Unpacking the New Therapy Contract Math for Skilled Nursing Providers Under PDPM

Faced with a sea change in the Medicare reimbursement system for nursing homes, operators have spent the last year asking a key question about their therapy offerings: outsource or in-house? And if the answer is outsource, what will that relationship look like moving forward in unfamiliar payment landscape?

There’s no one correct answer for contract therapy under the Patient-Driven Payment Model (PDPM), according to multiple voices in the industry, but all agree that both sides will need to recalibrate their expectations — and make sure that everyone’s incentives, from the operator to the contract therapy provider to the patient, are closely aligned.

“Customer satisfaction, good outcomes — this is what CMS is going to be looking at,” Michael Sciacca, chief operating officer of consulting firm Zimmet Healthcare Services Group, said during his company’s annual conference in Atlantic City, N.J. earlier this month. “When I talk about the efficiency side, running the department — this still has to be in place. Outcomes are important. CMS is tracking what we’re doing. There’s no hiding.”


Under the coming PDPM shift, which takes place October 1, providers will see financial incentives move away from therapy minutes and toward resident acuity, with the Centers for Medicare & Medicaid Services (CMS) explicitly changing the math to prevent the unnecessary provision of therapy services for financial gain.

That means that today’s contracts between contract therapy providers and skilled nursing operators require a careful revisit to ensure that both sides receive fair compensation, and residents continue to receive appropriate and quality care.

There has also been significant industry chatter about a potential mass movement either into outsourced therapy services or in-house programs, as providers look to maximize reimbursements and reduce costs where possible. But at least so far, Sciacca said that most providers in the space are sticking with what they know as they head into PDPM, leaning into the fact that they either have the clinical capabilities to provide a strong therapy program, or realizing that they’re better served by outsourcing.


“People stay with what they had,” Sciacca said. “The overarching result was that if you outsource, you’re staying outsourced. If you’re in-house, you’re going to stay in-house.”

So far, several models have emerged as early favorites in the revised contract game, according to Quality Rehab Management vice president of strategic partnerships Susan Krall; the Dallas-based consulting firm is currently working with providers to either shore up their internal therapy operations for PDPM, or renegotiate contracts with their partners.

“We are definitely hearing of how third-party rehab providers are proposing to structure their contracts,” Krall told SNN. “Many seem to be leaning towards a percentage of the therapy component or overall PDPM payment for every skilled day.”

For Sciacca, a fixed-payment model may work best due to a quirk in PDPM’s internal math. Under the new system, reimbursements will be based on five distinct categories — physical therapy, occupational therapy, speech language pathology, nursing, and non-therapy ancillaries — and each category can have an effect on the other four.

For instance, a resident with a high level of functional independence positively affects the physical and occupational therapy categories, but has a negative effect on the nursing reimbursements — thus creating a misaligned set of incentives for the skilled nursing facility and the therapy provider that could potentially lead to conflict or lost dollars on one end of the deal.

Instead, Sciacca recommends a fixed per-patient-day rate, coupled with annual or twice-yearly reconciliations to ensure that both sides receive their fair share. This model is both familiar to providers on either end of the spectrum and more equitable for all involved, according to Sciacca and Zimmet Healthcare Services Group president Marc Zimmet.

While providers rightfully focus on their own bottom lines, they can’t forget that their therapy providers also need to ensure that they earn enough to continue operating in the PDPM landscape.

“This should be the golden age of therapy. I really like what I see. Contract therapy is the most important part of it, I really believe,” Zimmet said. “But they’ve got to make a profit — and I’m speaking to the operators here. I’ve seen some operators try to squeeze too hard.”

Clearly spelling out each side’s responsibilities will also be important under the new payment model, as CMS is likely to crack down on providers that significantly change their therapy strategies in the immediate wake of the rule change October 1. If a given facility’s therapy minutes suddenly drop substantially in the first quarter of the new fiscal year, CMS could easily argue that there was a profit motive behind the old therapy plan and take corrective action.

That was a major concern for contract provider Blue Sky Therapy, CEO and president Renee Halfhill told SNN.

“First and foremost, when developing our pricing options, Blue Sky Therapy wanted to ensure compliance with all regulatory guidelines and did not want to incentivize any reduction in our service delivery,” she said.

Under the current Resource Utilization Group (RUG) system, therapy companies or in-house employees were largely responsible for proving the clinical need for skilled nursing services — a role that will shift to SNFs’ nursing staff with PDPM, Sciacca said. As a result, therapy providers’ eventual payments could rest on strong nursing documentation that clearly demonstrates why a given resident required skilled therapy care in the first place.

“If we drop the ball, that claim could be denied,” he said. “That’s a big concern.”

All that said, Zimmet’s team — which has helped renegotiate contracts for a wide swath of operators in the lead-up to PDPM — has found that therapy companies are generally engaged and ready to embrace change under the new system.

“They really do want to form a strong partnership,” Sciacca said. “It’s new for the companies, it’s new for the facilities. The therapy companies, by and large, have been very amenable to reworking the contracts.”

Halfhill echoed that sentiment in her comments to SNN.

“Ultimately, as a therapy provider, we wanted to offer pricing options that align with CMS initiatives, are patient-driven and that can be substantiated as clinically appropriate through our robust auditing and monitoring program,” she said.

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