RUGs III to RUGs IV: The Core of “Need to Know”

In the past month with October 1 looming closer, I’ve been fielding lots of questions regarding the transition from RUGs III to RUGs IV.  Instead of listing the questions and trying to recap my answers (my memory is good but not that good), I’ve settled on an overview or “summary”; the core of what SNFs need to know or if nothing else, get up to speed on quickly.  To organize this post, I’ve used headlines for expediency.

Overview: Difference Between RUGs III and RUGs IV

Simply put, the major difference applies to therapy at the expense of nursing or clinical care needs.  CMS became concerned that changes in the SNF population and patient needs altered industry practices and the allocation of resources, principally away from clinical nursing to rehabilitation therapy.  Via the engagement of 205 nursing homes across 15 states, CMS completed a time study to analyze the required resources provided to patients versus the clinical needs of patients.  The end result was an update to RUGs III known as RUGs IV.  RUGs IV consists of 66 groups divided into 16 categories (two were added) versus 53 under RUGs III.  To utilize the RUGs IV groups for payment, CMS revised the standardized assessment tool known as the MDS to version 3.0.  The final implementation rule published by CMS includes assurance that in calculating RUGs IV, the goal of payment parity is maintained.  In other words, the historical distribution of total payments to SNFs, based on 2007 claims data applied to RUGs IV, creates the same level of total PPS expenditure for SNFs as would occur under RUGs III.  Of course, this is not an assurance to any particular SNF that upon transition, revenues under RUGs IV will be equal or greater than revenues received under RUGs III.  The average rate, per CMS under RUGs IV will be $431.71 compared to $420.42 under RUGs III.

Financial Impacts Under RUGs IV

As with all changes of this magnitude, there are or will be, winners and losers. The losers in terms of financial impact are facilities that have run high levels of non-clinically complex rehab patients, treating on a concurrent therapy model.  Clearly, the bias under RUGs IV is for facilities to provide one-to-one therapy.  Under the concurrent therapy rules, the total treatment minutes are divided between the two patients (max that can be treated concurrently is two).  For example, one hour of therapy equals 30 minutes per patient.  The clear impact is that overall treatment minutes are reduced, reducing the RUG level and/or the SNF will need to increase the overall amount of therapy provided to patients (not practical or clinically viable) concurrently.  For example, an ultra high rehab under RUGs IV is divided into three groups based on ADL scores;  RUC, RUB, and RUA. The requirement, regardless of the ADL score, is for the resident to have a rehab diagnosis requiring a minimum of 720 minutes per week, receive 1 discipline 5 days per week and a second discipline 3 days per week.  Doing the math, meeting this criteria with concurrent therapy is virtually impossible.  Via CMS’ own analysis, the predicted percentage of patients that fall into RUC, RUB, and RUA under RUGs IV vs. RUGs III declines from 17.8% of all days of stay (RUGs III) to 8.9% of all days of stay (RUGs IV).  Not surprising however, is that the rate does increase under RUGs IV for these groups by an average  of more than $100 per day.  While contract therapy companies will give me continued grief for saying this, facilities that have contract therapy providers fall predominantly into this risk category; much heavier emphasis on concurrent and group therapy treatment models as a means of maximizing staff resources and maintaining high levels of productivity (benefits to the contract therapy company).

Another clear category of losers is facilities that took significant advantage of the hospital look-back provisions under RUGs III to establish diagnoses, rehab and clinical care plans.  RUGs IV and MDS 3.0 eliminate this provision entirely ( an exception exists for ventilator patients).  I like to use the example of “former” treatments such as IVs for fluids or medications present in the hospital.  Facilities that used the presence of IVs while a patient was in the hospital under the “look-back” provision could justify an extensive services qualifier to a high rehab group, capturing a high rehab plus extensive services RUG under RUGs III, even if the IV was gone when the patient was admitted to the SNF.  Under RUGs IV, no IV present on admission becomes the assessment basis plus, IVs for nutrition/hydration and medications now qualify as Clinically Complex rather than Extensive Services.  Extensive Services qualifiers under RUGs IV only include ventilator care, tracheostomy care, or isolation for an active, infectious disease.  The patient must also have an ADL score of 2 or higher.

The clear winners under RUGs IV are facilities that care for clinically complex patients and patients that are more ADL dependent.   For example, and in follow-up to the paragraph above, SNFs that provide ventilator care, tracheostomy care, care for infectious diseases, etc., plus provide rehab, can win “big”.  For example, a ventilator patient receiving 325 minutes of therapy per week from 1 discipline 5 days per week (Speech and/or OT are the most common here) would be categorized as an RVX under RUGs IV with a corresponding urban federal rate (payment rates are by regions) of $786.66.  An RVX under RUGs III pays $467.62.  A similar relationship holds true across the categories for facilities that provide care to more ADL dependent patients.  Higher ADL dependency scores increase payments rather rapidly.  There is a note of caution here though as today, I routinely see ADL scoring that is speculative at best (typically upped) as the MDS 2.0 is less sensitive about ADL scores to generate a RUGs rate.  Under MDS 3.0, the ADL assessments are far more sensitive and detailed, designed to truly qualify ADL deficits.  I believe a fair number of facilities will find their ADL scores decreasing rather than increasing over time.

As I indicated previously, RUGs IV increases the nursing index weights at the expense of rehab.  Essentially, facilities that typically bill below average rehab utilization (days) under RUGs III stand to come out ahead under RUGs IV, provided their clinical complexity is average or higher.  For example, an SSB for wounds under RUGs III correlates under RUGs IV to HD1 or HD2, depending on the presence (lack of) depression.  The clinical weight index jumps by  .50 under HD1 or by 1.0 under HD2, creating a positive revenue impact of $90 to $140 per day respectively.  Fundamentally, facilities that provide more clinical nursing care to a population with higher ADL deficits, cognitive impairments, and maintain an average rehab profile as expressed through utilization, will fare better under RUGs IV than RUGs III.

Assessing the Impact of RUGs III to RUGs IV

In order to assess the financial impact or revenue impact of payment under RUGs III vs. RUGs IV, a provider needs to essentially map their current/historic Medicare case mix as determined under MDS 2.0 (paid under RUGs III) to RUGs IV.  To date, there are two ways to do this and neither are easy.  The first is to complete an MDS 3.0 for each current resident under Medicare.  I don’t advise doing this as it is cumbersome and in many cases, providers are still learning the nuances of 3.0 assessments.  The second option is to use a cheat sheet and a somewhat simplified method.  The method is as follows.

  • Pick a fairly consistent utilization period such as the last six months to a year.  Across that period, total the number of patients billed under each applicable RUGs III category, including the days billed.  Obviously, not every group will be used.  For example, if during a set period such as six months, the facility had 42 patients in RHA with respective lengths of stay ranging from 22 days to 36 days,  I’d list 42 RHA with a calculated average length of stay.
  • For each RUGs III group with billed patient days, pull the corresponding MDS’ for each patient.  Analyze the MDS’ to develop a consistent profile of the patients that fit into the corresponding categories.  The profile should be specific enough to cover typical ADL scores, significant clinical issues (wounds, IVs, etc.), therapy disciplines and minutes, etc.
  • Next, using a spreadsheet that I can provide (drop me a note at including your e-mail address and I will send it out), map your RUGs III profiles as created in steps one and two to RUGs IV groups.  Note: An RVX under RUGs III will not likely correspond to an RVX under RUGs IV as to qualify,  a patient under a RUGs IV RVX must have a ventilator, require tracheostomy care or have an active infectious disease.  Also, be very conscious of the concurrent therapy minute changes under RUGs IV when mapping your therapy minutes.  Remember, under RUGs IV, concurrent therapy is divided equally among the two residents/patients (i.e., two residents in PT treated concurrently for an hour does not equal 60 minutes of therapy for each resident but 60 minutes total, 30 minutes allocated to each resident).
  • Once the facility has mapped each RUGs III profiled group  to corresponding RUGs IV groups, you can analyze the revenue impact.  Multiply the number of residents per RUGs III group times the average length of stay for the group times the applicable RUGs III rate.  This is your RUGs III revenue average.  Next, do the same calculation for the RUGs IV groups (if you need the RUGs IV rates, drop me a note at and I can provide them to you).  Finally, compare the two sets of revenue numbers.

IMPORTANT: The second method gives you a good generalization of the revenue impact but it is not exact.  To be more precise, one would need to analyze each billed encounter under the RUGs III system and then, translate the same profile to RUGs IV.  Additionally, the only true exact method is to reassess each patient under MDS 3.0.  Because of the significant changes under RUGS IV to ADL scoring, look-back periods, and therapy minutes (concurrent vs. one on one vs. group) and the weighting of clinical issues (IVs no longer qualify as “extensive”, etc.), it is very difficult to map precisely, the financial impact of transitioning from RUGs III to RUGs IV.

Important Points to Consider/Remember

Based on my varied and numerous conversations with providers, I’ve created this brief list of issues and/or important points regarding the transition from RUGs III to RUGs IV.

  • RUGs IV and MDS 3.0 will change “how” SNFs do business or it should, unless the SNF wants to see Medicare revenue shrink.  Extremely key to remember and plan for;
    • No look-back period
    • Concurrent therapy rules
    • Highest Rehab groups (extensive services)  require the patient to be on a ventilator or require tracheostomy care or have an infectious disease.
    • Next  highest rehab groups will be difficult to meet the minute and discipline requirements if your current standard for rehab relies heavily on concurrent therapy.
    • Emphasis on ADL scoring is key in terms of attaining higher groups within categories as is the documentation of depression (if present).
    • Assessments under MDS 3.0 are longer and meeting dates is critical to avoid default rates – more work, more staff time and time sensitive dates.
  • If an SNF is using a contract therapy provider or company, the time to review and gain understanding about the transition to RUGs IV is NOW.  The SNF needs to make certain that the therapy company is capable of providing the necessary staff resources to principally deliver one to one therapy.  The SNF also needs to understand the financial impact to its operations that occurs when the therapy company adds staff (if required).  Further, and this point can’t be ignored: Medicare billing liability for all claims under Part A and B follows or stays with the owner of the provider number.  In a relationship between an SNF and a therapy company, the SNF is the Part A and predominantly, the Part B provider – not the therapy company.  Under the law, the requirement to assure accurate and timely billing falls to the SNF.  Any OIG enforcement, RAC activity, etc., will focus all fines, penalties, recovery, etc. on the SNF, not the therapy company as the SNF is the owner of the Part A provider number.  Implication: Don’t let your therapy contractor “drive the bus” on the transition to RUGs IV.  This needs to be a partnership and one where each party knows the rules, knows the impacts and has clear duties spelled out in the contract with clear remedies.  SNFs should not rely on standard therapy company indemnity clauses as the clauses I have seen typically limit the damage to the SNF for claims rejections, etc. to the “charges” the therapy company passed on to the SNF for providing services under the contract as applicable to the specific claim.  In short, the SNF bears the loss of the revenue for the claim plus if applicable, any fines or penalties, even if the therapy company personnel and their actions were the primary reasons the Medicare claim was denied, rejected, and/or deemed fraudulent.
  • The weighting within RUGs IV and thus the dollars, skew to the nursing side of things, away from rehab.  The weighting has shifted to clinical from therapy and as a result, gaining dollars and better reimbursement will come from a) changing your patient profile to one that has more clinically complex patients, and/or b) capturing the true clinical needs of your patients and their depression, ADL dependency, etc., on the MDS 3.0.  I always urge caution about (b) as the daily documentation better support the picture portrayed under the MDS or the implication is that the MDS was created to take advantage of payment which, if not matched by a patient with those needs, is Medicare fraud. 
    • Providers that wish to alter their patient profile need to explore the full ramifications of doing so financially and operationally.  More clinically complex and dependent patients may generate more Medicare revenue under RUGs IV but they also come with a cost.  The cost is typically in higher medication use, supply use, and staff resources.  Suffice to say, this population requires more nursing staff and perhaps, different nursing staff in terms of qualifications and training.  Additionally,  more clinically complex and dependent patients require more Social Service time and are more potentially problematic from a survey standpoint as there is more “stuff” going on with them.  An SNF moving in this direction needs to evaluate fully, the risks, costs and benefits associated with such a strategy.
  • While CMS says that overall Medicare spending on SNF care remains the same under RUGs IV and RUGs III, don’t believe it.  The distribution as forecasted is clearly toward a particular patient profile that is different than current or, a RUGs IV profile patient is different than the current RUGs III profile patient.  MDS 3.0 is a lot of work and will require facilities to adapt how and when they do their assessments and what resources they allocate to the assessment process.  In short, to make a smooth transition between RUGs III and RUGs IV requires planning – a lot of it.  It is less about groups and assessments and more about “how” the SNF does business.  Understanding the core concepts behind MDS 3.0 and RUGs IV is akin to understanding the rules of the game.  No game can be played successfully and efficiently without first, fully understanding the rules.

15 thoughts on “RUGs III to RUGs IV: The Core of “Need to Know””

  1. Great blog. Very concise, but very informative. You just summed up 3 major conferences.
    What is your prospective on the possibility of CMS retroactively recouping funds at a later date due to RUG IV Rate adjustments?

    • Kitt:

      Thanks for the comment! In terms of CMS recouping potential overpayments during the interim phase between RUGs IV categorical payments and the final installation of the hyrbrid rates (a period supposedly between Oct. 1 and January 2011), I think the probability is 50/50. As usual, there are potential “flies” in the ointment. First, there is still a small probability that Congress will act prior to the implementation of the hybrid rates and retroactively, make October 1 the official start of RUGs IV. We won’t however, see movement on this until after the November elections. Personally, I think this step is more than a bit unlikely. Second, CMS will review claims data during the interim and compare the claims under RUGs IV from October 1 through December or at minimum, November. If claims and payments are trending about where CMS predicts they will (expenditure neutrality), then the pressure to recoup payments will be minimal. CMS will likely take a token stab at massaging potential over-payments categorically but not on a wholesale level. I believe when all is said and done, little will fundamentally occur where CMS recoups payments – I could of course, be wrong. Personally, I’m not sure that CMS is in a real good position from a preparedness standpoint to implement a wholesale recoupment program.

      The likely scenario is where CMS, for payments in 2012 (period after October 1, 2011), makes rate adjustments to correspond to a final analysis of any overpayments made during the interim period. In other words, CMS applies a negative rate adjustment factor to the market-basket increase for expenditures that were greater during the transition from RUGs IV to the hybrid rates period. This methodology for CMS is simpler, gives them time, fits within their existing rate formula and doesn’t require a reverse claims adjudication step.

      Again, thanks for the comment!

  2. As a rehab manager for a large sub-acute and long-term care provider of rehabilitation services, I found this blog very informative and useful for both myself and my staff. In a large company such as ours, folks at our level are usually treated like mushrooms- kept in the dark and fed bullshit! Although our top management has given us “a way” to manage the current changes, we have not been provided with any insight regarding the bigger picture. You have captured the essence of the new PPS regulations concisely in a few short pages, and provided enough information for us to proceed in a knowlegable manner.

    • Darryl: Thank-you for the comment and I’m glad I could provide you with some useful information. Come back often and if ever there is a specific topic you need some insight on, let me know. I cover virtually all aspects of health policy and health care operations and what I don’t know specifically, I have ample contacts who give me great insight and first-hand information. Good luck during this “transition phase”!

  3. Hi Reg,
    I had a recent conversation with one of the authors of the CMS Federal Register that is invoking all these changes. One of the questions I had for them was the following:

    Under RUGS IV interim there are 66 RUGS. Under RUGS III Hybrid there are 53 RUGS. If CMS in fact does institute RUGS III Hybrid and retroactively adjusts payments an SNF has to understand that dollar differential NOW and adjust revenue monthly or risk overstating / understating revenue.

    An SNF can’t wait until CMS retroactively adjusts payments in calendar year 2011 to determine their revenue. A 12/31/10 year end company has to prepare their financials with revenue properly stated. To do so they need to know the payment difference between the two. Think about the impact of a publicly traded national chains – revenue has to be stated properly to the SEC as well as Wall Street so the stock price adequately reflects financial performance.

    The problem I see is, for example: How to map say ES3 under RUGS IV interim to RUGS III Hybrid now. You can’t model the difference by inputting data in one system then the other to generate a RUGS score, payment and then differential because the Hybrid isn’t available.

    Further there are 23 RUGS in RUGS IV interim that don’t appear under RUGS III Hybrid. And, there are 10 RUGS under RUGS III Hybrid that don’t have a match under RUGS IV.

    I really haven’t heard anyone talking about this. CMS said they were working on a map that might be available later this month. Have I missed something here? Your thoughts would be appreciated. Thanks!

    • Brett:

      Thanks very much for the comment. As you know, CMS has had a devil of time getting this hybrid mess sorted out. The problem originated with Congress failing to act legislatively, setting a 10/1/10 date for RUGs IV implementation. Of course, the problem dates back to passage of the PPACA pushing implementation of RUGs IV to 2011 while leaving MDS 3.0 to go live on 10/1/10.

      To your issue: Here is what I am advising people to do regarding this transition and hyrbrid period. First, obtain a calculator with RUGs III hybrid rates and use it to establish a liability on the balance sheet for overpayments. I have a calculator tool that I make available. Second, run a month end manual test on your claims by using the published hybrid rates. CMS released these in August. The manual test is as easy as a quick sample of claims for the month, mapped agains the hybrid categories. Where a hybrid category does not exist, use the RUGs IV category – CMS has said it will use RUGs IV categories where no RUGs III hybrid exists. Third, compare your results and adjust your liability up or down by the error percentage (how much your sample said you were over or under) for the next month. Error always on the side of being conservative. Even for publicly traded companies, this method should work fine as the company can comment on its Qs as to why the liability is set-up and the rational used.

      In the end, I think that there is a good likelihood that CMS will not recoup many payments made during the interim period, if at all. RUGs IV is set to be fundamentally expenditure neutral to RUGs III for Medicare. During the interim period, it is unlikely that CMS will find a case for overpayments as providers are still adjusting to 3.0 and RUGs IV and won’t have had an opportunity to manage their case-mix by such a degree that payments made in the interim will exceed CMS expectations or forecast for expenditures. That said, I personally believe that CMS will set a date forward for implementation of the hybrid and make any adjustments in their annual rate setting process, adjusting perhaps, the market-basket increase down a tad. Of course, Congress may still act and retroactively, implement RUGs IV fully as of October 1, 2010 – though action won’t occur until after the November elections.

      For provider that establishes a repayment liability on their balance sheet, if CMS chooses not to recoup payments, the liability evaporates to a positive adjustment to income. Even for calendar year-end companies, plenty of time will exist after January 1 to know what happens next and make year-end adjustments accordingly.

      Feel free to drop me another note if I can provide more insight or offer any tools that I have.

      • Reg – great advice and FAST! Thank you. Follow up:

        You inferred in your post that essentially RUB under RUGS IV interim probably isn’t going to be RUB under RUGS III Hybrid. Since there isn’t a map or tool to date that can tell us what the RUG category will be, in my example, under RUGS III Hybrid one should use the RUGS III Hybrid payment, as a measurer of convservation since that payment is lower, as one constructs a balance sheet entry.

        And, if there isn’t a RUGS IV category under RUGS III Hybrid it’s ok to stay with the RUGS IV payment but self-disclose.

        Very helpful. I do have a calculator that I built using the Federal Register rates for RUGS IV interim, RUGS III Hybrid and the wage indices. Thank you for your offer though. If your tool is something other than I described please forward.

        The PPACA is certainly going to bring more change to LTC! If only we could get the enhanced FMAP permanent and keep the provider tax from rolling to 6%. There’s a lot of change coming in one year!
        Thank you, again, Reg!

        • Brett:

          My reference in the post is that a RUB under RUGs III (via MDS 2.0) will not correlate (likely) to an RUB under RUGs IV (via MDS 3.0). The hybrid RUGs III payment is a different issue. We can track the difference backwards however, as there is a correlation between RUGs IV and the hybrid RUGs III system or in other words, the RUGs III hybrid that is driven by the MDS 3.0 assessment tool. Remember, the real issue in determining categorical payments stems from the assessment tool – MDS 2.0 vs. MDS 3.0 and the assessment protocols. I have a cross-walk sheet that illustrates the difference between the categories under RUGs III vs. RUGs IV.

          The “nut” if you will is this: MDS 3.0 effectively scores patients into a RUGs IV category. If you know the RUGs IV category result, you can work backward to a corresponding RUGs III hybrid category. Check out the two tools I’ve e-mailed to you plus my explanations and hopefully, my comment here will make more sense.

  4. Sir,
    Has there been a limit set on the percentage of concurrent minutes treated baised on RUG i.e. ultra or very high? I continue to get different answers from my company on a daily baises. One day it’s concure all non-assessments then the next it’s don’t do any concurrent treatment at all. I am very confused as to if there is an ethical line here and when I ask this question I get a lashing. Just doesn’t feel right to me.

    • Brian:

      The minute requirements per rehab category haven’t changed. For example, under RUGs III, and Ultra High requires 720 minutes weekly of therapy and the same is true under RUGs IV. What is or will change when RUGs IV is fully implemented (as of now, 10/1/11) is how the minutes are determined. Today, under the RUGs III system which is still the law (I understand the confusion), therapy minutes can be counted concurrently and there is not a limit today on the provision of therapy concurrently.

      Under the concurrent therapy provision, minutes can be combined equally for each patient treatment session. For example, two patients treated concurrently for one hour equals 60 minutes of treatment time allocated to each patient. When RUGs IV is fully in effect, concurrent minutes must be divided between the two patients. Using the same one hour session for two patients, RUGs IV would allocate the minutes via a division of the 60 minutes to two 30 minute sessions – one for each patient. In other words, each patient is credited with 30 minutes vs. 60 minutes.

      The confusion today stems from the hodgepodge system that went into effect on 10/1. On 10/1, MDS 3.0 was implemented (by law) and CMS began using RUGs IV as the payment system, even though the rules applicable to RUGs IV are not yet law. The sole reason for this is CMS’ inability to have in-place, a RUGs III hybrid payment system and grouper that works with MDS 3.0. Today, RUGs IV and its grouper is the only system that interfaces with MDS 3.0. Facilites are paid today via RUGs IV categores but the rules regarding the calculation of therapy minutes still apply as under RUGs III – concurrent therapy can still be counted as one session of minutes for each patient.

      In summary, there is today, no limit on the amount of therapy minutes that can be provided concurrently and the rules for counting the minutes between patients are the same as they have been. A caution to remember is that once RUGs IV becomes law, concurrent therapy minutes must then be divided between each patient equally, making the attainment of the minute requirements for rehab categories considerably more difficult, unless the therapy sessions are basically one-on-one.

      Feel free to ask additional questions if this answer is not what you were looking for or you need additional clarification.

  5. RUG IV implementation was repealed on 12/15/2010, so do this mean that the grouper for MDS 3.0, RUG IV is being paid as of October 1 instead of the hybrid?

    • Yes. Hybrid never did go into effect. To my knowledge, it never achieved working status so thank God, Congress acted when they did to make RUGs IV implementation retroactive to October 1 – consolidating the dates of implementation as it should have been all along.

  6. It’s my understanding from seeing reported results that RUG-IV has a mistake in it and is overpaying. Actual payments seem to be showing increases of 15% or more versus 1.7% expected. Have you any thoughts on this?

    • I have heard this but haven’t as yet seen it. What I have seen is “relatively” flat revenues as opposed to the dramatic increases. As RUGs IV and MDS 3.0 is/was meant to be expense neutral, merely a shifting of revenue concentration to groups more clinically focused and/or for patients more clinically complex, the rumored higher payments would mean upcoding or a grouper flaw. I also haven’t heard anything unusual from CMS in DC as to skewed payments or upcoding trends, though they are always slower to catch trends than their intermediaries and regional offices. Suffice to say that if payments via the RUGs IV grouper are skewed higher than targeted, CMS will respond with additional probe activity and corrective adjustments via the annual formulaic rate update.

      Thanks for the comment.


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