Genesis’s PDPM Math: 12% Expense Savings, Shift to Fixed-Cost Therapy Contracts

Once the new Medicare payment model for nursing homes takes effect this fall, skilled nursing giant Genesis HealthCare (NYSE: GEN) expects to see significant expense savings — while also changing the way it negotiates therapy contracts with its third-party clients.

The Kennett Square, Pa.-based operator projects that the expanded opportunity for group and concurrent therapy, along with reduced paperwork burdens associated with fewer mandatory assessments, will lead to 10% to 12% in cost savings under the Patient-Driven Payment Model (PDPM), CEO George Hager said last week.

“A $100,000 reduction in therapy cost per building is a meaningful improvement in margin if we’re accurate in our assessment that the top line is revenue-neutral,” Hager said during a presentation at the RBC Capital Markets Global Healthcare Conference in New York City.


Under PDPM, therapy hours will no longer be the primary driver for Medicare reimbursements; instead, operators will receive payments more closely linked with residents’ medical needs, a move designed to prevent the over-provision of therapy simply to rack up as much income as possible.

The Centers for Medicare & Medicaid Services (CMS) has positioned the program as budget-neutral, and the total number of Medicare therapy dollars allocated by the federal government will not change. For providers, the budget-neutrality aspect means that for every center that sees an increase in Medicare reimbursements under PDPM, some other building will have to lose that amount — though chief financial officer Tom DiVittorio predicted that Genesis has a chance at being a net winner.

“No doubt, we’ll have facilities that are ups and downs, but as we’ve looked at it for our patient population, and run our models, we see it as a budget-neutral — maybe even slightly positive — outcome for us on the rates side,” DiVittorio said during the presentation.


But the CFO stressed that the real opportunity for Genesis will come on the expense side of the equation. PDPM will expand the use of group and concurrent therapy, modalities that providers often avoid under the current system because they reduce top-line revenue, DiVittorio said. With volume no longer driving payments, providers can use group and concurrent sessions to counteract some of the revenue declines they may experience during the PDPM shift, contributing to Genesis’s sunny outlook.

Genesis has also applied lessons learned during the shift to bundled payment reimbursement models for certain conditions, Hager said, when developing its PDPM strategy.

“We dramatically changed how we approached delivering therapy services to that patient population,” Hager said. “We got a great head start.”

In addition, while reduced paperwork burdens may not have as much of an impact on expenses, DiVittorio described the reduced assessment requirements as a net positive for clinicians.

“We don’t see that as maybe having any impact to our cost, but imagine a lot of very skilled clinicians who are spending a lot of time on paperwork, going through all of these patient assessments day after day after day — [they] can free up some of their time more for direct care,” he said.

PDPM’s effects will also extend to Genesis’s contract therapy business, with Hager warning operators that use third-party services to monitor levels of therapy provided before and after the shift carefully — lest they attract the attention of CMS regulators looking for any evidence that therapy had been provided improperly either before or after the change.

“As the largest contract therapy provider in the U.S., we are advising our customers — internal and external — to be very cautious about any reduction in the amount of therapy provided, arguing that the patient needs are no different pre- and post-PDPM,” he said.

Genesis has begun shopping fixed-cost or cost-plus therapy billing models to its third-party clients, which use the company’s services in about 1,200 facilities across the country. The reaction so far has been mixed, Hager said, as many operators have become accustomed to the current per-minute billing structure common in the industry over the last decade.

But some clients have been more receptive to the fixed-cost structure, under which Genesis would charge a monthly rate based on projected yearly therapy costs, then adjust it prospectively to account for changes in census.

“Some like the fact that you can lock in a cost savings, and for us, I think it’s an easier contracting method to staff to as well,” he said.

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