Medicare RUG Levels Explained: RUG-IV, PDPM, and Phase-Out

Medicare RUG levels were the Resource Utilization Group classifications that sorted skilled nursing facility patients into payment categories based on their care needs, driving the daily rate Medicare paid for each resident from July 1998 until October 1, 2019. The system used up to 66 groups organized under eight major clinical categories, with a patient’s therapy minutes, medical conditions, and functional dependence determining which level applied. Medicare replaced RUGs with the Patient-Driven Payment Model (PDPM) on October 1, 2019, and the last Medicaid uses of RUG-based classification ended on October 1, 2025.¹

What RUG Levels Were and Why Medicare Used Them

Before 1998, Medicare paid skilled nursing facilities based on their reported costs. The Balanced Budget Act of 1997 replaced that arrangement with a Prospective Payment System, under which CMS set standardized per-diem rates in advance. Because some patients cost far more to care for than others, the new system needed a way to sort residents by acuity. RUGs were that sorting tool.¹

The mechanics were straightforward. Each resident was assessed using the federally required Minimum Data Set (MDS), a clinical instrument capturing hundreds of data points on diagnoses, functional abilities, cognition, behavior, and services received. Assessment data ran through a software “grouper” that assigned a RUG code. Each RUG carried a case-mix index — a numerical weight reflecting the staff time and resources a typical patient in that group required. Higher weights produced higher daily payments.²

The system evolved in two main versions. RUG-III, in use from 1998 to 2010, started with 44 groups and later expanded to 53 and then 58. RUG-IV, effective October 2010 through September 2019, used 66 groups.³⁴

The Eight Major RUG-IV Categories

Under RUG-IV, the 66 groups sat inside eight clinical categories, arranged from highest resource intensity to lowest:⁵

Rehabilitation Plus Extensive Services — nine groups for patients receiving intensive therapy who also needed extensive medical services like ventilator care or tracheostomy management.
Rehabilitation — 14 groups covering five therapy intensity tiers, from ultra-high down to low.
Extensive Services — three groups for patients needing resource-heavy interventions such as ventilators, tracheostomy care, and suctioning, but not on the rehabilitation track.
Special Care High — eight groups for serious clinical conditions including multiple sclerosis, quadriplegia, stage 3 or 4 pressure ulcers, tube feeding, radiation therapy, or surgical wounds requiring active treatment.
Special Care Low — eight groups covering a lower-acuity subset of the special care population.
Clinically Complex — 10 groups for acute medical problems such as pneumonia, septicemia, internal bleeding, dialysis, chemotherapy, and diabetes requiring injections.
Behavioral Symptoms and Cognitive Performance — four groups for residents with hallucinations, delusions, wandering, verbal or physical behavioral symptoms, or rejection of care, with lower physical care needs.
Reduced Physical Function — 10 groups serving as the catch-all for residents who did not qualify for any higher category.

Classification worked from the top of the hierarchy down. The grouper checked the highest-acuity category first and placed the patient in the first group whose criteria they met. For Medicare payment, an alternative “index-maximizing” method evaluated every group the patient qualified for and selected the one with the highest case-mix index regardless of hierarchy position.⁵

The Five Rehabilitation Tiers

Because therapy drove the largest share of Medicare SNF payments, the rehabilitation category mattered most for reimbursement. RUG-IV defined five rehab intensity tiers by weekly therapy minutes across physical, occupational, and speech-language therapy, plus rules for how many days each discipline had to be delivered:⁶

Ultra-High: 720 or more minutes per week, with at least one discipline provided on five or more days and a second discipline on at least three days.
Very-High: 500 or more minutes per week, with at least one discipline on five or more days.
High: 325 or more minutes per week, with at least one discipline on five or more days.
Medium: 150 or more minutes per week, across five distinct days of any combination of the three disciplines.
Low: 45 or more minutes per week, across three distinct days, plus two or more restorative nursing services on six or more days.

Within each tier, patients were split further by their ADL score, producing the specific rehab RUG codes.

How the ADL Score Sorted Patients Within a Level

Almost every RUG category used a resident’s activities-of-daily-living (ADL) score to determine the specific subgroup. Under RUG-IV, the score came from four “late-loss” ADL items assessed on the MDS: bed mobility, transfer, toilet use, and eating.⁷

Each task was scored on a matrix combining two observations: what the resident actually did (self-performance, from independent to totally dependent) and how much physical help staff provided (from no assistance to two-or-more-person assist). Bed mobility, transfer, and toilet use each ran from zero to four points. Eating used a slightly different scale with no one-point score. The four item scores summed to a total ADL index ranging from 4 to 18 under RUG-III, or 0 to 16 in some RUG-IV formulations depending on version and state implementation.⁷

Higher scores meant greater dependence. Within any given clinical category, higher ADL scores placed patients into subgroups carrying heavier case-mix weights.

How a RUG Level Became a Dollar Amount

Once the grouper produced a RUG code, payment followed a set formula. CMS established federal per-diem base rates split into components, with separate rates for urban and rural facilities. In FY 2019 — the last full year under RUG-IV — unadjusted urban base rates were $181.44 for the nursing case-mix component, $136.67 for therapy case-mix, $18.00 for non-case-mix therapy, and $92.60 for non-case-mix. Rural rates were $173.34, $157.60, $19.23, and $94.31 respectively.⁸

Each RUG carried two case-mix indices, one for nursing and one for therapy. The base rate for each component was multiplied by its index to produce the adjusted daily rate. An urban patient in RUX, the highest rehabilitation-plus-extensive-services group, had a nursing index of 2.67 and a therapy index of 1.87. That worked out to roughly $484 for nursing plus about $256 for therapy, plus the non-case-mix portions, for a total of approximately $833 per day before geographic wage adjustment.⁹

The labor-related portion of the rate was then adjusted by the local hospital wage index. CMS updated overall rates annually using the SNF market basket, which tracked prices for goods and services used by nursing facilities.¹

Assessments were frequent under RUG-IV. Facilities completed up to five scheduled PPS assessments during a Medicare stay — on days 5, 14, 30, 60, and 90 — plus additional therapy-specific assessments when treatment started, ended, or changed. Each assessment could produce a new RUG classification and a new daily rate.⁴

What Changed From RUG-III to RUG-IV

The October 2010 transition brought several substantive changes. RUG-IV weights were built on the Staff Time and Resource Intensity Verification (STRIVE) project, which collected data in 2006 and 2007. The older RUG-III weights had been based on studies from 1995 and 1997.¹⁰

Concurrent therapy accounting also changed. Under RUG-III, when one therapist treated two patients at once, both could be credited with the full therapy time. RUG-IV required those minutes to be divided among the patients. RUG-IV also removed “look-back” provisions that had let facilities code diagnoses based on hospital treatments rather than services delivered at the SNF. And IV medications and feeding moved from the high-acuity Extensive Services category down to Clinically Complex, after research showed those patients required less resource intensity than other Extensive Services patients.¹¹

Why Medicare Replaced RUG Levels

Tying payment to therapy minutes created a well-documented incentive to deliver just enough therapy to cross into the next tier. This practice, called “thresholding,” could add $63 to $99 per day for as little as one additional minute of therapy.¹²

The data showed the pattern clearly. Between 2005 and 2013, the share of patients receiving therapy in the narrow 720-to-739-minute range — barely clearing the ultra-high threshold — grew from 5% to 33%.¹³ By 2016, more than 62% of ultra-high rehabilitation assessments reflected therapy provision of 10 or fewer minutes above the required threshold.¹⁴ The share of SNF patient days classified into intensive therapy RUGs rose from 27% in 2002 to 83% in 2017.

A 2012 OIG report found that one-quarter of all SNF claims in 2009 were billed in error, resulting in $1.5 billion in inappropriate Medicare payments. Twenty percent of claims were upcoded, and roughly half of those involved billing for ultra-high therapy when patients should have been placed in lower categories.¹⁵ A separate OIG report found that from 2006 to 2008, Medicare payments for ultra-high therapy nearly doubled, from $5.7 billion to $10.7 billion.¹⁶

Enforcement followed. In November 2013, the Ensign Group Inc. agreed to pay $48 million to resolve allegations that six of its California facilities submitted false claims to Medicare for medically unnecessary rehabilitation therapy. According to the Department of Justice, the government alleged that Ensign created a corporate culture that incentivized therapists to hit revenue targets by billing at ultra-high or very-high RUG levels without regard to individual patient needs, billed for therapy that was not provided, and kept patients in facilities longer than medically necessary. The settlement resolved two whistleblower lawsuits and was not an admission of liability.¹⁷

MedPAC found the system overpaid for high-therapy cases and underpaid for medically complex patients needing expensive non-therapy services like IV antibiotics, creating a disincentive to admit the sickest residents. Freestanding facilities with the highest shares of ultra-high and very-high therapy days had Medicare margins nearly seven times higher than those with the lowest shares — 16% compared to 2.3%.¹⁸

What Replaced RUG Levels: PDPM

On October 1, 2019, CMS replaced RUG-IV with the Patient-Driven Payment Model. PDPM does not classify patients by therapy volume. Instead, it uses five separate case-mix adjusted components — physical therapy, occupational therapy, speech-language pathology, nursing, and non-therapy ancillary services — each driven by patient characteristics like diagnosis, functional status, cognitive status, and comorbidities.¹⁹

The assessment burden also dropped sharply. Instead of up to five scheduled assessments plus therapy-specific ones, PDPM requires only an initial assessment and a discharge assessment, with an optional interim assessment for significant clinical changes.⁴ PDPM introduced a variable per-diem adjustment that gradually lowers rates for certain components over the course of a stay, and non-therapy ancillary costs became a standalone payment component classified by a weighted scoring of 50 specific comorbidities.²⁰

The new model has drawn its own scrutiny. A study covering 2018 through 2020 found that while SNFs reduced therapy services after PDPM took effect, coding intensity increased, and Medicare spending rose by an estimated $1.2 billion without significant improvements in mortality or rehospitalization rates.²¹ Researchers have also found that some of the same facilities that gamed RUG-IV through thresholding adapted their practices to exploit PDPM through upcoding of patient comorbidities.²²

The Final RUG Phase-Out in Medicaid

Medicare moved to PDPM in October 2019, but many state Medicaid programs kept using RUGs to set nursing facility payment rates. As of October 2020, 33 states and the District of Columbia still used RUGs for that purpose.²³

CMS ended support for RUG-III and RUG-IV on federally required assessments effective October 1, 2023, and allowed states a two-year grace period through the Optional State Assessment. That grace period expired on October 1, 2025.²⁴ States like Virginia transitioned their Medicaid nursing facility payments to PDPM on that same date.²⁵ With the FY 2026 SNF PPS final rule published in August 2025, RUGs no longer play any active role in Medicare policy, and PDPM is the sole case-mix classification model for skilled nursing facility payments.²⁶

1
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2
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3
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4
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5
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18
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20
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21
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22
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24
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25
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