Press release



New Medicare nursing home payment rates for fiscal 2006, proposed today by the Centers for Medicare & Medicaid Services (CMS), will refine the way nursing homes are paid to ensure quality, efficiency, and accuracy of payments, without reducing revenue for the industry.


“We are committed to providing high quality care to those in nursing facilities and to paying nursing homes properly for that care,” said Mark B. McClellan, M.D., Ph.D., administrator of CMS. “Refining the nursing home payment system will bring greater accuracy to our payments, greater support for patients who need the most help, and much-needed predictability for the nursing home industry.  These steps make sense for patients, nursing homes and the Medicare program.”


The proposed rule for the skilled nursing facility prospective payment system (SNF PPS) was placed on display at the Federal Register today.   As required by Congress, CMS is proposing a refinement to the resource utilization groups (RUGs) by introducing nine new payment categories, which determine the daily payments for Medicare beneficiaries in nursing facilities.  CMS is also proposing increases in the case mix index for all of the RUGs.  The increase in the index is equal to half of the value of the temporary “add-on” payments that end with the refinement of the current system. The increase in payments associated with the RUG-III refinements, together with an annual inflation increase of three percent, will result in virtually no change in overall SNF Medicare payments in FY 2006.


Under Medicare’s SNF PPS, each facility is paid a daily rate based on the relative needs of individual Medicare patients, adjusted for local labor costs.  The daily rate covers the costs of furnishing all covered nursing facility services, including routine services such as room, board, nursing services, and some medical supplies together with related costs such as therapies, drugs and lab services; and capital costs including land, buildings and equipment.


The proposed refinements in the RUGs will more accurately pay nursing homes for the care of medically complex patients by creating new payment categories that more closely match the kind of services being provided to them.    The proposed rule expands the number of RUG-III groups from 44 to 53, adding groups to account for the costs of certain medically complex patients who require rehabilitation services as well as multiple treatments for many illnesses or “comorbidities.”  


The proposed rule also retains the 128 percent adjustment for SNF residents with AIDS that was enacted in the Medicare Modernization Act of 2003 (MMA).


“These significant refinements to the nursing home payment system rely on good scientific research about how to deliver efficient, high quality care,” Dr. McClellan said.  In fact, the refinements are based on validated research conducted by CMS and its contracted research firms over the past several years.  Results of this research and other related issues will be discussed in an upcoming report to Congress required by the Benefits Improvement and Protection Act of 2000.


CMS has also proposed to increase the case mix indexes of all 53 RUG groups that reflect variations in non-therapy ancillary costs not fully captured in the RUG refinements.   This adjustment increases the component of the case mix weight that applies to both nursing and non-therapy costs.  This proposed change to the case mix indexes would increase aggregate payments under the SNF PPS.  The proposed increase to the relative weights is 8.4 percent, which amounts to a three percent increase in aggregate spending. This is a permanent payment increase that will be integrated into the base line spending levels and be continued in future years.


All of the refinements in the RUG payment system will begin on January 1, 2006 to provide sufficient time for billing systems to be upgraded. The current RUGs and add-on payments established by the Balanced Budget Refinement Act of 1999 would continue in effect for the first quarter of Fiscal Year 2006. For the remaining nine months of FY 2006, payments would be made under the new policy.


The proposed rule also includes a “market basket” update increase of approximately three percent ($510 million).  The update is based on a measure of the change in prices of a “market basket” of goods and services included in covered skilled nursing facility stays.  The price of items in the market basket is measured each year, and Medicare payments are adjusted accordingly.


Together, these payment refinements will result in Medicare SNF payments that are about equal in fiscal year 2006 to the payments in 2005.  This is in line with the recommendations of the Medicare Payment Assessment Commission (MedPAC), which recommended a zero update for SNF payments.  CMS expects refinements in the SNF PPS to still result in positive operating margins on nursing home Medicare business of around 10 percent next year.


Today’s proposed rule also discusses other SNF payment system issues including consolidated billing requirements, the three-day prior hospitalization requirement for SNF eligibility, and concurrent therapy. The agency is also seeking comment on quality-related payment changes, including “pay for performance” elements and site-neutral payments for post-acute care.  


The regulation also proposes other changes aimed at saving costs while enhancing accuracy and promoting quality.  Those proposals include changes in the way information is collected for the Minimum Data Set (MDS) such as limiting the reporting of certain high intensity services (e.g. IV medications) that the patient received before being admitted to a nursing facility. “These further changes hold the potential for better support for quality care without increasing Medicare costs,” Dr. McClellan said.


“With the Nursing Home Quality Initiative, representing an important collaboration between the nursing home industry, CMS, and other stakeholders, we’ve seen some important improvements in quality in many nursing homes,” Dr. McClellan said.  “As we move to more refined and predictable payments for nursing facilities, we want to take further steps to support and reward the ‘culture of quality’ that has emerged in many facilities.”


A full copy of the SNF PPS proposed rule for FY 2006 is available on the CMS website at  It is expected to be published in the Federal Register on May 19.  Public comments on the proposal will be accepted until July 12, 2005.