Crossing the Line: Navigating PDPM Therapy Rate Contracting

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Stethoscope on a chart

If you’ve ever driven on a long trip, odds are you’ve experienced your car straying past the highway’s center or outer lines. You know the feeling—the tires roll over rumble strips and emit that unnerving sound, or worse, lead the car toward a cement barricade. Such close calls remind us these safety implements are present to warn and protect the driver and passengers.

Choosing your contract rate with your therapy company may seem as scary as crossing the centerline of a busy highway at rush hour—and one wouldn’t be hard-pressed to find providers who share this sentiment. In making your rate determination, take comfort in knowing similar safety mechanisms are available to help mitigate risk to your organization.

To identify proper provisions, you should have at least a basic understanding of the new Patient-Driven Payment Model (PDPM) for Medicare Part A patients, which goes into effect October 1, 2019. This new system is much more patient-focused than the previous Resource Utilization Group, Version IV (RUG-IV) payment system. While RUG-IV had 66 payment groupings, PDPM has tens of thousands of payment iterations as part of its resident-driven orientation, based first on the primary diagnosis determined by a single ICD-10 code. The portion of the rate relating to therapy has its own granularity. For example, physical therapy (PT) and occupational therapy (OT) have a combined case-mix index (CMI) adjustment, while speech language pathology (SLP) has its own CMI adjustment. PT and OT payment components begin to decrease over the stay after the initial 20 days by 2 percent every seven days thereafter. You should take all of these factors into consideration when determining an effective therapy rate structure for your organization.

It’s also important to remember that the way skilled nursing facilities (SNF) have operated the last two decades is based largely on how they’ve been paid by Medicare. That is, payment has driven culture. So the way you ink your contracts for therapy services will drive the behavior of your organization and your contract therapy provider. With this in mind, organizations need to ensure their behaviors collectively stay between the “bright white lines” of Medicare compliance. All parties need to be aware that Medicare Administrative Contractors will be looking for providers with a dramatic reduction in therapy minutes from pre-implementation to post-implementation for the same clinical diagnoses. Just as driving 30 mph over the speed limit could result in a speeding ticket, this behavior more than likely will lead to significant citations and financial penalties.

To make sure you have enough gas to get to your destination, you’ll want to have a positive margin when you provide care to your Medicare patients. Similarly, your therapy company, or passenger, has to be in good health and awake to help you arrive safely at your destination. In other words, your contract therapy rate also should allow your therapy company a positive margin. Considering the heightened complexity of PDPM, it will be important the therapy rate is easy to understand, reconciles monthly and pays timely—like the way a navigation system helps find the fastest route to your destination.

So the parameters for the journey with your therapy company are:

  1. Patient-specific classification from the ICD-10 coding
  2. Case-mix payment adjustments for therapy
  3. Declining payment over time
  4. A reimbursement system driving resident-centered culture
  5. Compliance with Medicare regulations
  6. Positive margins for both the SNF and contract therapy provider
  7. An easy-to-understand system

We now will review a number of options to test the above factors in deciding which option is right for your organization.

Flat Rate Per Patient Day (PPD)

The first option is a flat rate PPD. The SNF pays this flat rate to the therapy company regardless of the volume of therapy, patient abilities or diagnosis or length of stay. This rate option is like heading straight for oncoming traffic—at least for most providers not used to extensive managed care contracting—due to the indeterminate risk the SNF or the therapy company may take. Although this rate option provides for a more predictable margin, it doesn’t take into consideration individual characteristics of the patient or the declining Medicare payment over time. In extreme circumstances where the rate is set too low, it could lead to rationing of therapy services, and ultimately, significant regulatory intervention and financial penalties.

Tiered Per Diem Rate Structure

Some have suggested a tiered per diem rate structure as another alternative payment option—for example, level 1, 2, 3 or 4, based on the clinical acuity of each patient. This rate structure is just slightly better than a flat per diem rate. The issue with this structure is who determines the levels and provisions for decreasing the levels throughout the length of stay. There currently is just not enough data to set these rates for both parties to have appropriate risk and margin.

Percentage of Therapy Rate Component

The rate option that seemingly addresses the factors described above is a percent of the therapy rate component. This rate structure takes into consideration the rate the SNF is paid for each patient’s case-mix adjustment and the declining payment over the length of stay. This provides for a margin for the SNF. It’s similar to how many SNFs have been paying for Part B therapy for decades (as a percentage of what the SNF is paid), so it’s easy to implement and understand. This rate option provides incentives for both parties to partner in finding the most accurate coding and case mix for each patient.

Modified Percentage of Therapy Rate Component

A recently proposed method takes the percentage of the therapy rate component one step further by adding a bonus payment based on other quality indicators, such as improving or maintaining the facilities’ value-based payment and Quality Reporting Program results. It also could include a bonus payment for the functional improvement of each patient. While this iteration more closely ties the SNF to the therapy company, the difficulty is how to measure and reward these bonuses accurately and in a timely manner.

Percentage of Total PDPM Payment

A similar rate option is a percent of the total PDPM payment. This rate structure aligns the facilities’ reimbursement to the therapy company. Under this method, it’s important to ensure the facilities’ margin is still preserved, not giving too much away for therapy.

Time-Based Structure

There are two options of time in facility and cost per minute for Part A PDPM patients. However, these methods fail to tie the contract therapy rate to the SNF’s patient reimbursement. They also don’t ensure a therapy margin for the SNF. But they’re easy to understand, and SNFs with very low Medicare Part A utilization may choose them for a period of time to get acclimated to PDPM.

Regardless of the method you choose, it’ll be important to know your per-minute cost of therapy pre- and post-PDPM implementation. For example, prior to implementation, your organization may have a rate close to a dollar per minute (or a surrogate of this determined by the number of minutes in a therapy category multiplied by a per-minute rate). When signing your therapy contracts, ask the therapy company to summarize for you the minutes rendered each month for PT, OT and SLP for your Part A PDPM patients on your invoice, including the group and concurrent minutes. The total Part A therapy cost from your therapy company should be divided by these total Part A minutes to determine a cost per minute. These monthly indicators should be maintained on a rolling 12-month basis. While there will be variations, significant swings in this per-minute cost should be warning signs you or your therapy company is getting close to the rumble strips. You also should monitor patient outcomes and quality indicators because a cost per minute that increases too much may indicate the potential for reduced outcomes and quality.

Other matters currently being considered in structuring rates are whether the SNF should pay for therapy for every Medicare Part A PDPM patient or just the patients who are on therapy case load, as well as if the SNF should pay for every single day of the Medicare Part A PDPM patient’s stay or just the days they receive therapy. When comparing contract offers from more than one therapy company, it’ll be important to know how the services have been quoted. Either way, understanding your cost per minute based on the above calculation can help you have a reasonable margin on your business, while your therapy company has one on theirs. In other words, you have enough gas to reach your destination and your passenger is awake and able to guide you.

Final Thoughts

Each facility should take the seven parameters above into consideration and, based on the risk tolerance of each organization, make a decision about which pricing option is right for them. It also will be very important to revisit the contract rate structure after a period of time as you become accustomed to the terrain of PDPM. Given the complexities and potential risks associated with the terms of a typical therapy contract, the contract should be reviewed by an attorney.

For more information on navigating the road to the right contract rate structure, contact John or your trusted BKD advisor.


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