The Office of Inspector General of the U.S. Department of Health and Human Services (OIG) issued a report on September 30, 2015, that calls for the Centers for Medicare and Medicaid Services (CMS) to reform payment for skilled nursing facility (SNF) services. The OIG focused on billing for therapy (e.g., speech, occupational, physical) as a driver increasing SNF revenue and noted that SNFs’ margin on Medicare reimbursement for therapy was 29 percent.   

Medicare pays SNFs a daily rate for therapy that is primarily based on the level of therapy provided to the beneficiary. The OIG’s review of therapy billings indicated that a disproportionate number of beneficiaries received 720 minutes of therapy during the relevant seven-day assessment period—exactly the number of minutes required for “ultra-high” categorization, which results in a higher level of resource utilization group, which in turn results in higher reimbursement. 

The OIG contends that beneficiaries’ acuity level has remained largely unchanged, but that SNFs have provided increased levels of therapy in order to justify higher reimbursement. The OIG also contends that SNFs billed one-quarter of 2009 claims in error, resulting in $1.5 billion in inappropriate Medicare payments. For the vast majority of the claims, OIG found that SNFs billed for higher levels of therapy than were reasonable or necessary. OIG further noted recent SNF settlements over allegations of fraudulent billing for medically unnecessary therapy and false reports of therapy being delivered. 

Finally, the OIG noted that CMS could have exercised its authority to adjust certain SNF reimbursements based on “case mix creep”—i.e., an increase in overall Medicare payments resulting from changes in SNF billing that do not reflect changes in beneficiaries’ characteristics. CMS has exercised a similar authority to adjust rates in the home health payment system, but has not done so for SNFs.

The OIG concluded that the difference between Medicare payments and SNFs’ costs for therapy, combined with the current payment method, creates an incentive for SNFs to bill for higher levels of therapy than are necessary. As an example, OIG stated that in FY 2012 SNFs received an average of $66 a day more than their therapy costs when they billed for an ultra-high level of therapy, but only an average of $11 more than their therapy costs when they billed for a low level of therapy.

The OIG calls on CMS to take the following steps: 

• Evaluate the extent to which current Medicare payments for therapy should be reduced (recognizing that statutory authority may be necessary to do so)
• Shift away from a volume-based reimbursement methodology to one based primarily on beneficiary characteristics
• Adjust Medicare payments to eliminate the effect of “case mix creep”
• Strengthen oversight of SNF billing

The OIG contended that payment reform could save the Medicare program billions of dollars and encourage SNFs to provide services that are better aligned with beneficiaries’ care needs. CMS concurred with all four recommendations.