Given the Medicare 4.2% increase in the Skilled Nursing Facility Prospective Payment System (SNF PPS) for 2025, some industry leaders are questioning whether the calculated rate was inadequate given inflation, workforce issues, and the funds needed to meet federal staffing needs. Some even argue that the rate increases are so far behind actual costs that a complete overhaul is needed to cover current and future care costs.

What’s particularly notable is that the forecast errors were corrected very conservatively, even though they could have been easily corrected, Brian Ellsworth, vice president of public policy and payment transformation at Health Dimensions Group (HDG), told Skilled Nursing News. At the same time, operators are increasing wages by 6 to 8 percent, while reimbursements, at least in Medicare, are only increasing by 4.2 percent.

“About 1.7% (of the Medicare rate) is forecast errors from two years ago,” Ellsworth said. “There have been three years in a row of pretty significant adjustments in forecast errors. Why be so conservative? And why do facilities have to wait so long to be properly compensated for this? That seems like an easy fix.”

The Centers of Medicare & Medicaid Services (CMS) has the methodology to correct subsequent updates, but the agency said inflation occurred very quickly.

“But that doesn’t explain the second and third years,” he noted. “There are a few adjustments to get to 4.2%, but I would point out that a large part of the adjustment is due to the previous year’s forecast error and this is the third year in a row with a material forecast error. Why don’t you correct the forecast methodology at this point?”

The increase is calculated as the 3% percentage increase in the SNF basket, plus a 1.7 percentage point forecast error correction and a 0.5% productivity correction, CMS explained in a memo. The basket update was slightly increased from the 2.8% increase originally proposed for 2025 earlier this year.

An old criticism, but the margins require a change

Providers have long recommended that CMS revise the methodology to better reflect actual costs, Martin Allen, senior vice president of reimbursement policy at the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), told SNN.

“Inflationary costs – particularly in recent years due to the pandemic – continue to exceed annual Medicare payment updates,” Allen said. “They certainly do not cover the $6.5 billion needed each year to meet the agency’s unfunded staffing mandate. At the same time, patient needs are broadly increasing and care practices are evolving.”

The delay in adjusting rates often leaves providers struggling to make up the difference between expected and actual costs, Allen said of members. Resources are already stretched thin, and the agency’s conservative rate-setting has placed significant burdens on providers to close the gap and keep their doors open.

“We encourage CMS to update its methodology and include a prospective adjustment for labor cost inflation, especially as providers look to continue investing in workforce development, recruitment and retention,” Allen said. “We need a reliable, more timely Medicare payment system that takes into account the increasing resources needed to support high-quality care.”

The agency could reconsider its approach to correcting the forecast error or it could forgo that rule and adjust the Medicare rate upward from the start, knowing that there is a rule in place to adjust it downward based on costs and inflation, Ellsworth said.

“What difference would it make to increase the last few cart updates by a point or two when you have a methodology that ultimately aligns them with the actual value? It won’t cost you any money, it will just give you a more appropriate refund up front,” Ellsworth said.

Inflation adjustment is part of a larger problem

Whether the increase is 4% or 40%, it is poorly targeted, said Marc Zimmet, CEO of Zimmet Healthcare Services Group.

The profitability of SNFs is directly related to Medicare volume, meaning a small group of providers fortunate enough to maintain a robust fee-for-service (FFS) business don’t need the increase. But it’s not enough for the growing number of facilities that don’t have enough FFS to cover inadequate Medicaid rates, Zimmet noted.

For reasons of justice, financing without rational distribution is irrelevant, he added.

“The average facility makes less than $100,000, but national averages mean nothing in skilled nursing. When you factor in arbitrary AWI changes and states’ Medicaid program cost-sharing policies, many ‘average’ facilities are net losers this year.

The fact that there has been no reasonable increase in Medicare benefits only shows that the SNF PPS has evolved from a payment rule to an enforcement rule.

“I’m disappointed. For years, we’ve kept all our weekend plans free for the Friday we expected the rule to be lifted – we were looking forward to it. That excitement has turned to dread,” he said of the SNF PPS. Medicare utilization has dropped to single digits in many markets as Medicare Advantage takes over the rule, yet CMS continues to act as if Medicare exists in a vacuum, Zimmet noted.

Medicare utilization is so low in many parts of the country that the update is barely newsworthy, Zimmet added. For the Medicare rate increase to cover a facility’s total cost increase, the increase would have to be closer to 250%, he said.