PDPM Margin Optimization Guide for Skilled Nursing Facilities

Introduction: The Margin Problem

Most skilled nursing facilities don't know their true admission margins until weeks after discharge—if they ever calculate them at all. By then, a money-losing admission has already consumed staff time, bed days, and clinical resources that could have gone to a more viable patient.

Since PDPM replaced RUG-IV in October 2019, the margin calculation has become more complex but also more predictable. Each patient's reimbursement is driven by five distinct components, all derived from clinical characteristics captured in the MDS assessment. This means the information you need to estimate margins exists in the discharge packet—you just need a systematic way to extract and analyze it.

This guide covers:

• How each of the five PDPM components affects your daily rate
• The most common margin leaks we see in SNF operations
• How payer mix creates hidden margin variance
• A framework for standardizing admission decisions

Understanding the 5 PDPM Components

PDPM calculates a daily rate by summing five separately-scored components. Each component is classified based on patient characteristics documented in the MDS 3.0 assessment.

Note: CMS publishes updated PDPM rate tables annually. See the CMS SNF PPS page for current rates.

Physical Therapy (PT)

PT reimbursement is driven primarily by the patient's functional status as documented in Section GG of the MDS. Patients with greater functional impairment (lower Section GG scores) classify into higher-paying PT groups.

Key factors:

• Section GG self-care and mobility scores
• Clinical category (e.g., major joint replacement, stroke)

Occupational Therapy (OT)

OT uses the same Section GG functional scores as PT but weights them differently, with more emphasis on self-care activities. The clinical category also influences classification.

Speech-Language Pathology (SLP)

SLP classification depends on cognitive function, swallowing status, and the presence of SLP-related conditions like aphasia or apraxia. Mechanically altered diets and tube feeding also influence classification.

Nursing

The nursing component often represents the largest portion of the daily rate. It's driven by:

• Clinical category assignment
• Extensive services (ventilator, tracheostomy care, isolation for active infections)
• Depression indicators

Non-Therapy Ancillary (NTA)

NTA is often the biggest margin lever because it's the most frequently under-coded component. NTA captures high-cost clinical conditions that require ancillary resources:

• IV medications and infusions
• Wound care (surgical wounds, pressure ulcers)
• Respiratory therapy
• Certain medications (chemotherapy agents, biologics)

Common PDPM Margin Leaks

Most facilities have systematic margin leaks they don't know about. These four are the most common:

1. Missing NTA Conditions

NTA conditions present in the hospital discharge summary often don't make it into the MDS. This happens when:

• The admissions team doesn't review the discharge packet for NTA-relevant conditions
• Clinical documentation doesn't carry forward conditions that resolve before the ARD
• ICD-10 codes aren't mapped to NTA comorbidities

Example: A patient admitted for pneumonia with IV antibiotics qualifies for NTA points, but if the IV is discontinued before the ARD and not documented in the MDS lookback period, those points are lost.

2. Under-Coded Section GG Functional Status

Section GG scores directly drive PT and OT reimbursement. Under-coding happens when:

• Assessments are done after the patient has already improved
• Staff document what the patient "can do" rather than what they "did do"
• Functional assessments don't capture the patient's worst performance in the lookback period

3. Payer Denials and Prior Authorization Gaps

Not all payers reimburse at PDPM rates, and many require prior authorization. Margin leaks occur when:

• Medicare Advantage authorization isn't obtained before admission
• Length of stay exceeds authorized days
• Clinical documentation doesn't support skilled level of care

4. Length of Stay Misalignment

PDPM includes variable per-diem adjustments (VPAs) that reduce therapy rates as length of stay increases. Margin leaks occur when:

• Patients stay beyond the point where costs exceed reimbursement
• Discharge planning starts too late
• No pre-admission estimate of optimal LOS exists

How Payer Mix Affects Your Margins

The same patient can generate vastly different margins depending on their payer. Understanding payer variance is critical for admission decisions.

Medicare Fee-for-Service (FFS)

Medicare FFS pays the full CMS-published PDPM rates. It's the gold standard for predictability:

• Rates are published annually and don't vary by facility
• No prior authorization required for skilled coverage
• 100-day benefit period (days 1-20 at full rate, days 21-100 with coinsurance)

Medicare Advantage (MA)

Medicare Advantage plans negotiate their own rates and terms:

• Rates typically 85-95% of FFS, but vary widely by plan
• Many plans require prior authorization
• Some plans use per-diem or case rates instead of PDPM
• Length of stay limits are common

Medicaid and Managed Medicaid

Medicaid rates vary dramatically by state and are often significantly below Medicare:

• Many states use case-mix systems unrelated to PDPM
• Daily rates often 40-60% of Medicare FFS rates
• Managed Medicaid adds another layer of rate negotiation and authorization requirements

Standardizing Admission Decisions

The Problem with "Gut Feel" Admissions

Most admission decisions are made quickly, under pressure, with incomplete information. The typical process:

1. Hospital calls with a referral
2. Admissions coordinator reviews discharge packet (if there's time)
3. Clinical team assesses whether they can care for the patient
4. Decision is made based on bed availability and general "viability"

What's missing: any systematic analysis of the financial margin.

This leads to two costly outcomes:

• Accepting money-losing admissions that consume resources without generating positive margin
• Declining viable admissions because the clinical complexity seems risky, even when the margin would be strong

Building an Admission Scoring Framework

A margin-aware admission framework should answer four questions:

1. What's the projected reimbursement?

• Extract PDPM-relevant clinical indicators from the discharge packet
• Estimate classification across all five PDPM components
• Adjust for payer-specific rates

2. What's the expected length of stay?

• Use diagnosis and clinical complexity to estimate LOS
• Factor in VPA adjustments for therapy components

3. What are the expected costs?

• Include direct care costs (nursing, therapy, ancillaries)
• Factor in overhead allocation
• Account for denial risk based on payer

4. What's the projected margin?

• Reimbursement minus costs equals margin
• Compare against your facility's margin threshold

Balancing Margin vs. Occupancy

Margin optimization doesn't mean rejecting every challenging admission. Consider:

• Current occupancy: An empty bed generates zero revenue. A marginally profitable admission is better than vacancy.
• Referral relationships: Consistently declining referrals from a key hospital can damage your referral pipeline.
• Clinical capabilities: Building expertise in high-acuity care can attract more complex (and often higher-margin) patients.

The goal isn't to maximize margin on every admission—it's to make informed decisions with clear visibility into the financial implications.

Tools and Next Steps

Implementing margin-aware admission decisions requires either dedicated analyst time or purpose-built tools. Here's how facilities typically approach it:

Manual Approach

• Train admissions staff on PDPM classification logic
• Create spreadsheet templates for margin estimation
• Allocate 30-60 minutes per admission for analysis
• Challenge: Time-intensive and prone to inconsistency

Automated Approach

• Use software to extract clinical indicators from discharge packets
• Automatically classify PDPM components
• Calculate margins with facility-specific cost structures
• Benefit: Consistent, fast, scalable

Getting Started

Whether you implement manual processes or adopt specialized tools, the first step is the same: start tracking your admission margins.

1. Audit recent admissions: Pick 10 recent Medicare admissions and calculate actual vs. expected margins
2. Identify leaks: Look for patterns in under-coded NTA, Section GG, or payer-related losses
3. Set margin thresholds: Define what constitutes an acceptable admission at your facility
4. Standardize the process: Whether manual or automated, create a consistent workflow for every admission

Frequently Asked Questions

What is PDPM and how does it affect SNF reimbursement?

PDPM (Patient-Driven Payment Model) is Medicare's reimbursement system for skilled nursing facilities, implemented in October 2019. It calculates daily rates based on five components: Physical Therapy (PT), Occupational Therapy (OT), Speech-Language Pathology (SLP), Nursing, and Non-Therapy Ancillary (NTA). Each component is scored based on patient characteristics from the MDS assessment, meaning accurate clinical documentation directly impacts your reimbursement.

Which PDPM component has the biggest impact on margins?

The Non-Therapy Ancillary (NTA) component often has the biggest margin impact because it's the most frequently under-coded. NTA captures conditions like IV medications, wound care, and respiratory therapy. Many facilities miss NTA-qualifying conditions that are present in discharge documentation but not captured in the MDS, leaving significant reimbursement on the table.

How can I estimate PDPM margins before admitting a patient?

Pre-admission margin estimation requires analyzing the discharge packet for PDPM-relevant clinical indicators, estimating reimbursement across all five components, factoring in expected length of stay, and comparing projected revenue against your facility's cost structure. Tools like AdmitScore automate this process by extracting clinical data from discharge documents and calculating projected margins in minutes.

What's the difference between Medicare FFS and Medicare Advantage PDPM rates?

Medicare Fee-for-Service (FFS) pays the full CMS-published PDPM rates. Medicare Advantage (MA) plans negotiate their own rates, which typically range from 85-95% of FFS rates. Some MA plans use different payment methodologies entirely. This variance means the same patient can generate significantly different margins depending on their payer, making payer verification critical before admission.

How do I know if my facility is leaving money on the table with PDPM?

Common signs include: NTA scores consistently at the lowest tier, Section GG functional scores that don't reflect actual patient acuity, high denial rates for therapy services, and admissions decisions made without margin analysis. Comparing your average PDPM case-mix index against regional benchmarks can also reveal optimization opportunities.