Examining the Impact of Prospective Payment System on Skilled Nursing Facilities Thesis

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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.

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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

TOPIC: Thesis on Examining the Impact of Prospective Payment System on Skilled Nursing Facilities Assignment

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


Add 20% for non-labor related X RUG Rate

RUG=Resource Utilization Group)

In the Fall of 1990, Medicare and Medicaid-certified nursing homes were mandated by Congress in the OBRA of 1987 to use a standardized, "reproducible," comprehensive functional assessment instrument to assess all patients and guide the development of individualized care plans. In 1989, the HCFA began the Multistate Nursing Home Case Mix and Quality (MNHCMQ) demonstration in which Kansas, Maine, Mississippi, and South Dakota implemented the Medicaid nursing home case-mix payment system. The four states, in addition to Texas and New York, also implemented a case-mix Medicare system (Ubokudom, Woods, and Schalk, p. 321)."

The resource utilization group (RUG) is defined by certain medical conditions that impact the patient's activities of daily living (ADLs). Since the payment is connected to the adjustment for case mix, then the documentation of the patient becomes essential, because Medicare will perform routine audits, and there are severe penalties for overbilling. When we talk about the adjustment for case mix, we're talking about the resource utilization group, or those patients who utilize certain services and require certain levels of care. Certainly patients being admitted to skilled nursing facilities have a variety of conditions, which require individualized care and treatment plans. It is by the services rendered that they become grouped by utilization of those services. Reimbursement then is a reflection of three things: the professional or nursing component; the cost of room and board (includes sheets, and other patient items), and administrative services, which are determined necessary for record keeping, charge submittal, and other administrative duties that are associated with the delivery of care and billing; ancillary services, such as therapies associated with the care rendered at the inpatient level of care prior to the skilled nursing level of care, and could include services like physical therapy for recovery of knee surgeries, or other types of surgical procedures (Medpac.gov, 2009, online).

Prospective payment system reimbursement means that skilled nursing facilities should be able to deliver these services with a quality of care by certified nursing, nurse assistants, orderlies, and therapists. Unfortunately, most nursing homes are private or corporate ownership, and there is a focus on profit. Even though, as we can see from the previous explanation and diagrams, there is a built in component that should address the professionalism to deliver the care, and the services, the focus on profit, some experts suggest, detracts from the quality of care (Kolb, p. 168).

It should also be mentioned that skilled nursing facilities often receive patients who suffer from the greater cost associated with HIV / AIDS (Medpac.gov, online). Contrary to what many people think, the cost associated with these patients is reimbursed at a higher rate, and is increased by 128% in the prospective payment per diem (Medpac.gov, online). This demonstrates the government's effort to ensure that there is care for patients suffering from HIV / AIDS, and that the extra services and staffing that the skilled nursing facilities must utilize in caring for the patients with the disease is offset by the higher per diem payment.


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… [END OF PREVIEW] . . . READ MORE

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