In 2008, the Medicare Payment Advisory Commission (MedPAC) recommended revision of the prospective payment system (PPS) for skilled nursing facilities (SNFs). This memo evaluates an update to that PPS design using data for 2007 SNF stays. The alternative design is compared with current policy, including the new RUG-IV classification system implemented in 2010. The alternative design outperforms current policy in its ability to explain variation in nontherapy ancillary costs and target therapy costs based on predicted therapy need. The alternative design would shift payments from facilities with high shares of rehabilitation therapy toward facilities with high shares of medically-complex patients.