Medicare transitions from RUG to PDPM:
In 2019, Medicare replaced the Resource Utilization Group (RUG-IV) system with the Patient-Driven Payment Model (PDPM), marking a major shift in how skilled nursing facilities (SNFs) are reimbursed. Under RUG-IV, payments were tied to therapy minutes, often incentivizing volume over patient needs.
PDPM introduced a case-mix classification model that links reimbursement to clinical complexity and patient characteristics—attempting to align reimbursement with health outcomes and resident needs rather than service quantity.
Problems with RUG-IV
- Payments were driven by therapy minutes, not patient needs, creating incentives for unnecessary therapy.
- Overutilization of therapy raised concerns about misalignment with patient-centered care goals.
- The nursing component under RUG-IV did not adequately account for non-therapy ancillary (NTA) costs, leaving medically complex patients underfunded.
Goals of PDPM
- Improve payment accuracy and appropriateness by focusing on patient characteristics rather than service volume.
- Reduce administrative burden through fewer required assessments and less emphasis on therapy tracking.
- Better support medically complex patients who were underserved under RUG-IV.
CMS requires state to implement PDPM or Alternative Acuity-Based Model:
Following the successful rollout of PDPM for Medicare, CMS issued guidance in September 2022 urging states to transition Medicaid nursing facility payments from RUGs to PDPM. The directive provided a multi-year transition window, with legacy RUG support ending September 30, 2025. Starting October 1, 2025, states were required to implement PDPM—or an alternative acuity-based model—for Medicaid reimbursement.
Wisconsin was the first state to implement a PDPM-based Medicaid payment model in January 2022—well ahead of CMS’s formal guidance. In the years that followed, states such as Georgia, Iowa, Massachusetts, Nebraska, and Utah (to name a few) also made the transition, with Minnesota and Texas joining most recently.
Since Medicaid is administered at the state level, PDPM serves as a common framework, but implementation details vary widely. While some states have adopted the full PDPM model, others use hybrid versions that incorporate only select components. Also, approximately 18 states never relied on RUG-based methodologies and are less likely to make this transition.
As a result of these state-specific variations, the most successful operators maintain a deep understanding of their state’s reimbursement structure to ensure compliance and optimize performance.
The Upshot:
For SNF operators, the Medicaid transition to PDPM presents both opportunities and challenges. According to Gravity Consulting’s report Medicaid PDPM Transition:
“This shift brings a critical change in how reimbursement is calculated: it places greater emphasis on diagnosis accuracy, clinical complexity, and the ongoing medical needs of long-term residents—and SNFs can play a vital role in improving their per diem rates through excellent clinical care, documentation, and coordination. However, because of the PDPM shift, SNFs can no longer rely on therapy to achieve the higher RUG score and boost their CMI. Nursing, dietary, social work, activities, and other key departments will need to increase their assessments, analysis, communication, and coordination of care for long-term care residents to ensure that all accurate PDPM components are captured on the MDS assessment for Medicaid.”
In other words, operators who excel at managing clinically complex residents and demonstrate strong capabilities in analysis, documentation, communication, and interdisciplinary coordination will thrive under PDPM. Conversely, those who relied heavily on therapy minutes or have weak documentation practices will face significant challenges.
- For Lenders, Landlords, and Investors: Success under PDPM requires a discerning eye to identify operators with the right clinical and operational sophistication.
- For Residents: This shift means care plans tailored to actual health needs rather than billing targets—ultimately improving health outcomes.
- For Taxpayers: PDPM aims to deliver more impactful spending on skilled nursing care, driving better outcomes and long-term savings across the healthcare system. These savings are critical to the sustainability of the industry, particularly as the aging population grows and healthcare costs consume an increasingly larger share of state and federal budgets.
– Director Andrew Lanzaro, Berkadia Seniors Housing & Healthcare