Options for Improving Medicare Payment for Skilled Nursing Facilities

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

The text below is an excerpt from the complete document. Read the full paper in PDF format.

Abstract

Medicare has paid skilled nursing facilities (SNFs) using a prospective payment system (PPS) since 1998. This report offers policy options to refine Medicare’s payment of SNF services by developing alternative patient classification models. Three models classify patients according to expected non-therapy ancillary (NTA) costs: two models use data from the SNF to model NTA costs; a third adds data from prior hospital stays. A fourth model predicts rehabilitation therapy costs using patient characteristics. The fifth uses Diagnostic Related Groups to predict total SNF care costs. The report also simulates options for outlier payments for exceptionally high-cost cases.

Introduction

After nearly a decade of double-digit rates of growth in Medicare expenditures for skilled nursing facility (SNF) services, the Balanced Budget Act (BBA) of 1997 mandated that the program's cost-based, retrospective reimbursement policy for SNFs be replaced by a prospective payment system (PPS). Initiated in 1998, the Medicare SNF PPS established a prospectively determined per-diem payment rate for SNF patient care— adjusted for case-mix, area wages, urban or rural status, and changes in input prices.

The SNF PPS has generally accomplished its major objective of curbing Medicare spending growth for SNF services. The new system provides a full range of SNF services to Medicare beneficiaries while allowing providers more flexibility in their use of Medicare funds. In addition, studies of the impact of the SNF PPS do not currently indicate systematic problems with beneficiary access or quality of care (Maxwell, et al. 2003).

Despite its accomplishments, stakeholders and policy analysts express varying degrees of concern over three aspects of the existing SNF PPS: (1) the ability of the current patient classification system to adequately account for cost variations of non-therapy ancillary (NTA) services, such as prescription medicines; (2) the basis of payment for rehabilitation therapy services on the amount of services used, rather than on expected need as reflected by patient characteristics; and (3) the ability of the relative payment weights for nursing services to reflect current care practices.

Seeking possible improvements in the SNF PPS, Congress passed a provision in the 2000 Benefits Improvement and Protection Act (BIPA) requiring that the Centers for Medicare and Medicaid Services (CMS) conduct research to assess potential refinements and alternatives to the existing payment system. In response to the Congressional mandate, CMS is funding a multi-year study conducted by analysts at the Urban Institute, University of Colorado, University of Michigan, and Harvard University.

(End of excerpt. The entire paper is available in PDF format.)

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@ui.urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.