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CMS Announces Medicare SNF Cuts: The Implication

On Friday, CMS released its Final Rule regarding FY 2012 SNF PPS reimbursement.  The Final Rule implements a reduction or “cut” in SNF PPS payments equal to 11.1% or $3.87 billion.  The 11.1% reduction is based on 2011 rates and spending/outlays.  In their proposed final rule published in May, CMS alluded to the real possibility that it would seek to reduce SNF payments via some element of program/technical correction as well as rate reductions.  Their reasoning stemmed from claim and resulting outlay experience that was significantly greater in dollar amounts than originally forecasted when MDS 3.0 and RUGs IV was devised and implemented.  Summarized, CMS had intended the conversion from RUGs III to RUGs IV to be expenditure neutral for Medicare.  Per recent figures and analysis from the OIG, expenditures under RUGs IV are running 16% higher than the “neutral” target.  For more information, see my recent post on this same topic at .

Given that the text of the Final Rule won’t be published until August 8 and as of Friday, CMS was still working on recalibrating the CMIs under RUGs IV, it isn’t possible to provide direct analysis of the actual rate scenario for FY 2012.  What I do know however, is that the “bark” in this case is definitely worse than the “bite”.  While overall spending is set for reduction, this doesn’t necessarily correlate directly to rate.  Briefly, here’s why:

  • CMS has factored into their projections of lower spending levels, a series of technical corrections such as changes in how minutes are allocated among participants in group therapy.  This change closes a loophole or as I have said, an area of oversight in the transition from III to IV.  Going forward, group therapy minutes must be divided in equal increments among all participants (e.g., one hour of therapy provided to a group of four equals four 15 minute therapy sessions; not an hour allocated to each participant as the system presently allows).  Additionally, CMS is tightening the Change of Therapy assessment requirements to more specifically, capture any changes in a patient’s therapy needs that would preclude re-classification to a different (presumably lower) RUG category.  This change is separate from any Change of Condition assessment.
  • Recalibration of RUGs categories via adjustment to the CMIs will occur based-off of 2011 utilization and projections.  The net result is change in category payments that will remain higher than experienced under RUGs III levels.  In short, the net “cut” will not be 11% across the board.  SNFs need to be astute as to how the CMIs work and translate into payments under each RUG.  Recalibration is designed to restore parity to the overall expenditure profile.  In order for CMS to do this, it will overlay utilization trends and patterns across the CMI continuum and adjust rates within the scope of its technical corrections, to forecast an overall program expenditure target that agrees (theoretically) with its original intentions in converting to RUGs IV.  In short, this doesn’t mean an 11% direct rate reduction.  If CMS were to impose and 11% cut to each category, overall outlays would reduce by more than 30% – that is not the target.
  • Based on what I see from most providers with a fairly balanced Medicare book of business (mix of clinical/nursing and rehab cases on par with 40% clinical, 60% therapy), the net to their per diem will be flat to a reduction of 2 to 5%.  This means that a facility with an average per diem today of $450 per day will see a 2012 per diem between $425 and $450 per day.  Providers that took advantage of the group therapy option to escalate or maintain their high rehab payments under IV will likely see a greater revenue shock.  In virtually all cases, providers that have a fairly balanced Medicare book should see a 2012 Medicare per diem that falls 6% to 8% higher than their FY 2010 per diem.

I will have a better idea of the actual impact when I see the final CMIs and resulting RUGs IV rates.  In the meantime and until the Final Rule and rates are implemented on 10/1 of this year, I don’t see much in the way of political intercession to change (positively) the rate and spending scenario.  Spending at the Federal level is a toxic subject and even with a potential debt ceiling deal looming, the microscope will remain directly on all areas of federal spending.  Entitlement spending (Medicare, Medicaid, and Social Security) is rising substantially faster than discretionary or military spending and logically, presents a big target for deficit hawks.  Logically, it will be difficult to gain the support of any Congressional industry sympathisers to push more money back into a system that most acknowledge, was unintentionally overpaying for care.  Consider FY 2011 a bit of a windfall and the changes forthcoming, pretty darn modest; all things being equal.


July 31, 2011 - Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , ,


  1. I hear this quite often. Contract therapy companies have traditionally relied on producing revenue for a SNF by focusing on a limited number of RUG categories; RU, RV, RH and so forth. The transition from III to IV did not meet the desired intent of CMS, namely to trim the overall payment profile to SNFs from “therapy” focused to “clinically” focused – more balanced. Frankly, most facilites were not positioned to take care of a more clinically complex resident base and the minimal changes made to therapy qualification and coding had little impact on the overall utilization patterns within SNFs. Along come the cuts, designed to re-base Medicare outlays for SNF care. Understandably, many SNFs and the therapy companies that support them are concerned as the most targeted reductions are within the playgrounds typically mined by therapy companies; the rehab categories. From where I sit, this was bound to happen. Your management is reacting to the very real prospect that the overall rules of the game are changing and the value proposition that your company uses with its SNF clientele is similarly changing. Given the economic realities at play for Medicare and Medicaid, this trend in terms of spending constraint, translated via rates to providers, is here to stay. Your organization will have to adjust and re-evaluate, like everyone in the SNF/Medicare space, how it does business. Thanks for the comment!

    Comment by Reg Hislop III | September 26, 2011

  2. I work for a contract therapy company providing services in a SNF. Corporate management is very concerned about the new “cut” in SNF PPS payment and have alerted to us employees that “future sacrifices” will have to be made to absorb this reduction. What those sacrifices entail remains to be seen. Rest assured we have not seen the last of these cuts but it will affect us all for a long time.

    Comment by Richard | September 24, 2011

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