.18 The global per
diem rate is the final reimbursement rate of daily SNF care reimbursed through Medicare Part A.
For the most part, the global per diem rate and the beneficiary’s length of stay in the SNF
determine the reimbursement amount for the SNF.
Examples of a Per Diem SNF Reimbursement
To better understand this complex payment system, the following are a few hypothetical
reimbursement calculations. Figure 3 provides an example of how much an SNF in New York
City would be reimbursed for providing one day’s care to a beneficiary classified under the
Rehabilitation Ultra High group with a high activities of daily living (ADL) index score (there is
no noncase-mix therapy component for this particular RUG).19 For comparison, Figure 4
provides an additional example of how much an SNF in a rural New York town would be
reimbursed for providing one day’s care to a beneficiary classified under the Rehabilitation
Medium group with a low ADL index score (there is no noncase-mix therapy component for this
particular RUG).
18 Section 511 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173)
requires an additional 128% increase in the per diem payment for an SNF resident with acquired immune deficiency
syndrome (AIDS).
19 The ADL index measures the patient’s function capability to perform routine daily activities independently. A higher
ADL index score represents less capability than a lower ADL index score.
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Figure 3. FY2013 SNF Prospective Payment System
Urban Example
Source: CRS analysis of Centers for Medicare & Medicaid Services, “Prospective Payment and Consolidated
Billing for Skilled Nursing Facilities for FY 2013,” 77 Federal Register, August 2, 2012.
Notes: 1. Not all groups will have a noncase-mix therapy component or therapy component. 2. RUG weights
are for group Rehabilitation Ultra, B (RUB)—beneficiaries receiving at least 720 minutes of therapy over the
seven-day look-back period and an activities of daily living (ADL) index score between 6 and 10 (B).
Figure 4. FY2013 SNF Prospective Payment System
Rural Example
Source: CRS analysis of Centers for Medicare & Medicaid Services, “Prospective Payment and Consolidated
Billing for Skilled Nursing Facilities for FY 2013,” 77 Federal Register, August 2, 2012.
Notes: 1. Not all groups will have a noncase-mix therapy component or therapy component. 2. RUG weights
are for group Rehabilitation Medium, A (RMA)—beneficiaries receiving at least 150 minutes of therapy over the
seven-day look-back period and an activities of daily living (ADL) index score between 0 and 5 (A).
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Medicare SNF Expenditures and Financial Performance
Total Medicare Parts A and B expenditures on SNF services were $27.4 billion in 2010. 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 Parts A and B payments,
increasing to 8.3% of total Medicare Parts A and B payments in 2010.20
Since the implementation of the SNF PPS, the majority of hospital-based SNFs have had large
negative Medicare margins, while at the same time the majority of freestanding SNFs, which
comprise 94% of all SNFs, have had positive Medicare margins.21 Between 2003 and 2010,
Medicare margins have been increasing across all types of freestanding providers (i.e., urban,
rural, for profit, nonprofit). In 2003, aggregate freestanding for-profit SNF margins and aggregate
freestanding nonprofit SNF margins were 13.4% and 1.3%, respectively (see Table 1). In 2010,
aggregate freestanding for-profit SNF margins increased to 20.7%, while freestanding nonprofit
SNF margins decreased slightly to 9.5%. In 2010, aggregate freestanding SNF had a Medicare
margin of 18.5%, with at least 75% of freestanding SNFs operating with a Medicare margin
greater than 9%.22 While Medicare reimbursements appear to be well above costs for SNFs in the
aggregate, Medicare contributes to roughly 23% of a nursing care facility’s total revenue, with
Medicaid payments for custodial care and skilled care comprising the largest share of revenue.23
Therefore, MedPAC’s analysis on the financial performance of Medicare payments for SNF care
may capture only about a quarter of the financial picture of an average nursing facility.
Table 1. Aggregate Freestanding SNF Medicare Margins
Type of
SNF 2003 2004 2005 2006 2007 2008 2009 2010
Al
10.9% 13.7% 13.1% 13.3% 14.7% 16.6% 18.0% 18.5%
Urban 10.3 13.2 12.6 13.1 14.5 16.3 17.9 18.5
Rural 13.8 16.1 15.2 14.3 15.5 18.0 18.7 18.4
For
profit
13.8 16.1 15.2 15.7 17.2 19.1 20.2 20.7
Nonprofit
1.4 3.5 4.5 3.5 4.1 6.9 9.6 9.5
Source: Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2012, p.
184, http://www.medpac.gov/documents/Mar12_EntireReport.pdf.
Note: A Medicare margin is the percentage of total Medicare SNF payments that exceed total costs for all SNF
providers.
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
20 Centers for Medicare & Medicaid Services, Health Care Financing Review 2011 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, November 2011, Table 6.1.
21 MedPAC determines the financial performance of providers by calculating the Medicare margin, measured by the
percentage difference in Medicare revenue paid to a facility compared to the costs of providing care to Medicare
beneficiaries. A positive margin may indicate a profit, whereas a negative margin may indicate a loss.
22 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2012, p. 183,
http://www.medpac.gov/documents/Mar12_EntireReport.pdf.
23 Ibid., p. 175.
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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 FY2012. While Congress has not enacted legislation to
eliminate a market basket update over the past decade, MedPAC has made such an update
recommendation for each of the past 10 years.24
Medicare SNF Rate-Setting Policy and Medicaid
The largest payer to all nursing facilities is the Medicaid program, which covers 63% of days in a
nursing facility.25 Medicaid is a means-tested entitlement program, financed jointly at the state
and federal level, that provides health insurance for the delivery of certain health care services.
According to the National Nursing Home Survey, in 2004, 88.3% of Medicaid beneficiaries in a
nursing facility were also eligible for Medicare; however, while Medicaid covers both custodial
care and skilled care in a nursing facility, custodial care is not a covered benefit under Medicare.26
Industry advocates insist that Medicaid does not cover the total costs of providing services to its
beneficiaries and that Medicare should subsidize Medicaid payments through SNF
reimbursements. Evidence suggests payments from non-Medicare payers do not cover the costs
of their beneficiaries. In 2010, the non-Medicare margin (nursing facility payments from non-
Medicare payers less costs) was -1.2%.27 When including Medicare, however, the nursing facility
industry’s total gross margin is 3.6%.28
MedPAC has examined potential implications of targeting Medicare SNF reimbursements to
compensate for inadequate payments from other providers. According to MedPAC, “Raising
Medicare rates to supplement low Medicaid payments would result 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.”29 MedPAC also states that “increased Medicare payment rates
could encourage states to further reduce their Medicaid payments and, in turn, create pressure to
raise Medicare rates.”30
Recent Developments
Since the implementation of the SNF PPS, the mix of SNF providers and SNF services has
changed. The most notable changes have been the decline in SNFs located within hospitals, the
24 The Centers for Medicare & Medicaid Services (CMS) is required by statute to implement an annual update to the
SNF payment rates equal to the changes in the SNF market basket index.
25 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2012, p. 175,
http://www.medpac.gov/documents/Mar12_EntireReport.pdf.
26 James M. Verdier, Coordinating and Improving Care for Dual Eligibles in Nursing Facilities: Current Obstacles
and Pathways to Improvement, Mathematica Policy Research, Inc., Policy Brief, Princeton, NJ, March 2010, p. 10,
http://www.mathematica-mpr.com/publications/pdfs/health/nursing_facility_dualeligibles.pdf.
27 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2012, p. 203,
http://www.medpac.gov/documents/Mar12_EntireReport.pdf.
28 Ibid.
29 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2011, p. 168,
http://www.medpac.gov/documents/Mar11_EntireReport.pdf.
30 Ibid.
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increase in rehabilitative therapy provided to beneficiaries, and an 11.1% reduction in Medicare
payments to SNFs.
Decline in Hospital-Based SNF Providers
While most SNFs are nursing facilities (freestanding) that provide custodial care in addition to
skilled nursing and rehabilitation care, SNFs are also located as distinct parts of a hospital
(hospital-based). To qualify as an SNF within a hospital, the distinct part must be physically
separated from the rest of the institution (e.g., building, floor, wing).
Prior to the SNF PPS, the number of hospital-based facilities furnishing SNF care was 2,165 in
1998, a 62% increase from the early 1990s.31 Since 1999, the number of hospitals operating an
SNF declined by 54%, to 934 hospitals.32 A number of factors are thought to have contributed to
the decline in hospital-based SNFs. The major reason is thought to be inadequate payments
relative to the costs for operating an SNF in the distinct part of a hospital.33 The SNF PPS was
designed to make no payment distinction between hospital-based and freestanding SNFs.
According to MedPAC’s calculations, between 2003 and 2010, Medicare margins for hospital-
based SNFs yielded substantially negative results.34 In 2010, the aggregate Medicare margin for
hospital-based SNFs was -67%. These negative margins are thought to be attributed to higher
hospital overhead costs and a greater number of skilled personnel per SNF bed in hospital-based
SNFs.
Additional reasons for the decline in hospital-based SNFs are thought to be the opportunity cost
of using hospital beds to provide post-acute care relative to acute care, SNF regulations, and
difficulties with providing a staff of nurses for the SNF from other parts of the hospital.35 In spite
of negative Medicare margins, some hospitals continue to operate their SNF, reporting that the
SNF fosters savings for the acute care side of the hospital and provides an important continuity of
care for the patient.
Shift in SNF Classification
At the time the SNF PPS was implemented, beneficiaries primarily receiving therapy services
(classified in rehabilitation groups) consisted of 71% of Medicare-covered SNF stays. By 2009,
beneficiaries classified in rehabilitation resource utilization groups (RUGs) consisted of 90.4% of
Medicare-covered SNF stays. In addition to the distribution shift toward beneficiaries primarily
31 Centers for Medicare & Medicaid Services, Health Care Financing Review 1994 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, February 1995, Table 42. Medicare Payment Advisory Commission, Report to the
Congress: Promoting Greater Efficiency in Medicare, June 2007, p. 203, http://www.medpac.gov/chapters/
Jun07_Ch08.pdf.
32 Centers for Medicare & Medicaid Services, Health Care Financing Review 2001 Medicare and Medicaid Statistical
Supplement, Baltimore, MD, April 2003, Table 43. Centers for Medicare & Medicaid Services, Health Care Financing
Review 2011 Medicare and Medicaid Statistical Supplement, Baltimore, MD, November 2011, Table 6.7.
33 Korbin Liu and Emily Jones, Closures of Hospital-Based SNF Units: Insights from Interviews with Administrators,
Discharge Planners and Referring Physicians, Urban Institute, No. 07-1, Washington, DC, March 2007, p. 20,
http://www.medpac.gov/documents/Mar07_Hospitalbased_SNFs_CONTRACTOR.pdf.
34 CRS analysis of MedPAC’s annual Medicare Payment Policy reports (2005 – 2012).
35 Medicare Payment Advisory Commission, Report to the Congress: Promoting Greater Efficiency in Medicare, June
2007, p. 208, http://www.medpac.gov/chapters/Jun07_Ch08.pdf.
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receiving therapy, a shift of covered SNF days within rehabilitation RUGs occurred, moving
toward therapy-intensive groups.36 Between 2001 and 2011, the share of Medicare-covered stays
in SNFs for beneficiaries classified in Ultra-high Rehabilitation RUGs has increased substantially,
from 7.4% to 49.7% of all Medicare rehabilitation groups (see Error! Reference source not
found.). These trends could be attributed to the recent decline in cases at inpatient rehabilitation
facilities or payment incentives within the SNF PPS.37 Since the Ultra-high Rehabilitation RUGs
are one of the more higher-paying case-mix groups, this shift has in part contributed to the strong
growth in Medicare SNF expenditures.
Figure 5. Distribution of Covered SNF Days, by Rehabilitation RUG
100%
on
ti
u
90%
rib
st
80%
70%
tion RUG Di
Rehab (Ultra High)
60%
lia
Rehab (Very High)
bi
50%
Rehab (High)
eha
Rehab (Medium)
R
40%
Rehab (Low)
ge of
30%
ta
n
e
20%
rc
e
P
10%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: CRS analysis of Resource Utilization Group data obtained from the Centers for Medicare & Medicaid
Services, prepared August 1, 2012.
Medicare SNF Overpayments in FY2011
The HHS Office of Inspector General estimated that CMS overpaid SNFs by $4 billion in
FY2011. 38 The overpayment occurred when CMS implemented the new case-mix classification
system (RUG-IV) and the accompanying beneficiary assessment (MDS 3.0) at the start of
FY2011. The RUG-IV classification system introduced 13 new groups that SNF beneficiaries
could be assigned to in addition to the existing 53 groups, for a new total of 66 RUGs. The
36 There are five different classifications for rehabilitation groups: low, medium, high, very high, and ultra high. The
amount of therapy minutes provided to a beneficiary separates the five different classifications.
37 Medicare Payment Advisory Commission, A Data Book: Health Care Spending and the Medicare Program, June
2011, p. 125, http://www.medpac.gov/documents/Jun11DataBookEntireReport.pdf.
38 Stuart Wright, Changes in Skilled Nursing Facilities Billing in Fiscal Year 2011, Health & Human Services Office of
Inspector General, OEI-02-09-00204, Washington, DC, July 8, 2011.
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updated classification system is intended to be more accurate at assigning Medicare payments to
actual SNF beneficiary costs than its predecessor.
The companion MDS 3.0 also introduced a change to the number of concurrent therapy minutes
that could be allocated to a beneficiary. Under the previous MDS 2.0 assessment, a provider
counted the total minutes of therapy provided to a beneficiary, usually over a seven-day window,
regardless if the therapy was provided individually, concurrently (a therapist providing different
therapy to two patients at the same time), or in a group (a therapist providing the same therapy to
three or four patients at the same time). With the implementation of MDS 3.0, CMS changed this
policy: in a concurrent therapy session half of the session minutes are allocated to the beneficiary.
For example, a therapist providing 60 minutes of occupational therapy to one beneficiary and
physical therapy to another beneficiary at the same time would allocate 30 minutes in the MDS
3.0 to each beneficiary for that particular session.
Because total therapy minutes partly determine a beneficiary’s RUG assignment, CMS expected
that some beneficiaries would “receive” a smaller amount of total therapy minutes because of the
new classification and be assigned to a less therapy-intensive and lower-paying RUG with MDS
3.0. CMS intended the transition to RUG-IV to be budget-neutral, so to address the expected shift
into less therapy-intensive RUGs and the subsequent Medicare SNF expenditure decline, CMS
increased the reimbursement rate for particular RUGs.
The expected decline in therapy minutes and shift of beneficiaries into different RUGs did not
occur, and as a result the HHS Office of Inspector General estimated that CMS overpaid SNFs by
$4 billion in FY2011. In order to make Medicare SNF expenditures equal to what would have
occurred in the absence of introducing RUG-IV, CMS recalibrated the RUG-IV classification
system in FY2012 to account for the change in provider behavior. The recalibration of RUG-IV is
expected to reduce Medicare SNF expenditures in FY2012 by 11.1% from FY2011 spending
levels.
Issues for Congress
Deficit Reduction Options from Medicare SNF Payments
Reducing payments to SNFs has been proposed as one option to help reduce overall federal
spending and to restrain growth in Medicare spending. Different methods to reduce the deficit
through Medicare SNF payments include freezing the market basket update and reducing or
eliminating reimbursement to providers for a Medicare beneficiary’s bad debt.
SNF Market Basket Update
As noted earlier, the SNF urban and rural base rates are updated for inflation by the percentage
change in the SNF market basket index. The change in the SNF market basket index from the
prior year is referred to as the market basket update. For FY2013, the market basket update is
2.5%.39 A provision in the Patient Protection and Affordable Care Act (ACA, as amended, P.L.
39 Centers for Medicare & Medicaid Services, “Prospective Payment and Consolidated Billing for Skilled Nursing
Facilities for FY 2013,” 77 Federal Register, August 2, 2012.
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111-148) requires a productivity adjustment—a decrease of the market basket update based on a
measure of the economy-wide change in productivity. For FY2013, the productivity adjustment is
0.7%, making the net update to Medicare SNF rates a 1.8% increase. The Obama
Administration’s Plan for Economic Growth and Deficit Reduction included a proposal of
adjusting the SNF market basket updates between 2014 and 2021.40 Constraining the growth in
the market basket would lower SNF spending relative to current law, resulting in lower Medicare
SNF expenditures.
Medicare Reimbursement of Bad Debt for SNF Services
Historically, Medicare has reimbursed SNFs 100% of the unpaid and uncollectable deductible or
copayment amounts (bad debt) that occurred from Part A services rendered to Medicare
beneficiaries. Bad debt related to Medicare Part B services are generally not reimbursed under the
Medicare program. This payment policy applies to Part B services (physicians’ services, durable
medical equipment) that are separately billable and Part B services that are bundled into the per
diem SNF reimbursement. To be reimbursed for bad debt, the outstanding amount must meet four
fundamental requirements: (1) the debt was related to the beneficiary’s deductible and/or
copayment amounts of a covered service; (2) a reasonable collection effort was made; (3) the debt
was uncollectible when declared “worthless”; and (4) sound business judgment established that
there was no likelihood of recovering the debt at any time in the future.
As established by the Deficit Reduction Act of 2005 (DRA, P.L. 109-171), SNFs are now
reimbursed at 70% of the beneficiary’s bad debt if the beneficiary does not have Medicaid as a
secondary payer. For bad debt that has arisen from services rendered to dual-eligible beneficiaries
(beneficiaries with both Medicare and Medicaid), the SNF is reimbursed at 100% of the bad debt.
In general, Medicaid will not pay a dual-eligible’s cost-sharing amount because the Medicare
provider payment is higher than what Medicaid would have paid for that same service. In
addition, providers are generally prohibited from collecting Medicare copayments or deductibles
from dual-eligible beneficiaries if Medicaid has denied payment.
With the enactment of The Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96),
reimbursement on bad debt for SNF services provided to Medicare beneficiaries is reduced to
65% in FY2013 and subsequent fiscal years. Reimbursement on bad debt for SNF services
provided to a dual-eligible is reduced to 88% in FY2013, 76% in FY2014, and 65% in FY2015
and subsequent fiscal years.
Reducing the amount that Medicare reimburses SNFs for bad debt has been discussed in deficit-
reduction strategies. The Simpson-Bowles Commission put forth a proposal eliminating any bad
debt reimbursement, whereas the Obama Administration has suggested the percentage be reduced
to 25%.41 Similarly, a bill sponsored by House Republican Dave Camp and supported by the
House Republican Policy Committee Chairman, Tom Price, proposed reducing the amount of
40 Office of Management and Budget, The President’s Plan for Economic Growth and Deficit Reduction, September
2011, p. 36, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/jointcommitteereport.pdf.
41 The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010, p. 38,
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf.
Office of Management and Budget, Fiscal Year 2013 Budget of the U.S. Government, February 2012, p. 33,
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/jointcommitteereport.pdf.
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Medicare SNF bad debt reimbursement to 55% for FY2015 and subsequent fiscal years.42 In
2011, Medicare paid an estimated $600 million for Medicare beneficiaries’ SNF bad debt. Of that
amount, approximately $260 million was for dual-eligible beneficiaries’ SNF bad debt.
Concluding Observations
Since 2003, SNF aggregate Medicare margins have been steadily increasing (reaching 18.5% for
freestanding SNFs in 2010). Nursing facilities, where 94% of SNFs are located, however, had an
overall total margin of 3.6% in 2010 for all services, including both SNF care and custodial care.
These nursing facilities primarily provide custodial care with the Medicaid program providing the
largest source of revenue. Because Medicare SNF payments have been, in the aggregate, well
over costs, reducing these reimbursements to SNFs has been discussed in the context of deficit
reduction efforts. Current reductions in SNF reimbursements as well as any future payment
reductions will receive close attention from nursing care industry advocates, who are likely
to contend that Medicare provides necessary subsidies to help cover the losses associated with
other residents living in the nursing care facility. However, under its established rate-setting
policy, CMS only addresses the adequacy of Medicare’s SNF payments relative to Medicare’s
SNF recipients and does not subsidize other payers and other non-Medicare covered services.
Acknowledgments
The author would like to thank Sibyl Tilson, Specialist in Health Care Financing, and Amber Wilhelm,
Graphics Specialist, for their contributions to this report.
42 House Republican Policy Committee, “Price Votes to Protect Seniors, Taxpayers, and Promote a Stronger Energy
Future,” press release, December 13, 2011, http://policy.house.gov/press-release/price-votes-protect-seniors-taxpayers-
and-promote-stronger-energy-future.
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