• Center on Health Equity and Access
  • Clinical
  • Health Care Cost
  • Health Care Delivery
  • Insurance
  • Policy
  • Technology
  • Value-Based Care

The Patient-Driven Payment Model: Addressing Perverse Incentives, Creating New Ones

The American Journal of Managed CareApril 2020
Volume 26
Issue 04

The Patient-Driven Payment Model addresses perverse incentives in Medicare’s previous payment system for skilled nursing facilities, but it includes new incentives that may be problematic.

Am J Manag Care. 2020;26(4):150-152. https://doi.org/10.37765/ajmc.2020.42831

Takeaway Points

  • The Patient-Driven Payment Model (PDPM) addresses perverse incentives in Medicare’s prior payment system for skilled nursing facilities by prioritizing patient needs over service volume.
  • The PDPM has introduced new incentives that may be problematic, potentially leading to unintended consequences.
  • Regulators should maintain close oversight of billing by skilled nursing facilities and patient outcomes as the PDPM takes effect to mitigate potential unintended consequences.

In October 2019, Medicare, which spends $30 billion on 2.4 million skilled nursing facility (SNF) stays annually, began reimbursing facilities using the Patient-Driven Payment Model (PDPM).1 The PDPM replaces the Resource Utilization Groups (RUG) system, which had been used since 1998 and which many believe created perverse incentives that contributed to rapid growth and unwarranted variation in Medicare spending on postacute care.2,3 The PDPM was implemented to address these problems, and although it is a step forward, it also creates new risks for unintended consequences.3 This commentary explores these risks and what can be done to mitigate them.

Perverse Incentives in the Previous Payment System for SNFs

Medicare has historically reimbursed SNFs using the RUG system, in which the level of payments varied across 5 categories based on the number of therapy minutes provided weekly (Table 1). This system had sharp cutoffs and large payment differentials for therapy-minute thresholds separating each RUG category. Some SNFs are thought to have taken advantage of these features to increase revenue by moving patients into higher RUG payment categories, contributing to rapid growth in Medicare expenditures.4 Under the RUG system, an SNF received $438 per day, on average, for a typical patient needing assistance with 6 to 10 activities of daily living in the “very high” RUG category (Table 1). If this same patient were placed in the “ultra-high” category, the per diem payments increased to $601, on average. Between 2002 and 2016, the use of the ultra-high category increased from 7% to 63% of all SNF days reimbursed by Medicare5—a 9-fold increase. There was no corresponding change in case mix during this period.5

Large payment differentials among RUG categories also led to “high billing,” in which some SNFs systematically submitted claims just surpassing the therapy-minute threshold required for a payment category. In the earlier example, an SNF providing a patient with 719 minutes of therapy in a week would receive the very high category payment rate ($438), but providing 720 minutes would raise payment to the ultra-high category rate ($601). The $163, or 37%, differential in the per diem payment between the very high and ultra-high categories created a strong incentive for SNFs to provide just enough therapy to move a patient into the higher-paying category, regardless of whether they required such intensive therapy. In a 2016 analysis, we found that nearly one-fifth of all SNFs billed 90% or more of their ultra-high category claims within 10 minutes of the payment threshold (ie, 720-730 therapy minutes).

Addressing Perverse Incentives in the RUG System Through the PDPM

As its name suggests, the PDPM is based on patient characteristics. Instead of paying SNFs based on the volume of therapy provided, the PDPM uses diagnoses and other clinical factors to set payment rates for 5 components that are summed to determine the per diem reimbursement: physical therapy, occupational therapy, speech language pathology services, nursing services, and nontherapy ancillary conditions and services. A sixth component, based on SNF resources used during the stay, is also added to this per diem reimbursement but does not vary by beneficiary risk.

Whereas the RUG system incentivized longer SNF stays and more therapy, the PDPM incentivizes shorter stays with less therapy through an adjustment factor for physical therapy, occupational therapy, and nontherapy ancillary conditions and services. After the first 20 days of the SNF stay, the adjustment factor is reduced by 2% every 6 days.

Potential Unintended Consequences of the PDPM

Although the PDPM addresses a key feature of the RUG system by replacing payment based on the volume of services delivered with payment based on patient characteristics, it has also introduced other incentives that may be problematic (Table 2). For example, the PDPM’s component for nontherapy ancillary conditions and services, based on a list of 50 comorbidities and services, is weighted upward by 300% during the first 3 days of the stay. Ostensibly, this makes sense because the cost of providing SNF care is substantially higher at the beginning of a patient’s stay. But certain comorbidities and services in this payment component can greatly increase reimbursements, and they thus carry the risk of being overreported and overutilized. An SNF located in an urban area, for instance, receives per diem payments that are $175 higher during the first 3 days for a patient with diabetes and chronic obstructive pulmonary disease compared with payments for a patient without these 2 conditions.6 The provision of intravenous medication alone can increase the per diem rate by the same amount. SNFs are likely to invest in developing expertise in International Classification of Diseases, Tenth Revision coding, which was not required under the RUG system; therefore, as with other value-based payment models, regulators should monitor for gaming related to upcoding motivated by the PDPM.7-9

A related concern is that the prospect of higher payments for greater patient complexity could lead some SNFs to selectively admit sicker patients, who may require levels of care that are beyond a given SNF’s abilities. If SNFs are willing to accept higher-acuity patients, hospitals—incentivized to reduce lengths of stay—may be willing to discharge patients “sicker and quicker.” Previous research has raised concerns about such practices.10 Substituting SNF care for hospital care has led to higher readmission rates for patients with certain conditions. Although financial penalties for hospitals with excessive readmissions may deter unsafe discharges to SNFs, these policies are increasingly under scrutiny themselves for potentially contributing to adverse consequences, including higher mortality rates for patients with certain conditions.11

Finally, compared with the RUG system, the PDPM incentivizes shorter SNF stays and less therapy, which may have negative consequences for some patients. Although shorter SNF length of stay has not been associated with worse outcomes,12,13 findings of prior research suggest that less therapy can lead to decreased functional improvement, higher readmission rates, and a lower likelihood of discharge to the community.14-16


The PDPM brings welcome changes to SNF reimbursement by prioritizing patient needs over service volume, but it also carries the risk of new unintended consequences. These potential problems, which are features of other value-based payment systems, should be closely monitored and rigorously studied. Accountable care organizations and episodic payments that include postacute care offer some hope, as they incentivize healthcare organizations to discharge patients to SNFs only when appropriate and to refer patients to high-quality facilities. Findings of recent studies suggest that these payment programs have reduced postacute care spending, primarily through lower SNF utilization, without adversely affecting outcomes.13,17-19 The recently implemented SNF Value-Based Purchasing Program, which imposes financial penalties on SNFs with high hospital readmission rates, may also discourage facilities from accepting patients requiring care beyond their capabilities. It is not yet clear whether this negative incentive (maximum 2%) is large enough to prevent SNFs from accepting patients they are not equipped to care for. Regardless, policy makers should maintain close oversight of SNF billing practices and patient outcomes as the PDPM takes effect to mitigate potential unintended consequences.Author Affiliations: Division of Health Policy and Economics, Department of Healthcare Policy and Research (MAU, DK, HYJ), and Department of Medicine (DK), Weill Cornell Medical College, New York, NY.

Source of Funding: None.

Author Disclosures: The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (MAU, DK, HYJ); acquisition of data (MAU, HYJ); analysis and interpretation of data (MAU, DK, HYJ); drafting of the manuscript (MAU, DK, HYJ); critical revision of the manuscript for important intellectual content (MAU, DK, HYJ); statistical analysis (MAU, HYJ); and supervision (HYJ).

Address Correspondence to: Hye-Young Jung, PhD, Weill Cornell Medical College, 402 E 67th St, New York, NY 10065. Email: arj2005@med.cornell.edu.REFERENCES

1. CMS, HHS. Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities (SNF) Final Rule for FY 2019, SNF Value-Based Purchasing Program, and SNF Quality Reporting Program. Fed Regist. 2018;83(153):39162-39290.

2. Medicare Payment Advisory Commission. Report to the Congress: Medicare Payment Policy. Washington, DC: Medicare Payment Advisory Commission; 2017.

3. Newhouse JP, Garber AM. Geographic variation in Medicare services. N Engl J Med. 2013;368(16):1465-1468. doi: 10.1056/NEJMp1302981.

4. Levinson DR. Inappropriate payments to skilled nursing facilities cost Medicare more than a billion dollars in 2009. Office of Inspector General website. oig.hhs.gov/oei/reports/oei-02-09-00200.pdf. Published November 2012. Accessed June 3, 2019.

5. Medicare Payment Advisory Commission. Report to the Congress: Medicare Payment Policy. Washington, DC: Medicare Payment Advisory Commission; 2018.

6. CMS, HHS. Medicare Program; Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities; Updates to the Quality Reporting Program and Value-Based Purchasing Program for Federal Fiscal Year 2020. Fed Regist. 2019;84(152):38728-38833.

7. Wadhera RK, Sukul D, Secemsky EA, et al. Temporal trends in unstable angina diagnosis codes for outpatient percutaneous coronary interventions. JAMA Intern Med. 2019;179(2):259-261. doi: 10.1001/jamainternmed.2018.5124.

8. Ody C, Msall L, Dafny LS, Grabowski DC, Cutler DM. Decreases in readmissions credited to Medicare’s program to reduce hospital readmissions have been overstated. Health Aff (Millwood). 2019;38(1):36-43. doi: 10.1377/hlthaff.2018.05178.

9. Sukul D, Hoffman GJ, Nuliyalu U, et al. Association between Medicare policy reforms and changes in hospitalized Medicare beneficiaries’ severity of illness. JAMA Netw Open. 2019;2(5):e193290. doi: 10.1001/jamanetworkopen.2019.3290.

10. Unruh MA, Trivedi AN, Grabowski DC, Mor V. Does reducing length of stay increase rehospitalization of Medicare fee-for-service beneficiaries discharged to skilled nursing facilities? J Am Geriatr Soc. 2013;61(9):1443-1448. doi: 10.1111/jgs.12411.

11. Wadhera RK, Joynt Maddox KE, Wasfy JH, Haneuse S, Shen C, Yeh RW. Association of the Hospital Readmissions Reduction Program with mortality among Medicare beneficiaries hospitalized for heart failure, acute myocardial infarction, and pneumonia. JAMA. 2018;320(24):2542-2552. doi: 10.1001/jama.2018.19232.

12. Kumar A, Rahman M, Trivedi AN, Resnik L, Gozalo P, Mor V. Comparing post-acute rehabilitation use, length of stay, and outcomes experienced by Medicare fee-for-service and Medicare Advantage beneficiaries with hip fracture in the United States: a secondary analysis of administrative data. PLoS Med. 2018;15(6):e1002592. doi: 10.1371/journal.pmed.1002592.

13. McWilliams JM, Gilstrap LG, Stevenson DG, Chernew ME, Huskamp HA, Grabowski DC. Changes in postacute care in the Medicare Shared Savings Program. JAMA Intern Med. 2017;177(4):518-526. doi: 10.1001/jamainternmed.2016.9115.

14. Lenze EJ, Lenard E, Bland M, et al. Effect of enhanced medical rehabilitation on functional recovery in older adults receiving skilled nursing care after acute rehabilitation: a randomized clinical trial. JAMA Netw Open. 2019;2(7):e198199. doi: 10.1001/jamanetworkopen.2019.8199.

15. O’Brien SR, Zhang N. Association between therapy intensity and discharge outcomes in aged Medicare skilled nursing facilities admissions. Arch Phys Med Rehabil. 2018;99(1):107-115. doi: 10.1016/j.apmr.2017.07.012.

16. Jung HY, Trivedi AN, Grabowski DC, Mor V. Does more therapy in skilled nursing facilities lead to better outcomes in patients with hip fracture? Phys Ther. 2016;96(1):81-89. doi: 10.2522/ptj.20150090.

17. Barnett ML, Wilcock A, McWilliams JM, et al. Two-year evaluation of mandatory bundled payments for joint replacement [erratum in N Engl J Med. 2019;380(21):2082. doi: 10.1056/NEJMx190016]. N Engl J Med. 2019;380(3):252-262. doi: 10.1056/NEJMsa1809010.

18. Joynt Maddox KE, Orav EJ, Zheng J, Epstein AM. Evaluation of Medicare’s bundled payments initiative for medical conditions. N Engl J Med. 2018;379(3):260-269. doi: 10.1056/NEJMsa1801569.

19. Dummit LA, Kahvecioglu D, Marrufo G, et al. Association between hospital participation in a Medicare bundled payment initiative and payments and quality outcomes for lower extremity joint replacement episodes. JAMA. 2016;316(12):1267-1278. doi: 10.1001/jama.2016.12717.

Related Videos
Dr Jeffrey Sippel
Lalan Wilfongd, MD, US Oncology Network
Ben Urick, PharmD, PhD
Bincy Abraham, MD
Screenshot of Laura Wingate in a Zoom interview
Screenshot of Haley Naik, MD, smiling
Screenshot of Byron Lam, MD
Screenshot of Charles Wykoff, MD, PhD
Related Content
© 2023 MJH Life Sciences
All rights reserved.