Resource Utilization Groups (RUGs) is a patient classification system historically used by the Centers for Medicare and Medicaid Services (CMS) to determine reimbursement rates for Skilled Nursing Facilities (SNFs) in the United States. Instituted as part of the Prospective Payment System (PPS) for Medicare Part A services, the RUG system provided a standardized method for linking the complexity of a resident’s care to the payment the facility received. This system became a central mechanism for calculating daily rates, establishing a model where payment was tied to a resident’s documented need for resources.
Defining Resource Utilization Groups
The core purpose of the Resource Utilization Groups system was to classify nursing home residents into categories that represented similar anticipated resource consumption. The term “resource utilization” refers to the amount of staff time, supplies, and services a patient typically requires during a daily stay in a Skilled Nursing Facility. By grouping residents with comparable needs, the RUG system aimed to ensure that facilities received a fair and predictable daily payment rate. This rate was intended to cover the costs associated with providing the necessary nursing care, therapy, and other services.
The classification was based on information collected through the Minimum Data Set (MDS), a comprehensive, standardized assessment tool required for all residents in Medicare and Medicaid certified facilities. Each RUG category was assigned a specific case-mix index, which served as a multiplier to the base payment rate. A resident assigned to a higher RUG category, indicating a greater need for facility resources, resulted in a higher daily reimbursement rate. This structure created a direct financial link between a resident’s assessed acuity and the facility’s payment.
The RUGs Patient Classification System
The most recent iteration, RUG-IV, categorized residents into one of 66 groups, which were organized under eight major classification categories, such as Rehabilitation Plus Extensive Services, Special Care High, and Clinically Complex. The system employed a hierarchical logic, meaning a resident would be assigned to the group that yielded the highest payment rate for which they qualified. Data from the Minimum Data Set (MDS) drove this assignment, with two components holding significant weight: therapy volume and functional status.
The amount of therapy a patient received was a primary driver for classification into the higher-paying Rehabilitation groups. RUG-IV required specific minimum thresholds of therapy minutes per week—including physical, occupational, and speech therapy—to qualify for various levels, such as Ultra High (720+ minutes) or Very High (500+ minutes). Functional status was determined by a score from 0 to 16, derived from the assessment of four “late-loss” Activities of Daily Living (ADLs): bed mobility, transfers, toilet use, and eating. This ADL score helped differentiate the resource needs within the major categories, with higher scores indicating a greater need for nursing resources.
The Transition to the Patient-Driven Payment Model
The Resource Utilization Groups system for Medicare Part A payment was largely replaced by the Patient-Driven Payment Model (PDPM) beginning in October 2019. This change was implemented by CMS to address concerns that the RUG system incentivized the volume of services, particularly therapy minutes, over the actual clinical needs of the patient. The PDPM represents a fundamental philosophical shift in how Skilled Nursing Facilities are reimbursed for Medicare services.
Unlike RUGs, which focused heavily on the number of therapy minutes provided, PDPM shifted the focus to the patient’s characteristics, primary diagnosis, and complex medical conditions. The new model uses five payment components—Physical Therapy, Occupational Therapy, Speech-Language Pathology, Nursing, and Non-Therapy Ancillary services—each driven by patient-specific clinical data rather than minutes alone. This redesign was an effort to create a more accurate and equitable payment system that rewards facilities for managing clinical complexity rather than simply maximizing service delivery.
Despite the shift for Medicare Part A, the RUG system is not entirely obsolete. Some state Medicaid programs and other non-Medicare payment systems continue to use the RUG-IV methodology or variations of it to classify residents and determine daily reimbursement rates. While no longer the primary Medicare payment mechanism, the RUG system remains a relevant classification structure in certain segments of long-term care finance.