What upcoming reimbursement changes mean for skilled nursing facilities’ cash flow and investment needs.

Upcoming changes in the payment system used by skilled nursing facilities (SNFs) could affect individual facilities’ cash flow over time. Whether revenues at a given facility rise or fall, the arrival of the Patient-Driven Payment Model (PDPM) will likely require changes to business strategy, staff management and financial planning systems.

The sooner that SNFs prepare for the upcoming changes, the better off they will be. By investing in staff and
technology preparation now, organizations can make a smoother transition to the changes in care delivery
required by the new model.

The Philosophy Behind Moving to PDPM

The decision to replace the current payment model, RUGIV (Resource Utilization Groups, Version IV), represents
another move toward value-based care. When PDPM arrives on October 1, 2019, the Centers for Medicare &
Medicaid Services (CMS) expect it to shift incentives from providing a high volume of services (fee-for-service) to
encouraging activities that improve patient health (fee-for-value).

Under RUG-IV, reimbursement payments were tied to volume (or hours) of delivering therapies. Under PDPM,
by contrast, payments will be linked to residents’ health characteristics and the number of days that patients
receive treatment. These measures are tied more closely to the value or outcome of the care provided.

What’s changing?

PDPM mandates that residents are categorized under one or more of five payment components based upon their
diagnosed conditions, as well as their mental and physical capabilities. While the metrics used to categorize patients are similar to those used under RUG-IV, PDPM makes significant changes to both the way the patients’ functional abilities are assessed and the effect these scores have on reimbursement.

PDPM uses patients’ ability to perform 10 basic physical functions to help classify them for payment components.
Unlike RUG-IV, however, the patient’s overall degree of independence has no direct effect on payment levels.
In terms of cognitive function, PDPM uses the same assessment tools as RUG-IV, but with a simplified scale for
classifying the patient’s results.

PDPM also introduces a variable per diem adjustment and a new “Interrupted Stay” policy that changes the
calculation for a patient’s length of stay. As a result, PDPM reduces payments to SNFs the longer a patient remains in the facility. The timing and magnitude of these step-downs in payment rates differ depending on the type of therapy provided.

How these changes affect SNFS.

SNFs will experience changes in five key areas due to PDPM:

1. Reimbursement.

Facilities with the highest revenues under RUG-IV are likely to see greater declines in their revenues than lower-revenue facilities due to the shift away from paying for services under PDPM. Revenue will also become less predictable for all facilities because the new model will be much more complex. Facilities should also keep in mind that promises from CMS that PDPM will be “budget-neutral” apply to the program’s overall budget for CMS, rather than for each individual SNF. As a result, in addition to helping CMS redistribute the same level of payments to reward SNFs providing more valuable care and better outcomes, higher program costs in the future could lead to reimbursement rate cuts to keep the program budget-neutral system-wide.

2. Care provision.

Under PDPM, facilities will have less incentive to provide patients specific high-revenue therapies than they did under RUG-IV. Instead, facilities will have more incentive to take on residents with complex diagnoses, since these types of conditions will generally lead to higher reimbursement rates.

3. Administration.

PDPM makes significant cuts to requirements for follow-up assessments, which can lower SNFs’ costs and reduce administrative overhead. The change also puts increased pressure on SNFs to come up with an accurate diagnosis code the first time, as incorrect diagnoses will typically lead to reduced revenue, even after facilities make corrections.

4. Capital needs and liquidity.

Facilities will experience setup costs for technology, staffing, training and developing new operating procedures before PDPM even takes effect. They will also need resources to ensure they have the proper documentation for outcomes and length of stay—key metrics for calculating reimbursements.

5. Change management and operational challenges.

Staff training will continue to remain key in tight labor markets. Changes caused by PDPM may require a shift in organizational responsibilities, such as who is best suited to perform assessments (nurse admin vs. therapy vs. medical director); how early and often assessments need to be updated and by whom—and who should prepare the necessary reports. Balancing clinical and care responsibility with billing accuracy may also affect employee morale.

Looking Ahead

CMS has announced an aggressive implementation timeline. RUG-IV billing ends on September 30, and PDPM
billing begins immediately afterward, on October 1. SNFs have very little time to prepare. Even though Medicare
only typically accounts for about 20% of an SNF’s revenue, similar reimbursement changes are on the horizon for
Medicaid and Managed Care in the next 12 to 24 months.1 Together, these programs account for over two-thirds of a typical SNF’s revenues, which underscores the urgency of care organizations getting their implementation right the first time.2

Although the industry has been diligently preparing for PDPM, it’s hard to know exactly how the change will affect SNFs’ bottom line initially. For SNFs that rely on the Department of Housing and Urban Development (HUD) for loan funding, it’s especially important to keep in mind the importance of performance factors. Since HUD’s lending formula relies heavily on a facility’s performance over the past 12 months, lags in performance could require facilities and their lenders to adapt: SNFs may need to seek a bridge loan to maximize proceeds or reduce their reliance on HUD funding.

As facilities prepare for these changes, they should consider reaching out to their lender to schedule a borrower
assessment. Lenders can help review and address the financial impacts of the upcoming changes. They can help
facilities assess any new working capital requirements or explore options for financing new equipment. They can
also examine covenant settings to look for ways to offer increased flexibility during the transition.

Want to learn more?

The shift to PDPM presents challenges and opportunities to SNFs. M&T Bank and M&T Realty Capital are focused on understanding the impacts of upcoming changes to Skilled Nursing reimbursement models.

As our clients prepare for the implementation of PDPM, we are listening to concerns and positioning flexible solutions to support their adoption of the changes. Contact your relationship manager to explore additional ways to gain time, flexibility and financing throughout this period of change.

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Disclosures

1Centers for Medicare and Medicaid Services, National Health Expenditures, December 2018. Compiled by the Peter G. Peterson Foundation. https://www.pgpf.org/chart-archive/0230_medicaid_nursing_care

2National Skilled Nursing Data Report through 2019 Q1, compiled by National Investment Center for Senior Housing & Care (NIC) > National Skilled Nursing Trend (p.5) – Revenue Mix January 2012 through March 2019

This article is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.

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