Medicare home health reimbursement can feel like navigating a maze. Since 2020, the Patient-Driven Groupings Model (PDGM) has governed how agencies are paid for caring for Medicare beneficiaries. Understanding this system is essential for financial stability, accurate forecasting, and operational planning.

Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or regulatory advice. Medicare regulations change frequently. Always consult official CMS guidance, your Medicare Administrative Contractor, and qualified healthcare billing professionals for decisions affecting your agency.

What Is PDGM?

The Patient-Driven Groupings Model replaced the older Home Health Resource Group (HHRG) system on January 1, 2020. Under PDGM, Medicare pays home health agencies a predetermined amount for each 30-day period of care, adjusted based on patient characteristics rather than the volume of services provided.

This shift represented a fundamental change in payment philosophy. Instead of paying more when agencies deliver more therapy visits, PDGM ties reimbursement to patient clinical characteristics and needs. The goal was to better align payments with the actual cost of care while reducing incentives for unnecessary service utilization.

The 432 Case-Mix Groups

PDGM classifies patients into 432 distinct payment groups based on five factors:

  • Admission source: Whether the patient comes from the community or an institutional setting (hospital, skilled nursing facility, or inpatient rehabilitation facility)
  • Timing: Whether this is an early 30-day period (first or second) or a late period (third or beyond) within a sequence of care
  • Clinical grouping: One of 12 clinical categories based on the principal diagnosis (e.g., musculoskeletal rehabilitation, neurological rehabilitation, wound care)
  • Functional impairment level: Based on OASIS assessment responses measuring the patient's ability to perform activities
  • Comorbidity adjustment: Additional payment for patients with certain secondary diagnoses that increase care complexity

How Payment Amounts Are Calculated

CMS establishes a national standardized 30-day payment amount each year. For 2026, after adjustments, this base payment is modified by case-mix weights specific to each of the 432 patient groups.

The Base Payment

Each calendar year, CMS updates the base payment rate using a market basket adjustment that accounts for inflation in the costs of goods and services home health agencies purchase. For 2026, CMS finalized an estimated 2.4% rate increase based on the home health market basket update.

Case-Mix Weights

Each of the 432 PDGM groups has a case-mix weight that reflects the relative resource use for that patient type. A weight of 1.0 represents average resource use. Weights higher than 1.0 indicate higher-than-average expected costs, while weights below 1.0 indicate lower expected costs.

For 2026, CMS recalibrated all 432 PDGM case-mix weights using 2024 claims data. These updated weights aim to reflect current utilization patterns and ensure payments appropriately match the resources needed for each patient category.

Geographic Adjustment

The case-mix adjusted payment is further modified by a wage index that accounts for geographic variation in labor costs. Agencies in higher-cost labor markets receive proportionally higher payments.

The 2026 Payment Rule: Key Changes

On November 28, 2025, CMS released the final rule for Calendar Year 2026 home health payment. The rule represents a net decrease in aggregate Medicare payments, though with important nuances.

Aggregate Payment Impact

CMS estimates the 2026 rule will decrease aggregate Medicare home health payments by approximately 1.3%, or $220 million, compared to 2025. This is significantly less than the 6.4% reduction CMS had proposed in June 2025.

Components of the Change

The payment update consists of several components:

  • Market basket increase: +2.4% to account for inflation in agency operating costs
  • Permanent behavioral adjustment: -1.023% to account for differences between assumed and actual behavioral changes following PDGM implementation
  • Temporary adjustment: -2.7% to recoup past overpayments related to PDGM behavioral changes

Understanding the Behavioral Adjustments

When CMS implemented PDGM in 2020, the agency assumed certain behavioral changes would occur, such as shifts in coding practices and service delivery patterns. The law requires CMS to analyze actual versus assumed behavior through 2026 and make permanent and temporary adjustments to correct any resulting payment inaccuracies.

CMS reduced the permanent adjustment from what was proposed after industry commenters argued that some post-2022 behavioral changes were attributable to factors unrelated to PDGM, including the OASIS-E assessment transition, expanded value-based purchasing, and increased Medicare Advantage penetration.

Low Utilization Payment Adjustments (LUPA)

Not all 30-day periods qualify for the full case-mix adjusted payment. When an agency provides fewer visits than a specified threshold, the period is classified as Low Utilization Payment Adjustment (LUPA), and payment is made on a per-visit basis instead.

How LUPA Works

Each of the 432 case-mix groups has an associated LUPA threshold, typically ranging from 2 to 6 visits. If the total visits in a 30-day period fall below this threshold, the agency receives per-visit payment amounts instead of the full 30-day case-mix payment.

LUPA payments are generally lower than full case-mix payments, so agencies should understand their LUPA rates and identify patterns that may indicate opportunities for care coordination improvements.

2026 LUPA Updates

CMS recalculated LUPA thresholds for 2026 using 2024 utilization data. Agencies should review the updated thresholds for their most common patient populations to understand how visit patterns may affect reimbursement.

Outlier Payments

For patients requiring unusually intensive services, PDGM includes an outlier payment mechanism. When the estimated cost of a 30-day period exceeds a fixed-dollar loss threshold plus the case-mix payment amount, the agency receives additional outlier payments.

Outlier payments are designed to protect agencies from significant losses on high-acuity patients while preventing outlier payments from becoming a disproportionate share of total Medicare home health spending.

Documentation and Coding Best Practices

Accurate reimbursement under PDGM depends on thorough documentation and precise coding. Several key areas deserve attention:

Principal Diagnosis Selection

The principal diagnosis determines which of the 12 clinical groupings applies to a patient. Selecting the diagnosis that best represents the primary reason for home health care is essential. This should reflect the condition most directly responsible for the skilled services being provided.

Secondary Diagnoses and Comorbidities

Comorbidity adjustments can significantly affect payment. Ensure all relevant secondary diagnoses are captured and coded accurately. CMS has defined specific diagnosis codes that qualify for comorbidity adjustments, grouped into high, low, and no-comorbidity categories.

OASIS Accuracy

Functional impairment levels derive from OASIS assessment responses. Clinicians completing OASIS assessments should be thoroughly trained and receive regular feedback on assessment accuracy. Overstating or understating functional limitations creates compliance risk and may result in inaccurate payments.

Admission Source Verification

Institutional admission sources (from hospitals, SNFs, or IRFs) receive higher payment rates than community admissions for early periods. Verify and document admission sources accurately based on actual patient referral patterns.

Medicare Advantage Considerations

While PDGM governs traditional (fee-for-service) Medicare, Medicare Advantage plans have expanded significantly and now cover more than half of Medicare beneficiaries in many markets. MA plans negotiate their own payment rates and may impose additional utilization management requirements.

Agencies increasingly report that MA plans are applying more aggressive prior authorization, concurrent review, and retrospective audit practices. Building relationships with MA plan case managers and maintaining thorough documentation can help minimize denials and payment delays.

Value-Based Purchasing

Medicare's Home Health Value-Based Purchasing (HHVBP) Model adds another payment dimension. Under HHVBP, agencies can receive payment adjustments, positive or negative, based on quality performance metrics compared to their peers.

The HHVBP expanded model, implemented nationwide in 2023, applies adjustments of up to 5% (increasing to higher percentages in future years). Quality performance on measures including patient outcomes, process metrics, and patient experience surveys determines where an agency falls on the adjustment scale.

Strategies for Optimizing Medicare Reimbursement

Within the bounds of accurate documentation and appropriate care delivery, agencies can take several steps to ensure they receive appropriate PDGM payments:

Invest in Coder Training

Coding accuracy directly affects payment accuracy. Regular training for clinical and coding staff on PDGM-relevant diagnosis coding, OASIS completion, and documentation requirements pays dividends in appropriate reimbursement.

Monitor LUPA Rates

Track LUPA rates by clinical group and care team. High LUPA rates may indicate opportunities to improve care coordination, patient education, or visit scheduling to ensure patients receive appropriate care intensity.

Analyze Case-Mix Trends

Regularly review your agency's case-mix distribution compared to national benchmarks. Significant deviations may indicate coding issues, referral pattern changes, or documentation gaps that warrant investigation.

Prepare for Quality Reporting

Quality scores affect both HHVBP payments and your agency's reputation with referral sources. Implement systematic quality improvement processes and monitor quality metrics proactively rather than reactively.

Looking Ahead

The 2026 rule represents the final year of the statutory PDGM behavioral adjustment period. After 2026, the permanent behavioral adjustment will be locked in, and the temporary adjustment framework will conclude. Agencies should monitor CMS rulemaking for any post-2026 policy changes.

Additionally, CMS continues to explore potential changes to home health payment methodology. Staying engaged with industry associations and public comment opportunities helps agencies anticipate and prepare for future policy directions.

Note: Medicare regulations are complex and subject to change. This article provides general information current as of its publication date. For guidance specific to your agency's circumstances, consult with healthcare billing experts, Medicare Administrative Contractors, and legal counsel familiar with home health regulatory requirements.