Medicare's prospective payment system for skilled nursing facilities

Skilled Nursing Prospective Payment System

Prospective Payment System (PPS) for skilled nursing facilities (SNF) comes under the Medicare recipient provision 4432(a) of the Balanced Budget Act (BBA) of 1997 (HHS.gov, 2009, found online). This was a revision to the Medicare plan, where previously there had been no prospective payment system, but a "cost based," or, on the adjustable low volume payment system (HHS.gov, online), the government is now utilizing PPS (HHS.gov, online), which has some features that actually mean higher payments to skilled nursing facilities. The new payment system was implemented effective July 1, 1998, and initial rates were based on the fiscal year (FY) 1995 cost reports which were filed by the skilled nursing facilities (HHS.gov, online).

The PPS ensures that there is an adjustment for those facilities that are located in geographically remote areas (HHS.gov, online), or areas where utilization can be impacted by the geographic location. For many skilled nursing facilities, this is an improved payment system over the prior one, and it gives the skilled nursing facilities an opportunity to receive higher reimbursement rates. The prospective payment system was intended to create an even playing field for skilled nursing facilities regardless of geographical location. This is an equitable payment system, but it could mean doing more accounting and reporting for some facilities, and revisions in some billing of services.

This brief essay will examine the prospective payment system in an effort to understand the language and the billing and payment processes, and what those mean to skilled nursing facilities.

Better Reimbursement Rates for Skilled Nursing Facilities

The current prospective payment system came about after much lobbying of Congress by the skilled nursing home industry. There was the prevailing thought that skilled nursing homes were being reimbursed unfairly, because reimbursement was dependent upon whether or not skilled nursing facilities, or classified as intermediate care facilities (ICFs) (Ubokudom, Sunday, Woods, JA, and Schalk, Lorinda, 2002, p. 321). The skilled nursing facility has always been paid under the Part B component of Medicare (outpatient, physicians, and special services), but was paid following Part a reimbursement (inpatient care), when patients were transferred immediately from inpatient care, to skilled nursing facilities (HHS.gov, online). It is distinguished from the more permanent setting of long-term care facilities (LTCFs), because patients are ordinarily discharged from a skilled nursing course of care, and return home with service through a home health care (HHC) component of service.

Industry experts feel that the move to a prospective payment system means not just better reimbursement for skilled nursing facilities, but also lends itself to an improvement in the quality of care and services that are delivered to the patient (Kolb, Patricia, 2003, p. 137). One of the biggest incentives of the prospective payment system is that it incorporates an element of the provider's cost in paying professional staff, and thusly, should manifest as more and even higher quality in professional staff that are employed by the facility. The elements of the prospective payment system are:

1. Implementation of the per diem (per day rate) prospective payment system

The reimbursement covers all costs of delivery of skilled nursing level care: routine, ancillary, and capital

Payment under the Part a component of the Medicare Program (previously paid under Part B during a Part a stay)

FY 1995 costs are updated to FY 1998 by a SNF market basket minus 1 percentage point for each of fiscal years 1996, 1997 and 1998. Providers which received new provider exemptions in FY 1995 are excluded from the data base. Routine cost limit exceptions payments are also excluded. The data is aggregated nationally by urban and rural area to determine standardized federal per diem rates to which case mix and wage adjustments apply.

RATES: Federal rates are set using allowable costs from FY 1995 cost reports. The rates also include an estimate of the cost of services which, prior to July 1, 1998, had been paid under Part B but furnished to SNF residents during a Part a covered stay. Case Mix Adjustment: Per diem payments for each admission are case-mix adjusted using a resident classification system (Resource Utilization Groups III) based on data from resident assessments (MDS 2.0) and relative weights developed from staff time data.

Geographic Adjustment: The labor portion of the federal rates is adjusted for geographic variation in wages using the hospital wage index.

Annual Updates: Payment rates are increased each Federal fiscal year using a SNF market basket index.

Transition: A three-year transition that blends a facility-specific payment rate with the federal case mix adjusted rate is used. The facility-specific rate includes allowable costs (from FY 1995 cost reports) including exceptions payments. Payments associated with 'new provider' exemptions are included but limited to 150% of the routine cost limit. It also includes an add-on for related Part B costs similar to the federal rate.

Effective Date: The PPS system is effective for cost reporting periods beginning on or after July 1, 1998 (HHS.gov, online).

These are positive changes that were intended to bring about improved quality of care for the many entering skilled nursing facilities each year. Whether or not it will yield the improvements that are hoped for, will only be determined over time, but there is now an equitable reimbursement in place that was sorely missing the delivery of skilled nursing care previously.

To better understand the reimbursement, it can be explained this way:

SNF Base Rate -Adjusted for Geographic Factors-Adjusted for Case Mix

76% Adj by Area Wages Base Rate Adj for Geographic Factors

PAYMENT

Add 20% for non-labor related X RUG Rate

THE PER DIEM

The skilled nursing level of care is referred to as a post acute level of care, because the inpatient setting is the acute level of care (Medpac.gov, online). In 2003, the federal government made Medicare payments of $14.3 billion to 2.4 million skilled nursing setting facilities (Medpac.gov, online). Agreeably, that total suggests that the quality of care for patients in skilled nursing facilities should be one that is exceptional; unfortunately there continue to be problems in the quality of care, because the components for the reimbursement do not focus on a corporate or private ownership profit margin.

There are length of stay rules that govern skilled nursing facilities, which are reimbursed for up to 100 days of care per calendar year (Medpac.gov, online). If the patient requires more than 100 days of care, that patient is deemed by the government to be in need of long-term care (LTC), for which Medicare does not reimburse providers for. The patient costs associated with skilled nursing facilities is often offset by a Medicaid component, and if the patient has any financial responsibility, it is minimal. However, to qualify for the Medicaid component, the patient must be indigent, and if the patient owns any property, the state in which the patient receives the skilled nursing or long-term nursing care in, which made payments for the patient shares, can seize the patient's assets at death, and sell the assets (usually property) to offset its losses.

The resource utilization groups by which the government determines the RUG payment to the skilled nursing facility, are classified by 53 groups of diagnoses that are related to skilled nursing levels of care (Medpac.gov, online). The groups are assigned reimbursement levels (refer to diagram above), and are periodically updated by the group as is determined by the government with regards to inflation in the cost of the RUG (Medpac.gov, online). The RUGs are tracked by the government, because the patients who fall within a certain RUG should have similar charges for utilization of care (Medpac.gov, online).

Again, documentation must support the RUG. For instance, when physical therapy or another ancillary service is utilized by the patient, the number of minutes, or hours that the patient receives in service will impact the per diem payment of the RUG. Therefore, the documentation must support the charges submitted for reimbursement, as well as the need for services (Medpac.gov, online).

As is demonstrated, the PPS reimbursement for SNF should be such as to ensure a high quality of care delivered by professionals in the setting. It was what the industry lobbied for, and the improved quality of care was what the beneficiaries expected to see come about. It is too soon for to determine the extent to which the quality of care has improved, but studies are being conducted that should reveal if the efforts to reimburse skilled nursing facilities on a more equitable basis through the PPS has been successful.