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13 components are the same for all residents. A higher RUG rating means more care is needed and a higher rate is paid for a resident’s care. Medicaid Property Costs. Another component of Minnesota’s value-based reimbursement system consists of the Property Costs including interest expense and return on equity. In Minnesota, Property Costs have been set under a system that allows for increases when the legislature decided to allow for inflation or based on construction projects. The inflation increases were not given from 2011 through 2018, but 2.45% was given in 2019. In 2020, the legislature adopted a change to Property Costs that will be phased-in over several years. The new method is called Fair Rental Value (“FRV”) and will set rates based on an appraisal of the property rather than its cost and the cost of improvement projects. FRV will apply only to construction through the moratorium exception process, hardship process, or consolidation of nursing facilities authorized on March 1, 2020, and later. Facilities that do not meet this criteria will remain on the current system until, if ever, the legislature expands the FRV system to more facilities. Medicaid External Fixed Costs. A third component of Minnesota’s value-based reimbursement system consists of the External Fixed Costs including bed surcharges, real estate taxes, special assessments, MDH licensing fees, Public Employee Retirement Account costs, and employee scholarship program expenses. The External Fixed Costs are updated each year to reflect current costs and resident days as allowed from the most recent Medicaid cost report. Minnesota Medicaid Hospice Payment System. In Minnesota, hospice providers are paid for each day a patient is under hospice care. The payment methodology and amounts are the same as those used by the Medicare program described below. The limits and cap amounts are the same as those used by the Medicare program except that the inpatient day limit on both inpatient respite days and general inpatient days do not apply to patients with AIDS. There can be no assurance that the payment amounts for hospice services provided by the nursing facilities will be sufficient to cover the actual costs of providing such services. Medicare The successful operation of applicable nursing facilities in the current competitive marketplace has become increasingly dependent on revenues derived from Medicare. Average lengths of stay in many applicable nursing facilities are becoming shorter as applicable nursing facilities are being used more significantly by residents who are recovering from hospitalizations and whose rates are typically covered by Medicare reimbursement. Such Medicare payments are limited to resident stays of 100 days or less following a hospitalization. These payment rates are frequently higher than comparable rates paid by the Medicaid program, but they include payment for therapy and other ancillary services, which are separately billed for Medicaid recipients. At the same time, the ongoing trend in Medicare payment rates is expected to continue to be focused on the creation of savings to the federal government through an emphasis on cost cutting and the imposition of greater responsibility on providers to control costs and take on the risk of providing quality care to residents under stricter budget constraints. Future limitations on Medicare payment rates and other restrictions can be expected to have an adverse impact on applicable nursing facilities and such impact may be material. Medicare rates for nursing facilities are established under a method called the Prospective Payment System (“PPS”). Effective October 1, 2019 a new case-mix classification system titled Patient Driven Payment Model (PDPM) was implemented and replaced the previous Resource Utilization Group, Version IV (RUG-IV) system under the Skilled Nursing Facility Prospective Payment System. Under PDPM providers’ rates will be determined based on six payment components utilizing relevant clinical factors. This change reflects a shift from the RUG-IV system in which the amount of therapy provided to a patient drove the payment rate. The PDPM classification methodology utilizes a combination of six payment components to derive payment: physical therapy, occupational therapy, speech language pathology, nursing, non-therapy ancillary, and non-case mix. With the exception of the non-case mix component of the rate, the other five components are case-mix adjusted to cover utilization of applicable nursing facility resources that vary according to patient characteristics. Different patient characteristics are used to determine a patient’s classification into a case-mix group within each of the case-mix adjusted payment components. Hospice services are reimbursed on a cost-based prospective payment method, subject to a “cap” amount. Two “caps” affect Medicare payments under a hospice benefit: (i) the number of days of inpatient care furnished is limited to not more than 20% of total patient care days; and (ii) the aggregate payment amount received in the cap year is limited to the cap amount times the number of Medicare patients served. CMS establishes daily payment