A tale of two payment reforms

Over the next 30 years, the Medicare program will account for nearly 80 percent of the increase in health care spending. This growth will continue to put pressure on the already dire situation facing the Hospital Insurance (HI) Trust Fund, which is expected to fail in 2028. With these looming fiscal problems, policymakers need to be hypervigilant about services paid for from the HI Trust Fund, including skilled nursing facility (SNF) services and home health agency (HHA) services. Long criticized by the Medicare Payment Advisory Commission for increasing profits over patients, SNFs had a marginal Medicare profit of 25 percent in 2020, and HHAs had a 23 percent profit. To address these issues, the Centers for Medicare and Medicaid Services (CMS) recently initiated comprehensive payment reform.

Goals of payment reform

CMS has contracted with Acumen, LLC for HHA reform and Abt Associates for HHA reform. The goal in both cases was to develop an alternative case-mix adjustment methodology in which Medicare payments would be adjusted based on patient characteristics. This work led to the development of the patient-driven payment model (PDPM) for SNFs and the home health group model (HHGM) for HHAs, which purposefully intended to shift reimbursement away from dependence on volume of therapy.

In addition to the focus on patient characteristics, CMS also aimed for the implementation of both payment reforms to be budget neutral, meaning that actual costs would not be higher or lower than projected costs in a given year, without excess withdrawals from trust funds. When CMS proposed the implementation of the PDPM, it did not imply a change in provider behavior under the new payment system. However, when CMS proposed the implementation of HHGM, it was assumed that provider behavior would change in three ways:

  1. Increased clinical group coding, where primary diagnosis codes lead to episode group assignments that trigger higher payments;
  2. Additional comorbidity coding where secondary diagnosis codes result in higher payments; and
  3. Overuse of short-visit episodes, as the total number of episodes is expected to increase due to the change from a 60-day to a 30-day episode of care.

CMS estimated that these three behavior changes would result in overpayments (an extrabudgetary neutral effect) and therefore proposed a 4.3 percent reduction in future HHA payments. Not surprisingly, the respective industries reacted differently to these proposals. After the 2020 proposals, the SNF trade association supported the PDPM and the home health trade association opposed the HHGM. In response to comments, CMS finalized the PDPM but did not finalize the HHGM. This initial divergence put SNF and HHA payment reform on radically different paths.

Precedent-setting statutory language

Three months after CMS chose not to finalize the HHGM, Congress is requiring its implementation. Congress codified CMS’ previous proposal to change home health services from a 60-day to a 30-day episode of care. The policy also requires CMS to make assumptions about changes in behavior that might occur under the new payment system. CMS is required to evaluate such changes from 2020 through 2026. After such evaluation, CMS is required to make one or more permanent future increases or decreases to adjust any costs (higher or lower) that are different than expected.

It is common for CMS to make one permanent prospective adjustment with payment reform, rather than multiple adjustments. Some examples of past prospective reductions include Medicare-Severity Diagnosis Related Groupings (MS-DRGs) for inpatient hospitals (2008), Resource Utilization Groupings version three (RUG-III) for SNFs (2012), PDPM for SNFs (2023 –2024) , and the Patient-Driven Grouping Model (PDGM), the new name for HHGM that CMS adopted after the Congressional mandate (2020).

The 2020 behavior adjustment for HHA PDGM was only the first reduction CMS pursued. CMS is currently exercising its authority to implement “one or more” future adjustments (Appendix 1) with a proposal for a second future reduction of 7.69 percent to begin in 2023.

Figure 1: Comparison of SNF and HHA Medicare Payment Reforms—Estimated Excess Trust Fund Withdrawals

Sources: Percentages reported in skilled nursing facility and home health agency regulations, and the dollar amounts were obtained by multiplying the total annual Medicare payments calculated in the authors’ analysis by Standard analysis files for skilled nursing facilities (FY2020 = $26.00 billion, FY2021 = $25.61 billion) and home health agencies (CY2020 = $17.12 billion, CY2021 = $16.04 billion). The 2022 and 2023 payments are derived by multiplying the 2021 amounts by standard payment update factors such as market basket and performance adjustments, and for HHAs, CMS’s estimated effects of updating the loss ratios in fixed dollars and rural supplement rates as reported in the relevant regulations. Retrospective recovery amounts were calculated by multiplying total annual payment amounts by the forward adjustment rates. CY = calendar year; FY = fiscal year.

In addition to prospective adjustment, Congress also granted CMS the authority to apply retrospective reimbursement under the PDGM. This is an important difference from prospective adjustment—retrospective law allows CMS to go back to the beginning of PDGM implementation and apply additional adjustment as needed to account for changes in behavior. In the case of PDGM, CMS is required to implement the additional 7.69 percent reduction through 2020 through 2022 (Appendix 1). As required by law, CMS must implement the retrospective refund on an interim basis until the total amount (~$3.2 billion) of the overpayment is collected. CMS’s authority to pursue retrospective recovery of PDGM is precedential because it is the only instance of such authority in title 18 of the Social Security Act (SSA). Although not included in the SSA, Congress previously required (2012) a retrospective reduction of $11 billion in hospital payments with the shift to MS-DRGs.

Absence of a retrospective authority for SNG

Like PDGM, CMS ultimately implemented a prospective SNF reduction for PDPM. Also, like the PDGM, the PDPM prospective reduction does not apply to all overpayments for the first three years of performance. In the same way that CMS intends to apply the 7.69 percent reduction to HHA payments, CMS should also apply an annual reduction of 4.6 percent to SNF payments for 2020 through 2023 (Table 1). However, CMS does not have the statutory authority to apply a retrospective payment reduction to SNFs. Such authority requires an act of Congress.

There are several reasons why Congress should consider giving CMS the authority to retroactively recover PDPM overpayments to SNFs. First, CMS’s stated intent to achieve budget neutrality has not been met, resulting in approximately $4.0 billion (Appendix 1) being overpaid. Second, as noted above, the HI Trust Fund will fail in 2028 and SNF costs are reimbursed by the HI Trust Fund.

Finally, SNFs and HHAs are often viewed as competitors in the Medicare program. Applying the retrospective reduction only to HHAs and not to SNFs places SNFs in a more advantageous financial position than HHAs, thereby undermining competition based on quality and outcomes. Furthermore, differential treatment can signal to patients, markets, and others that there is a preference for one setting over another.


CMS’ push for payment reform for both SNFs and HHAs is a positive step that addresses longstanding criticisms of the Medicare program. Given the stated goal of implementing payment reform in a budget-neutral manner, Congress should strive for parity among payment systems by giving CMS retrospective reimbursement authority in both the SNF and HHA payment systems. As both Congress and CMS consider future payment reforms in the Medicare program, Congress should consider proactively giving CMS the ability to retroactively recover payments to ensure budget neutrality in each of its payment systems. In addition, CMS must also do its part to uniformly implement future payment adjustments in the context of payment reforms. Such actions would ensure that competition occurs on the basis of quality and results, rather than the arbitrary application of payment adjustments.

Leave a Comment

Your email address will not be published. Required fields are marked *