Why CMS’ Reimbursement System Has a Long Way to Go

Medicare payment accuracy has steadily eroded since 2006,  according to a new report jointly produced by the Medicare Payment Advisory Commission and the Urban Institute.

The study compares the relationship between skilled nursing facility (SNF) payments and costs over time to assess whether changes the Centers for Medicare & Medicaid Services (CMS) has made to the payment system have improved payment accuracy for therapy and nontherapy ancillary (NTA) services.

Changes to payment policies have made payment accuracy worse, the report finds.


“The need to reform Medicare’s payments to skilled nursing facilities is as strong as ever,” the report says, adding that Medicare’s payments for services furnished by SNFs are estimated to be over $31 billion in 2014. “Payments [for therapy and NTA] are less able to explain differences in costs across both stays and facilities and payments are less proportional to costs. When more therapy is furnished, facility costs increase but program payments increase more quickly, to an even greater extent now than in the past.”

Currently, payments for therapy services are tied to the amount of therapy provided rather than patient need and generally overpay facilities for the costs of those services, the study finds. Payments for NTA services do not vary with these services’ costs or a patient’s need for the services, leaving some facilities underpaid.

“As a result, SNFs face incentives to shift their patient mix toward intensive therapy case-mix groups by providing unnecessary therapy services,” the report says.


The ability to explain cost differences for NTA services across facilities has gone from explaining 10% of the variation in 2006 to none in 2014, data show.

“Because payments for NTA services have essentially zero statistical relationship to costs at the stay and facility levels, facilities with more patients with higher expected NTA costs due to higher need for those services will be underpaid for treating those cases,” the report notes.

The report points to current payment policies as to why there is a large degree of inaccuracy.

“At the stay and facility levels, policies in 2006 explained more of the variation in costs [for therapy care] than current payment policies,” the report says, adding that current (2014) payment policy, in which payment for NTA services are part of the nursing payment, “results in very inaccurate payments for NTA services.”

An alternative design could improve the accuracy of payments, the report suggests.

“An alternative design that establishes a separate component for NTA services and bases therapy payments on patient characteristics would result in payments that are more accurate and proportional to facility costs,” the report says.

The study brings together data from related prior studies conducted over several years, and new analyses.

Access the study here.

Written by Cassandra Dowell