Medicare payment rates to nursing homes will increase by $780 million next year, the Centers for Medicare & Medicaid Services (CMS) announced today.

The boost in payments is the result of a 3.4 percent increase in the annual market basket calculation of the cost of goods and services included in a skilled nursing facility stay. The price of the items in the basket is measured every year and Medicare payments are adjusted accordingly. 

A recalibration of the payment categories, intended to correct a previous error, which had been proposed for Fiscal Year 2009 has been delayed while CMS continues to evaluate the data.  The proposed rule announcing the planned recalibration was published in the Federal Register on May 4, 2008.

“CMS is committed to providing high quality care to those in skilled nursing facilities and to paying those facilities properly for that care,” said Acting Administrator Kerry Weems  . 

“However, in view of the widespread industry concern that a recalibration could potentially have adverse effects on beneficiaries, clinical staff, and the quality of SNF care, we will continue to evaluate the underlying data carefully as we consider implementing an adjustment in the future,” Weems said.

Medicare pays skilled nursing facilities on a prospective payment system known as the Skilled Nursing Facility (SNF) Prospective Payment System (PPS).   The SNF PPS uses a resource classification known as Resource Utilization Groups (RUGs) to help determine a daily payment rate.  The RUGs reflect a patient’s severity of illness and the kind of services that a person requires—something known as “case-mix.” Each RUG group is assigned a case-mix weight showing the relative acuity of each RUG group within the overall system. 

In 2006, CMS made refinements to the case mix structure to account more accurately for the resources used in the care of medically complex patients.  The refinement expanded the case-mix model to add nine new groups for beneficiaries requiring both therapy and extensive medical services, and included an adjustment to account for non-therapy ancillary services. The payment rates were updated using estimated data that have formed the basis of our payments to SNFs since the beginning of 2006.

The expansion of the RUG model was intended to be budget neutral but actually resulted in increased Medicare expenditures. Once actual utilization data under the expanded RUG model became available, CMS found that patients were being classified into one of the newly-created RUG groups more than 30 percent of the time (as compared to CMS’s earlier projection of 19 percent), thus triggering Medicare payments that are far higher than was originally intended. 

In the May proposed rule, CMS proposed to make changes in the RUGs to establish payment rates that more accurately reflect the needs of patients. In this final regulation, however, the agency says it will continue to evaluate the data, and determine what action it will take in the future.

A copy of the final rule is available on the CMS website at: http://www.cms.hhs.gov/SNFPPS/LSNFF/list.asp#TopOfPage

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