The New Medicaid Reimbursement System Rolls Out Today: The Nursing Facility Price-Based Payment Methodology

In a June 9, 2014 Medicaid Memo, the Department of Medical Assistance Services (DMAS) announced the upcoming implementation of the Nursing Facility Price-Based Payment Methodology. [i] This new payment system will be effective for all Medicaid claims with dates of service on or after July 1, 2014, and affects operating rates and rates for capital costs.[ii] Although representing what is expected to be a positive change in Medicaid reimbursement rates for nursing facilities, these changes will require modification to existing facility practices in order to adapt to the new payment methodology.

Rate Calculations for Direct and Indirect Operating Costs

Under the current Medicaid reimbursement system for operating costs, each facility receives a facility-specific per diem rate based on that facility’s prior year costs. The current system is, therefore, referred to as a “cost-based” payment methodology. The new “price-based” system, however, will set prospective rates by looking at the average costs of a base-year (representing an average baseline for operating costs), apply the inflation rate predicted for the rate-year (i.e., the current and ongoing year), and then adjust that rate for regional differences according to peer group.[iii]

The initial base-year and baseline cost will be the average provider fiscal year costs for calendar year 2011. The inflation rate applied will be that predicted by IHS Global Insight, unless otherwise adjusted by the General Assembly. The price-based rates will be increased annually, and the base-year will be updated (“re-based”) in 2018 and every three years thereafter using the settled cost reports for the most recent calendar year.

The “Price-Based Spending Floor” for Operating Costs

The new price-based formula also includes a “price-based spending floor.” DMAS’s explanation of this concept is confusing, and DMAS fails to consistently use its own definitions of “cost” and “price” established in the earlier description of each methodology. DMAS will project what it will pay facilities by adjusting base-year costs to reflect rate-year predicted inflation (“price”). DMAS will then adjust final payments in one of two ways, depending on the facility’s actual costs for the rate-year. Facilities with costs at or above 95% of the projected payment amount will receive the full amount projected by DMAS; these facilities will receive the projected amount whether costs are 95% or 105% of that amount. Facilities with costs below 95% of the projected payment will receive an amount adjusted downward according to the formula illustrated in the following example:

In the base-year, Facility spent $100 per day in operating costs. Based on inflation, DMAS predicts that Facility will spend $101 per day in 2016. At the

end of the year 2016, Facility determines that it spent $90 per day. Since $90 is less than 95% of $101, Facility will receive the projected payment minus the difference between the base-year cost and 95% of the projected payment, or $101 - ($100 - $95.95).[iv] Facility, therefore, will receive $96.95 from DMAS for the daily operating costs.

“Low cost” facilities, therefore, will receive the same amount whether their costs are 94% or less of the projected amount.

The key take-away from the “price-based spending floor” model is that there will be two payment amounts facilities can receive from DMAS. Higher payments will go to facilities with costs at or above 95% of DMAS projections, while facilities with costs below 95% of DMAS projections will receive reimbursement at the downward adjustment. Although the price-based spending floor reduces the amount DMAS pays low-cost facilities, DMAS purports the method will still result in a higher rate for such facilities than they would receive under the current cost-based payment methodology. DMAS anticipates that this system will allow the agency to implement greater adjustments for all facilities at a lower overall cost to Medicaid.

Direct Rate Case Mix Adjustment

With the new price-based methodology, DMAS plans to implement a “simplified version” of the Medicare RUG (Resource Utilization Group) system, using the RUG III – 34 Medicaid Grouper (and associated weights). RUGs will be used to establish facilities’ case mix for cost neutralization in determining the direct costs utilized in price-setting and to adjust claim payments for residents. Case mix will no longer be normalized and payments will be adjusted by raw case mix, prompting changes in case mix to result in a contemporaneous change in reimbursement rates.

Facility direct rates for claims with dates of service between July 1, 2014 and October 31, 2014 will be case mix adjusted using the facility’s average case mix from September and December 2013. Beginning November 1, 2014, direct rates will be adjusted on each claim according to the resident’s RUG score. This means that facilities will need to prepare to begin submitting RUG scores on their Medicaid residents starting November 1 of this year. DMAS states that it will publish billing guidance in a Medicaid Memo in September.

The Transition

Transition from the cost-based system to the price-based payment methodology will occur in 25% increments over a four-year period, beginning with payments reflecting 25% of the price-based rate and 75% of the cost-based rate in 2015 and becoming fully price-based in 2018. [v]

Rates for Capital Costs

DMAS will pay facilities for their capital costs through a modified Fair Rental Value (FRV) system. Providers will now be required to submit FRV reports to DMAS, and FRV reimbursement rates will based on the on the prior calendar year information adjusted to the state fiscal year (SFY) and applying the RS Means values and rental rates for the corresponding fiscal year. DMAS will make mid-year FRV rate adjustments for renovations with a capital expenditure of no less than $3,000 per bed and with an effective date prior to April 30 of the corresponding fiscal year.


Although the Nursing Facility Price-Based Payment Methodology is expected to bring more money to the table, facilities will need to implement procedures and systems to capture the work they do in providing for their Medicaid residents in order to realize the benefits of the new payment methodology. With billing guidance still forthcoming, facilities may consider using their current understanding of the RUG system and Medicare billing to remind staff of the increasing importance of detailed and accurate assessments and documentation.

If you have questions about the Nursing Facility Price-Based Payment Methodology or other Medicaid reimbursement issues, please contact Peter Mellette ( or Harrison Gibbs (, or call Mellette PC at (757) 259-9200.

[i] The Medicaid Memo is available to subscribers for download at{2ACAEC42-BC94-4D40-816B-2B170C809B1C}&impersonate=true&objectType=document&id={D84877EE-A321-424C-83B5-6FA50B3990B7}&objectStoreName=VAPRODOS1.

[ii] The Memo also defines new peer groups, which reflect a combination of the Medicare wage regions and Medicaid rural and bed capacity classifications, and rate changes to NATCEPs and criminal background checks. NATCEP rates will be the per diem rate for the base-year inflated to the rate-year, and will apply the same rate of inflation as that used to calculate operating rates. Payment for criminal background checks will be the base-year per diem rate.

[iii] The 2015 rates are now available for download at

[iv] Price – (Cost – 95% of Price)

[v] Dates reflect corresponding fiscal years.

This Client Advisory is for general educational purposes only. It is not intended to provide legal advice specific to any situation you may have. Individuals desiring legal advice should consult legal counsel for up to date and fact specific advice.
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