June 26, 2008

Mr. Harry Weems

Acting Administrator

Centers for Medicare and Medicaid Services

Room 445-G

Hubert Humphrey Bldg.

200 Independence Ave., SW

Washington DC

20201

Attention: CMS-1534-P

RE: CMS-1534-P: Medicare Program; Prospective Payment System and
Consolidated Billing for Skilled Nursing Facilities for FY 2009

Dear Mr. Weems:

The American Association of Homes and Services for the Aging (AAHSA)
appreciates the opportunity to submit comments on the Centers for
Medicare and Medicaid (CMS) Proposed Rule: Medicare Program; Prospective
Payment system and consolidated billing for Skilled Nursing facilities
for FY 2009, published in the *Federal Register* on May 7, 2008.

The members of AAHSA ([www.aahsa.org](http://www.aahsa.org/)) help
millions of individuals and their families every day through
mission-driven, not-for-profit organizations dedicated to providing the
services that people need, when they need them, in the place they call
home. Our 5,800 member organizations, many of which have served their
communities for generations, offer the continuum of aging services:
adult day services, home health, community services, senior housing,
assisted living residences, continuing care retirement communities and
nursing homes. AAHSA's commitment is to create the future of aging
services through quality people can trust.

AAHSA has comments on Section II.B (Annual Update---Case Mix
Adjustments). These follow a description of some relevant background
issues.

# BACKGROUND

The Balanced Budget Act of 1997 (BBA) required CMS to develop a
prospective payment system for skilled nursing facilities and to publish
updated rates and the case-mix classification to be used before August 1
for rates in effect October 1 of the same year. For cost reporting
periods on or after July 1, 1998, CMS implemented a SNF PPS that
reimburses a prospective rate, which is based on the Resource
Utilization Groups (RUGs) classification system, to SNFs for services
provided to residents covered by Medicare Part A. A key purpose of
implementing the new case-

mix related system was to ensure that Medicare rates appropriately paid
for the changing acuity of Medicare SNF patients.

In this proposed rule, CMS proposes to reduce SNF rates because
increases in patient acuity have been greater than CMS anticipated. For
reasons explained below, AAHSA believes that these reductions are
unwarranted, improper, and exacerbate serious inaccuracies in the
payment system. To understand the latter, additional background is
useful.

**The case-mix classification system (RUGs) poorly accounts for
variations in NTA costs**

Immediately after the rule implementing the SNF PPS was published on May
12, 1998, clinicians, researchers, and provider groups began pointing
out a serious problem with the new system: it failed to account for
differences among patients in the use of non-therapy ancillaries (NTA).
These are primarily medications, but also include supplies, laboratory
tests, and respiratory therapy. The new system assumes that NTA costs
are correlated with nursing time and hence uses the nursing index part
of the RUGs system to account for differences among patients with
respect to NTA. Clinicians and provider groups supplied CMS and Congress
case after case example of how the new system failed to account properly
for NTA costs. The problem was identified as being especially acute
among medically complex patients, who generally require the most costly
NTA.

Congress took note. For example, in September 1999 the Appropriations
Committee Report for the Department of Health and Human Services stated,
"The Committee has heard concerns regarding the equity of the new
Medicare SNF prospective payment system as it relates to non-therapy
ancillaries. The demonstration upon which the new system was based did
not include this class of items and services \[in the prospective rate;
they were treated as a pass-through\]." The Committee urged CMS to fix
the problem.[^1]

In response to these concerns, and acknowledging problems with the rule,
CMS contracted with Abt Associates for research on the issue. The
initial findings from that study, released October 1, 1998, confirmed
that RUG III has little ability to predict the use of NTA and that the
new PPS contained financial disincentives to care for certain medically
complex patients with high NTA costs.[^2]

Various members of Congress stepped up calls for an immediate temporary
solution as well as longer-range solutions. For example, Senator Orrin
Hatch (R-Utah) said in the Senate, "Unless relief is provided and this
anomaly in the payment system is corrected, a major impediment will
remain for certain patients with high non-therapy ancillary costs to
receive Medicare services in nursing facilities. An immediate
transitional modification is needed before irreparable harm is done to
quality care and access for high cost patients....We must ...develop
longer term solutions for these crucial services, but first we must do
no harm in the interim."[^3] Senator Hatch expressed concern that
without amendment the new system would drive some providers to
sub-optimal decisions for beneficiaries, such as focusing on lighter
care patients and eliminating respiratory therapists and similar
specialty staff.

In 1999, Congress passed the Balanced Budget Refinement Act (BBRA). The
BBRA provided for 20 percent add-on payments to selected RUG groups as a
temporary fix to the NTA problem. The RUG groups selected for the
add-ons were those for medically complex patients and 3 rehabilitation
groups where it was also thought many medically complex patients were
classified, based on the information available at the time. Congress
specified that the add-ons were to remain until the later of October 1,
2000, or the implementation of refinements to the case-mix system to
account for the costs of NTAs and medically complex patients.

The Abt research, substantially completed in February 2000 did indeed
provide compelling evidence of the need for refinements to the payment
system to better account for NTA and hence for medically complex
patients. But an effort to implement refinements on October 1, 2000
failed when part of the research conducted initially on a limited sample
of cases could not be replicated with a larger, national sample of
cases. The part that could be successfully replicated was virtually
identical to the change proposed with the current rule. But in 2000 CMS
concluded that a single change to the case-mix system (adding more RUGs
groups based on patients with both extensive services and
rehabilitation) would not serve as an appropriate refinement---a correct
judgment in our view, as discussed later.

After the implementation of the new system, research on its components
and effect was undertaken by various federal agencies. By 2000, although
there were on-going disputes about the overall adequacy of total
payments, there was agreement across the board that the new system did
not account properly for NTAs; MedPAC, GAO, and the Inspector General
agreed this was a problem. The Inspector General reported finding access
problems to SNF care for medically complex patients with high NTA
costs.[^4]

When Congress subsequently passed the Benefits Improvement and
Protection Act of 2000 (BIPA), the BBRA add-ons were essentially
continued, but they were adjusted to correct an anomaly created by
adding 20 percent to three rehabilitation classes, in addition to the 20
percent add-ons for medically complex groups. Under that system, some
patients with higher rehabilitation use got lower rates than some groups
with lower rehabilitation use. In BIPA the add-ons were restructured in
a budget neutral fashion to leave 20 percent add-ons for the medically
complex patients and place a 6.7 percent add-on on each rehabilitation
group. Congress specified that the BIPA add-ons should remain until
appropriate refinements were implemented to address the problems of
medically complex patients (which meant the identified problems with NTA
costs which are especially problematic for medically complex patients).
BIPA also required CMS to conduct a study of alternatives to the RUGs
case-mix classification system to better account for resource use, with
the report due January 1, 2005. The full report of this research,
conducted by the Urban Institute, was not submitted to Congress nor made
public until well *after* CMS changed the RUGs classification system in
2006.

**The "refinements" implemented January 1, 2006 did not meaningfully
improve accuracy**

On January 1, 2006, CMS made two changes ("refinements") to the case-mix
classification system, which the agency asserted sufficiently addressed
system problems (lack of ability to pay appropriately for non-therapy
ancillaries, especially for medically complex patients) so that the rate
cushions added by Congress (6.7 percent for rehabilitation patient and
20 percent for medically complex patients) could be eliminated. First,
CMS added nine new RUGs classes for patients qualifying for both
rehabilitation and "extensive services."[^5] Second, CMS increased the
nursing index uniformly across all RUG groups by 9 percent, adding an
amount to payments equal to approximately 3% of SNF revenues. The agency
stated that this uniform allocation acted as a proxy for an adjustment
to account for the high degree of variability in non-therapy ancillaries
within and across RUG groups. AAHSA urged CMS not to implement the
proposed changes because they would only exacerbate problems:

> "AAHSA recommends that these case-mix changes not be implemented
> because CMS provides no evidence that payment accuracy is improved,
> available evidence suggests the proposed changes are unlikely to
> meaningfully improve the problems which the add-ons are designed to
> address and could actually reduce payment accuracy. Further, the
> proposed changes create additional problems including poor clinical
> incentives. AAHSA urges CMS instead to complete the planned new time
> study and the very promising research begun by the Urban Institute. We
> believe these will enable CMS to develop and implement a rational,
> well-conceived solution to the NTA problem for medically complex and
> other patients using strong research and appropriate data" (Comment
> letter from AAHSA to CMS, July 12, 2005).

The time study is not yet completed, but the research begun by the Urban
Institute for CMS was extended under a contract with MedPAC, which has
long been concerned about problems with the SNF PPS and wanted to build
on the very useful initial findings from the Urban Institute. In its
June 2008 *Report to Congress*, MedPAC reported that the current SNF PPS
still fails very badly with respect to accurately paying for medically
complex patients and those who need costly medications and other NTAs.
The current system, MedPAC reports, explains only 5% of NTA costs. This
and other inaccuracies in the payment system could be substantially
improved by a different approach proposed by MedPAC, based on the Urban
Institute research. That research indicates that not-for-profit SNFs are
particularly disadvantaged by current inaccuracies in the payment
system. For example, MedPAC reports that if its proposed system
refinements were implemented, there would be a four-fold increase in the
overall accuracy of payments and that consequently rates for
not-for-profit SNFs would on average increase 7 percent (29 percent
would have rate increases over 10 percent).[^6]

**COMMENTS**

AAHSA has comments on Section II.B of the proposed rule.

**II. ANNUAL UPDATE OF PAYMENT RATES**

**II.B Case-mix Adjustments**

CMS proposes to reduce SNF rates, by making certain adjustments to the
RUGs system, because increases in patient acuity have been greater than
CMS anticipated. AAHSA believes that these reductions are unwarranted
and improper, exacerbate serious inaccuracies in the payment system, and
hence compromise quality care. Consequently, AAHSA requests that CMS not
make the proposed adjustments to the RUGs system that result in reduced
rates. AAHSA further believes that if CMS goes forward with the
adjustments, that errors in the calculations should be corrected.

**AAHSA recommends that CMS not make the proposed adjustments**

AAHSA believes the proposed adjustments are improper and should not be
made for at least five reasons.

1)  [The proposed adjustments are directly contrary to the design and
    intent of the SNF PPS which is meant to provide higher payments as
    case-mix acuity increases]{.underline}

In making changes to the case-mix classification system on January 1,
2006, CMS used 2001 case-mix data (the most recent then available) to
make the recalibration adjustments to the weights that are required
whenever a case-mix system is modified, changing the scale. But CMS has
now discovered that the SNF case-mix has changed since 2001 and thus
costs are higher than CMS had anticipated. CMS proposes to recalibrate
the system, both the change in weights and the related adjustment,
designed to help mitigate poor explanation of NTA variation. CMS used
2006 case-mix data for this proposed recalibration ("parity adjustment")
and noted that it would also consider 2007 case-mix data.

This is completely inappropriate because SNF acuity has been increasing
since the implementation of the PPS and the system was specifically
designed to pay SNFs more as acuity increased. This proposed
"re-recalibration" introduces an entirely new and disturbing concept to
the SNF PPS, in which SNFs would be penalized for accepting higher
acuity patients---the very purpose of the system.

2)  [CMS lacks authority to reduce rates to maintain "budget
    neutrality"]{.underline}

CMS says, in effect, that in calculating the adjustments for the
"refinements" implemented on January 1, 2008, budget projections were
made for FY 2007 (the first year of the newly designed rates), based on
assumptions regarding patient acuity after the implementation of the
refinements. But, CMS notes, acuity was higher than projected, leading
to an excess of costs over "budget." CMS lacks authority to make such an
adjustment. The physician payment system, for example, specifically
includes a budget target adjustment and the hospital payment system
similarly requires annually that CMS adjust payments for budget
neutrality. This hospital "budget neutrality" adjustment is separate
from the annual "recalibration adjustment," required to assure parity
between the previous year's case-mix classification system and the new
one, based on DRG reclassifications. For example, for hospital rates for
FY 2000, CMS first recalibrated the DRG weights, using MedPAR data:

> "The weights developed according to the methodology described above,
> using the final DRG classification changes, result in an average case
> weight that is different from the average case weight before
> recalibration. Therefore, the new weights are normalized by an
> adjustment factor, so that the average case weight after recalibration
> is equal to the average case weight before recalibration. This
> adjustment is intended to ensure that recalibration by itself neither
> increases nor decreases total payments under the prospective payment
> system." (*Federal Register*: Vol. 63, No. 147; July 31, 1998, p.
> 40965).

That step is identical to the recalibration that CMS made (or should
have made) when the RUGs system was "refined" for rates beginning
January 1, 2006. But, because the law regarding construction of hospital
payments requires that case-mix reclassification changes also be budget
neutral for the coming year, CMS was required to make a second set of
adjustments:

"Section 1886(d)(4)(C)(iii) of the Act requires that beginning with

FY 1991, reclassification and recalibration changes be made in a manner

that assures that the aggregate payments are neither greater than nor

less than the aggregate payments that would have been made without the

changes. Although normalization is intended to achieve this effect,

equating the average case weight after recalibration to the average

case weight before recalibration does not necessarily achieve budget

neutrality with respect to aggregate payments to hospitals because

payment to hospitals is affected by factors other than average case

weight. Therefore, as we have done in past years and as discussed in

section II.A.4.b of the Addendum to this final rule, we make a budget

neutrality adjustment to assure that the requirement of section

1886(d)(4)(C)(iii) of the Act is met (*Ibid).*

This second step---an adjustment for budget neutrality---is not part of
the SNF payment system. Congress specifically charged CMS with a "budget
neutrality" adjustment for hospital payments, but did not do so with
respect to SNF payments.[^7] If Congress believes that payments to SNFs
are excessive from a budgetary perspective, then Congress may adjust
rates accordingly.

3)  [The proposed changes are contrary to CMS' explicit statement in
    2005 that no such changes would be made]{.underline}

In the proposed rule for SNF rates for FY 2006, CMS describes the RUGs
"refinements" it ultimately implemented, triggering a loss of the
"add-ons" that Congress put in place to mitigate some of the severe
inaccuracies in the payment system. At that time, CMS promised the
following:

> "We note that we are advancing these proposed changes under our
> authority in section 101(a) of the BBRA to establish case-mix
> refinements, and that the changes we are hereby proposing will
> represent the final adjustments made under this authority.
> Accordingly, *[any future changes to the case-mix weights or other
> components of the SNF PPS would be accomplished through staff time
> measures and other validated analytical studies]{.underline}*
> (emphasis added; *Federal Register,* Vol. 70, No. 96, May 19, 2005,
> pg. 29079).

Part of the "refinements" that CMS implemented, in order to eliminate
the "add-ons," was an amount of additional rate money---allocated
uniformly across all the RUG groups (on the nursing component) as a
proxy for an adjustment to account for the high degree of variability in
non-therapy ancillaries within and across RUG groups. In the current
proposal, CMS proposes to cut those dollars, with not one "validated
analytical study" to support the notion that the previous adjustment
amount was too high. CMS now finds that it set the amount "too high" for
what it hoped to spend, but that is a very different matter from having
a "validated analytical study" demonstrating, for example, that the
degree of variability in NTAs within and across RUG groups miraculously
became improved, thus justifying a cut in the adjustment.

4)  [The proposed changes exacerbate the problem of underpayments for
    medically complex patients, making the system less
    accurate]{.underline}

As MedPAC and others have repeatedly noted, the current SNF PPS does a
very poor job of targeting adequate payments to medically complex
patients, relative to therapy cases. The proposed changes exacerbate
these problems by targeting medically complex patients for greater rate
reductions than those for therapy cases. This occurs, mathematically,
because the changes proposed are related to the nursing component, but
not the therapy component, a situation that results from CMS making the
previous "refinements" before it had sufficient data to properly adjust
both the nursing and therapy components. Thus, an error of the past will
now be further compounded if the proposed changes are implemented,
resulting in further problems for medically complex patients and the
facilities that attempt to serve them. The table below illustrates how
rates for patients classified as SE3 (a very medically complex category)
will decline more than rates for patients classified as RUX (the highest
rehabilitation RUG group) in two areas of Connecticut. While wage index
variations influence the exact dollar rate changes from place to place,
it is universally true across the country that rates for medically
complex patients will be more disadvantaged by the proposed changes than
rates for therapy patients---not at all what would be expected if the
changes made the payment system "more accurate" as CMS asserts.

+-----------+-----------+-----------+-----------+-----------+-----------+
|           | **RUG**   | **Rate    | **Rate    | **Percent | **Change  |
|           |           | for FY    | for FY    | change**  | in buying |
|           |           | 2008**    | 2009**    |           | po        |
|           |           |           |           |           | wer**[^8] |
+-----------+-----------+-----------+-----------+-----------+-----------+
| **New     | RUX       | \$681.01  | \$675.08  | *-0.9%*   | *-4.0%*   |
| Haven,**  |           |           |           |           |           |
|           |           |           |           |           |           |
| **Conn    |           |           |           |           |           |
| ecticut** |           |           |           |           |           |
+-----------+-----------+-----------+-----------+-----------+-----------+
|           | SE3       | \$409.67  | \$395.60  | *-3.4%*   | *-6.5%*   |
+-----------+-----------+-----------+-----------+-----------+-----------+
| **Rural   | RUX       | \$704.49  | \$680.78  | *-3.4%*   | \-*6.5%*  |
| Conn      |           |           |           |           |           |
| ecticut** |           |           |           |           |           |
+-----------+-----------+-----------+-----------+-----------+-----------+
|           | SE3       | \$394.64  | \$370.87  | *-6.0%*   | *-9.1%*   |
+-----------+-----------+-----------+-----------+-----------+-----------+

5)  [The proposed changes reduce needed revenues for quality patient
    care when costs are increasing and rates were already
    problematic]{.underline}

CMS opines in the proposed rule that it "believe\[s\] this recalibration
could be made without creating undue hardship on providers," having
noted "that after \[MedPAC\] conducted a thorough review of SNF profit
margins, MedPAC concluded that, in the aggregate, SNFs are operating on
a sound financial basis" (*Federal Register*, Vol. 73, No. 89, May 7,
2008, p. 25923). Unfortunately, patients are not treated "in aggregate,"
but by individual facilities. As MedPAC reports, not-for-profit SNF
margins are low and---given the poor targeting of dollars for patients
with high cost drugs and other aspects of complex care---not-for-profits
on average have rates that are 7 percent too low. Yet, with these
proposed changes, CMS reports that payment to non-profit facilities will
decline by 0.5% which translates into an official loss of buying power
of 3.6% (taking projected inflation into account). But projected
inflation---the official market basket update---could not have
anticipated the effect on the economy in general, including nursing
homes, of soaring gas and food prices. Thus, the official loss of buying
power from this proposed change is surely an understatement.

> **AAHSA recommends that if CMS decides to implement changes, that the
> re-recalibration be amended to correct an inadvertent technical
> error**

CMS did its original recalibration adjustment (to equalize case-mix
weights, following reclassification) using 2001 data. For the
re-recalibration in this proposed rule, CMS used 2006 case-mix data.
However, this is technically incorrect as all of the case-mix changes in
calendar year 2006 occurred after implementation of the new
classification system. Thus, the re-recalibration wrongly removes actual
changes in patients. The technical step of recalibration is designed to
equalize the weights when a case mix scaling system is changed, based on
the patients in the mix at the time the change is made. Since case mix
is somewhat sensitive to time of year, it would be optimal to have a
full year of data for the change. This argues for doing the
re-recalibration using calendar year 2005 patient data. On the other
hand, since case-mix has been increasing for some time, one might argue
that the re-calibration should in theory be done on the patient mix
present at the last moment before the change was implemented---midnight
on December 31, 2005. Since this is impractical, an alternative would be
doing the re-recalibration of patients served during three moths before
and after December 31, 2005.

AAHSA appreciates the opportunity to submit our views on this issue and
the time and consideration you devote to the comment process.

Sincerely,

s/Barbara Manard

Barbara Manard, Ph. D.

Vice President Health/LTC Strategies

American Association of Homes and

Services for the Aging

[^1]: *Congressional Record,* October 21, 1998, p. S12876.

[^2]: *Development and Refinement of the RUGIII Resident Classification
    System, Preliminary Findings,* HCFA NO. 500-96-0003; Task Order #5,
    October 1, 1998.

[^3]: *Congressional Record,* October 21, 1998, p. S12876.

[^4]: Testimony of George Grob to the Senate Committee on Aging,
    September 5, 2000.

[^5]: To qualify for "extensive services," a patient must have the
    following: ADL sum = 7+; plus one or more of the following: IV
    feeding (last 7 days), IV meds (last 14 days), vent/respirator (last
    14 days), tracheotomy (last 14 days), or suctioning (last 14 days).

[^6]: Medicare Payment Advisory Commission, June 2008. *Report to
    Congress,* page 186.

[^7]: CMS has explicit authority to reduce SNF rates for "case-mix
    creep"---changes due to upcoding rather than actual changes in
    patients (42 U.S.C. 1395yy(e)(4)(F). But that is not the issue here.
    CMS has not said that it is making the adjustment because of
    "case-mix creep," but instead notes that there are more high rehab
    cases than CMS expected.

[^8]: CMS reports in the proposed rule that projected price increases
    from FY 2008 to FY 2009 are 3.1 percent---the market basket update.
    Thus, the "change in buying power" of a new rate is the sum of the
    nominal rate change and the projected increase in the cost of items
    that nursing homes must buy.