Client Advisory: Therapy Contract Approaches for Skilled Nursing Facilities Under the Patient Driven Payment Model


For over a year, skilled nursing facilities (SNFs) have prepared for the impending adoption of the Patient Driven Payment Model (PDPM) for fiscal year 2020 (beginning October 1, 2019). The adoption of the PDPM has significant implications for the therapy contracts (physical, occupational, and speech language pathology) that SNFs enter into with third-party therapy contractors to provide therapy services to their residents. With the financial pressures SNFs are facing, it is important that SNFs make fiscally responsible decisions.[1] This client advisory looks at the general approaches SNFs can take in their therapy contracts and the implications these approaches may have.

PDPM in Brief

The PDPM will calculate payments to SNFs in a different manner than the previous payment system, the Resource Utilization Group, Version IV (RUG-IV), did. The RUG-IV model focused on the amount of therapy minutes provided to patients. Conversely, PDPM focuses on the needs of the individual patients and tailors payments to the specific medical needs and challenges that individual patients have when they enter the SNF. Previous contracts, based on the RUG-IV system that emphasized therapy minutes, will no longer align with how SNFs will receive Medicare payments. These prior therapy contracts should be re-evaluated and re-negotiated to ensure they are structured based on the PDPM compensation model and to ensure a SNF is not bearing the brunt of the financial risk presented by PDPM.

SNF Approaches to Providing Therapy Based on the PDPM

Based on the PDPM system, there are four approaches—one current and three alternate—that SNFs can take in their provision of therapy services.

  • Per Minute Approach

Currently, therapy contracts that SNFs have with third parties pay contractors based on the amount of therapy minutes the contractors provide to patients. This contractual arrangement made sense under the RUG-IV model where Medicare compensated SNFs based on therapy minutes; it followed that therapy contractors should be compensated in a similar fashion. However, carrying over a per minute approach to therapy contracts under the PDPM is not advisable.

Under PDPM, a per minute approach places the bulk of the financial risk associated with such contracts on the SNFs. Compensating therapy contractors via a per minute calculation would incentivize them to continue to provide a large quantity of therapy services. An incentive to provide a high quantity of services is out of line with the PDPM’s goal of tailoring therapy and therapy payments to the individual needs of the patients at the SNF. Because PDPM does not calculate payments to SNFs based on quantity, structuring a therapy contract this way would put the SNF at risk of paying its therapy contractor more than the SNF would receive from Medicare.[2] A SNF should not agree to a per minute payment approach in its future therapy services contracts.

  • Per Diem Approach

The second, alternate approach SNFs could adopt in their therapy contracts compensates their therapy contractors per day that patients receive therapy at the SNF. While this would be a better approach than a per minute approach, it still would not completely track with how SNF payments will be calculated under the PDPM. This approach misses two key elements of PDPM: (1) that Medicare payments decline over time under PDPM and (2) that PDPM payments are based on the individual characteristics of the SNF’s patients.[3] The per diem approach would cause SNFs to potentially lose money the longer the patient receives therapy at the SNF. The SNF could account for this factor by including language in the therapy contract that lowers the daily rate over time to mirror the PDPM reduction in daily rates.[4]

The SNF risks losing revenue if the per diem rate is set too high based on patient characteristics at that facility. SNFs could adjust for this concern by taking a tiered approach to per diem rates by grouping patients into acuity groups based on therapy needs and then assigning separate per diem rates to each acuity group.[5] However, this would create classification issues forcing SNFs to consider the litany of factors that PDPM incorporates, and it lends itself to a high risk of error and potential loss of revenue if the SNF miscalculates the acuity groups or misclassifies certain patients or groups of patients.[6] A too low per diem rate incentivizes the therapy contractor to ration services, which could put the SNF at risk of regulatory scrutiny.[7] A model based on a per diem approach could work if nuanced to account for these weaknesses, but such accounting would create a risk of error and a high administrative burden.

  • Percentage Approach

The third general approach that SNFs can take to their therapy contracts uses percentage payments. This approach compensates therapy contractors based on a percentage of what the SNF receives from their total PDPM payment or from their therapy rate component payment.[8] This would start to balance the risk between the SNF and the therapy contractor and ensure that the compensation model mirrors how SNFs are paid under PDPM. However, without quality measures, this approach still has the potential for abuse.

Because a therapy contractor would receive the same fixed percentage regardless of the quality of the services provided, there would be no incentive for the contractor to provide the best possible services. This could lead to contractors providing inadequate therapy services to the patients at the SNF. To account for this weakness, a percentage approach should be supplemented with a quality measure bonus provision that provides additional money to the contractor based on a set quality measure such as: measurable functional improvements of patients or ability of the patient to be discharged from the SNF as a result of their therapy.[9] While calculating these bonuses would create an additional administrative burden for the SNF,[10] such a nuanced approach could correctly allocate risk and performance measures between the SNF and therapy contractor and provide SNFs with a more projectable therapy margin. SNFs should keep in mind that if the contract has additional considerations, such as referrals or outpatient therapy, this could have potential implications under the federal Anti-Kickback Statute.

  • Bring Therapy In-House

The fourth potential approach to therapy services at SNFs is for SNFs to bring therapy services back in-house, and not use a therapy contractor at all. While this may not be an option for all SNFs, it may be something that SNFs with more therapy patients and available resources will want to consider.[11] The biggest positive outcome of this approach is the direct oversight it gives the SNF over the therapy services provided to its patients. Regardless of whether or not a SNF uses a contractor for therapy, if a regulatory body audits the therapy at a facility, the SNF is responsible for the therapy services provided. Bringing these services in-house allows the SNF to directly oversee its own employees to ensure appropriateness of provided therapy.

Such a decision would create some additional burdens on the SNF. The SNF would need to hire therapists, ensure they were qualified, and properly compensate them to maintain a positive therapy margin. They would also need to train and educate staff to make sure that the medical coding was accurate and that the therapy needs of its clients are met in light of PDPM. This would create some additional administrative burdens as the SNF oversees these new employees and may need to contract for other therapy equipment that had been provided by past contractors.


Regardless of which approach a SNF takes, it is important that the SNF understands its costs and the financial implications of PDPM so it can make the best possible decision in order to promote its financial health. SNFs should remember that the SNFs typically come to the negotiating table with less information than the therapy contractors do.[12] Should you or your SNF have a need to renegotiate your contract with your outside therapy services provider or have other legal needs concerning the impending implementation of the PDPM, please contact Peter Mellette, Harrison Gibbs, Elizabeth Dahl, or Scott Daisley at Mellette PC.

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.

[1] Alex Spanko, Even Top Providers Face Financial Peril as Median Skilled Nursing Margin Falls to Zero, Skilled Nursing News (Oct. 8, 2018),

[2] Which PDPM Therapy Pricing Method is Best?, Healthpro Heritage (last visited May 24, 2019),

[3] John Harned, Crossing the Line: Navigating PDPM Therapy Rate Contracting, BKD CPAs & Advisors (Mar. 14, 2019),

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.; Sharon Dratch, PDPM: 10 Questions About Managing Care, Pricing and Data Analytics, Optima Healthcare Solutions (Nov. 28, 2018),

[10] John Harned, Crossing the Line: Navigating PDPM Therapy Rate Contracting, BKD CPAs & Advisors (Mar. 14, 2019),

[11] Maggie Flynn, Providers Can’t Fall for Therapy Myths When Preparing for PDPM, Skilled Nursing News (Mar. 5, 2019),

[12] Maggie Flynn, No Room for Error as Providers Update Rehab Contracts Under PDPM, Skilled Nursing News (Dec. 3, 2018),

Categories: Client Advisory