When looking at the 4.2% Medicare increase in the Skilled Nursing Facility Prospective Payment System (SNF PPS) for 2025, some leaders in the space wonder if the rate calculated has been inadequate considering inflation, labor woes, and funds needed to meet the federal staffing mandate. Some even argue that rate increases are so far behind actual costs that a complete overhaul is needed to meet existing and future costs of care.

Notably, the forecast error adjustments have been pretty conservative when it could be an easy fix, said Brian Ellsworth, VP of public policy and payment transformation at Health Dimensions Group (HDG), told Skilled Nursing News. All the while, operators are increasing wages by 6% to 8% while reimbursement is only going up by 4.2%, at least for Medicare.

“About 1.7% of [the Medicare rate] is forecast error from two years ago,” said Ellsworth. “There have been three years in a row of pretty material forecast error adjustments. Why is it so conservative? And why do facilities have to wait so long to be appropriately reimbursed on that? It seems like an easy fix.”

The Centers of Medicare & Medicaid Services (CMS) has the methodology to correct subsequent updates, but the agency has said inflation came on very quickly.

“But that doesn’t explain a second year and a third year of it,” he noted. “There are a couple of adjustments in terms of how you get to 4.2%, but my point is a big part of the adjustment is the prior year’s forecasting error, and it’s the third year in a row of a material forecast error. At this point, why aren’t you fixing the forecast methodology?”

The increase is calculated based on the SNF market basket percentage increase of 3%, plus a 1.7 percentage-point forecast error adjustment and 0.5% productivity adjustment, CMS said in a memo. The market basket update was increased slightly from the 2.8% increase for 2025 that CMS initially proposed earlier this year.

An old gripe, but margins demand a change

Providers have long recommended that CMS revise the methodology to better reflect actual costs, said Martin Allen, senior vice president of reimbursement policy at the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), told SNN.

“Inflationary costs—especially in recent years due to the pandemic—continue to outpace the annual Medicare payment updates,” said Allen. “They most certainly do not cover the $6.5 billion needed each year to meet the agency’s unfunded staffing mandate. Meanwhile, patients’ needs are largely increasing, and care practices are advancing.”

The lag in rate adjustments often leaves providers scrambling to make up the difference between anticipated and actual costs, Allen said of members. Resources are already scarce, and the agency’s conservative rate setting has been placing significant burdens on providers to cover the gap and keep their doors open.

“We encourage CMS to update its methodology and include a prospective adjustment for labor inflation costs, particularly as providers seek to further invest in workforce development, recruitment, and retention,” said Allen. “We need a reliable, more timely Medicare payment system that recognizes the increasing resources needed to support high-quality care.”

The agency could reconsider how they arrive at the forecast error adjustment, or waive the policy and adjust the Medicare rate higher from the outset, knowing there is policy in place to adjust back down, depending on cost and inflation, said Ellsworth.

“What would have been the harm of jacking up the last couple of market basket updates by a point or two, recognizing that you have a methodology that ultimately reconciles it to what’s actual anyway? It’s not going to cost you money, it’s just going to more appropriately reimburse on the front end,” said Ellsworth.

Inflation adjustment is part of a bigger problem

Whether the increase was 4% or 40%, it’s poorly targeted, Zimmet Healthcare Services Group CEO Marc Zimmet said.

SNF profitability is directly correlated with Medicare volume – that means the increase isn’t needed by a small group of providers lucky enough to maintain a robust fee-for-service (FFS) business, but it’s not enough for the growing number of facilities without enough FFS to cover Medicaid’s inadequate rates, Zimmet noted.

In terms of equitability, funding is irrelevant without rational distribution, he added.

“The average facility nets less than $100k, but national averages mean nothing in Skilled Nursing. Factor in arbitrary AWI changes and state Medicaid cost-sharing policies, plenty of “average” facilities are net losers this year.

The lack of a rational Medicare increase just goes to show that the SNF PPS has turned into an enforcement rule, rather than a payment rule.

“I’m disappointed. For years, we’d all clear our weekend schedule based on the Friday we expected the rule to drop – we were excited for it. That excitement has turned to dread,” he said of the SNF PPS. Medicare utilization is down to single digits in many markets as Medicare Advantage takes over, yet CMS continues to act as if Medicare exists in a vacuum, Zimmet noted.

Medicare utilization is so low in many areas of the country that the update is barely newsworthy anymore, Zimmet added. In order for the Medicare rate increase to cover a facility’s overall cost escalation, the increase would have to be closer to 250%, he said.