Direct Answer
Skilled nursing facility (SNF) billing under Medicare Part A uses a per diem prospective payment system. Since October 2019, Medicare SNF reimbursement is determined by the Patient-Driven Payment Model (PDPM), which classifies residents across five clinical case-mix components and pays a combined per diem rate for the entire stay. Prior to PDPM, the Resource Utilization Group (RUG-IV) model paid based primarily on therapy minutes. PDPM shifted the payment focus to patient clinical complexity and care needs rather than therapy volume — a change with profound implications for SNF revenue cycle management, MDS documentation, and therapy utilization.
Table of Contents
Medicare SNF Coverage Criteria
Medicare Part A covers SNF care only when specific qualifying criteria are met — coverage gaps are one of the most significant sources of SNF payment disputes and beneficiary complaints: Three-day qualifying hospital stay: the patient must have been admitted as an inpatient (not observation) at a qualifying hospital for at least three consecutive days (not counting the discharge day) within 30 days before SNF admission; observation status does not count as an inpatient stay — a patient who spent 4 days in the hospital under observation status does not qualify for Part A SNF coverage regardless of the care received; the 30-day window means a patient hospitalized 31+ days ago does not qualify under that stay; Skilled care requirement: Medicare Part A SNF coverage requires that the patient needs skilled nursing services or skilled rehabilitation therapy on a daily basis that: requires the skills of a qualified professional (registered nurse, licensed practical nurse, physical therapist, occupational therapist, speech therapist); cannot safely or effectively be performed by or taught to non-skilled individuals or self-administered by the patient; the care must also be related to the condition for which the patient was hospitalized or for a condition that arose during the SNF stay; Medical necessity for SNF level of care: the skilled care must be medically necessary — that is, the patient's condition requires the level of care provided; documentation must support that the patient's clinical condition requires daily skilled care; CMS has clarified that improvement is not required for coverage — maintenance therapy can qualify if the patient needs skilled care to maintain function or prevent deterioration (Jimmo v. Sebelius settlement, 2013); Benefit period structure: Medicare SNF benefits are structured by benefit period (same as Part A hospital): days 1–20: Medicare pays 100% of the approved rate; days 21–100: patient owes a daily coinsurance ($204.00 per day in 2024) — secondary insurance or Medicaid may cover this; days 101+: Medicare pays nothing; benefit period resets after the patient has been out of the hospital and SNF for 60 consecutive days.
PDPM Case-Mix Classification
PDPM replaced RUG-IV for Medicare Part A SNF stays effective October 1, 2019. Under PDPM, the per diem rate consists of five case-mix adjusted components plus a non-case-mix component: The five case-mix components: Physical Therapy (PT): classified based on the primary diagnosis (PT diagnostic category), functional impairment score (PDPM Section GG functional activities), and presence of cognitive impairment; Occupational Therapy (OT): classified based on the primary diagnosis (OT diagnostic category) and functional impairment score; Speech-Language Pathology (SLP): classified based on the primary diagnosis (SLP diagnostic category) and presence of cognitive impairment, swallowing disorders, mechanically altered diet, or feeding tube; Nursing (NUR): the most complex component; classified based on: the nursing diagnosis category (derived from the primary diagnosis); the presence of extensive services (IV medication, respiratory therapy, complex wound care, tracheostomy, ventilator); the presence of special care high conditions (dialysis, radiation treatment); the presence of multiple comorbidities; the presence of depression; the ADL score (Section G or GG functional assessment); Non-Therapy Ancillaries (NTA): reflects the expected cost of ancillary services (medications, labs, supplies); classified based on the presence of specific conditions and procedures (major bone marrow transplant, special treatments, 12 comorbidity points triggers); Variable and non-variable per diem rates: some PDPM components apply a declining per diem rate over the stay (because certain therapy services are front-loaded early in SNF stays); PT and OT components apply variable per diem adjustments — a higher rate in the first 20 days and a lower rate from day 21 onward; this replaced the RUG-IV incentive to maximize therapy minutes but still reflects the cost pattern of SNF care; ICD-10 primary diagnosis drives classification: the ICD-10 diagnosis code listed as the primary diagnosis on the MDS (Section I0020B) maps to the PDPM classification category for each component; selecting the most accurate and specific ICD-10 code is critical — a diagnosis of Z87.39 (personal history of other musculoskeletal disorders) generates a much lower PDPM rate than M79.10 (myalgia, unspecified site) or a more specific surgical/orthopedic code from the hospitalization.
MDS Assessment and Timing
The Minimum Data Set (MDS) is the clinical assessment instrument that drives PDPM classification and CMS quality reporting. MDS assessment timing compliance is critical for correct SNF billing: Required MDS assessment types and timing under PDPM: 5-Day Assessment (Item A0310B = 01): the primary assessment for PDPM classification; must be completed within days 1–8 of the SNF stay (day 1 = first day of Part A coverage); the ARD (Assessment Reference Date, Item A2300) must be set to a day between days 1–5; this assessment establishes the PDPM classification for the entire stay (subject to interim assessment changes); IPA (Interim Payment Assessment, Item A0310B = 07): an optional assessment that the SNF may elect when a significant change in condition warrants re-classification; a significant change is clinically meaningful — a newly diagnosed condition or major improvement/decline; the IPA resets the per diem classification from the IPA ARD forward; Discharge Assessment (Item A0310F = 01 or 10): completed when the resident is discharged or when the Medicare Part A stay ends; required for MDS quality measure reporting; Section GG functional assessment: under PDPM, functional status captured in Section GG (Functional Abilities and Goals) is a key driver of PT, OT, and NUR component classification; Section GG assesses self-care and mobility activities on an 7-level rating scale (1 = dependent through 6 = independent); higher functional impairment scores (lower functional ability) generally drive higher PT and OT component rates; Section GG must be completed accurately at admission and at discharge for quality reporting; MDS coding accuracy and PDPM revenue: the connection between MDS coding and PDPM revenue is direct — errors in the primary diagnosis code, Section GG scoring, or comorbidity identification result in incorrect payment; SNFs with robust clinical documentation and accurate MDS coding consistently achieve higher PDPM rates than peer facilities because their patients' complexity is fully captured; ICD-10 coding on the MDS requires a certified medical coder or an MDS coordinator trained in ICD-10 to translate the physician's clinical language into the correct specific code.
Consolidated Billing Requirements
SNF consolidated billing is one of the most important — and most frequently violated — compliance requirements in SNF billing: What is SNF consolidated billing? Under Medicare law, the SNF is financially responsible for virtually all services provided to a Part A Medicare resident during the SNF stay; this means: when a Part A SNF resident receives services from an outside provider (visiting physicians, therapy companies, laboratory, ambulance, durable medical equipment), the SNF must pay for those services out of the PDPM per diem; outside providers cannot bill Medicare Part B directly for the majority of services during a Part A SNF stay; Excluded services (may be billed separately to Medicare Part B): a limited list of services are excluded from consolidated billing and can be billed by outside providers: certain physician and practitioner services; certain dialysis services; certain chemotherapy drugs and administration; certain emergency services; certain ambulance services; certain high-cost Part B drugs; certain complex diagnostic tests; Common consolidated billing violations: an outside therapy company billing Medicare Part B for therapy minutes during a Part A SNF stay; a home health agency billing Medicare for services provided to a Part A SNF resident; a laboratory billing Medicare Part B for lab services for a Part A SNF resident; a DME supplier billing Medicare for equipment provided to a Part A SNF resident; an ambulance company billing Medicare for non-emergency transport during an SNF stay; Consequences of consolidated billing violations: outside providers who incorrectly bill Medicare for services covered under the SNF consolidated billing rule are overpaid; the SNF may also have liability exposure if it received a discounted rate or failed to pay outside providers appropriately; CMS and its Recovery Audit Contractors (RACs) actively audit consolidated billing compliance.
SNF Advance Beneficiary Notice
The SNF Advance Beneficiary Notice (SNF ABN) is a specific notice required when a skilled nursing facility believes Medicare will not cover continued SNF care for a particular resident: When to issue an SNF ABN: the SNF must issue a written notice to the beneficiary (Form CMS-10055, sometimes called a "Notice of Medicare Non-Coverage" or NOMNC) at least two calendar days before Medicare-covered care ends; the notice must explain: that Medicare coverage is expected to end on a specific date; the reason Medicare coverage will end (e.g., the resident no longer needs skilled care, coverage days are exhausted); the resident's right to appeal the coverage termination through the Beneficiary and Family Centered Care Quality Improvement Organization (BFCC-QIO); QIO appeal rights: the BFCC-QIO reviews SNF coverage termination decisions on appeal; if the beneficiary appeals in writing before the coverage end date, Medicare coverage continues until the QIO issues its decision; this provides beneficiaries meaningful protection against premature coverage termination; SNF ABN vs. hospital ABN: the SNF ABN (NOMNC) is a specific form distinct from the general Medicare ABN (Form CMS-R-131) used in outpatient settings; the forms are not interchangeable; consequences of failing to issue the notice: if the SNF fails to provide proper written advance notice and the beneficiary is billed for services, the SNF may not be able to collect from the beneficiary; proper notice is a precondition for beneficiary liability; Notification of Medicare Non-Coverage timing: two days before coverage ends; if the stay is less than two days, notice must be given as soon as possible; if coverage ends on a weekend, the notice must be given by Thursday.
FAQ
How did PDPM change SNF revenue cycle management compared to RUG-IV?
The transition from RUG-IV to PDPM in October 2019 fundamentally shifted the drivers of SNF reimbursement, with cascading effects on clinical documentation, therapy delivery, MDS coding, and revenue cycle management. Under RUG-IV: therapy minutes were the primary driver of payment — higher therapy minutes drove higher RUG classifications and higher per diem rates; SNFs were incentivized to maximize therapy volume, leading to therapy utilization concerns and allegations of therapy-driven billing rather than medically necessary therapy; the RUG classification system was relatively straightforward — total weekly therapy minutes mapped to specific RUG categories; Under PDPM: the primary diagnosis ICD-10 code on the MDS drives classification across all five components; clinical complexity, comorbidities, and functional status replace therapy minutes as the main payment drivers; therapy is still delivered based on clinical need, but it no longer drives a higher per diem rate through volume; Key revenue cycle changes under PDPM: ICD-10 coding expertise became critical: the specificity of the ICD-10 code assigned to the primary diagnosis on the MDS directly affects the PDPM classification; SNFs had to invest in ICD-10 coding training for MDS coordinators or contract with certified coders; MDS accuracy for comorbidities: PDPM's NTA (non-therapy ancillary) component rewards accurate documentation of comorbidities that increase care intensity; SNFs that fail to capture all qualifying comorbidities receive lower NTA rates; Section GG functional assessment accuracy: functional assessment drives PT, OT, and NUR component rates; inaccurate Section GG scoring results in under- or over-payment; Clinical documentation improvement: similar to hospital CDI, SNFs now benefit from concurrent clinical documentation review to ensure that physician documentation supports the highest appropriate PDPM classification; therapy delivery shifted to clinical need: SNFs with high therapy utilization under RUG-IV saw revenue decreases when PDPM reduced the therapy utilization incentive; SNFs that invested in clinical complexity care and documentation saw offsetting revenue stability or increases from the NUR and NTA components; Overall, PDPM rewarded SNFs that accurately captured clinical complexity through diagnosis coding, comorbidity documentation, and functional assessment — and disadvantaged those that had relied primarily on therapy volume.
What is the three-day qualifying hospital stay requirement and how does observation status affect SNF eligibility?
The three-day qualifying hospital stay requirement is one of the most significant and frequently misunderstood Medicare SNF coverage criteria, and observation status creates particular complexity: The basic requirement: Medicare Part A SNF coverage requires that the patient was admitted as a hospital inpatient for three or more consecutive calendar days (midnight to midnight) within 30 days before admission to the SNF; the day of discharge does not count toward the three-day total; the three days must be as an inpatient — not in observation status; Why observation status is a problem: observation status is an outpatient status, not an inpatient status; patients in observation status are technically outpatients even if they are in a hospital bed for multiple days; Medicare does not count observation days toward the three-day qualifying stay; A patient who spends four days in the hospital — two days in observation followed by two days as an inpatient after admission — has only two qualifying inpatient days, not four; to qualify for SNF coverage from that hospitalization, the patient would need one more inpatient day; The financial impact on beneficiaries: patients who do not meet the three-day inpatient requirement must pay privately for SNF care or use Medicaid if eligible; a hospitalization of four days in observation followed by an SNF admission can result in the patient owing the full SNF rate out of pocket — commonly $400–$600 per day or more; Hospital obligations (NOTICE Act, 2016): the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) requires hospitals to provide written notice within 36 hours to patients who are in observation status for more than 24 hours; the notice (CMS Form 10611, MOON — Medicare Outpatient Observation Notice) must explain: that the patient is in outpatient observation status (not admitted as an inpatient); that observation days will not count toward the three-day SNF qualifying stay; the financial implications for SNF eligibility; SNF pre-admission responsibility: when admitting a prospective Part A SNF patient, the SNF should verify inpatient status — not just the number of hospital days; requesting the hospital records or MOON form confirms whether the stay included the required inpatient days; admitting a patient who does not meet the three-day rule under Part A results in denied claims and potential overpayment liability.
SNF Revenue Cycle Management That Captures Every PDPM Dollar Your Patients Earn
Valiant Lifecare's SNF billing specialists manage MDS ICD-10 coding accuracy, PDPM classification optimization, consolidated billing compliance, SNF coverage appeals, and Medicare Advantage contract management — maximizing SNF revenue while ensuring full regulatory compliance.
Optimize Your SNF Revenue Cycle