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The Medicare Payment System for Skilled Nursing Facilities Needs To Be Reevaluated


OIG, the Medicare Payment Advisory Commission, and other entities have raised longstanding concerns regarding Medicare's skilled nursing facility (SNF) payment system. These concerns focus on SNF billing, the method of paying for therapy, and the extent to which Medicare payments exceed SNFs' costs. Medicare pays SNFs a daily rate for nursing, therapy, and other services. The daily rate for therapy is primarily based on the amount of therapy provided, regardless of the specific beneficiary characteristics or care needs.

Previously, OIG found that SNFs increasingly billed for the highest level of therapy even though key characteristics of SNF beneficiaries remained largely unchanged from 2006 to 2008. OIG also found that SNFs billed one quarter of all 2009 claims in error-primarily by billing for higher levels of therapy than they provided or were reasonable or necessary-which resulted in $1.5 billion in inappropriate Medicare payments. This study provides further evidence that supports and quantifies these concerns.


This study was based on several data sources, including Medicare Part A SNF claims, Medicare cost reports, and beneficiary assessments. We used Medicare cost reports to compare Medicare payments to SNFs' costs for therapy over a 10-year period. We used claims to determine the extent to which SNF billing and beneficiary characteristics changed from fiscal years (FYs) 2011 to 2013. Finally, we determined the extent to which changes in SNF billing affected Medicare payments.


We found that Medicare payments for therapy greatly exceeded SNFs' costs for therapy. We also found that under the current payment system, SNFs increasingly billed for the highest level of therapy even though key beneficiary characteristics remained largely the same. Increases in SNF billing-particularly for the highest level of therapy-resulted in $1.1 billion in Medicare payments in FYs 2012 and 2013.


The findings of this and prior OIG reports demonstrate the need for CMS to reevaluate the Medicare SNF payment system. Payment reform could save Medicare billions of dollars and encourage SNFs to provide services that are better aligned with beneficiaries' care needs. We recommend that CMS: (1) evaluate the extent to which Medicare payment rates for therapy should be reduced, (2) change the method for paying for therapy, (3) adjust Medicare payments to eliminate any increases that are unrelated to beneficiary characteristics, and (4) strengthen oversight of SNF billing. CMS concurred with all four of our recommendations.

Copies can also be obtained by contacting the Office of Public Affairs at

Download the complete report.

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