State Medicaid agencies test whether a nursing facility resident still qualifies for the level of care being billed, not only whether the paperwork behind that level is complete. A May 2026 audit by Maryland's Office of Legislative Audits found the state could not confirm that 4,425 of 14,609 nursing facility Medicaid recipients reviewed for calendar year 2024, 30 percent of them, had received the continued stay review required to verify they still needed nursing facility care, leaving $338.3 million in that year's payments without assurance they were proper. A separate federal rule decides payment for residents with a serious mental illness or intellectual disability: Preadmission Screening and Resident Review (PASRR), and for that population, a resident's PASRR status, not the chart alone, decides whether Medicaid pays for the stay.
Level of Care as a Payment Condition
Federal Financial Participation, the federal share of a Medicaid nursing facility payment, is available only when a resident with mental illness or intellectual disability has been determined under 42 CFR 483.116(a) to need nursing facility services, or has elected to stay under the 483.118(c)(1) election for only the 483.120 services tied to the condition. 42 CFR 483.122 ties the federal match to that determination: without it, Medicaid need not pay for the stay no matter how complete the clinical record looks. A missing or stale determination is a basis to deny the claim outright. That is a different audit question from the MDS coding and cost report findings in Nursing Facility Medicaid Audits: MDS Reviews and Cost Reports; here, the stay itself, not the billed rate, is what auditors test.
PASRR Screening and the Annual Review Clock
PASRR runs in two stages. Level I identifies applicants or residents suspected of having a serious mental illness or intellectual disability under the clinical criteria at 42 CFR 483.102(b). Level II is the independent determination, made by the state mental health or intellectual disability authority, of whether the individual needs nursing facility services and whether the 483.120 services are also required. 483.112(c) requires a written preadmission determination within an annual average of 7 to 9 working days of referral, and 483.114 requires an annual review within every fourth quarter after the prior screen. A hospital discharge can skip preadmission screening only if the physician certifies, before admission, a stay under 30 days; a longer stay still needs an annual resident review within 40 calendar days of admission.
How State Auditors Test the Claim
The Maryland audit shows how a review failure becomes a reimbursement problem. Its utilization control agent contractor was required to perform continued stay reviews, quarterly in a resident's first year and annually after, confirming the resident still needed the billed level of care. The audit tested only whether the review happened on schedule and was in the record, not the resident's clinical status. A missing, late, or undocumented review leaves the state unable to show the related payments were proper, the condition behind the $338.3 million finding above. A facility can pursue an audit appeal once the state issues its determination, but that right runs from the state's record, not the facility's own files, which cannot substitute for the missing review.
Consequences When a Determination Fails
Three outcomes follow a finding that a person does not need nursing facility care. An applicant found ineligible under 483.118(a) cannot be admitted. A resident needing neither nursing facility care nor the 483.120 services must be discharged under 483.118(b). A long-term resident, at least 30 months in the facility, needing only the 483.120 services may choose to remain under 483.118(c), but 483.122(a) ties the federal match to a 483.116(a) finding or that 483.118(c)(1) election, so remaining without one means Medicaid stops paying. A facility paid for a stay PASRR did not support faces recoupment of the payment. Duplicate Billing Findings in Medicaid Audits covers a claim tested after it is paid; a missing PASRR determination can block the claim before the facility is ever paid.
A nursing facility's documentation can be flawless and the claim can still fail, because PASRR status, not the chart, decides whether Medicaid owes for the stay.
Why Early Legal Counsel Is Critical
It is critical that a nursing facility promptly retain experienced healthcare defense counsel once a state audit raises a level of care or PASRR finding. Early legal intervention protects the facility's procedural rights, tests the continued stay review and PASRR determinations against the correct federal standard, avoids conceding a contestable eligibility finding, and preserves the record needed on appeal. Delaying representation can expose the facility to recoupment it could otherwise have challenged.
How Health Law Alliance Can Help
Health Law Alliance has represented 2,500+ clients nationwide.
If a state audit has questioned whether your nursing facility's residents meet Medicaid's level of care or PASRR requirements, Health Law Alliance's nursing facility Medicaid audit defense attorneys can review the underlying determination, the timeliness of the required screening or review, and the facility's options under the firm's Medicaid audit defense practice. Contact Health Law Alliance for a free, confidential consultation.
