The United States Department of Health and Human Services’ Office of Inspector General ("OIG") released a report on November 9, 2012 entitled "Inappropriate Payments to Skilled Nursing Facilities Cost Medicare More Than a Billion Dollars in 2009" (the "Report"). The Report reviewed a sample of Medicare claims paid to skilled nursing facilities ("SNF") in 2009 to determine the extent of erroneous payments made by the Center for Medicare & Medicaid Services ("CMS") in that year. Based on that review, the OIG concluded that almost 25% of claims were improperly filed in 2009 causing overpayment of approximately $1.5 billion. For a full copy of the report, click here.1

The Methodology of the Report

In performing its analysis, the OIG reviewed 499 claims from 245 SNF stays for 2009 and extrapolated its findings. The nursing homes sampled in the report were not identified. To perform the reviews, the OIG contracted with three registered nurses, a physical therapist, an occupational therapist, and a speech therapist. These professionals were tasked with determining the appropriateness of the claims. They looked to see "whether each claim met Medicare coverage requirements that (1) the SNF stay be related to a condition that was treated in a prior hospital stay, (2) the beneficiary needs and receives daily skilled nursing or therapy, and (3) the beneficiary has a physician order for skilled nursing or therapy."2

If the claim did not meet these three requirements, the reviewers would note when the stay should have ended and how much was allegedly overpaid. On the other hand, if the claim met these requirements, the reviewers would focus on Minimum Data Set ("MDS") items, which are used to determine the resource utilization group ("RUG") for a patient. The MDS describes the beneficiary’s "clinical condition, functional status, and expected and actual use of services," and based on this description, the beneficiary is placed in an appropriate RUG.3 The RUG classification determines payment because "[each] RUG has a different Medicare per diem payment rate," with some RUGs requiring more payment because therapy is necessary for the patient. 4

"The reviewers noted any inconsistencies [between the medical records and the MDS] and recoded the MDS on the basis of their review."5

The OIG Alleges That Over $1.5 Billion Was Overpaid By CMS in 2009

Using this statistical extrapolation and method of review, the OIG determined that Medicare inappropriately paid $1.5 billion in 2009, representing 5.6% of the $26.9 billion paid to SNFs that year. The Report alleges that the majority of the inappropriate billing occurred because inaccurate RUGs were used for beneficiares. The OIG asserted that professionals working at SNFs improperly made MDS assessments, which resulted in improper RUG classifications and erroneous billings. Improper RUGs were found in roughly 23% of all claims in 2009. Making up this percentage, upcoding – using a RUG higher than necessary – allegedly occurred in 20.3% of all claims, and downcoding – using a RUG lower than necessary – allegedly occurred in 2.5% of all claims. According to the OIG, "SNFs misreported information on the MDS for 47% of claims" meaning that reviewers were unable to find information in the medical records sufficient to match the MDS items in these claims.6 The OIG also concluded that 2.1% of all claims did not meet coverage requirements, meaning that beneficiaries were deemed, by the reviewers, to be ineligible for Medicare coverage sometime before or during their stay.

The Report focused on the amount of therapy that the SNFs were providing to the beneficiaries finding that "SNFs misreported the amount of therapy that the beneficiaries received or needed" in 30% of claims.7 Additionally, 57% of the upcoded claims "reported providing more therapy on the MDS than was indicated in the medical record." 8 Because therapy is reported on the MDS, the OIG’s findings, if true, mean that erroneous information regarding therapy frequently placed beneficiaries in improper RUGs. The Report also alleges instances in which more therapy was provided to a beneficiary during the look-back period – the period during which the MDS is completed for purposes of RUG classification – than was provided outside of that period. Giving specific examples, the Report emphasized that this practice caused CMS to pay amounts that were based on unnecessary and improper services.

Continuing its emphasis on therapy, the Report found that a quarter of the upcoded claims indicated therapy that was "not reasonable and necessary."9 Examples of the reviewers’ opinions were provided in the Report, with some findings of unreasonable and unnecessary therapy being more egregious than others. In one instance, the OIG found that therapy had been provided when a physician refused to sign an order for a particular therapy, but in another instance, the OIG’s reviewers found that the SNF "provided an excessive amount of therapy to the beneficiary given her condition." 10 Based on the vague explanation in the latter instance, it is possible that the reviewers substituted their judgment for that of the physicians and therapy professionals.


The OIG made six recommendations to CMS at the conclusion of the Report. The OIG recommended (1) an increase and expansion of reviews into SNF claims, (2) the use of CMS’ Fraud Prevention System to identify SNFs that are billing for higher paying RUGS, (3) the monitoring of compliance with CMS’ new policy regarding assessments for changing therapy needs, (4) a change in the method of determining how much therapy is needed to ensure payments, (5) the improvement of MDS accuracy, and (6) following up with SNFs that billed in error. Importantly, CMS concurred with all six recommendations in order to "reduce inaccurate, medically unnecessary, and fraudulent claims by SNFs."11

Thus, an important takeaway from the Report is the need for providers to keep proper medical records in order to support the MDS descriptions and RUG classification that lead to Medicare billings. The OIG and CMS are carefully monitoring SNFs, and as indicated by CMS, more activity is forthcoming in order to assure that SNFs comply with Medicare billing requirements.