The Patient Driven Payment Model reshaped how Medicare pays skilled nursing facilities, and it reshaped how those payments get audited. Since PDPM replaced the RUG-IV case-mix system in October 2019, CMS and the HHS Office of Inspector General have built parallel review programs around the same vulnerability: whether the Minimum Data Set (MDS) assessment driving a resident's payment classification is supported by the clinical record. For physicians who certify skilled need and the facilities billing under their orders, a PDPM audit measures whether the paper trail proves the intensity of care billed, component by component. The exposure runs from single-claim denials to extrapolated recoupment demands reaching into eight figures.
The Shift From RUG-IV To PDPM
PDPM classifies every Medicare Part A stay into six payment components: physical therapy, occupational therapy, speech-language pathology, nursing, non-therapy ancillary (NTA) services, and a non-case-mix component. Unlike RUG-IV, which paid primarily on therapy minutes delivered, PDPM ties reimbursement to ICD-10 diagnosis coding, clinical comorbidities, and the functional status recorded in Section GG of the MDS. That shift moved the audit target: reviewers now ask whether the diagnosis codes, the NTA comorbidity items, and the Section GG functional scores that generated the payment group are substantiated by contemporaneous clinical notes, not reconstructed after the fact.
Where Federal Auditors Are Focused
The HHS Office of Inspector General is running an active audit series, SRS-A-25-010, testing whether SNF payments across all six PDPM components comply with Medicare requirements, with completion targeted through FY2028. A completed audit in that series found Pinnacle Multicare Nursing and Rehabilitation Center in the Bronx failed to meet Medicare requirements on 99 of 100 sampled claims for services billed in 2020 and 2021. The sample alone carried $1.1 million in overpayments; OIG estimated the facility's total exposure, once extrapolated across the full claim population, at $31.2 million. Cited violations: unsupported rate codes, services for residents who did not need skilled nursing care, and documentation gaps. CMS runs a parallel track. Medicare Administrative Contractors (MACs) began a nationwide 5-Claim Probe and Educate Review of every Medicare-billing SNF in June 2023, after CMS's CERT program measured the SNF improper payment rate at 15.1% in 2022, up from 7.79% the year before, the largest driver of the overall Medicare error rate that year.
A rate code the medical record does not support, on even one sampled claim, can be extrapolated into a demand many times the size of the original claim.
The Documentation Gaps That Drive Findings
Three gaps recur across PDPM findings. Section GG scores get coded from a judgment call the daily notes never mirror, so the MDS "usual performance" score has nothing in the chart to confirm it. NTA comorbidity items get checked without an active, current diagnosis and treatment plan behind them. And skilled-level nursing gets billed for residents whose record supports custodial care, the same defect OIG cited at Pinnacle. Each gap is small on one claim. Under Recovery Audit Contractor (RAC) and Unified Program Integrity Contractor (UPIC) review, a sample of flagged claims becomes the basis for extrapolating the error rate across the full lookback period, turning a documentation shortfall into a facility-wide demand.
The New CMS Data Validation Layer
A newer review sits on top of RAC, UPIC, and MAC probe reviews: CMS's SNF data validation process for MDS-based quality measures, finalized in the FY2024 and FY2025 SNF PPS final rules. The validation contractor can select up to 1,500 SNFs a year and requires the medical records within 45 days. A missed deadline, or records that do not support the MDS data already reported, brings payment consequences on top of any MAC, RAC, or UPIC review already underway. Auditors increasingly benchmark skilled therapy documentation against the same medical necessity standard MACs apply in a local coverage determination: the record has to independently support the service, not restate the assessment.
Why Early Legal Counsel Is Critical
It is critical that physicians and skilled nursing facility operators promptly retain experienced healthcare defense counsel upon receiving an audit notice, data validation request, subpoena, or other government inquiry. Early legal intervention can protect the provider's rights, ensure appropriate responses to government and contractor requests, avoid inadvertent admissions, preserve relevant defenses, and allow counsel to communicate with auditors on the provider's behalf. Delaying representation can significantly affect the outcome of a matter and expose the provider to unnecessary risk.
How Health Law Alliance Can Help
Health Law Alliance defends physicians and skilled nursing operators through PDPM audits, from the first MAC probe letter through an extrapolated demand and the Medicare overpayment appeal process. The firm has overseen 2,000+ audits across Medicare and Medicaid provider types. If your facility or a physician you supervise has received a PDPM-related audit notice, data validation request, or overpayment demand, contact us for a free, confidential consultation.
