PDGM stands for the Patient-Driven Groupings Model, a payment system Medicare uses to reimburse home health agencies. It took effect on January 1, 2020, replacing the older system that based payments heavily on how many therapy visits a patient received. Under PDGM, payment is instead determined by the patient’s clinical characteristics, meaning what’s actually wrong with them and how much help they need, rather than the volume of services delivered.
How PDGM Changed Home Health Payment
Before PDGM, home health agencies received higher Medicare payments when they provided more therapy visits. This created a financial incentive to schedule extra physical therapy, occupational therapy, or speech therapy sessions regardless of whether patients needed them. The old system also operated on 60-day payment cycles.
PDGM flipped that structure. Payments are now calculated in 30-day periods instead of 60-day ones, and the amount Medicare pays for each period depends on five patient-specific factors rather than visit counts. This was a fundamental shift: agencies can no longer increase revenue simply by adding more visits to the schedule.
The practical result has been a measurable reduction in therapy visits. Research published in Innovation in Aging found that after PDGM took effect, patients received roughly one fewer visit each of physical therapy, occupational therapy, and speech therapy per home health stay. Patients were still just as likely to receive these services, but each course of care involved fewer sessions.
The Five Factors That Determine Payment
Every 30-day payment period under PDGM is classified using five characteristics. Together, these place each period into a specific payment group that determines how much Medicare reimburses the agency.
- Admission source: Was the patient living in the community or coming from an institutional setting (like a hospital or skilled nursing facility) in the 14 days before starting home health? Institutional admissions generally receive higher payment because those patients tend to need more intensive care.
- Timing: Is this the first or second 30-day period of a home health episode (“early”), or a later period (“late”)? Early periods typically receive higher payment. Late periods are almost always classified as community admissions unless the patient was hospitalized in the preceding 14 days.
- Clinical grouping: Patients are sorted into one of 12 clinical categories based on their primary diagnosis. These groupings cover areas like musculoskeletal conditions, wounds, heart and lung problems, neurological disorders, and behavioral health needs.
- Functional impairment level: Patients are rated as low, medium, or high functional impairment based on standardized assessment items covering grooming, dressing (upper and lower body), bathing, toilet transfers, general transferring, walking ability, and hospitalization risk. Higher impairment levels correspond to higher payment.
- Comorbidity adjustment: Secondary diagnoses can trigger additional payment. Comorbidity adjustments fall into three tiers: none, low, or high, depending on which additional conditions the patient has and how much those conditions are expected to increase the cost of care.
How 30-Day Periods Work
Under the old system, a home health episode lasted 60 days. PDGM cut that in half. Each 30-day period is independently classified and paid, so a patient who needs 90 days of home health would generate three separate 30-day payment periods, each with its own classification.
The first two 30-day periods are labeled “early,” and any period after that is labeled “late.” This matters because early periods are reimbursed at a higher rate, reflecting the reality that patients usually require the most resources at the start of their care. Late periods always default to a community admission source classification unless the patient had an acute hospitalization in the 14 days immediately before that period began. A stay in a skilled nursing facility before a late period does not count as institutional unless the patient had been formally discharged from home health before that stay.
Low Utilization Payment Adjustments
If a patient receives very few visits during a 30-day period, Medicare doesn’t pay the full case-mix adjusted rate. Instead, it applies a Low Utilization Payment Adjustment (LUPA), which reimburses the agency on a per-visit basis at a much lower amount. Under the old system, the LUPA threshold was a flat four visits or fewer. PDGM made this more nuanced: each payment group now has its own LUPA threshold, ranging from two to six visits. The threshold for each group is set at the 10th percentile of visits for that particular case-mix category, with a floor of at least two visits.
For home health agencies, avoiding LUPAs is a significant financial concern. If a patient’s needs don’t warrant enough visits to clear the threshold, the agency receives substantially less than the full 30-day payment. This has pushed agencies to be more deliberate about which patients they admit and how care plans are structured.
What This Means for Payment Rates
PDGM didn’t just change how payments are categorized. It also triggered ongoing adjustments to the actual dollar amounts Medicare pays. CMS has been recalibrating rates to account for differences between what the model predicted agencies would be paid and what actually happened in practice.
For calendar year 2026, CMS finalized a 2.4 percent payment update (about $405 million), but that increase is largely offset by downward adjustments. A permanent adjustment of roughly negative 1 percent accounts for the financial impact of PDGM during its first three years. On top of that, a temporary negative 3 percent adjustment was applied to avoid making the full correction in a single year, which CMS determined could create financial instability and access problems for patients. All told, CMS estimates that Medicare payments to home health agencies in 2026 will decrease by about 1.3 percent, or $220 million, compared to 2025.
These reductions reflect CMS’s conclusion that PDGM initially resulted in higher payments to agencies than intended, and the system is now being corrected to align spending with the model’s original projections.
How PDGM Affects Patients
If you or a family member receives Medicare home health services, PDGM works entirely behind the scenes. You won’t see a bill or be asked to choose a payment group. But the model does influence your care in indirect ways.
Because payment no longer increases with more therapy visits, some patients may notice shorter courses of therapy than they would have received before 2020. The reduction of roughly one visit per therapy discipline per stay may not sound like much, but for patients recovering from a stroke or major surgery, those sessions can matter. On the other hand, PDGM was designed to ensure that sicker, more functionally impaired patients receive appropriately higher-resourced care, since payment now reflects clinical complexity rather than visit volume.
Your home health agency will conduct a standardized assessment (called OASIS) that evaluates your ability to perform daily tasks like bathing, dressing, and walking. These scores directly determine your functional impairment level and, by extension, how much Medicare pays for your care. Accurate assessment is critical, so it’s worth being honest about your limitations rather than demonstrating your best possible performance during the evaluation.