Pennsylvania Clears the Bases, Wins Budget Adjustment Victory

The state of Pennsylvania’s recently approved budget included a very technical, but very important element for SNFs, according to Jay Gormley, chief investment officer, COO, Advisory, Zimmet Healthcare Services Group.

In his weekly update on all matters long-term care, he said the new budget significantly raised the floor of the Budget Adjustment Factor (BAF), which is “a very big deal.”

At the topline level, the budget for 2026-27 in the Keystone State increases the BAF from 0.8035 to 0.86, which is worth around $18 PPD, but the impact is far greater because the rate will now free-float and not be tied to a legislative mean price, Gormley said.

Historically, he said Pennsylvania has been one of the country's more sophisticated cost-based reimbursement systems. For instance, each nursing facility's Medicaid rate is calculated prospectively using allowable costs, peer group pricing, annual rebasing, inflation adjustments, and quarterly case mix updates.

“In theory, these calculations are designed to determine what each facility should be paid based upon its costs and the clinical complexity of the residents it serves. In practice, however, those calculated rates have historically represented only the first step in determining reimbursement,” Gormley said.

After calculating every facility's Medicaid rate, the state’s Dept. of Human Services compared the statewide weighted average of those calculated rates to what was in effect a legislatively established target average Medicaid payment per day.

He said if the statewide average rate per day exceeded that target, the department applied a BAF, reducing every facility's reimbursement proportionally until the statewide average payment aligned with the statutory target.

“The BAF therefore served as the final balancing mechanism within the reimbursement system. While each facility's rate reflected its own costs and case mix, the amount ultimately paid depended upon the relationship between the statewide calculated average rate and the legislatively established target rate,” Gormley said.

More BAF

The BAF was recalculated every quarter, which is important because it fundamentally shaped the incentives within Pennsylvania's reimbursement system, he stressed.

“As resident acuity increased, facilities improved documentation, annual rebasing recognized higher operating costs, inflation adjustments increased allowable expenses, or other refinements to the reimbursement methodology increased calculated rates, the statewide average calculated rate also increased,” Gormley said.

That is unless the General Assembly simultaneously increased the target average payment, the BAF necessarily declined to maintain the legislatively established statewide average reimbursement.

“In other words, while providers continued to ‘earn’ or qualify for higher on paper Medicaid rates, the BAF reduced the percentage of those rates that were ultimately funded to fixed target rate established by legislative fiat. The practical consequence was that Pennsylvania functioned much more like a target-rate reimbursement system than a traditional prospective payment system,” he said.

Improvements in resident acuity across the industry did not necessarily translate into comparable increases in reimbursement because those improvements increased the statewide average calculated rate, placing downward pressure on the BAF.

Other Pressures

And further, annual rebasing and inflation updates often generated smaller financial gains than providers expected because a portion of those increases was effectively absorbed through a lower adjustment factor.

Facilities could outperform their peers by improving documentation or admitting more clinically complex residents, but they frequently found themselves competing within a reimbursement system that was designed to maintain a relatively stable statewide average payment, Gormley said.

New Days

Flash forward to now and the new budget. He said the changes enacted represent a significant departure from that longstanding policy described above. Rather than continuing to adjust the BAF each quarter to maintain a legislatively established target average payment, Pennsylvania has instead established a fixed Revenue Adjustment Neutrality Factor of 0.86 for the next two fiscal years.

“While the underlying cost-based reimbursement methodology remains unchanged [including rebasing, quarterly case mix adjustments, peer group pricing, and allowable cost calculations] the state has fundamentally changed the final funding mechanism that converts calculated rates into actual reimbursement,” Gormley said.

PDPM Rises

Pennsylvania has effectively committed to allowing the reimbursement methodology itself to drive payment levels over the next two years. This policy change arrives at a particularly important time. Beginning in April 2026, Pennsylvania started its phased transition from the legacy RUG-III case mix methodology to the Patient Driven Payment Model (PDPM), with full implementation scheduled for January 2027.

Gormley said under the previous reimbursement structure, one of the industry's primary concerns was that statewide increases in case mix resulting from PDPM could have been partially offset through future reductions in the BAF.

“In effect, facilities would have generated higher calculated rates under PDPM only to see part of those gains neutralized by a lower statewide adjustment factor. By establishing a fixed adjustment factor during this transition period, the Commonwealth has substantially reduced that concern,” he noted.

Facilities that appropriately document resident acuity and generate higher PDPM case mix scores should now be considerably more likely to realize the financial benefit of those higher calculated rates rather than having those gains diluted through future BAF reductions.

“This is far more than a rate increase…it is a transformational structural change that should benefit providers [and their residents] across the Commonwealth for years to come,” Gormley said.

Kudos to State Advocates

In discussing the positive aspects of the developments on BAF, he made sure to praise the efforts of the state’s long-term care advocates.

“We have to acknowledge the effort it took to make all of this a reality. So, major hats off to Mike Jacobs and the entire team at the Pennsylvania Health Care Association [PHCA] for delivering what is arguably the most significant improvement to Pennsylvania's nursing facility reimbursement system in years,” Gormley said.

PHCA President and CEO Michael Jacobs said the establishment of the floor for the BAF “represents one of the most consequential victories for Pennsylvania’s nursing homes in decades.”

“For far too long, providers could demonstrate rising costs and increasing resident needs, only to see the reimbursement they earned reduced through a declining BAF. This historic reform provides greater stability and predictability, ensuring that future payment adjustments—including those resulting from the transition to PDPM—are far more likely to reach the providers caring for Pennsylvania’s seniors,” he said.

Further, Jacobs noted that “this is more than an increase in funding; it is a fundamental improvement to the Medicaid reimbursement system that will strengthen resident care, support our dedicated workforce and provide nursing homes with greater confidence as they plan for the future.”

Questions on this article? Contact Patrick Connole at pconnole@parkplacelive.com.