Skilled Nursing Facility Reimbursement is Dependent on Resource Utilization Groups

The Balanced Budget Act of 1997 included the implementation of a Medicare Prospective Payment System (PPS) for skilled nursing facilities (SNFs) and hospitals with a swing bed agreement, consolidated billing, and a number of related changes. The PPS system replaced the retrospective cost-based system for SNFs under Part A of the program (Federal Register Vol. 63, No. 91, May 12, 1998, Final Rule). Effective with cost reporting periods beginning on or after July 1, 2002, SNF-level services furnished in rural swing bed Hospitals are paid based on the SNF PPS instead of the previous, cost-related method (Federal Register Vol. 66, No. 147, July 31, 2001, Final Rule). However, the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 included an exemption of critical access hospital swing beds from the SNF PPS.

The SNF PPS is the culmination of substantial research efforts beginning as early as the 1970s that focus on the areas of nursing home payment and quality. In addition, it is based on a foundation of knowledge and work by a number of States that developed and implemented similar case-mix payment methodologies for their Medicaid nursing home payment systems. See CMS’s RAI Version 3.0 Manual CHAPTER 6: MEDICARE SKILLED NURSING FACILITY PROSPECTIVE PAYMENT SYSTEM (SNF PPS)

Using the MDS in the Medicare Prospective Payment System

A key component of the Medicare SNF PPS is the case-mix reimbursement methodology used to determine resident care needs. A number of nursing home case-mix systems have been developed over the last 20 years. Since the early 1990s, however, the most widely adopted approach to case-mix has been the Resource Utilization Groups (RUGs). This classification system uses information from the MDS assessment to classify SNF residents into a series of groups representing the residents’ relative direct care resource requirements.

In 2005, the Centers for Medicare & Medicaid Services (CMS) initiated a national nursing home staff time measurement (STM) study, the Staff Time and Resource Intensity Verification (STRIVE) Project. The STRIVE project represents the first nationwide time study for nursing homes in the United States to be conducted since 1997, and the data collected has been used to update payment systems for Medicare SNFs and Medicaid nursing facilities (NFs). Based on this analysis, CMS has developed the RUG-IV classification system that incorporates the MDS 3.0 items.

Over half of the State Medicaid programs also use the MDS for their case-mix payment systems. The RUG-IV system replaces the RUG-III for Medicare in October 2010. However, State Medicaid agencies have the option to continue to use the RUG-III classification systems or adopt the RUG-IV system. CMS also provides the States alternative RUG-IV classification systems with 66, 57, or 48 groups with varying numbers of Rehabilitation groups (similar to the RUG-III 53, 44, and 34 groups). States have the option of selecting the system (RUG-III or RUG-IV) with the number of Rehabilitation groups that better suit their Medicaid long-term care population. State Medicaid programs always have the option to develop nursing home reimbursement systems that meet their specific program goals. The decision to implement a RUG-IV classification system for Medicaid is a State decision. Please contact your State Medicaid agency if you have questions about your State Medicaid reimbursement system.

The MDS assessment data is used to calculate the RUG-IV classification necessary for payment. The MDS contains extensive information on the resident’s nursing needs, ADL impairments, cognitive status, behavioral problems, and medical diagnoses. This information is used to define RUG-IV groups that form a hierarchy from the greatest to the least resources used. Residents with more specialized nursing requirements, licensed therapies, greater ADL dependency, or other conditions will be assigned to higher groups in the RUG-IV hierarchy. Providing care to these residents is more costly and is reimbursed at a higher level.  See CMS’s RAI Version 3.0 Manual CHAPTER 6: MEDICARE SKILLED NURSING FACILITY PROSPECTIVE PAYMENT SYSTEM (SNF PPS)

Resource Utilization Groups Version IV (RUG-IV)

The RUG-IV classification system has eight major classification categories: Rehabilitation Plus Extensive Services, Rehabilitation, Extensive Services, Special Care High, Special Care Low, Clinically Complex, Behavioral Symptoms and Cognitive Performance Problems, and Reduced Physical Function (see Table 1). The categories, except for Extensive Services, are further divided by the intensity of the resident’s ADL needs. The Special Care High, Special Care Low, and Clinically Complex categories are also divided by the presence of depression. Finally, the Behavioral Symptoms and Cognitive Performance Problems and the Reduced Physical Function categories are divided by the provision of restorative nursing services.

A calculation worksheet was developed in order to provide clinical staff with a better understanding of how the RUG-IV classification system works. The worksheet translates the standard software code into plain language to assist staff in understanding the logic behind the classification system. A copy of the calculation worksheet for the RUG-IV classification system for nursing homes can be found at the end of this section.

Relationship between the Assessment and the Healthcare Claim for Financial Reimbursement

The SNF PPS establishes a schedule of Medicare assessments. Each required Medicare assessment is used to support Medicare PPS reimbursement. There are scheduled PPS assessments performed around Day 5, Day 14, Day 30, Day 60, and Day 90 of a Medicare Part A stay (as defined in Chapter 2). These scheduled assessments establish per diem payment rates for associated standard payment periods. Unscheduled off-cycle assessments are performed under certain circumstances when required under the regulations (e.g., when the resident’s condition changes). See Chapter 2 for greater detail on assessment types and requirements. These unscheduled assessments may impact the per diem payment rates for days within a standard payment period.

Numerous situations exist that impact the relationship between the assessment and the claim above and beyond the information provided in this chapter. It is the responsibility of the provider to ensure that claims submitted to Medicare are accurate and meet all Medicare requirements. For example, if the resident’s status does not meet the criteria for Medicare Part A SNF coverage, the provider is not to bill Medicare for any non-covered days. The assignment of a RUG is not an indication that the requirements for SNF Part A have been met. Once the resident no longer requires skilled services, the provider must not bill Medicare for days that are not covered. Therefore, the following information is not to be considered all-inclusive and definitive. Refer to the Medicare Claims Processing Manual, Chapter 6, for detailed claims processing requirements and policies.

To verify that the Medicare bill accurately reflects the assessment information, two data items derived from the MDS assessment must be included on the Medicare claim:

Assessment Reference Date (ARD)

The ARD must be reported on the Medicare claim. CMS has developed internal mechanisms to link the assessment and billing records.

Health Insurance Prospective Payment System (HIPPS) Code

Each Medicare claim contains a five-position HIPPS code for the purpose of billing Part A covered days to the Part A/Part B Medicare Administrative Contractor (A/B MAC). The HIPPS code consists of the RUG-IV code and the Assessment Indicator (AI) as described below. CMS provides standard software and logic for HIPPS code calculation.

RUG-IV Group Code. The first three positions contain the RUG-IV group code to be billed for Medicare reimbursement. The RUG-IV group is calculated from the MDS assessment of clinical data. See Section 6.6 for calculation details on each RUG group. CMS provides standard software, development tools, and logic for RUG-IV calculation. CMS software, or private software developed with the CMS tools, is used to encode and transmit the MDS assessment data and automatically calculates the RUG-IV group. CMS edits and validates the RUG-IV group code of transmitted MDS assessments. Skilled nursing facilities are not permitted to submit Medicare Part A claims until the assessments have been accepted into the CMS database, and they must use the RUG-IV code as validated by CMS when bills are filed, except in cases in which the facility must bill the default code (AAA). See Section 6.8 for details. The following RUG-IV group codes are used in the billing process:

Rehabilitation Plus Extensive Services:




Extensive Services:

ES3, ES2, ES1

Special Care High:

HE2, HE1, HD2, HD1, HC2, HC1, HB2, HB1

Special Care Low:

LE2, LE1, LD2, LD1, LC2, LC1, LB2, LB1

Clinically Complex:

CE2, CE1, CD2, CD1, CC2, CC1, CB2, CB1, CA2, CA1

Behavioral Symptoms and Cognitive Performance:

BB2, BB1, BA2, BA1

Reduced Physical Function:

PE2, PE1, PD2, PD1, PC2, PC1, PB2, PB1, PA2, PA1



There are two different Medicare HIPPS codes that may be recorded on the MDS 3.0 in Items Z0100A (Medicare Part A HIPPS code) and Z0150A (Medicare Part A non-therapy HIPPS code). The Medicare Part A HIPPS code may consist of any RUG-IV group code. The Medicare Part A non-therapy HIPPS code is restricted to the RUG-IV groups of Extensive Services and below. Which of these HIPPS codes is included on the Medicare claim depends on the specific type of assessments involved.

The RUG group codes in Items Z0100A and Z0150A are validated by CMS when the assessment is submitted. If the submitted RUG code is incorrect, the validation report will include a warning giving the correct code, and the facility must use the correct code in the HIPPS code on the bill.

The provider must ensure that all Medicare assessment requirements are met. When the provider fails to meet the Medicare assessment requirements, such as when the assessment is late (as evidenced by a late ARD), the provider may be required to bill the default code. In these situations, the provider is responsible to ensure that the default code and not the RUG group validated by CMS in Items Z0100A and Z01050A is billed for the applicable number of days. See Section 6.8 of this chapter for greater detail.

AI Code. The last two positions of the HIPPS code represent the Assessment Indicator (AI), identifying the assessment type. The AI coding system indicates the different types of assessments that define different PPS payment periods and is based on the coding of Item A0310. CMS Provides standard software, development tools, and logic for AI code calculation. CMS software, or private software developed with the CMS tools, automatically calculates the AI code. The AI code is validated by CMS when the assessment is submitted. If the submitted AI code is incorrect on the assessment, the validation report will include a warning and provide the correct code. The facility is to use the correct AI code in the HIPPS code on the bill. The code consists of two digits, which are defined below. In situations when the provider is to bill the default code, such as a late assessment, the AI provided on the validation report is to be used along with the default code, AAA, on the Medicare claim. Refer to the Medicare Claims Processing Manual, Chapter 6, for detailed claims processing requirements and policies.

First AI Digit. The first digit identifies scheduled PPS assessments that establish the RUG payment rate for the standard PPS scheduled payment periods. These assessments are PPS 5- day, 14-day, 30-day, 60-day, 90-day, and readmission/return. The Omnibus Budget Reconciliation Act (OBRA 1987) required assessments are also included because they can be used under certain circumstances for payment (see Section 6.8). Table 2 displays the first AI code for each of the scheduled PPS assessment types and the standard payment period for each assessment type.

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