Assessing the RUG-III resident classification system for skilled nursing facilities

Resource utilization groups, version III (RUG-III) is used by CMS to classify skilled nursing facility (SNF) residents into Medicare payment groups. Using a sample of 1,304 SNF residents with Medicare-covered stays, we find that RUG-III only explains 10.4 percent of the variance in total per diem costs. RUG-III explains variance in staff-time costs fairly well, but does not explain variance in non-therapy ancillary costs. Receipt of special treatments such as intravenous medications and respiratory therapy is strongly associated with high residual costs (p < 0.01). Modifications to the RUG-III system can increase its variance explanation.