New Payment Models for Therapy Contracts

By Mark McDavid, OTR, RAC-CT, CHC - March 27, 2019

October 1 will be here before we know it. And with that comes Medicare’s new Patient-Driven Payment Model (PDPM) for beneficiaries accessing their SNF Part A benefit. It seems like every day there is a new webinar being advertised to help you understand all of the ins and outs of PDPM. It is definitely a more complex system than the RUG-IV system we operate under currently. As we analyze data collected in our facilities, trying to understand where we stand in a PDPM world, there is one other thing to consider: your therapy contract.


Under RUG-IV, most therapy contracts pay the therapy contractor based on the therapy RUG score achieved. In this model, the therapy contractor and the SNF provider have aligned incentives. In other words, the more therapy that gets provided in the look-back period, the higher the payment to the facility and thus the higher the payment to the therapy contractor; the incentives are clearly aligned. However, under PDPM, no such alignment appears to exist. PDPM payments are based on patient characteristics, not service delivery. So, how will you pay your therapy contractor under PDPM? What options are out there for paying the contractor? Is there a way to align incentives between the two organizations? We will introduce below a few of the payment models being discussed in the industry and some of the pros and cons of each model.


Payment Model 1: Time On-Site

In this model, the provider pays the contractor X dollars per hour for every hour the contractor’s staff are on-site. This model is simple to understand and easy to audit for accurate billing. However, there is no incentive for the contractor to minimize staff time/labor, and the financial risk is shifted to the provider.


Payment Model 2: Flat Rate Per Patient Day

In this model, the provider pays the contractor a flat rate for each Part A patient day. This model is also easy to understand and audit. The rate would have to be based on provider/contract history and a shared understanding that an adequate amount of therapy will continue after October 1 to service the needs of patients in order to maintain good outcomes. This model takes a certain amount of trust between the provider and contractor, and the financial risk is shifted to the contractor.


Payment Model 3: Percentage of the PDPM Therapy Components

In this model, the provider would pay the contractor a percentage of the PT, OT, and SLP components paid to the provider under PDPM. The contractor must provide an adequate amount of therapy to ensure that good outcomes are achieved. There is incentive for your contractor to assist with capturing the best possible therapy payment for each Part A patient, which, in a more complex payment model, may be something the provider is seeking. In doing so, the contractor is rewarded with a higher payment. The financial risk in this model falls on the contractor, who is left to manage the volume of therapy for a fluctuating amount of payment.


Payment Model 4: Percentage of the Entire PDPM Payment

In this model, the provider would pay the contractor a percentage of the entire PDPM payment. This might be something to consider in a scenario where your contractor is providing more services than just therapy. If the contractor is providing assistance with restorative, ICD-10 coding, and BIMS or Cognitive Function Scale testing, then paying the contractor a portion of the entire payment might be in order. The financial risk in this model is weighted toward the contractor as in Model 3, since the volume of therapy must be managed for a fluctuating payment.


In my opinion, Models 3 and 4 have the most aligned incentives. Clearly, the incentives are not aligned exactly, but they are more so than in Models 1 and 2. I would take Models 3 and 4 one step further by adding a quality component to the contract. That might look like sharing your Quality Reporting Program or Value-Based Purchasing program incentive or penalty with your contractor. This will help you hold the contractor’s feet to the fire when it comes to ensuring that an adequate amount of therapy is being provided to continue to achieve good outcomes. 


Payment Model 5: Don’t Pay the Contractor

While giving advice to not pay your contractor is a bit tongue in cheek, there seems to be more and more discussion about some providers taking their therapy programs in-house. In my opinion, in certain scenarios an in-house model may make sense for the provider and in others it doesn’t. You do shift the financial risk back to the provider in this model, but also all of the financial reward. This model could be very attractive for larger SNFs or for those with multiple therapy lines of business on campus (think continuing-care retirement communities). If you are considering an in-house model, understand that therapists must run a gauntlet of regulations when providing service to patients with various payer types. Understanding what your therapists can and cannot do is imperative in this model, so seeking outside expertise to make this transition is a must.


There are other payment models being discussed in the industry; however, Models #3, #4, and #5 are the ones that we are hearing discussed the most.


Lastly, whatever model you choose, I would encourage you not to sign a full year’s contract. I would recommend that you have a business meeting four to six months into your implementation of PDPM and discuss how the chosen contract is working for both the provider and the contractor. I believe that PDPM will allow for a win-win for the provider, contractor, and patients, but finding the right balance and fit for you and your contractor will be the key. If, at four to six months, things are working for both parties, sign a contract for another six months. If the current payment model is not working for both parties, now is the time to renegotiate and try something new.


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