Skilled Nursing Facilities (SNFs) have undergone significant changes in the way they receive payments over the years. In the past, Medicare reimbursed facilities based on the actual costs of care but this often led to inefficiencies and uneven spending. To create a fairer and more predictable system, Medicare introduced prospective payment methods that classified residents and paid facilities a set amount per day for each resident.

This is where RUGs, or Resource Utilization Groups, came into play. RUGs were categories that grouped SNF residents based on their clinical needs and the resources they used, such as nursing services and therapy minutes. Each RUG level represented the complexity of a resident’s care needs, with higher levels bringing higher reimbursement rates. This system linked payments to the intensity of care rather than simply the volume of services delivered.

Although Medicare has transitioned to the Patient-Driven Payment Model (PDPM), RUGs remain relevant, as many state Medicaid programs and historical audits continue to rely on them. In this blog, we will delve into the details of RUG levels and explain why they remain essential in SNF billing.

How RUG Levels Worked in SNF Billing

RUG levels formed the backbone of the SNF payment system for many years. They translated clinical information and therapy data into clear payment categories with the help of the following process:

Step 1: MDS Assessments

The process began with the Minimum Data Set (MDS), which collected resident details, including daily activities, therapy minutes, and medical conditions. Accurate MDS data were vital as they directly determined payment classification.

Step 2: Classification Rules

Based on the MDS, residents were grouped using therapy minutes, number of therapy days, and clinical needs. For instance – those with higher therapy services often fell into Rehab groups, whereas others with complex medical conditions went into different categories.

Step 3: Case-Mix Weights

Each group was assigned to a Case-Mix Index (CMI), which measured the average resource utilization per patient. A higher CMI indicated that the resident was expected to require more care, resulting in higher reimbursement.

Step 4: Group Categories

The system divided residents into categories such as Rehab, Extensive Services, Special Care, Clinically Complex, and Reduced Physical Function. In fact, each category reflected a different level of care intensity.

Step 5: Payment Formula

Finally, payment was calculated prospectively. The formula was:

Per-Diem Rate = Base Rate × CMI (plus adjustments for geography and facility type).

This meant facilities were paid based on classification rather than individual costs.

Why RUG Levels Mattered in SNF Billing

RUG levels were more than just a classification system as they guided:

• Financial Planning

RUG levels helped facilities anticipate revenue and budget more effectively. As each resident’s classification determines the expected per-diem payment, administrators can plan expenses for staffing, therapy services, and medical equipment.

• Care Prioritization

Higher RUG levels highlighted residents with more complex needs. As a result, nursing and therapy staff could focus their time and attention on those who required the most care. This ensures that residents receive treatment proportional to their clinical condition.

• Quality Monitoring

RUG classifications allowed facilities to track trends in patient acuity and therapy usage. This monitoring helped identify areas that required improvement, supported regulatory compliance and encouraged higher-quality care.

• Operational Efficiency

RUG data also guided workflow and staffing decisions. In fact, facilities can schedule therapy sessions and organize staff shifts efficiently by using these insights. This reduced bottlenecks and improved daily operations.

• Policy and Reimbursement Alignment

Even after Medicare transitioned to PDPM, many state Medicaid programs continued to use RUG-based reimbursement systems. Therefore, facilities needed to maintain accurate RUG expertise to comply with multi-payer billing rules and ensure consistent funding.

Transition From RUGs to PDPM

The transition from RUGs to the PDPM was designed to address perverse incentives and align reimbursement more closely with clinical complexity. Under the RUG system, therapy minutes often drove payment, which sometimes encouraged unnecessary services. In contrast, PDPM focuses on a multi-component classification that considers nursing needs, therapy requirements, and non-therapy ancillary services. It also incorporates updated base rates, case-mix indexes and per-diem adjustments to more accurately reflect the intensity of care.

This change has had a significant impact on reimbursement and provider behavior. On average, SNFs received higher overall payments under PDPM while therapy volumes and coding intensity shifted to better match patient needs. But states that continue to use RUG-based Medicaid programs faced challenges in adapting their payment models to the new system.

As a result, Medicare implemented the “hard switch” to PDPM in October 2019, and many states adopted optional state assessments (OSAs) to maintain RUG classifications temporarily. For example, Texas plans to implement PDPM for long-term care facilities in September 2025 to mark a complete transition from RUG-based systems. This phased approach enables facilities and states to adjust their operations, ensure compliance and maintain continuity of care as they adapt to the updated payment model.

Why RUG Levels Still Matter in SNF Billing

Although the PDPM has replaced the RUG system for Medicare Part A reimbursements, RUG levels continue to influence SNFs as follows:

• Medicaid Reimbursement

Many state Medicaid programs continue to use RUG-based systems for reimbursement. For instance, Pennsylvania has adopted a modified version of PDPM to focus on the nursing component to establish Medicaid case-mix indexes. This transition underscores the ongoing importance of RUG classifications in state-level reimbursement strategies.

• Historical Data Analysis

RUG levels provide a historical benchmark for analyzing patient acuity and trends in resource utilization. In fact facilities can compare current data with past classifications to assess changes in patient care needs and adjust staffing and resource allocation accordingly.

• Billing and Coding Accuracy

Though PDPM has shifted the focus to clinical characteristics, accurate coding remains essential. In fact, RUG classifications continue to play a crucial role in ensuring that billing codes accurately reflect the services provided. Thereby, this reduces the risk of audits and ensures compliance with federal and state regulations.

• Training and Staff Education

Understanding RUG levels is vital for staff training and education. Even as PDPM becomes more prevalent, SNF staff must be knowledgeable about both systems to ensure accurate assessments, documentation, and billing practices.

• Contractual Agreements

Some SNFs have contractual agreements with managed care organizations or other payers that reference RUG classifications. These agreements may stipulate reimbursement rates based on RUG levels which makes it necessary for facilities to maintain RUG-based documentation.

Conclusion

Undoubtedly, RUG levels continue to play a crucial role in SNF operations, even after the transition to PDPM. They help facilities understand patient care needs, guide accurate documentation, and support financial planning. However, accurately managing both RUG and PDPM systems is not an easy task. This is why many facilities choose outsourcing SNF billing and coding service providers to ensure precision, reduce risks, and maintain compliance across all payer systems.

In fact, partnering with specialized offshore Medical billing and Coding Companies in India, such as InfoHub Consultancy Services, enables facilities to access professionals who are well-versed in both RUG-based and PDPM billing methodologies. This ensures precise coding, timely claim submissions and thorough documentation for reducing errors and improving revenue capture.

FAQs

1. Are RUG levels still relevant for private insurance billing?

Ans. Some private payers reference RUG classifications for reimbursement guidelines.

2. Can RUG scores influence therapy program planning?

Ans. They guide decisions on therapy intensity and session scheduling.

3. Are RUG scores considered in strategic planning for high-acuity patients?

Ans. They help forecast care needs and budget for complex patient populations.

4. Can facilities leverage RUG data for cost optimization?

Ans.  It supports efficient use of resources and improves financial decision-making.

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