Despite Hands-Off Approach from CMS, PDPM Pitfalls Remain for Nursing Home Operators, Investors

Against the backdrop of the COVID-19 pandemic, the federal government has left its new Medicare payment system for nursing homes virtually unchanged since the original rollout in October 2019 — but that doesn’t mean operators and investors should assume the status quo will last forever.

The Centers for Medicare & Medicaid Services (CMS) and its audit partners are still collecting reams of data on provider behavior under the Patient-Driven Payment Model (PDPM), and the desire to enforce budget neutrality and prevent individual actors from gaming the system remains in force.

“What’s the potential compliance target from a third-party auditor? It’s anything that makes your rate higher, and anything that you’re an outlier in,” Vincent Fedele, chief operating officer at CORE Analytics, said Tuesday during SNN’s virtual Payments, Policy, and Capital Summit.


PDPM was designed to largely eliminate the misaligned incentives baked into the old Resource Utilization Group (RUG) model, which rewarded operators for providing the highest volume of therapy services possible — resulting in a raft of multimillion-dollar settlements from companies accused of providing medically unnecessary therapy solely for cash.

Instead, the new model links Medicare dollars to resident need; in short, the sicker and more clinically complex the patient, the more money the facility receives to provide that care.

The few pre-COVID months of PDPM data raised concerns that far more winners than losers were emerging under the system, which was intended to pay out the same total amount of Medicare dollars on skilled nursing care as RUG had. But as with everything else in post-acute and long-term care, the COVID-19 pandemic scrambled CMS’s best-laid plans, and the federal government implemented only minor technical changes when updating the payment structure for the 2021 fiscal year.


“In recognition of the significant impact of the COVID-19 public health emergency, and limited capacity of health care providers to review and provide comment on extensive proposals, CMS has limited annual SNF rulemaking required by statute to essential policies including Medicare payment to SNFs,” CMS noted at the time.

Anyone looking for long-term patterns in the COVID-era PDPM data, however, must do so with extreme caution. The system generated several pandemic-related boosts that are unlikely to continue past the emergency, Fedele noted.

Take isolation in private rooms, a key strategy for preventing the spread of COVID-19 in any congregate living facility — and also a high-dollar PDPM input that takes precedence over others in the calculation hierarchy, driving rates higher.

“This obviously distorts not only your rates, but the ability to benchmark performance,” Fedele said. “In normal times, there is not 17% isolation; a more normal number looks like 1%, or less than 1%. Isolation is the highest payment category, which skews the rates upwards. If you’re looking at a facility’s performance to underwrite a deal, or wanted to see how you’re doing in the PDPM system, it’s extremely misleading to use the information because you’re basing it on something that won’t be present in normal times.”

Medicare eligibility waivers that allow beneficiaries to extend their 100 days of SNF coverage, along with a suspension of the three-day stay rule requiring prior hospitalization, have also provided revenue streams that will no longer exist when the federal government ends its formal COVID-19 emergency.

That causes problems for both operators curious about how they’re doing under PDPM relative to the past and their peers, as well as investors evaluating the long-term health of a given property or portfolio.

“If you underwrite a deal that has 60% isolation capture, continuing for years one and two post-pandemic, there’s going to be an issue with the bank and possibly defaulting on the loan,” Fedele said. Using the correct rate to project the Medicare revenue is imperative.”

As with many other aspects of life after COVID, it’s unclear when and how much CMS will crack down on perceived areas of imbalance in the PDPM system. The agency is currently without a confirmed administrator as the Biden transition continues; the confirmation process for Department of Health and Human Services (HHS) secretary nominee Xavier Becerra, who would directly oversee CMS, remains in limbo amid Republican objections to his lack of health care experience and support for reproductive rights.

With turnover in Washington and so many other pressing issues related to COVID-19, it would be difficult for CMS to fully assess the changes needed — even if they had more than a handful of PDPM data points from more normal times.

“I think that there will be some refinements, and there probably should be in some of the finite component areas, but it’s almost impossible — in fact, it is impossible — to accurately determine some of these metrics with four and a half, five months of limited data pre-COVID, and then numbers that are completely based on abnormalities that will never occur, God willing, again,” Fedele said

That said, there are some easy areas for auditors to focus on, such as any facility with high levels of non-therapy ancillary (NTA) services, long lengths of stay, or elevated capture of codes based on subjective patient interviews, such as impaired cognition, Fedele noted.

The scrutiny can also go both ways, however, with consistently low acuity scores potentially indicating a facility that’s failing to accurately meet and document residents’ needs; concerns over the potential withholding of therapy services, for instance, received attention from both therapists and media outlets during the earliest days of PDPM as the service swung overnight from being a revenue driver to a cost center.

Fedele emphasized that he hasn’t seen wild swings in care provided in his audit work, with payment shifts driven largely by improvements in documenting services that operators had offered pre-PDPM but never had a reason to log for reimbursement. But that doesn’t mean regulatory attention won’t eventually come to anyone suspected of improper billing.

“Any category that that dictates how high your rate is — obviously, you don’t have to be a rocket scientist to say that that’s probably a high category [for scrutiny],” he said.

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