Medicare’s Skilled Nursing Facility Payments

Medicare’s Skilled Nursing Facility Payments

Order Code RL33921
Medicare’s Skilled Nursing Facility Payments
March 14, 2007
Julie Stone
Specialist in Social Legislation
Domestic Social Policy

Medicare’s Skilled Nursing Facility Payments
Summary
Medicare covers skilled nursing facility (SNF) care following a beneficiary’s
discharge from a hospitalization of at least three days. If the beneficiary needs skilled
care, Medicare will pay for up to 100 days of SNF care per “spell of illness.”
Medicare pays for a relatively small proportion of nursing home care in the
United States. In 2005, Medicare payments accounted for 16% of total national
spending on this care. Medicaid, by comparison, accounted for 43%, and out-of-
pocket expenditures accounted for about 26%.
Between 1999 and 2004, Medicare spending on SNF care almost tripled,
increasing from almost $5.9 billion to $17.2 billion. Spending on SNF care also
grew as a share of total Medicare spending, from 4.7% to 6.7% during this period.
Medicare pays SNFs using a prospective payment system (PPS). Under SNF
PPS, Medicare makes a daily payment that varies depending upon the therapy,
nursing, and special care needs of the beneficiary as described by one of 53 different
payment groups, known as resource utilization groups (RUGs). Payments are
updated annually by the SNF “market basket” increase (the measure of inflation of
goods and services used by SNFs). For FY2007, the SNF payment update is the full
market basket of 3.1 percentage points. Add-on payments are also made for care
provided to persons who are HIV-positive or have Acquired Immune Deficiency
Syndrome (AIDS).
A refined payment system was implemented through regulation on January 1,
2006. The refinements updated and recalibrated the RUGs and added nine new
Rehabilitation plus Extensive Services groups into the RUG classification system.
It is still too soon to know whether the refined case mix system is adequate or will
warrant additional refinements.
The Medicare Payment Advisory Commission (MedPAC) recommends the
elimination of a market basket increase for SNFs for FY2008. The President’s budget
proposal would also freeze SNF payments for FY2008, and would increase payments
annually starting in FY2009 and beyond by the SNF market basket minus 0.65
percentage points. HHS projects the President’s proposal would save Medicare
$1.01 billion in FY2008 and $9.21 billion over the five-year budget period between
FY2008 and FY2012. The Congressional Budget Office’s (CBO) estimate of the
President’s budget proposal projects savings of $400 million in FY2008 and $4.2
billion between FY2007 through FY2012.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SNF Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SNF PPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Base Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Wage and Other Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Payment Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
RUGs Refinement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Medicare Margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Acute Care Versus Long-Term Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Figures
Figure 1. Number of SNF Providers by Type of Facility,
1999 to 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. National Nursing Home Expenditures,
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. SNF Payments and Covered Days,
1994-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Skilled Nursing Facility Payments,
Days Covered by Medicare, Calendar Years 1994-2004 . . . . . . . . . . . . . . . . 4
Table 2. Utilization of SNF Benefit,
1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Medicare’s Skilled
Nursing Facility Payments
Introduction
Medicare covers nursing home services for beneficiaries who require skilled
nursing care and/or rehabilitation services following a hospitalization of at least three
consecutive days. The program does not cover nursing care if only custodial care is
needed — for example, when a person needs assistance with bathing, walking, or
transferring from a bed to a chair. To be eligible for Medicare-covered skilled nursing
facility (SNF) care, a physician must certify that the beneficiary needs daily skilled
nursing care or other skilled rehabilitation services that are related to the
hospitalization,1 and that these services, as a practical matter, can be provided only
on an inpatient basis. For example, a beneficiary released from the hospital after a
stroke and in need of physical therapy, or a beneficiary in need of skilled nursing care
for wound treatment following a surgical procedure, might be eligible for Medicare-
covered SNF care.
SNF services may be offered in a free-standing or hospital-based facility. A
freestanding facility is generally part of a nursing home that covers Medicare SNF
services as well as long-term care2 services for people who pay out-of-pocket,
through Medicaid, and/or through a long-term care insurance policy. Generally,
Medicare SNF patients make up just a small portion of the total resident population
of a free-standing nursing home.
Some hospitals also offer SNF services3 in addition to a broad range of acute
and emergency care services. The majority of hospital-based providers have
dedicated beds that they use only for SNF beneficiaries. Some small rural hospitals,
however, are permitted to use their beds for either SNF care or acute care services,
as needed. These are referred to as swing-beds and are authorized under section 1883
of the Social Security Act. (See Figure 1).
1 Or that the condition started while the beneficiary was getting Medicare-covered SNF care.
2 Long-term care refers to a wide range of supportive and health services for persons who
have limited or no capacity for self-care due to illness, cognitive disorders, or a physically
disabling condition. It differs from other types of care in that the goal of long-term care is
not to cure an illness, but to allow an individual to attain or maintain an optimal level of
functioning.
3 The Medicare Payment Advisory Commission (MedPAC), “Skilled Nursing Facility
Services,” Section 4A, March 2006.

CRS-2
Figure 1. Number of SNF Providers by Type of Facility,
1999 to 2004
16,000
14,000
12,000
s
Non-hospital based
ie
10,000
ilit
c
a
f F
8,000
r o
e
b
6,000
m
u
N
hospital based
swing beds
4,000
2,000
-
1999
2000
2001
2002
2003
2004
Source: Tables 43 of the Annual Statistical Supplement for years 2001, 2002, 2003, 2004, and 2005;
and Table 6.7 of the Annual Statistical Supplement for 2006, Centers for Medicare and Medicaid
Services.
In 2004, freestanding facilities covered 91% of SNF stays whereas hospital-
based facilities covered 8.9% of SNF stays (4.78% of which were covered by swing
bed facilities). In recent years, the number of freestanding nursing homes have
increased slightly (from 12,868 facilities in 1999 to 13,648 facilities in 2004) while
the number of hospital-based nursing homes (including swing bed facilities) have
decreased slightly (from 3,336 facilities in 1999 to 2,055 in 2004). Also in 2004,
67% of SNF facilities were for-profits, 28% were nonprofit, and 5% were
government run.4
Financed under Part A of Medicare, these “extended care services”5 must be
provided in a SNF that is certified to participate in Medicare. Medicare covers 100
days of SNF care in each “spell of illness.”6 Beneficiaries pay nothing for the first
20 days of care but are required to pay a daily copayment for days 21 through 100
4 MedPAC, Report to Congress: Medicare Payment Policy, Section 3A, March 2007.
5 Section 1812(a)(2)(A) of the Social Security Act defines the scope of the benefit, “post-
hospital extended care services for up to 100 days during any spell of illness.”
6 A spell of illness begins when a beneficiary receives inpatient hospital or Part A covered
SNF care and ends when the beneficiary has not been an inpatient of a hospital or in a
covered SNF stay for 60 consecutive days (§ 1861(a) of the Social Security Act). A
beneficiary may have more than one spell of illness per year.

CRS-3
($124 per day in 2007).7 If a beneficiary exhausts his or her Medicare Part A SNF
benefit, yet continues to need care in a nursing facility, Medicare pays for other
covered medical services, such as physician visits or durable medical equipment, that
may be provided in the nursing facility but cannot pay for the nursing facility care
itself. Some of these Medicare beneficiaries may also be eligible for Medicaid which
covers custodial nursing facility care for persons with long-term care needs, among
other services. Some beneficiaries can be discharged to their homes and be eligible
for Medicare-covered home health care or Medicaid-covered acute and/or long-term
care services. Others may pay out-of-pocket for needed care not covered by
Medicare.
Medicare pays for a relatively small proportion of nursing home care in the
United States. In 2005, Medicare payments accounted for 16% of total national
spending on this care. Medicaid, by comparison, accounted for 43%, and out-of-
pocket expenditures accounted for about 26%8 (see Figure 2).
Figure 2. National Nursing Home Expenditures, 2005
Other Federal,
state and Local
3%
Out-of-Pocket
26%
Medicaid 43%
Private HI 8%
Medicare
16%
Other Private
Funds 4%
Source: CRS analysis of Centers for Medicare and Medicaid Services, Office of the Actuary.
7 This co-payment is equivalent to one-eighth of inpatient hospital deductible amounts.
8 Centers for Medicare and Medicaid Services, Office of the Actuary, National Health
Statistics Group, U.S. Bureau of the Census.

CRS-4
Although SNF spending declined during the three-year transition period (1998-
2000) between Medicare’s cost-based reimbursement system and its prospective
payment system (PPS), spending on SNF care across the longer period between 1994
and 2004 almost tripled, increasing from almost $5.9 billion in 1994 to $17.2 billion
in 2004. Spending on SNF care also grew as a share of total Medicare spending
($255.3 billion in 2004), from 4.7% to 6.7% during this period.
Between 1994 and 1998, prior to the implementation of PPS, average annual
spending increased by 17%. Between 2000 and 2004, after the transition to PPS,
spending growth slowed to an average annual rate of 13%. The average annual
growth rate of SNF care is greater than Medicare’s average annual growth rate as a
whole (13% versus 10% from 2000-2004). The number of days covered by SNF care
also grew between 1994 and 2004 — from 36.1 million days to 62.3 million days.
(Data are not available to show the amount of funds paid to SNFs for care provided
for the managed care enrollees.9) See Table 1 and Figure 3 for more detail.
Table 1. Skilled Nursing Facility Payments,
Days Covered by Medicare, Calendar Years 1994-2004
Total
Covered
Medicare
SNF as a % of
Payments Percent
days
Percent
payments
Medicare
Year
(millions)
change (thousands)
change
(millions)
payments
1994
5,904
—
36,091
—
147,106
—
1995
7,495
26.9%
40,182
11.3%
158,980
4.7%
1996
9,095
21.3%
45,883
14.2%
167,063
5.4%
1997
11,199
23.1%
48,239
5.1%
175,423
6.4%
1998
11,224
0.2%
45,429
-5.8%
168,164
6.7%
1999
9.617
-14.3%
43,397
-4.5%
166,687
5.8%
2000
10,651
10.8%
44,834
3.3%
174,261
6.1%
2001
13,105
23.0%
48,974
9.2%
197,505
6.6%
2002
14,503
10.7%
54,674
11.6%
215,411
6.7%
2003
15,172
4.6%
59,240
8.4%
232,821
6.5%
2004
17,213
13.5%
62,263
5.1%
255,325
6.7%
Average annual percent change:
1994-1998
(pre-PPS)
17%
6%
1998-2000
(PPS transition)
-3%
-1%
2000-2004
(Post-PPS)
13%
9%
Source: CRS analysis of Table 6.1 of Medicare and Medicaid Annual Statistical Supplement 2006.
Note: Payments represent fee-for-service only and exclude amounts paid for managed care services.
Numbers have been rounded.
9 Data only reflect spending for Medicare fee-for-service service and would not reflect
spending on SNF services made by plans for managed care enrollees.

CRS-5
Figure 3. SNF Payments and Covered Days, 1994-2004
20,000
70
Payments
18,000
60
16,000
50
14,000
Days Covered
)
s
12,000
rs
lla
40
o
thousand
f D 10,000
o
s
ays (
n
illio
30
Prospective
ed D
B
8,000
Payment
Full PPS
ver
Cost-based
o
System
System
C
System
Transition
6,000
20
4,000
10
2,000
0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: CRS analysis of Table 6.1 of the Medicare and Medicaid Annual Statistical Supplement 2006.
In 2003, about 2.4 million Medicare beneficiaries used SNF care. Utilization of
SNF care increased by 33% between 1999 and 2003, while days per admission
remained relatively stable, growing by 5.5% between this period (average annual
increase was 1%) (See Table 2).
Table 2. Utilization of SNF Benefit, 1999-2003
1999
2000
2001
2002
2003
Number of admissions
1,796
1,824
1,950
2,223
2,385
(thousands)
Days per admission
23.6
24
24.6
24.6
24.9
Source: SNF Medicare Provider Analysis and Review stay records from CMS, Office of Research,
Development and Information.

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SNF Payment
The rapid growth of Medicare payments to SNFs during the 1990s focused
Congressional attention on the payment system. From the inception of the Medicare
program in 1966, SNFs were paid using “reasonable cost reimbursement.” In other
words, Medicare paid SNFs their actual costs of delivering care to Medicare
beneficiaries. Thus SNFs had few incentives to control costs — a system that many
regarded as inherently inflationary. Although there were limits on “routine service
costs”10 there were no limits on “ancillary costs”11 which the General Accountability
Office (GAO) and others noted helped fuel the large increases in SNF costs in the
early 1990s.12
In response to escalating SNF spending, Congress enacted a number of
provisions in the Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) to control
growth in this benefit. Chief among these provisions was the requirement to
implement a prospective payment system (PPS) for SNFs being paid through the fee-
for-service delivery system. SNF payments made by Medicare Advantage for
managed care enrollees are paid based on the terms negotiated between the Medicare
advantage plan and the particular provider, and are not necessarily paid using the
SNF PPS system.
SNF PPS
In the BBA 97, Congress required the Secretary of Health and Human Services
to establish a PPS for SNF care beginning July 1, 1998. The new payment system
was implemented on a staggered basis — beginning with the start of each SNF cost-
reporting period13 on or after July 1, 1998 — and phased in over three years.14 Under
the SNF PPS, a SNF receives a daily payment that covers all the services provided
that day, including room and board, nursing, therapy, and drugs, as well as an
estimate of capital-related costs.15 Any profits are retained by the SNF, and any
losses must be absorbed by the SNF, thereby providing an incentive to deliver
services as efficiently as possible.
10 Routine service costs included costs of regular room, dietary, nursing services, minor
medical supplies, medical social services, psychiatric social services, and use of certain
facilities and equipment for which a separate charge is not made.
11 Ancillary costs are costs for specialized services, such as therapy, drugs, and laboratory
services, that are directly identifiable with individual patients.
12 “Between 1992 and 1995, daily ancillary costs grew 18.5% a year, compared to 6.4% for
routine service costs.” Testimony of William J. Scanlon, Sept. 15, 1999, before the House
Committee on Commerce, Subcommittee on Health and the Environment.
13 A cost-reporting period is the equivalent of a fiscal year for the facility.
14 Payments for care provided through Critical Access Hospital (CAHs) are made on a
reasonable cost-basis and not through the SNF PPS system.
15 Some care costs are paid separately under the statute such as physician visits and dialysis.

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Base Payment
The daily base payment is based on 1995 costs that have been increased for
inflation and vary by urban or rural location. This “federal per diem rate” is adjusted
for treatment type and care needs of the beneficiary based on the resource utilization
group (RUG) assignment of the beneficiary. The beneficiary is classified into one of
53 RUG categories. Each RUG represents a payment adjusted for case mix and is
composed of three parts. For RUGs used to pay for the care of patients who require
intensive therapy, the three parts include (a) a nursing component; (b) a variable
therapy component; and (c) a non-case mix adjusted flat rate component. For RUGs
used to pay for the care of patients who do not require intensive therapy, the three
components are: (a) a nursing component; (b) a flat therapy component; and (c) a
non-case mix adjusted flat rate component. For 2007, the per diem base amounts
range from $583.10 to $157.60 for urban facilities, and from $609.24 to $156.70 for
rural facilities. Patient assessments are done at various times during a patient’s stay16
and the RUG category in which a patient is placed can change with changes to the
patient’s condition.
Wage and Other Adjustments
A portion of these daily payments is further adjusted for variations in area
wages, using the hospital wage index, to account for geographic variation in wages.
Seventy-six percent of the per diem amount will be adjusted by a budget neutral wage
index.
SNF per diem PPS payments are also adjusted to include a temporary 128%
increase for any SNF resident who are HIV-positive or have Acquired Immune
Deficiency Syndrome (AIDS; see later section of this report). Unlike other PPSs, the
SNF PPS statute does not provide for an adjustment for extraordinarily costly cases
(an “outlier” adjustment).
Payment Updates
Section 1888(e) of the Social Security Act requires that the base payments be
adjusted each year by the SNF market basket update — that is the measure of
inflation of goods and services used by SNFs. For FY2007, the SNF payment update
is the full market basket increase of 3.1%. The update for future years, without
changes to current law, is also the full market basket increase.
Each year, the update of the payment rate also includes, as appropriate, an
adjustment to account for the market basket forecast error for previous years. This
adjustment accounts for the most recently available fiscal year for which there are
final data and applies whenever the difference between the forecasted and actual
change in the market basket exceeds 0.25 percentage points. For FY2005 (the most
recently available data), the estimated increase in the market basket was 2.8
percentage points, while the actual increase was 2.9 percentage points, resulting in
16 SNFs use an assessment tool, called the Minimum Data Set (MDS), to evaluate and record
the health status and functional capabilities of residents in nursing homes.

CRS-8
only a 0.1 percentage point difference. As a result, the payment rates for FY2007 did
not include a forecast error adjustment.
Legislative History
On several occasions, payment rates for SNFs have also been affected by
specific legislative provisions. A summary of the more recent legislative changes
follows.
In response to concerns raised by the nursing home industry regarding adequacy
of SNF PPS payments, temporary payment increases were provided in the Balanced
Budget Refinement Act of 1999 (BBRA 99, P.L. 106-113) and the Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA
2000, P.L. 106-554).
Two of the three temporary increases expired September 30, 2002. One, from
BBRA 99, increased the SNF base rates 4% for FY2001 and FY2002. The second,
from BIPA 2000, was a 16.6% increase in the nursing component of the payment rate
from April 1, 2001 until September 30, 2002. The dollar value of these two
temporary increases was $1.4 billion in 2002.17 (The expiration of these add-ons has
been dubbed by some in the industry as the SNF “cliffs.”)
The third temporary increase, from BBRA 99 (as amended by BIPA 2000),
increased payment rates by 6.7% for 14 RUG groups for persons needing
rehabilitation therapies and by 20% for 12 RUG groups for certain patients needing
complex care. These add-ons were intended to correct for a distortion in the payment
system for rehabilitation therapy which had been paying by the number of minutes
of therapy rather than by the patients’ clinical characteristics, the costs of providing
nontherapy ancillary services (e.g., prescription drugs), and the relative weights of
basing payments on old data.18 The add-ons expired with the implementation of the
refinements to the case-mix classification system on January 1, 2006.19
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(P.L. 108-173) provided for a temporary 128% increase in the PPS per diem payment
for any SNF resident who is HIV-positive or has Acquired Immune Deficiency
Syndrome (AIDS), effective October 1, 2004, and intended to remain in effect only
until the Secretary certified that there is an appropriate adjustment in the case mix to
compensate for the increased costs associated with such residents. In the CMS Notice
(71 FR 43158-43198, July 31, 2006), the Secretary did not address certification of
the AIDS add-on with the implementation of the case-mix refinements, thus allowing
the temporary add-on payments to continue through FY2007 and beyond.
Medicare pays the costs of certain items on a reasonable cost basis (outside of
the applicable SNF PPS system), including unpaid debt for beneficiaries’ coinsurance
17 67 Federal Register 49817, July 31, 2002.
18 MedPAC, Report to the Congress: Medicare Payment Policy, March 2004.
19 Described in the Final Rule 70 FR 45028, Aug. 5, 2005.

CRS-9
and deductible amounts. Historically, CMS reimbursed certain providers for 100%
of the debt. The Deficit Reduction Act of 2005 (P.L. 109-171) reduced Medicare
payments to SNFs for allowable bad debts to 70% for beneficiaries who are not
eligible for both Medicare and Medicaid. Medicare’s payments for allowable bad
debts attributed to dual eligible beneficiaries would remain at 100%.
MedPAC recommends the elimination of a market basket increase for SNFs for
FY2008. The President’s budget proposal would also freeze SNF payments for
FY2008, and would increase payments annually starting in FY2009 and beyond by
the SNF market basket minus 0.65 percentage points. HHS projects the President’s
proposal would save Medicare $1.01 billion in FY2008 and $9.21 billion over the
five-year budget period between FY2008 and FY2012. The Congressional Budget
Office’s (CBO) estimate of the President’s budget proposal projects savings of $400
million in FY2008 and $4.2 billion from FY2007 through FY20012.
Current Issues
RUGs Refinement
Since the inception of SNF PPS, the Centers for Medicare and Medicaid
Services (CMS), the agency that administers Medicare within the Department of
Health and Human Services, has been conducting research on refinements to the
RUGs to ensure adequacy of payments. In April 2000 the Secretary proposed
refining the RUGs by adding payment categories to better compensate SNFs for
providing care to medically complex patients as well as to better account for the
“non-therapy ancillary service” costs (such as prescription drugs and respiratory
therapy). However, the proposal was withdrawn when, upon further analysis, CMS
determined that the existing RUGs did a better job than the proposed ones in
describing differences in patient resource use. Later that year, BIPA 2000 required
the Secretary to study different systems for categorizing SNF patients and to report
to Congress by January 1, 2005 with the results and any recommendations for
changing the SNF PPS statute.
Reports published in 2002 and 2003 by the GAO and MedPAC further
emphasized the importance of refining the PPS RUG system. Both reports raised
concerns that payment rates for certain types of patients were not adequate because
the patient classification system did not sufficiently account for the different care
needs of patients. They also noted that the therapy RUGs were paid at levels that far
exceed costs and were thus highly profitable for certain providers.20 Refining the
RUGs so that payments are better aligned with the actual resources used in caring for
patients, they asserted, would eliminate incentives to care for one kind of patient over
another.
20 U.S. General Accounting Office, Skilled Nursing Facilities: Providers Have Responded
to Medicare Payment System by Changing Practices, GAO-02-841 (Washington, DC,
August 2002); Medicare Payment Assessment Commission, Report to the Congress:
Medicare Payment Policy, (Washington, DC, March 2003).

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In May 19, 2005 (70 FR 29070), the Secretary issued a proposed rule which was
finalized on August 4, 2005 (42 CFR Parts 409, 411, 424, and 489).This rule laid out
refinements to the SNF PPS. The refinements updated and recalibrated the therapy
and nursing case-mix indices associated with all of the RUGs and added nine new
Rehabilitation plus Extensive Services groups into the RUG classification system
(increasing the number of RUGs from 44 to 53). The final rule also authorized the
incorporation of the Office of Management and Budget’s revised definitions for
Metropolitan Statistical Areas and Combined Statistical Areas used to distinguish
payment adjustments for SNFs located in urban and rural areas. The refined RUG
system became effective on January 1, 2006. It is still too soon to know whether the
refined case mix system is adequate or will warrant additional refinements.
Spending
The PPS system was intended to help control spending on SNF care and since
its application the spending growth rate has slowed (from a 17% average annual
growth rate between 1994 and 1998, pre-PPS, to a 13% average annual growth rate
between 2000 and 2004, post-PPS). However, spending on SNF care continues to
increase.
Such expenditure growth may, in part, be attributable to growth in the number
of SNF admissions as well as growth in number of SNF days. Between 1999 and
2003, the number of admissions increased from 1.8 million in 1999 to 2.4 million in
2003. This represents an average annual increase of 7%, exceeding the growth rate
in the Medicare population during that period (i.e. 1.2% for Part A).21
Spending growth may also be attributable to recent changes in the the RUG
classification system. Since the refinement of the payment system, MedPAC has seen
a shift in the utilization of the higher rehabilitation case-mix groups, each of which
is also attached to higher payment rate. As a result, the program is now paying for
more therapy and less for nursing and other items, relative to prior years.22
Supply
One indicator of payment adequacy is provider supply. The number of SNF
providers nationwide remained relatively steady between 1999 and 2004. MedPAC
reports that freestanding SNFs grew an average of 3.7% annually between 2000 and
2004. It also reports that for-profit facilities had a lower average annual growth rate
(3.5%) than non-profit providers (4.4 %).
21 edPAC, “A Data Book: Healthcare Spending and the Medicare Program: Section 9, Post-
Acute Care,” June 2006 and MedPAC, Report to Congress: Medicare Payment Policy,
Section 3A, March 2007.
22 This shift may be a result of a changing Medicare population. MedPAC, Report to
Congress: Medicare Payment Policy, Section 3A, March 2007.

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Medicare Margins
MedPAC also projects that the Medicare margins, a measure of the difference
between estimated costs and SNF expenditures, for freestanding SNFs will be 11%
in 2007, accounting for the full MB update scheduled in Medicare law. Significant
variation exists across facilities, with one-quarter of all freestanding SNFs having
margins at or below 4.7%, two-quarters (or half) having margins of at least 15.5%,
and almost one quarter having margins of almost 25%.23 MedPAC also explains that
margins vary by facility type, with for-profit facilities earning much larger margins
(18%), while non-profit facilities earn much smaller margins (9%). Further, margins
are higher in rural facilities than they are in urban facilities.
Access
The Office of Inspector General (OIG) of the Department of Health and Human
Services conducted a 2004 study to investigate whether Medicare beneficiaries have
adequate access to needed SNF care upon discharge from a hospital, among other
questions. Through interviews with discharge planners, persons responsible for
conducting patient assessments prior to hospital discharge and assisting with post-
hospital placement when necessary, the OIG found that 84% of discharge planners
reported that they are able to place all of their Medicare beneficiaries who need care
in a SNF (For a 2001 survey, 73% of discharge planners reported successful
placements).
OIG also reported that it did not find a large (i.e., greater than 1%) change since
its 2001 study in access to care among those beneficiaries in nine out of the 10 most
common diagnostic groups and eight out of 10 of the most common RUG payment
groups. However, ninety-one percent of responders reported that beneficiaries with
certain conditions experienced more delays. These patients required intravenous
antibiotics and/or expensive drugs, wound care, ventilator, or dialysis, or patients
having behavioral problems. The survey responders suggested that among the
explanations for these delays are the difficulties SNFs sometimes have in providing
the appropriate level and/or type of care to certain patients. They also suggested that
SNF reimbursement for intravenous antibiotics, and payment for expensive drugs or
dialysis were inadequate, and that SNFs may not have the necessary equipment or
appropriately trained staff to care for certain patients.24
Acute Care Versus Long-Term Care
Since the program’s inception in 1965, Medicare has delivered acute care
services to the elderly and certain persons under age 65 who have disabilities.25 The
23 MedPAC, Report to Congress: Medicare Payment Policy, Section 3A, March 2007.
24 Office of Inspector General, Department of Health and Human Services, “Medicare
Beneficiary Access to Skilled Nursing Facilities: 2004,” OEI-02-04-00270, July 2006.
25 Medicare was enacted in 1965 (P.L. 89-97) in response to the concern that only about half
of the nation’s seniors had health insurance, and most of those only had coverage for
inpatient hospital costs. The new program, which became effective July 1, 1966, included
(continued...)

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program was established to respond to the need for assistance in paying for hospital
and post-hospital care among the elderly and certain persons with disabilities. At that
time, life expectancy among the elderly and persons with disabilities was lower than
it is today and the demand for long-term care services on a widespread basis was far
less pressing.
In the more than 40 years since the program was established, demographic
changes and advances in medical technology are just some of the factors that have
contributed to a longer life span for both populations and a greater demand for long-
term care services, including custodial nursing home care.
As a post-hospitalization benefit, covering no greater than 100 days of skilled
nursing home care, Medicare’s SNF benefit does not cover long-term custodial care
and is thus not considered a long-term care benefit. However, since long-term
custodial stays in nursing home or in community-based settings are often triggered
by acute care episodes and hospitalizations (e.g., strokes or falls), Medicare’s SNF
coverage does play a significant role on the continuum of care for persons
transitioning between a higher level of independence and the need for assistance with
self-care.
25 (...continued)
coverage for hospital and post-hospital services under Part A and doctors and other medical
services under Part B.