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Skilled Nursing Facility PPS


Section 4432(a) of the Balanced Budget Act (BBA) of 1997 modified how payment is made for Medicare skilled nursing facility (SNF) services. Effective with cost reporting periods beginning on or after July 1, 1998, SNFs are no longer paid on a reasonable cost basis or through low volume prospectively determined rates, but rather on the basis of a prospective payment system (PPS). The PPS payment rates are adjusted for case mix and geographic variation in wages and cover all costs of furnishing covered SNF services (routine, ancillary, and capital-related costs).

Implementing instructions relating to coverage and physician certification/recertification are forthcoming and are not included in these sections.

The Balanced Budget Act of 1997 mandates the implementation of a per diem prospective payment system (PPS) for skilled nursing facilities (SNFs) covering all costs (routine, ancillary and capital) related to the services furnished to beneficiaries under Part A of the Medicare program. Major elements of the system include:

  • 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. 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.
  • Case Mix Adjustment: Per diem payments for each admission are case-mix adjusted using a resident classification system (Resource Utilization Groups, version IV (RUG-IV)) based on data from resident assessments (MDS 3.0) and relative weights developed from staff time data. The 66-group RUG IV model includes an administrative presumption under which beneficiaries who are correctly assigned to one of the upper 52 RUG-IV groups on the initial 5-day, Medicare-required assessment are automatically classified as meeting the SNF level of care definition up to and including the assessment reference date (ARD) on the 5-day Medicare-required assessment. (A beneficiary assigned to any of the lower 14 RUG-IV groups is not automatically classified as either meeting or not meeting the definition, but instead receives an individual level of care determination using the existing administrative criteria.) CMS designates the upper 52 RUG-IV groups for purposes of this administrative presumption, consisting of all groups encompassed by the following RUG-IV categories: Rehabilitation plus Extensive Services; Ultra High Rehabilitation; Very High Rehabilitation; High Rehabilitation; Medium Rehabilitation; Low Rehabilitation; Extensive Services; Special Care High; Special Care Low; and Clinically Complex.
  • 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 percent 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.
  • For further information on the prospective payment system and its full legislative history, please refer to the document entitled "Skilled Nursing Facility (SNF) Prospective Payment System (PPS) Legislative History," available via the Downloads list below.


For a one-stop resource web page focused on the informational needs and interests of Medicare Fee-for-Service (FFS) skilled nursing facilities go to the SNF Center.