```

[Federal Register Volume 76, Number 152 (Monday, August 8, 2011)]
[Rules and Regulations]
[Pages 48486-48562]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19544]

[[Page 48485]]

Vol. 76

Monday,

No. 152

August 8, 2011

Part III

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 413

Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2012; Final Rule

Federal Register / Vol. 76 , No. 152 / Monday, August 8, 2011 / Rules 
and Regulations

[[Page 48486]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 413

[CMS-1351-F]
RIN 0938-AQ29

Medicare Program; Prospective Payment System and Consolidated 
Billing for Skilled Nursing Facilities for FY 2012

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule updates the payment rates used under the 
prospective payment system for skilled nursing facilities (SNFs) for 
fiscal year 2012. In addition, it recalibrates the case-mix indexes so 
that they more accurately reflect parity in expenditures between RUG-IV 
and the previous case-mix classification system. It also includes a 
discussion of a Non-Therapy Ancillary component currently under 
development within CMS. In addition, this final rule discusses the 
impact of certain provisions of the Affordable Care Act, and reduces 
the SNF market basket percentage by the multi-factor productivity 
adjustment. This rule also implements certain changes relating to the 
payment of group therapy services and implements new resident 
assessment policies. Finally, this rule announces that the proposed 
provisions regarding the ownership disclosure requirements set forth in 
section 6101 of the Affordable Care Act will be finalized at a later 
date.

DATES: Effective Date: This final rule is effective on October 1, 2011.

FOR FURTHER INFORMATION CONTACT:

Penny Gershman, (410) 786-6643 (for information related to clinical 
issues).
John Kane, (410) 786-0557 (for information related to the development 
of the payment rates and case-mix indexes).
Kia Sidbury, (410) 786-7816 (for information related to the wage 
index).
Bill Ullman, (410) 786-5667 (for information related to level of care 
determinations, consolidated billing, and general information).

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Current System for Payment of SNF Services Under Part A of 
the Medicare Program
    B. Requirements of the Balanced Budget Act of 1997 (BBA) for 
Updating the Prospective Payment System for Skilled Nursing 
Facilities
    C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement 
Act of 1999 (BBRA)
    D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)
    E. The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA)
    F. The Affordable Care Act
    G. Skilled Nursing Facility Prospective Payment--General 
Overview
    1. Payment Provisions--Federal Rate
    2. FY 2012 Rate Updates Using the Skilled Nursing Facility 
Market Basket Index
II. Summary of the Provisions of the FY 2012 Proposed Rule
III. Analysis of and Responses to Public Comments on the FY 2012 
Proposed Rule
    A. General Comments on the FY 2012 Proposed Rule
    B. FY 2012 Annual Update of Payment Rates under the Prospective 
Payment System for Skilled Nursing Facilities
    1. Federal Prospective Payment System
    a. Costs and Services Covered by the Federal Rates
    b. Methodology Used for the Calculation of the Federal Rates
    2. Case-Mix Adjustments
    a. Background
    b. Development of Case-Mix Indexes
    3. Wage Index Adjustment to Federal Rates
    4. Updates to Federal Rates
    5. Relationship of RUG-IV Case-Mix Classification System to 
Existing Skilled Nursing Facility Level-of-Care Criteria
    6. Example of Computation of Adjusted PPS Rates and SNF Payment
    C. Resource Utilization Groups, Version 4 (RUG-IV)
    1. Prospective Payment for SNF Non-Therapy Ancillary Costs
    D. Ongoing Initiatives Under the Affordable Care Act
    1. Value-Based Purchasing (Section 3006)
    2. Payment Adjustment for Hospital-Acquired Conditions (Section 
3008)
    3. Nursing Home Transparency and Improvement (Section 6104)
    E. Other Issues
    1. Required Disclosure of Ownership and Additional Disclosable 
Parties Information (Section 6101)
    2. Therapy Student Supervision
    3. Group Therapy and Therapy Documentation
    4. Proposed Changes to the MDS 3.0 Assessment Schedule and Other 
Medicare-Required Assessments
    5. Discussion of Possible Future Initiatives
    F. The Skilled Nursing Facility Market Basket Index
    1. Use of the Skilled Nursing Facility Market Basket Percentage
    2. Market Basket Forecast Error Adjustment
    3. Multifactor Productivity Adjustment
    a. Incorporating the Multifactor Productivity Adjustment Into 
the Market Basket Update
    b. Federal Rate Update Factor
    G. Consolidated Billing
    H. Application of the SNF PPS to SNF Services Furnished by 
Swing-Bed Hospitals
IV. Analysis of and Responses to Public Comments on the FY 2011 
Update Notice With Comment
V. Provisions of the Final Rule
VI. Collection of Information Requirements
VII. Economic Analyses
    A. Regulatory Impact Analysis
    1. Introduction
    2. Statement of Need
    3. Overall Impacts
    4. Detailed Economic Analysis
    5. Alternatives Considered
    6. Accounting Statement
    7. Conclusion
    B. Regulatory Flexibility Act Analysis
    C. Unfunded Mandates Reform Act Analysis
    D. Federalism Analysis
Regulation Text
Addendum: FY 2012 CBSA-Based Wage Index Tables (Tables A & B)

Acronyms

    In addition, because of the many terms to which we refer by acronym 
in this final rule, we are listing these acronyms and their 
corresponding terms in alphabetical order below:

ABN Advance Beneficiary Notice
AIDS Acquired Immune Deficiency Syndrome
ARD Assessment Reference Date
ASAP Assessment Submission and Processing
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Public Law 106-113
BIMS Brief Interview for Mental Status
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Public Law 106-554
CAH Critical Access Hospital
CBSA Core-Based Statistical Area
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CMI Case-Mix Index
CMS Centers for Medicare & Medicaid Services
COT Change of Therapy
EOT End of Therapy
EOT--R End of Therapy--Resumption
FQHC Federally Qualified Health Center
FR Federal Register
FY Fiscal Year
GAO Government Accountability Office
HAC Hospital-Acquired Condition
HCC Hierarchical Condition Category
HCPCS Healthcare Common Procedure Coding System
HIPAA Health Insurance Portability and Accountability Act of 1996
HR-III Hybrid Resource Utilization Groups, Version 3
IGI IHS (Information Handling Services) Global Insight, Inc.
MDS Minimum Data Set
MFP Multifactor Productivity
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275

[[Page 48487]]

MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MPAF Medicare PPS Assessment Form
MSA Metropolitan Statistical Area
NTA Non-Therapy Ancillary
OMB Office of Management and Budget
OMRA Other Medicare-Required Assessment
ONTA Other Non-Therapy Ancillary
OSCAR Online Survey Certification and Reporting System
PAC-PRD Post Acute Care Payment Reform Demonstration
PECOS Medicare Provider Enrollment, Chain, and Ownership System
PPS Prospective Payment System
QIES Quality Improvement and Evaluation System
RAI Resident Assessment Instrument
RAVEN Resident Assessment Validation Entry
RFA Regulatory Flexibility Act, Public Law 96-354
RNP Routine NTA Bundled Payment
RHC Rural Health Clinic
RIA Regulatory Impact Analysis
RTM Reimbursable Therapy Minutes
RUG-III Resource Utilization Groups, Version 3
RUG-IV Resource Utilization Groups, Version 4
RUG-53 Refined 53--Group RUG-III Case-Mix Classification System
SCHIP State Children's Health Insurance Program
SCPA Significant Correction of a Prior Assessment
SCSA Significant Change in Status Assessment
SNF Skilled Nursing Facility
STM Staff Time Measurement
STRIVE Staff Time and Resource Intensity Verification
TNP Tiered Non-Routine NTA Payment
UMRA Unfunded Mandates Reform Act, Public Law 104-4

I. Background

    In the May 6, 2011 Federal Register, we published a proposed rule 
(76 FR 26364) (hereafter referred to as the FY 2012 proposed rule), 
setting forth potential updates to the payment rates used under the 
prospective payment system (PPS) for skilled nursing facilities (SNFs), 
for fiscal year (FY) 2012. Annual updates to the PPS rates for (SNFs) 
are required by section 1888(e) of the Social Security Act (the Act), 
as added by section 4432 of the Balanced Budget Act of 1997 (BBA, Pub. 
L. 105-33, enacted on August 5, 1997), and amended by subsequent 
legislation as discussed elsewhere in this preamble. Our most recent 
annual update occurred in an update notice with comment period (75 FR 
42886, July 22, 2010) that set forth updates to the SNF PPS payment 
rates for fiscal year (FY) 2011. We subsequently published a correction 
notice (75 FR 55801, September 14, 2010) for those payment rate 
updates. We respond to public comments which relate to the FY 2011 
update notice, along with those relating to the FY 2012 proposed rule, 
in this final rule.

A. Current System for Payment of Skilled Nursing Facility Services 
Under Part A of the Medicare Program

    Section 4432 of the BBA amended section 1888 of the Act to provide 
for the implementation of a per diem PPS for SNFs, covering all costs 
(routine, ancillary, and capital-related) of covered SNF services 
furnished to beneficiaries under Part A of the Medicare program, 
effective for cost reporting periods beginning on or after July 1, 
1998. In this final rule, we are updating the per diem payment rates 
for SNFs for FY 2012. Major elements of the SNF PPS include:
     Rates. As discussed in section I.G.1. of this final rule, 
we established per diem Federal rates for urban and rural areas using 
allowable costs from FY 1995 cost reports. These rates also included a 
``Part B add-on'' (an estimate of the cost of those services that, 
before July 1, 1998, were paid under Part B but furnished to Medicare 
beneficiaries in a SNF during a Part A covered stay). We adjust the 
rates annually using a SNF market basket index, and we adjust them by 
the hospital inpatient wage index to account for geographic variation 
in wages. We also apply a case-mix adjustment to account for the 
relative resource utilization of different patient types. As further 
discussed in section I.G.1. of this final rule, for FY 2012 this 
adjustment will utilize the Resource Utilization Groups, version 4 
(RUG-IV) case-mix classification, and will use information obtained 
from the required resident assessments using version 3.0 of the Minimum 
Data Set (MDS 3.0). (The information collection burden associated with 
the resident assessment is approved under OMB Control Number 0938-
0739.) Additionally, as noted elsewhere in this preamble, the payment 
rates at various times have also reflected specific legislative 
provisions for certain temporary adjustments.
     Transition. Under sections 1888(e)(1)(A) and (e)(11) of 
the Act, the SNF PPS included an initial, three-phase transition that 
blended a facility-specific rate (reflecting the individual facility's 
historical cost experience) with the Federal case-mix adjusted rate. 
The transition extended through the facility's first three cost 
reporting periods under the PPS, up to and including the one that began 
in FY 2001. Thus, the SNF PPS is no longer operating under the 
transition, as all facilities have been paid at the full Federal rate 
effective with cost reporting periods beginning in FY 2002. As we now 
base payments entirely on the adjusted Federal per diem rates, we no 
longer include adjustment factors related to facility-specific rates 
for the coming fiscal year.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the case-mix classification is based, in part, on the beneficiary's 
need for skilled nursing care and therapy, we have attempted, where 
possible, to coordinate claims review procedures with the existing 
resident assessment process and case-mix classification system. As 
further discussed in section III.B.5. of this final rule, this approach 
includes an administrative presumption that utilizes a beneficiary's 
initial classification in one of the upper 52 RUGs of the 66-group RUG-
IV case-mix classification system to assist in making certain SNF level 
of care determinations. In the July 30, 1999 final rule (64 FR 41670), 
we indicated that we would announce any changes to the guidelines for 
Medicare level of care determinations related to modifications in the 
case-mix classification structure (see section III.B.5. of this final 
rule for a more detailed discussion of the relationship between the 
case-mix classification system and SNF level of care determinations).
     Consolidated Billing. The SNF PPS includes a consolidated 
billing provision that requires a SNF to submit consolidated Medicare 
bills to its fiscal intermediary or Medicare Administrative Contractor 
for almost all of the services that its residents receive during the 
course of a covered Part A stay. In addition, this provision places 
with the SNF the Medicare billing responsibility for physical therapy, 
occupational therapy, and speech-language pathology services that the 
resident receives during a noncovered stay. The statute excludes a 
small list of services from the consolidated billing provision 
(primarily those of physicians and certain other types of 
practitioners), which remain separately billable under Part B when 
furnished to a SNF's Part A resident. A more detailed discussion of 
this provision appears in section III.G of this final rule.
     Application of the SNF PPS to SNF services furnished by 
swing-bed hospitals. Section 1883 of the Act permits certain small, 
rural hospitals to enter into a Medicare swing-bed agreement, under 
which the hospital can use its beds to provide either acute or SNF 
care, as needed. For critical

[[Page 48488]]

access hospitals (CAHs), Part A pays on a reasonable cost basis for SNF 
services furnished under a swing-bed agreement. However, in accordance 
with section 1888(e)(7) of the Act, these services furnished by non-CAH 
rural hospitals are paid under the SNF PPS, effective with cost 
reporting periods beginning on or after July 1, 2002. A more detailed 
discussion of this provision appears in section III.H. of this final 
rule.

B. Requirements of the Balanced Budget Act of 1997 (BBA) for Updating 
the Prospective Payment System for Skilled Nursing Facilities

    Section 1888(e)(4)(H) of the Act requires that we provide for 
publication annually in the Federal Register:
    (1) The unadjusted Federal per diem rates to be applied to days of 
covered SNF services furnished during the upcoming FY.
    (2) The case-mix classification system to be applied for these 
services during the upcoming FY.
    (3) The factors to be applied in making the area wage adjustment 
for these services.
    Along with other revisions discussed later in this preamble, this 
final rule provides these required annual updates to the Federal rates.

C. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA)

    There were several provisions in the BBRA (Pub. L. 106-113, enacted 
on November 29, 1999) that resulted in adjustments to the SNF PPS. We 
described these provisions in detail in the SNF PPS final rule for FY 
2001 (65 FR 46770, July 31, 2000). In particular, section 101(a) of the 
BBRA provided for a temporary 20 percent increase in the per diem 
adjusted payment rates for 15 specified groups in the original, 44-
group Resource Utilization Groups, version 3 (RUG-III) case-mix 
classification system. In accordance with section 101(c)(2) of the 
BBRA, this temporary payment adjustment expired on January 1, 2006, 
upon the implementation of a refined, 53-group version of the RUG-III 
system, RUG-53 (see section I.G.1. of this final rule). We included 
further information on BBRA provisions that affected the SNF PPS in 
Program Memoranda A-99-53 and A-99-61 (December 1999).
    Also, section 103 of the BBRA designated certain additional 
services for exclusion from the consolidated billing requirement, as 
discussed in section III.G. of this final rule. Further, for swing-bed 
hospitals with more than 49 (but less than 100) beds, section 408 of 
the BBRA provided for the repeal of certain statutory restrictions on 
length of stay and aggregate payment for patient days, effective with 
the end of the SNF PPS transition period described in section 
1888(e)(2)(E) of the Act. In the final rule for FY 2002 (66 FR 39562, 
July 31, 2001), we made conforming changes to the regulations at Sec.  
413.114(d), effective for services furnished in cost reporting periods 
beginning on or after July 1, 2002, to reflect section 408 of the BBRA.

D. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)

    The BIPA (Pub. L. 106-554, enacted December 21, 2000) also included 
several provisions that resulted in adjustments to the SNF PPS. We 
described these provisions in detail in the final rule for FY 2002 (66 
FR 39562, July 31, 2001). In particular:
     Section 203 of the BIPA exempted CAH swing beds from the 
SNF PPS. We included further information on this provision in Program 
Memorandum A-01-09 (Change Request 1509), issued January 16, 
2001, which is available online at http://www.cms.gov/transmittals/downloads/a0109.pdf.
     Section 311 of the BIPA revised the statutory update 
formula for the SNF market basket, and also directed us to conduct a 
study of alternative case-mix classification systems for the SNF PPS. 
In 2006, we submitted a report to the Congress on this study, which is 
available online at http://www.cms.gov/SNFPPS/Downloads/RC_2006_PC-PPSSNF.pdf.
     Section 312 of the BIPA provided for a temporary increase 
of 16.66 percent in the nursing component of the case-mix adjusted 
Federal rate for services furnished on or after April 1, 2001, and 
before October 1, 2002; accordingly, this add-on is no longer in 
effect. This section also directed the Government Accountability Office 
(GAO) to conduct an audit of SNF nursing staff ratios and submit a 
report to the Congress on whether the temporary increase in the nursing 
component should be continued. The report (GAO-03-176), which GAO 
issued in November 2002, is available online at http://www.gao.gov/new.items/d03176.pdf.
     Section 313 of the BIPA repealed the consolidated billing 
requirement for services (other than physical therapy, occupational 
therapy, and speech-language pathology services) furnished to SNF 
residents during noncovered stays, effective January 1, 2001. (A more 
detailed discussion of this provision appears in section VII. of this 
final rule.)
     Section 314 of the BIPA corrected an anomaly involving 
three of the RUGs that section 101(a) of the BBRA had designated to 
receive the temporary payment adjustment discussed above in section 
I.C. of this final rule. (As noted previously, in accordance with 
section 101(c)(2) of the BBRA, this temporary payment adjustment 
expired upon the implementation of case-mix refinements on January 1, 
2006.)
     Section 315 of the BIPA authorized us to establish a 
geographic reclassification procedure that is specific to SNFs, but 
only after collecting the data necessary to establish a SNF wage index 
that is based on wage data from nursing homes. To date, this has proven 
to be unfeasible due to the volatility of existing SNF wage data and 
the significant amount of resources that would be required to improve 
the quality of that data.
    We included further information on several of the BIPA provisions 
in Program Memorandum A-01-08 (Change Request 1510), issued 
January 16, 2001, which is available online at http://www.cms.gov/transmittals/downloads/a0108.pdf.

E. The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA)

    The MMA (Pub. L. 108-173, enacted on December 8, 2003) included a 
provision that resulted in a further adjustment to the SNF PPS. 
Specifically, section 511 of the MMA amended section 1888(e)(12) of the 
Act, to provide for a temporary increase of 128 percent in the PPS per 
diem payment for any SNF residents with Acquired Immune Deficiency 
Syndrome (AIDS), effective with services furnished on or after October 
1, 2004. This special AIDS add-on was to remain in effect until ``* * * 
the Secretary certifies that there is an appropriate adjustment in the 
case mix * * * to compensate for the increased costs associated with 
[such] residents. * * *'' The AIDS add-on is also discussed in Program 
Transmittal 160 (Change Request 3291), issued on 
April 30, 2004, which is available online at http://www.cms.gov/transmittals/downloads/r160cp.pdf. In the SNF PPS final rule for FY 
2010 (74 FR 40288, August 11, 2009), we did not address the 
certification of the AIDS add-on in that final rule's implementation of 
the case-mix refinements for RUG-IV, thus allowing the temporary add-on 
payment created by section 511 of the MMA to remain in effect.
    For the limited number of SNF residents that qualify for the AIDS 
add-on, implementation of this provision

[[Page 48489]]

results in a significant increase in payment. For example, using FY 
2009 data, we identified less than 3,500 SNF residents with a diagnosis 
code of 042 (Human Immunodeficiency Virus (HIV) Infection). For FY 
2012, an urban facility with a resident with AIDS in RUG-IV group 
``HC2'' would have a case-mix adjusted payment of $401.48 (see Table 5) 
before the application of the MMA adjustment. After an increase of 128 
percent, this urban facility would receive a case-mix adjusted payment 
of approximately $915.37.
    In addition, section 410 of the MMA contained a provision that 
excluded from consolidated billing certain services furnished to SNF 
residents by rural health clinics (RHCs) and Federally Qualified Health 
Centers (FQHCs). (Further information on this provision appears in 
section III.G. of this final rule.)

F. The Affordable Care Act

    On March 23, 2010, the Patient Protection and Affordable Care Act, 
Public Law 111-148, was enacted. Following the enactment of Public Law 
111-148, the Health Care and Education Reconciliation Act of 2010 (Pub. 
L. 111-152, enacted on March 30, 2010) amended certain provisions of 
Public Law 111-148 and certain sections of the Social Security Act and, 
in certain instances, included ``freestanding'' provisions (Pub. L. 
111-148 and Pub. L. 111-152 are collectively referred to in this final 
rule as ``the Affordable Care Act''). Section 10325 of the Affordable 
Care Act included a provision involving the SNF PPS. Section 10325 
postponed the implementation of the RUG-IV case-mix classification 
system published in the FY 2010 SNF PPS final rule (74 FR 40288, August 
11, 2009), requiring that the Secretary not implement the RUG-IV case-
mix classification system before October 1, 2011. Notwithstanding this 
postponement of overall RUG-IV implementation, section 10325 further 
specified that the Secretary implement, effective October 1 2010, the 
changes related to concurrent therapy and the look-back period that 
were finalized as components of RUG-IV (see 74 FR 40315-19, 40322-24, 
August 11, 2009). As we noted in the FY 2011 SNF PPS Notice with 
Comment Period (75 FR 42889), implementing the particular combination 
of RUG-III and RUG-IV features specified in section 10325 of the 
Affordable Care Act would require developing a revised grouper, 
something that could not be accomplished by that provision's effective 
date (October 1, 2010) without risking serious disruption to providers, 
suppliers, and State agencies. Accordingly, in the FY 2011 Notice with 
Comment Period (75 FR 42889), we announced our intention to proceed on 
an interim basis with implementation of the full RUG-IV case-mix 
classification system as of October 1, 2010, followed by a retroactive 
claims adjustment, using a hybrid RUG-III (HR-III) system reflecting 
the Affordable Care Act configuration, once we had developed a revised 
grouper that could accommodate it. In that Notice with Comment period, 
we also invited public comment specifically on our plans for 
implementing section 10325 of the Affordable Care Act in this manner.
    However, section 202 of the Medicare and Medicaid Extenders Act of 
2010 (Pub. L. 111-309, enacted December 15, 2010) repealed section 
10325 of the Affordable Care Act. Therefore, we leave in place the 
implementation of the full RUG-IV system as of FY 2011, as finalized in 
the FY 2010 SNF PPS final rule (74 FR 40288). Moreover, as the repeal 
of section 10325 of the Affordable Care Act eliminates the need for a 
subsequent transition to the HR-III system, this renders moot any 
further discussion of public comments that we had invited on our 
planned implementation of that transition. In addition, we note that 
implementation of version 3.0 of the Minimum Data Set (MDS 3.0) has 
proceeded as originally scheduled, with an effective date of October 1, 
2010. The MDS 3.0 RAI Manual and MDS 3.0 Item Set are published on the 
MDS 3.0 Training Materials Web site, at http://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp.
    We note that a parity adjustment was applied to the RUG-53 nursing 
case-mix weights when the RUG-III system was initially refined in 2006, 
to ensure that the implementation of the refinements would not cause 
any change in overall payment levels (70 FR 45031, August 4, 2005). A 
detailed discussion of the parity adjustment in the specific context of 
the RUG-IV payment rates appears in the FY 2010 SNF PPS proposed rule 
(74 FR 22236-38, May 12, 2009) and final rule (74 FR 40338-40339, 
August 11, 2009), in the FY 2011 Notice with Comment Period (75 FR 
42892-42893), and in the FY 2012 proposed rule (76 FR 26370 through 
26377).
    Accordingly, as discussed above, effective October 1, 2010, we 
implemented and paid claims under the RUG-IV system that was finalized 
in the FY 2010 SNF PPS final rule. In section III.D. of this final 
rule, we discuss certain ongoing Affordable Care Act initiatives that 
relate to SNFs, and in section III.E.1, we discuss proposed revisions 
involving section 6101 of the Affordable Care Act, regarding required 
disclosure of ownership and additional disclosable parties information.

G. Skilled Nursing Facility Prospective Payment--General Overview

    We implemented the Medicare SNF PPS effective with cost reporting 
periods beginning on or after July 1, 1998. This methodology uses 
prospective, case-mix adjusted per diem payment rates applicable to all 
covered SNF services. These payment rates cover all costs of furnishing 
covered skilled nursing services (routine, ancillary, and capital-
related costs) other than costs associated with approved educational 
activities and bad debts. Covered SNF services include post-hospital 
services for which benefits are provided under Part A, as well as those 
items and services (other than physician and certain other services 
specifically excluded under the BBA) which, before July 1, 1998, had 
been paid under Part B but furnished to Medicare beneficiaries in a SNF 
during a covered Part A stay. A comprehensive discussion of these 
provisions appears in the May 12, 1998 interim final rule (63 FR 
26252).
1. Payment Provisions--Federal Rate
    The PPS uses per diem Federal payment rates based on mean SNF costs 
in a base year (FY 1995) updated for inflation to the first effective 
period of the PPS. We developed the Federal payment rates using 
allowable costs from hospital-based and freestanding SNF cost reports 
for reporting periods beginning in FY 1995. The data used in developing 
the Federal rates also incorporated an estimate of the amounts that 
would be payable under Part B for covered SNF services furnished to 
individuals during the course of a covered Part A stay in a SNF.
    In developing the rates for the initial period, we updated costs to 
the first effective year of the PPS (the 15-month period beginning July 
1, 1998) using a SNF market basket index, and then standardized for the 
costs of facility differences in case mix and for geographic variations 
in wages. In compiling the database used to compute the Federal payment 
rates, we excluded those providers that received new provider 
exemptions from the routine cost limits, as well as costs related to 
payments for exceptions to the routine cost limits. Using the formula 
that the BBA prescribed, we set the Federal rates at a level equal to 
the weighted mean of freestanding costs plus 50 percent of the 
difference between the freestanding mean and weighted mean of all SNF

[[Page 48490]]

costs (hospital-based and freestanding) combined. We computed and 
applied separately the payment rates for facilities located in urban 
and rural areas. In addition, we adjusted the portion of the Federal 
rate attributable to wage-related costs by a wage index.
    The Federal rate also incorporates adjustments to account for 
facility case-mix, using a classification system that accounts for the 
relative resource utilization of different patient types. The RUG-IV 
classification system uses beneficiary assessment data from the MDS 3.0 
completed by SNFs to assign beneficiaries to one of 66 RUG-IV groups. 
The original RUG-III case-mix classification system used beneficiary 
assessment data from the MDS, version 2.0 (MDS 2.0) completed by SNFs 
to assign beneficiaries to one of 44 RUG-III groups. Then, under 
incremental refinements that became effective on January 1, 2006, we 
added nine new groups--comprising a new Rehabilitation plus Extensive 
Services category--at the top of the RUG-III hierarchy. The May 12, 
1998 interim final rule (63 FR 26252) included a detailed description 
of the original 44-group RUG-III case-mix classification system. A 
comprehensive description of the refined RUG-53 system appeared in the 
proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 
FR 45026, August 4, 2005), and a detailed description of the current 
66-group RUG-IV system appeared in the proposed and final rules for FY 
2010 (74 FR 22208, May 12, 2009, and 74 FR 40288, August 11, 2009).
    Further, in accordance with sections 1888(e)(4)(E)(ii)(IV) and 
(e)(5) of the Act, the Federal rates in this final rule reflect an 
update to the rates that we published in the notice with comment period 
for FY 2011 (75 FR 42886, July 22, 2010) and the associated correction 
notice (75 FR 55801, September 14, 2010), equal to the full change in 
the SNF market basket index, adjusted by the forecast error correction, 
if applicable, and the Multifactor Productivity (MFP) adjustment for FY 
2012. A more detailed discussion of the SNF market basket index and 
related issues appears in sections I.G.2. and III.F. of this final 
rule.
2. FY 2012 Rate Updates Using the Skilled Nursing Facility Market 
Basket Index
    Section 1888(e)(5) of the Act requires us to establish a SNF market 
basket index that reflects changes over time in the prices of an 
appropriate mix of goods and services included in covered SNF services. 
We use the SNF market basket index, adjusted in the manner described 
below, to update the Federal rates on an annual basis. In the SNF PPS 
final rule for FY 2008 (72 FR 43425 through 43430, August 3, 2007), we 
revised and rebased the market basket, which included updating the base 
year from FY 1997 to FY 2004. The FY 2012 market basket increase is 2.7 
percent, which is based on IHS Global Insight, Inc. (IGI) second 
quarter 2011 forecast with historical data through first quarter 2011.
    In addition, as explained in the final rule for FY 2004 (66 FR 
46058, August 4, 2003) and in section III.F.2. of this final rule, the 
annual update of the payment rates includes, as appropriate, an 
adjustment to account for market basket forecast error. As described in 
the final rule for FY 2008, the threshold percentage that serves to 
trigger an adjustment to account for market basket forecast error is 
0.5 percentage point effective for FY 2008 and subsequent years. This 
adjustment takes into account the forecast error from the most recently 
available FY for which there is final data, and applies whenever the 
difference between the forecasted and actual change in the market 
basket exceeds a 0.5 percentage point threshold. For FY 2010 (the most 
recently available FY for which there is final data), the estimated 
increase in the market basket index was 2.2 percentage points, while 
the actual increase was 2.0 percentage points, resulting in the actual 
increase being 0.2 percentage point lower than the estimated increase. 
Accordingly, as the difference between the estimated and actual amount 
of change does not exceed the 0.5 percentage point threshold, the 
payment rates for FY 2012 do not include a forecast error adjustment. 
As we stated in the final rule for FY 2004 that first promulgated the 
forecast error adjustment (68 FR 46058, August 4, 2003), the adjustment 
will ``* * * reflect both upward and downward adjustments, as 
appropriate.'' Table 1 shows the forecasted and actual market basket 
amounts for FY 2010.

            Table 1--Difference Between the Forecasted and Actual Market Basket Increases for FY 2010
----------------------------------------------------------------------------------------------------------------
                                                              Forecasted FY    Actual FY 2010        FY 2010
                           Index                             2010 increase *     increase **       difference
----------------------------------------------------------------------------------------------------------------
SNF.......................................................               2.2               2.0              -0.2
----------------------------------------------------------------------------------------------------------------
* Published in Federal Register; based on second quarter 2009 IHS Global Insight Inc. forecast (2004-based
  index).
** Based on the second quarter 2011 IHS Global Insight forecast, with historical data through the first quarter
  2011 (2004-based index).

    Furthermore, effective FY 2012, as required by section 3401(b) of 
the Affordable Care Act, the market basket percentage is reduced by a 
productivity adjustment equal to ``the 10-year moving average of 
changes in annual economy-wide private nonfarm business multi-factor 
productivity (as projected by the Secretary for the 10-year period 
ending with the applicable fiscal year, year, cost-reporting period or 
other annual period)'' (the MFP adjustment). As discussed in greater 
detail in section III.F.3 of this final rule, the MFP adjustment for FY 
2012 is 1.0 percent.

II. Summary of the Provisions of the FY 2012 Proposed Rule

    In the FY 2012 proposed rule (76 FR 26364), we presented two 
options for updating the payment rates used under the prospective 
payment system for skilled nursing facilities (SNFs), for fiscal year 
2012. In this context, we examined recent changes in provider behavior 
relating to the implementation of the Resource Utilization Groups, 
version 4 (RUG-IV) case-mix classification system and considered a 
possible recalibration of the case-mix indexes so that they more 
accurately reflect parity in expenditures between RUG-IV and the 
previous case-mix classification system. We also included a discussion 
of a Non-Therapy Ancillary component and outlier research currently 
under development within CMS. In addition, the proposed rule discussed 
the impact of certain provisions of the Affordable Care Act. We 
proposed to require for fiscal year 2012 and subsequent fiscal years 
that the SNF market basket percentage change be reduced by the multi-
factor productivity adjustment. We also proposed to require Medicare 
SNFs and Medicaid nursing facilities to disclose certain information to 
the Secretary of

[[Page 48491]]

the United States Department of Health and Human Services (the 
Secretary) and other entities regarding the ownership and 
organizational structure of their facilities. Finally, we proposed 
certain changes relating to the payment of group therapy services and 
proposed new resident assessment policies.

III. Analysis of and Responses to Public Comments on the FY 2012 
Proposed Rule

    In response to the publication of the FY 2012 proposed rule, we 
received over 170 timely public comments from individual providers, 
corporations, government agencies, private citizens, trade 
associations, and major organizations. The following are brief 
summaries of each proposed provision, a summary of the public comments 
that we received related to that proposal, and our responses to the 
comments.

A. General Comments on the FY 2012 Proposed Rule

    In addition to the comments we received on the proposed rule's 
discussion of specific aspects of the SNF PPS (which we address later 
in this final rule), commenters also submitted the following, more 
general observations on the payment system. We received many comments 
expressing concern about the SNF PPS system as a whole and the MDS 3.0 
and RUG-IV system.
    Comment: We received a number of comments raising concerns about 
the complexity of the MDS 3.0 that included several new assessment 
types, the need to clarify the RAI manual, and the time required to 
become trained on the new MDS 3.0 requirements.
    Response: We appreciate these concerns and we recognize that the 
transition to the MDS 3.0 was complex and labor-intensive. We provided 
extensive training and opportunities to assist with questions about the 
MDS 3.0 and RUG-IV models both prior to and after its October 1, 2010 
implementation on audio conferences, at national training conferences, 
in the form of the RAI Manual and subsequent clarification updates, and 
postings to the MDS 3.0 and SNF PPS Web sites. We have also provided 
support in response to oral and written inquiries, and issued 
clarification during Open Door Forums, RAI Manual updates, and through 
online and telephone technical assistance. We are committed to 
continuing training on both the MDS 3.0 and RUG-IV systems. In fact, we 
are developing training programs to assist providers to adapt to any 
new policy changes introduced on and after October 1, 2011. 
Additionally, as we receive provider input through these efforts, we 
will continue to update and clarify the RAI manual to ensure that it 
continues to provide accurate information and guidance on CMS policies.
    Comment: One commenter recommended that we address the need for 
stricter requirements for training and certification of food services 
directors and staff. The commenter states that stricter guidelines will 
improve patient health and safety.
    Response: We appreciate this comment, but note that the specific 
issues the commenter raised about the requirements for food services 
staff relate to the certification standards for long-term care 
facilities and, therefore, are beyond the scope of this final rule. We 
have, however, shared these comments with CMS survey and certification 
staff so that they can consider these suggestions as part of their 
ongoing review and refinement of our policies.

B. FY 2012 Annual Update of Payment Rates Under the Prospective Payment 
System for Skilled Nursing Facilities

1. Federal Prospective Payment System
    This final rule sets forth a schedule of Federal prospective 
payment rates applicable to Medicare Part A SNF services beginning 
October 1, 2011. The schedule incorporates per diem Federal rates that 
provide Part A payment for almost all costs of services furnished to a 
beneficiary in a SNF during a Medicare-covered stay.
a. Costs and Services Covered by the Federal Rates
    In accordance with section 1888(e)(2)(B) of the Act, the Federal 
rates apply to all costs (routine, ancillary, and capital-related) of 
covered SNF services other than costs associated with approved 
educational activities as defined in Sec.  413.85. Under section 
1888(e)(2)(A)(i) of the Act, covered SNF services include post-hospital 
SNF services for which benefits are provided under Part A (the hospital 
insurance program), as well as items and services (other than those 
services excluded by statute) that, before July 1, 1998, were paid 
under Part B (the supplementary medical insurance program) but 
furnished to Medicare beneficiaries in a SNF during a Part A covered 
stay. (These excluded service categories are discussed in greater 
detail in section V.B.2 of the May 12, 1998 interim final rule (63 FR 
26295 through 26297)).
b. Methodology Used for the Calculation of the Federal Rates
    The FY 2012 rates reflect an update using the full amount of the 
latest market basket index reduced by the MFP adjustment. The FY 2012 
market basket increase factor is 2.7 percent which, as discussed in 
section VI.C of this final rule, is reduced by a 1.0 percent MFP 
adjustment, resulting in an MFP-adjusted market basket percentage of 
1.7 percent. A complete description of the multi-step process used to 
calculate Federal rates initially appeared in the May 12, 1998 interim 
final rule (63 FR 26252), as further revised in subsequent rules. We 
note that the temporary increase of 128 percent in the per diem 
adjusted payment rates for SNF residents with AIDS, enacted by section 
511 of the MMA (and discussed previously in section I.E of this final 
rule), remains in effect.
    We used the SNF update factor to adjust each per diem component of 
the Federal rates forward to reflect cost increases occurring between 
the midpoint of the Federal FY beginning October 1, 2010, and ending 
September 30, 2011 (FY 2011), and the midpoint of the Federal FY 
beginning October 1, 2011, and ending September 30, 2012 (FY 2012), to 
which the payment rates apply. In accordance with section 
1888(e)(4)(E)(ii)(IV) of the Act, we update the payment rates for FY 
2012 by a factor equal to the full market basket index percentage 
increase. As further explained in sections I.G.2 and III.F.2 of this 
final rule, as applicable, we adjust the market basket index by the 
forecast error from the most recently available FY for which there is 
final data and apply this adjustment whenever the difference between 
the forecasted and actual change in the market basket exceeds a 0.5 
percentage point threshold. In addition, as further explained in 
sections I.G.2 and III.F.3 of this final rule, effective FY 2012 and 
each subsequent fiscal year, we are required to reduce the market 
basket percentage by the MFP adjustment. We further adjust the rates by 
a wage index budget neutrality factor, described later in this section. 
Tables 2 and 3 reflect the updated components of the unadjusted Federal 
rates for FY 2012, prior to adjustment for case-mix.

[[Page 48492]]

                             Table 2--FY 2012 Unadjusted Federal Rate Per Diem Urban
----------------------------------------------------------------------------------------------------------------
                                          Nursing--  case-  Therapy--  case-   Therapy--  non-
             Rate component                      mix               mix            case-mix        Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.........................           $160.62           $120.99            $15.94            $81.97
----------------------------------------------------------------------------------------------------------------

                             Table 3--FY 2012 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                          Nursing--  case-  Therapy--  case-   Therapy--  non-
             Rate component                      mix               mix            case-mix        Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.........................           $153.46           $139.51            $17.02            $83.49
----------------------------------------------------------------------------------------------------------------

2. Case-Mix Adjustments
a. Background
    Section 1888(e)(4)(G)(i) of the Act requires the Secretary to make 
an adjustment to account for case-mix. The statute specifies that the 
adjustment is to reflect both a resident classification system that the 
Secretary establishes to account for the relative resource use of 
different patient types, as well as resident assessment and other data 
that the Secretary considers appropriate. In first implementing the SNF 
PPS (63 FR 26252, May 12, 1998), we developed the RUG-III case-mix 
classification system, which tied the amount of payment to resident 
resource use in combination with resident characteristic information. 
Staff time measurement (STM) studies conducted in 1990, 1995, and 1997 
provided information on resource use (time spent by staff members on 
residents) and resident characteristics that enabled us not only to 
establish RUG-III, but also to create case-mix indexes (CMIs).
    Although the establishment of the SNF PPS did not change Medicare's 
fundamental requirements for SNF coverage, payment levels under the PPS 
vary based on the patient's anticipated care needs and resource 
utilization. One of the elements affecting the SNF PPS per diem rates 
is the case-mix adjustment derived from a classification system based 
on comprehensive resident assessments using the MDS. Case-mix 
classification is based, in part, on the beneficiary's need for skilled 
nursing care and therapy. The case-mix classification system uses 
clinical data from the MDS, and wage-adjusted staff time measurement 
data, to assign a case-mix group to each patient record that is then 
used to calculate a per diem payment under the SNF PPS. Because the MDS 
is used as the basis for payment as well as a clinical document, we 
have provided extensive training on proper coding and the time frames 
for MDS completion in our Resident Assessment Instrument (RAI) Manual. 
For an MDS to be considered valid for use in determining payment, the 
MDS assessment must be completed in compliance with the instructions in 
the RAI Manual in effect at the time the assessment is completed. For 
payment and quality monitoring purposes, the RAI Manual consists of 
both the Manual instructions and the interpretive guidance and policy 
clarifications posted on the appropriate MDS Web site at http://www.cms.gov/NursingHomeQualityInits/25_NHQIMDS30.asp.
    The original RUG-III grouper logic was based on clinical data 
collected in 1990, 1995, and 1997. As discussed in the SNF PPS proposed 
rule for FY 2010 (74 FR 22208, May 12, 2009), we subsequently conducted 
a multi-year data collection and analysis under the Staff Time and 
Resource Intensity Verification (STRIVE) project to update the case-mix 
classification system for FY 2011. The resulting RUG-IV case-mix 
classification system reflected the data collected in 2006-2007 during 
the STRIVE project, and was finalized in the FY 2010 SNF PPS final rule 
(74 FR 40288, August 11, 2009) to take effect in FY 2011 concurrently 
with an updated new resident assessment instrument, the MDS 3.0, which 
collects the clinical data used for case-mix classification under RUG-
IV.
    Under the BBA, each update of the SNF PPS payment rates must 
include the case-mix classification methodology applicable for the 
coming Federal FY. As indicated in section I.G of this final rule, the 
payment rates set forth herein reflect the use of the RUG-IV case-mix 
classification system from October 1, 2011, through September 30, 2012.
b. Development of Case-Mix Indexes
    In the FY 2012 proposed rule (76 FR 26370 through 36377), we 
discussed the implementation of the RUG-IV classification system, 
effective October 1, 2010. We also discussed the accompanying parity 
adjustment that was intended to ensure that estimated total payments 
under the RUG-IV model would be equal to those payments that would have 
been made under the 53-group RUG-III model that it replaced. We then 
explained that actual utilization patterns under the refined case-mix 
system differed significantly from the initial projections, and as a 
consequence, rather than achieving parity as intended, this adjustment 
to the new RUG-IV system triggered a significant increase in overall 
payment levels under the RUG-IV model, representing substantial 
overpayments to SNFs.
    Accordingly, the FY 2012 proposed rule included a discussion of two 
options for updating the rates for FY 2012. The first option was to 
recalibrate the parity adjustment (using the methodology discussed in 
the FY 2012 proposed rule) to ensure that the adjustment actually 
achieves its intended purpose, to make the transition from RUG-53 to 
RUG-IV in a budget neutral manner, as discussed further below. Under 
the second option, CMS reserved the option not to implement a 
recalibration of the parity adjustment in FY 2012 if, as additional FY 
2011 claims data became available, they indicated that utilization 
patterns are more consistent with our projections and expenditures are 
more in parity with those under the RUG-53 model. Under this second 
option, we stated we would simply update the payment rates for FY 2012 
by the FY 2012 market basket adjustment of 2.7 percent, reduced by the 
MFP adjustment of 1.0 percent, for a net market basket increase factor 
of 1.7 percent.
    As discussed in the FY 2012 proposed rule, the recalibration of the 
FY 2011 parity adjustment, which formed the basis of the first option 
discussed above, was initially determined through an analysis of 
utilization data from the first quarter of FY 2011. The methodology for 
determining the parity adjustment necessary given utilization patterns 
observed in the first quarter of FY 2011 is described in the FY 2012 
proposed rule (76 FR 26370 through 26377) and follows the same basic 
methodology described in the FY 2006 SNF PPS

[[Page 48493]]

proposed rule (70 FR 29077 through 29079), the FY 2009 SNF PPS proposed 
rule (73 FR 25923) and the FY 2009 SNF PPS final rule (73 FR 46421-23).
    In the FY 2012 proposed rule, we stated that this adjustment was 
based on a set of data derived from first quarter FY 2011 claims and 
MDS assessments. We further stated that we would continue to monitor 
claims data and utilization patterns in FY 2011 to confirm our 
preliminary assessment of the recalibration that would be necessary to 
achieve parity between the RUG-53 and RUG-IV models, and would update 
the parity adjustment accordingly. For this final rule, as further 
discussed below, we have been able to update the recalibration of the 
FY 2011 parity adjustment with a data set which includes claims and MDS 
3.0 assessments for the first 8 months of FY 2011.
    Using the same methodology for determining the recalibration 
discussed in the FY 2012 proposed rule and approximately 2.2 million 
claims matched to the MDS 3.0 assessment, representing 8 months (or 
nearly 3 full quarters) of FY 2011 (from October 1, 2011 through May 
31, 2011), we determined that the utilization patterns identified in 
our analysis of the first quarter FY 2011 data continued throughout the 
entire 8-month period (these data are available at http://www.cms.gov/SNFPPS/02_Spotlight.asp). We then repeated our recalibration 
calculation using the full 8-month data set, which is available at 
http://www.cms.gov/SNFPPS/02_Spotlight.asp. We found that, while 
retaining the original 61 percent adjustment to the CMIs assigned to 
each of the RUG-IV non-therapy groups, the necessary adjustment to the 
nursing CMIs of the RUG-IV therapy groups would be 19.84 percent, a 
difference of only .03 percent from the 19.81 percent adjustment 
discussed in the proposed rule. We believe that this updated analysis 
confirms our preliminary analysis, and demonstrates effectively that 
the utilization patterns observed in the first quarter of FY 2011 were 
not temporary aberrations or the result of a learning curve with 
respect to the RUG-IV and MDS 3.0 transition, but instead represent a 
new pattern of provider behavior that differs significantly from 
expected utilization patterns that were the basis for the original 
parity adjustment, and which resulted in significant increases in 
overall payment levels under RUG-IV.
    In addition, the increased expenditure levels due to the 
implementation of the RUG-IV system have been validated by the Office 
of the Inspector General (OIG) in a separate review of SNF payments 
during the first 6 months of FY 2011. According to a preliminary 
analysis by OIG, the utilization trends related to the shifts in the 
modes of therapy and the classification of high percentages of SNF 
beneficiaries into the highest-paying RUG-IV groups were even more 
pronounced in the FY 2011 second quarter (January through April 2011) 
than in the first quarter (October through December 2010) that was used 
for the analyses included in the FY 2012 proposed rule (This OIG report 
is available at http://oig.hhs.gov/oei/reports/oei-02-09-00204.asp.)
    As we stated in the proposed rule (76 FR 26371), given that the 
most notable differences between expected and actual utilization 
patterns occurred within the therapy RUG categories, we believe that 
rather than applying the new parity adjustment percentage to all 
nursing CMIs, it is more appropriate to maintain the 61 percent 
adjustment to the nursing CMIS for the RUG-IV non-therapy groups, and 
reduce the 61 percent parity adjustment as it applied to the nursing 
CMIs for the RUG-IV therapy groups.
    In the proposed rule, we invited comments on the two options 
discussed above. A discussion of these comments, including our 
responses, appears below.
    Comment: We received a variety of comments regarding the two 
options presented in the proposed rule for updating the payment rates 
for FY 2012. Most commenters were opposed to the option to recalibrate 
the FY 2011 parity adjustment. Many of these commenters expressed their 
belief that the recalibration considered in the proposed rule will have 
a significantly negative impact on facilities and beneficiaries. These 
commenters believed that the recalibration discussed in the proposed 
rule should be either withdrawn or significantly reduced.
    Response: In light of the previous recalibration of the SNF PPS 
case-mix indexes in FY 2010, which addressed excess payments associated 
with the RUG-53 implementation in FY 2006 but only after those excess 
payments had persisted for several years, we believe it is imperative 
that we act in a well-considered but expedient manner once excess 
payments such as those in FY 2011 are identified. Allowing these 
significant anomalies to persist and failing to take timely action to 
correct the situation creates instability under the RUG-IV system, in 
the SNF PPS, and the Medicare program generally, which ultimately 
affects Medicare beneficiary access and quality of care. As we 
explained in the FY 2012 proposed rule (76 FR 26370-26373), in 
recalibrating the CMIs under the RUG-IV model, we expect to restore 
payments to their appropriate level by correcting an inadvertent 
increase in overall payments. Because the recalibration is removing an 
unintended excess payment rather than decreasing an otherwise 
appropriate payment amount, we do not believe that the recalibration 
should negatively affect facilities, beneficiaries, or quality of care, 
or create an undue hardship on providers.
    Further, in its March 2011 report to the Congress (available at 
http://www.medpac.gov/documents/Mar11_EntireReport.pdf), MedPAC 
reports that average Medicare margins have increased for freestanding 
SNFs since 2005. In 2009, the aggregate Medicare margin for 
freestanding SNFs, which represent more than 90 percent of all SNF 
facilities, was 18.1 percent, up from 16.6 percent in 2008 and 
representing the ninth consecutive year where the aggregate Medicare 
margin for freestanding SNFs was greater than 10 percent. For these 
reasons, we believe that the parity adjustment should not be withdrawn 
or reduced.
    Comment: Several commenters asserted that the higher payments 
observed in FY 2011 were, at least partially, the result of real acuity 
changes which should be accounted for in the calculation of the parity 
adjustment. These commenters stated that, as an alternative approach, 
CMS should consider comparing data from FY 2010 and FY 2011 when 
calculating the recalibration factor, to account for changes in patient 
acuity.
    Response: We disagree with this comment on the basis that, as 
described in the FY 2012 proposed rule (76 FR 26371), the same FY 2011 
claims and MDS information were used to determine both RUG-III payments 
and RUG-IV payments. Using the same population for the same timeframe 
serves to control for acuity level changes, as well as other factors, 
such as patient volume, across the RUG-III and RUG-IV systems and 
provide an appropriate comparison for our financial analysis.
    We would also note, as discussed further below, that we did a 
comparison of data from all of FY 2010 and from the first eight months 
of FY 2011 that did not control for changes in patient acuity, and 
found that it did not result in a significant difference in the 
recalibration factor necessary to equalize RUG-IV payments and RUG-III 
payments. In testing this alternative methodology, we did control for 
volume by calculating the percentage of FY 2010 days of service for 
each of the RUG-III groups, broken down by urban and rural days, and 
then multiplied each

[[Page 48494]]

percentage by the total number of urban or rural FY 2011 days of 
service, as appropriate, to determine the number of days of service for 
each RUG-III group, relative to the total volume for the first eight 
months of FY 2011. Therefore, even though the recalibration methodology 
discussed in the proposed rule (76 FR 26370-73) controls for changes in 
patient acuity, we note that the alternative approach above which was 
suggested by commenters would not change the recalibration factor.
    Comment: Some commenters asserted that CMS failed to provide 
sufficient information for a third party to reproduce CMS's conclusions 
with regard to the parity adjustment. A few commenters stated that the 
lack of access to data, or the timeframe for when certain data were 
released, limited the ability of stakeholders to develop substantive 
comments on the recalibration considered in the proposed rule. 
Additionally, a few commenters referred to specific requests that were 
made by a few of the major nursing home trade associations for access 
to claims and MDS data for the fourth quarter of FY 2010 and the first 
quarter of FY 2011. They noted that we had declined to fulfill those 
data requests, due to certain data disclosure requirements in the 
privacy regulations that were promulgated under the Health Insurance 
Portability and Accountability Act of 1996 (Pub. L. 104-191, enacted on 
August 21, 1996) (HIPAA). These commenters asserted that CMS should 
reconsider its data security policies in light of the use of more 
``real-time'' data.
    Response: We do not agree with assertions that CMS provided 
inadequate data to evaluate and comment upon the proposals described in 
our proposed rule. The methodology used to establish the case-mix 
adjustments is the same as that described in detail in the FY 2006 SNF 
PPS proposed rule (70 FR 29077 through 29079), the FY 2009 SNF PPS 
proposed rule (73 FR 25923), and the FY 2009 SNF PPS final rule (73 FR 
46421 through 46422), as updated in the FY 2012 proposed rule (76 FR 
26370 through 26377). In addition, the data used to calculate the 
adjustments are publicly available on the CMS Web site, as explained 
below. We tested the ability to reproduce the parity adjustment 
calculation using only information available on the CMS Web site as of 
May 3, 2011, and in the proposed rule and were able to do so. We used 
the first quarter FY 2011 days of service for the RUG-IV system and a 
distribution of what those days would have looked like under RUG-III 
(available in the Downloads section of our Web site at http://www.cms.gov/SNFPPS/02_Spotlight.asp). We multiplied the RUG-IV and 
RUG-III days of service by the FY 2012 unadjusted Federal per diem 
payment rate components, multiplied by the unadjusted case-mix indexes 
(the unadjusted RUG-IV case-mix indexes can be calculated by dividing 
the adjusted case-mix indexes, provided in the proposed rule in Tables 
5A or 6A, by the adjustment factor of 1.1981) to establish expenditures 
under the RUG-III and RUG-IV systems. The parity adjustment was 
determined as the percentage increase necessary for the nursing CMIs of 
the RUG-IV therapy groups to generate estimated expenditure levels 
under the RUG-IV system that were equal to estimated expenditure levels 
under the RUG-III system.
    While this data alone would have been sufficient for a third party 
to reproduce our results, in an effort to respond to data requests from 
stakeholders and give the public as much information as possible to 
evaluate the two parity adjustment options considered in the proposed 
rule, we also made available on our Web site, as of June 16, 2011, a 
distribution of paid days by provider number and by month for the 
fourth quarter of FY 2010 under RUG-III and the first quarter of FY 
2011 under RUG-III and RUG-IV. This data could be used to allow 
stakeholders to analyze acuity trends and further evaluate the adequacy 
of the data used to determine the appropriate recalibration. Finally, 
we posted on our Web site a detailed memo which outlined how 
stakeholders could use MDS 3.0 data to determine the appropriate RUG-
III group for a given RUG-IV patient, even though this information was 
also already available to facilities on their final validation reports. 
Thus, we provided stakeholders and their trade associations with 
extensive data described earlier, so that they had multiple avenues for 
analyzing the underlying data and verifying CMS's results. We believe 
the additional information provided was beyond the information 
necessary to replicate our calculation. In this way, we provided even 
greater transparency of our methods and data analysis while fulfilling 
our data security responsibilities under HIPAA.
    Furthermore, with regard to the ability of stakeholders to provide 
substantive comments, we do not agree with the commenter's statement 
that the necessary data were released too late to allow for analyses 
that would generate substantive comment on the proposed rule. As 
illustrated above, the data provided on the CMS Web site and in the 
proposed rule were more than sufficient for stakeholders to reproduce, 
evaluate, and critique the recalibration methodology and results. This 
is evident in the notable breadth and detail of the commenters' 
critiques of our supporting data, methodology, and results, which we 
view as at least in part a reflection of the extensive amount of data 
that we have made available to the public throughout this process, and 
of the ability of commenters to provide both timely and substantive 
comments on the proposed rule. Even after the issuance of the FY 2012 
proposed rule, we continued to respond to requests for technical 
assistance and posted additional technical materials on our Web site so 
that all stakeholders could have access to the responses to the 
technical questions that we received.
    Certain data, such as specific MDS and claims data requested by 
certain trade associations, could not be made available upon the 
request of stakeholders. CMS' data security policy, which derives from 
our responsibilities under HIPAA, does not allow CMS to release patient 
identifiable data when such data are not necessary to accomplish the 
purpose of the disclosure (here, analyzing our proposals). As noted 
above, these data were not necessary to provide substantive and timely 
comments on the proposals contained in the proposed rule, as evidenced 
by the ability of internal staff to replicate and verify the results of 
our calculation using data available on our Web site well before the 
end of the comment period. Accordingly, as the non-patient identifiable 
information was itself adequate for purposes of assessing our 
proposals, we were not able to release the requested patient 
identifiable information.
    That said, CMS does make certain information available from the 
claims and MDS files. CMS has an established timeline for the release 
of such information, which normally allows for up to a year after the 
data have been finalized in order to screen and cleanse the data 
properly of anything that would permit patient identification. Any 
attempt to speed up this process would result in the assumption of 
unacceptable risks that patient-identifiable information would be 
released by mistake, which would threaten the basic privacy protections 
that beneficiaries must be afforded. Finally, as discussed above, some 
commenters suggested that, given our increased use of more real-time 
data (that is, data from the current fiscal year as opposed to claims 
data

[[Page 48495]]

from a prior year) for our recalibration analyses, we should consider 
updates to our data security policies to ensure that stakeholders have 
adequate access to data and that the rulemaking process is as 
transparent as possible. We agree that the process should remain 
transparent, but we also note that the data security policies that 
cover the patient-level claims and MDS data used as the basis of the 
parity adjustment recalibration implemented in this final rule are 
required by the HIPAA privacy regulations and exist first and foremost 
to protect Medicare beneficiaries. While commenters requested certain 
claims and MDS data in order to evaluate our recalibration results, 
assumptions, and methodology, as discussed above, the data requested 
were not necessary to provide substantive and timely comments on the 
proposals contained in the proposed rule so we were unable to provide 
such data under the HIPAA privacy rule's ``minimum necessary'' 
provisions. As we stated above, we believe the data we provided on the 
CMS Web site and in the proposed rule were more than sufficient for 
stakeholders to reproduce, evaluate, and critique the recalibration 
methodology and results. We will continue to make data available to 
stakeholders within the limits of the law. Finally, we have updated the 
data on our Web site to reflect the use of the eight months of data 
used to finalize this rule.
    Comment: Many commenters raised general concerns over the data used 
to determine the appropriate recalibration of the FY 2011 parity 
adjustment. Many of these commenters believed that one fiscal quarter 
of data was insufficient to justify a recalibration of the magnitude 
discussed in the proposed rule and that CMS should wait until it has a 
greater set of data from which to draw conclusions about utilization 
patterns in FY 2011. Several commenters were concerned that, given the 
increased burden associated with transitioning both to RUG-IV and MDS 
3.0 simultaneously, it is possible that the first quarter of FY 2011 
may represent facilities working to transition properly rather than 
accurately representing evolving provider behavior. One commenter 
specifically stated that using one quarter of data would not adequately 
control for the possibility of ``seasonality'' in SNF PPS claims 
submission, payments, and acuity levels, and provided a detailed 
analysis of previous fiscal quarters to demonstrate the possibility of 
a difference between the first fiscal quarter of a given year and the 
remainder of that year. One commenter also raised concerns related to 
the provider-level data that CMS made available to stakeholders upon 
their request, specifically that the data provided for a certain set of 
providers did not match the data that this commenter acquired 
independently for this provider. A few commenters highlighted potential 
calculation errors in the analysis and data presented in the proposed 
rule, with one commenter specifically highlighting an error in the 
calculation of the nursing CMI for a certain non-therapy RUG-IV group.
    Response: We acknowledge the commenters' concerns about relying 
solely on one fiscal quarter of data to finalize a recalibration of the 
magnitude discussed here. However, as noted in the proposed rule, the 
first quarter of data served only as the basis for our preliminary 
analysis of FY 2011 utilization. In the proposed rule, we committed to 
monitoring FY 2011 utilization data continually to confirm the results 
of our preliminary analysis regarding the need to recalibrate the 
parity adjustment. The stated purpose of the discussion of this first 
quarter FY 2011 data in the proposed rule was to ``provide the public 
with information on the potential scope and impact of the 
recalibration'' we considered in the proposed rule (76 FR 26371). Given 
that we have updated the data file with claims and MDS assessments 
ranging over 8 months of FY 2011 and for the reasons outlined below, we 
believe that the utilization patterns observed as part of our 
preliminary analysis do, in fact, represent an accurate reflection of 
utilization for the whole of FY 2011.
    Additionally, as stated above, we have now updated the 
recalibration based on 8 months of FY 2011 data, and utilization 
patterns are virtually identical to FY 2011 first quarter findings 
(Data available at http://www.cms.gov/SNFPPS/02_Spotlight.asp). 
Therefore, we believe that observed utilization patterns are more 
likely the result of evolving provider behavior rather than errors and 
adjustments made during the early transition period to RUG-IV and MDS 
3.0. Moreover, since facilities were given more than one year to 
prepare for the implementation of both RUG-IV and MDS 3.0, we believe 
that facilities were given ample time for education and preparation for 
the transition and that any confusion or mistakes due to transition 
issues would have been addressed prior to, or in the very early stages 
of, the RUG-IV and MDS transition.
    With regard to commenters' claims related to ``seasonality'' of the 
first quarter FY 2011 data, our own analysis of FY 2010 claims data 
demonstrated that the first quarter of a given fiscal year does appear 
to provide a reasonable approximation of patient acuity levels and 
payments for the whole of that fiscal year. We reviewed the FY 2010 
claims by RUG classification and by month for each month of FY 2010. 
Ultimately, we found that the distribution of RUG groups remained 
stable over the year and no particular quarter, or even month, stood 
out as demonstrating a different RUG distribution from the rest of that 
year (these data are available at http://www.cms.gov/SNFPPS/02_Spotlight.asp). In fact, the only real difference in SNF payment levels 
occurs in the transition between one fiscal year and another, where 
this difference is attributable to the annual payment update and market 
basket adjustment rather than to any ``seasonality'' existing between 
the fourth quarter of a given fiscal year and the first quarter of the 
following fiscal year.
    Finally, with regard to the comment related to the provider-level 
data, we were unable to verify this commenter's claim as we were not 
provided with any details as to the location or type of provider in 
question. After a review of the data used to support the recalibration, 
we found the underlying data to be accurate, and sufficient to perform 
the proper calculation of the recalibration. We did identify one RUG 
category (LB2) where we incorrectly stated the nursing CMI as 1.46 in 
the proposed rule, when it should be 1.45. This correction, while it 
would have a very small effect on the per diem payment for that RUG 
group, did not have any impact on our calculation of the parity 
adjustment. This error has since been corrected and tables 5 and 6 in 
this final rule reflect the correct nursing CMI for LB2.
    Comment: Many commenters expressed concern over the possibility of 
a reduction to Medicare payment rates in light of other reductions in 
areas such as Medicaid. Some commenters stated that Medicare should 
maintain SNF payment levels to cross-subsidize what they characterized 
as inadequate payment rates for nursing facilities under the Medicaid 
program. Other commenters urged CMS to reconsider the recalibration in 
light of the potential impact on the weak national economy. A few 
commenters discussed the importance of the health care industry, 
specifically SNFs, as representing a significant sector of job growth 
during the recent economic recession. Finally, a few commenters 
asserted that the recalibration would drive providers into bankruptcy, 
as they assert happened

[[Page 48496]]

when the SNF PPS was initially implemented in the late 1990s.
    Response: We wish to clarify that it is not the appropriate role of 
the Medicare SNF benefit to cross-subsidize nursing home payments made 
under the Medicaid program. As noted by several commenters, the primary 
purpose of the Medicare SNF benefit is to provide accurate payment for 
Medicare Part A services provided in a SNF setting. Further, we note 
that MedPAC has also indicated that it is inappropriate for the 
Medicare program's SNF payments to be used to account for Medicaid 
shortfalls. Specifically, on page 159 of its March 2011 Report to 
Congress on Medicare Payment Policy (which is available online at 
http://www.medpac.gov/documents/Mar11_EntireReport.pdf), MedPAC 
stated:

    * * * the Commission believes such cross-subsidization is not 
advisable for several reasons. First, on average, Medicare payments 
account for less than a quarter of revenues to freestanding skilled 
nursing facilities. A cross-subsidization policy would use a 
minority share of Medicare payments to underwrite a majority share 
of states' Medicaid payments. Second, raising Medicare rates to 
supplement low Medicaid payments would result in poorly targeted 
subsidies. Facilities with high shares of Medicare payments--
presumably the facilities that need revenues the least--would 
receive the most in subsidies from the higher Medicare payments, 
while facilities with low Medicare shares--presumably the facilities 
with the greatest need--would receive the smallest subsidies. Third, 
increased Medicare payment rates could encourage states to further 
reduce their Medicaid payments and, in turn, create pressure to 
raise Medicare rates. In addition, a Medicare subsidy would have an 
uneven impact on payments, given the variation across states in the 
level and method of paying for nursing home care. In States where 
Medicaid payments were adequate, the subsidy would add to excessive 
payments. Last, higher Medicare payments could further encourage 
providers to select patients based on payer source or to 
rehospitalize dual-eligible patients to qualify them for a Medicare-
covered, higher payment stay.

    We agree with MedPAC, and therefore, do not agree with the 
commenters that cited cross-subsidizing Medicaid as a justification for 
maintaining Medicare SNF payments at any specific level.
    We are also aware of the concerns that reductions in payment levels 
can have a negative impact on SNFs and the quality of care furnished to 
nursing home patients across the country. However, in this particular 
case, the recalibration discussed in the proposed rule and finalized in 
this final rule corrects, on a prospective basis only, the unintended 
excess payment that we observed for FY 2011. In addition, even with the 
recalibration, FY 2012 rates will still be 3.4 percent higher than FY 
2010 rates, the period immediately preceding the introduction of RUG-IV 
and the unintended spike in payments. Also, FY 2010 expenditures 
increased by 4.8 percent over FY 2009, a period where both MedPAC and 
CMS have calculated margins for free-standing SNFs to average 18.1 
percent. Moreover, we have not proposed any action to recoup 
retroactively the excess expenditures already made to SNFs during FY 
2011. Instead, we are limiting the scope of the recalibration to 
restoring the intended SNF PPS payment levels on a prospective basis 
only effective October 1, 2011.
    We have also considered the concerns raised by commenters that 
restoring the intended payment levels will result in job losses and add 
significant burden to health care workers and States. CMS cost report 
and Online Survey Certification and Reporting System (OSCAR) data show 
that, for the majority of freestanding SNFs and SNFs that operate as 
part of chains, there has been little change in staffing with the 
implementation of RUG-IV. Therefore, as data do not indicate that 
facilities increased staffing with the implementation of RUG-IV and 
aggregate payments will return to a level commensurate with those made 
under RUG-III, we do not believe that restoring payments to their 
intended and appropriate levels should necessarily result in job losses 
or add significant burden to health care workers or States.
    As regards the comment that CMS should reconsider the recalibration 
in light of the potential impact on a weak economy, we do not believe 
that potential economic effects justify perpetuating observed and 
acknowledged excessive and inaccurate payments. Again, we note that 
MedPAC found in 2009 that the aggregate Medicare margin for 
freestanding SNFs, which represent more than 90 percent of all SNF 
facilities, was 18.1 percent, up from 16.6 percent in 2008 and 
representing the ninth consecutive year where the aggregate Medicare 
margin for freestanding SNFs was greater than 10 percent.
    Finally, with regard to those comments which asserted that the 
recalibration would trigger bankruptcies similar to those that they 
attributed to the implementation of the SNF PPS in the late 1990s, 
studies have indicated multiple factors for nursing home closures 
during that time, such as chain membership, investment decisions in an 
uncertain market, and market competition. A more detailed analysis of 
the research in this area appears in the FY 2010 final rule (74 FR 
40297 through 40298). Ultimately, the existing body of research fails 
to indicate that case-mix reimbursement is a significant contributor to 
nursing home bankruptcy, particularly considering the small percentage 
of facility revenues which derive from Medicare payments. Thus, we do 
not agree with those commenters who asserted that the recalibration, in 
and of itself, could lead to the bankruptcy of SNF providers or that it 
could create the degree of fiscal pressure that could impact negatively 
on facility staffing or the quality of care in SNFs.
    Comment: Many commenters, while conceding that overpayments in FY 
2011 do exist, questioned the magnitude of the recalibration deemed 
appropriate by CMS. Several commenters expressed concern with the 
distribution of RUG-III payment days used by CMS to calculate the 
parity adjustment. These commenters stated that the RUG-III 
distribution of days posted by CMS appeared to show incorrectly a 
decline in patient acuity (particularly in the case of Rehabilitation 
plus Extensive Services RUG groups) and that this apparent decline in 
patient acuity may have been due to flaws in the crosswalk methodology. 
These commenters believed that this led to an underestimation of RUG-
III payments, thereby causing an overestimation of the necessary parity 
adjustment. A few commenters identified the methodology used by CMS to 
crosswalk between MDS 3.0 data and RUG-III group classification as 
potentially introducing certain biases and errors into the parity 
adjustment calculation. One commenter specifically referred to a 
potential inaccuracy in the crosswalk methodology as it related to ADL 
conversions, the depression scale used under MDS 2.0 and MDS 3.0, and 
certain MDS items (such as IV medications) which required facilities to 
``look-back'' to services received during the patient's qualifying 
hospital stay.
    Response: As stated above, several commenters suggested that the 
distribution of RUG-III payment days (which were derived from MDS 3.0 
assessments submitted in FY 2011 or through review of final validation 
reports available to stakeholders) which appeared to reflect an 
apparent drop in patient acuity between FY 2010 and FY 2011, actually 
reflected a flaw in the crosswalk methodology used by CMS. In response 
to this comment and in response to the comments suggesting a potential 
inaccuracy in the RUG-III crosswalk, we conducted a detailed

[[Page 48497]]

analysis of this potential issue. We first confirmed that the physical 
programming for the crosswalk file was correct and found no errors in 
the programming. We then turned our attention to policy and assessment 
differences between the RUG-III and RUG-IV systems that could be 
affected by the simultaneous transition to MDS 3.0.
    We identified a few areas where using the MDS 3.0 could possibly 
affect the determination of a patient's case-mix classification under 
RUG-III or RUG-IV. The first area was a difference on the depression 
scale used under MDS 2.0 and MDS 3.0 where we found, through an 
analysis of MDS data from July 2010 through April 2011, that the number 
of depression cases triggered under MDS 2.0 was greater than the number 
of depression cases triggered under MDS 3.0 by approximately 6.6 
percent. However, since depression plays a small role in the 
determination of a patient's RUG classification (using either the MDS 
2.0 FY 2010 data or the MDS 3.0 FY 2011 data, approximately 2 percent 
of all Medicare beneficiaries classified into RUG-III groups where 
depression was a qualifying factor), this difference would not have a 
significant impact on the RUG-III distribution or parity adjustment 
recalibration. We also examined the ADL scale used under MDS 2.0 and 
MDS 3.0 for the same period described above and found that the mean ADL 
scale score between the two assessments was virtually identical; that 
is, patients classified into the same ADL categories under both models. 
Therefore, the ADL scale could not be a source of differences in 
classification due to using the crosswalk.
    Next, we examined the use of OMRAs, particularly the End of Therapy 
(EOT) OMRA and its accompanying policies. Specifically, under MDS 2.0, 
facilities could be paid at a therapy rate for 8 to 10 days after the 
discontinuation of all therapies before the EOT OMRA would be 
necessary. Under MDS 3.0, the ARD for the EOT OMRA must be set for 1 to 
3 days after the discontinuation of all therapies, and the relevant 
non-therapy RUG rate is paid from the date that therapy was 
discontinued. We agree that the program used to estimate RUG-III 
payments did not adjust for the change in the EOT policy. Instead, any 
change from a therapy RUG group to a non-therapy RUG group that would 
normally result from the completion of an EOT OMRA, specifically under 
MDS 2.0, would only be picked up on the next scheduled MDS 2.0 
assessment. As a result, the crosswalk in this case may have led to an 
overestimation of RUG-III payments, which would mean that we actually 
could have underestimated the parity adjustment necessary to bring RUG-
IV payments in line with RUG-III payments.
    Finally, one commenter specifically referred to a potential issue 
with the RUG-III crosswalk related to capturing IV services provided to 
SNF residents during the resident's qualifying hospital stay. The 
commenter stated that the crosswalk did not accurately account for 
these services, leading to an underestimation of RUG-III payments. 
Based on comments we received, we reviewed MDS assessment data related 
to the coding of IV medications received by the patient prior to 
admission to the SNF. After a review of MDS data from July 2010 through 
April 2011, we did find a significant drop in coding for IV services 
received prior to the resident's admission to the SNF between FY 2010 
and FY 2011. However, given the lack of data, it would be very 
difficult to ascertain if this drop is the result of facilities 
admitting a lower volume of beneficiaries who had an IV while in the 
qualifying hospital stay or, as one commenter suggested, that it 
stemmed from the elimination of a payment incentive for collecting data 
from the prior hospital stay and failure to report this item accurately 
on the MDS 3.0. While this item would not affect the patient's RUG-IV 
classification, it would be necessary to provide an accurate 
classification of that patient into a RUG-III category, which is an 
essential aspect of the recalibration calculation. We note that many 
commenters believed that patient acuity likely did not drop from FY 
2010 to FY 2011. Thus, it is possible that, as one commenter posited, 
some facilities failed to report accurately on the MDS 3.0 if the 
patient had received an IV prior to admission to the SNF, due to the 
elimination of the payment incentive for reporting this item. However, 
we do not have the data to confirm the basis for the drop in coding IV 
services.
    We considered the potential impact of inaccurate reporting of IVs 
and other potential crosswalk issues, as described above. However, as 
stated above, it is impossible to ascertain the cause and extent of any 
observed reporting differences or to quantify the impact of the 
reporting change on aggregate expenditure levels. However, in order to 
approximate the impact of these coding changes, we compared the actual 
RUG-IV payments from first quarter FY 2011 with a data set from the 
fourth quarter of FY 2010 that included payments that were actually 
calculated under the RUG-III system. We found that the necessary 
recalibration using this much less precise methodology was remarkably 
similar to the recalibration results discussed in section III.B.2 of 
this final rule. In fact, these results were within 1.5 percent of the 
recalibration calculation performed using the FY 2011 data. It should 
be noted that by using different data sets for the comparisons, we 
could not control for acuity changes or any other factors, such as 
patient volume, but the difference in the final result was very minor. 
Therefore, we believe that any actual issues with the RUG-III crosswalk 
would have a negligible effect on the recalibration calculation. 
Moreover, because we cannot determine reliably whether the difference 
in observed versus historically predicted use of IVs during a patient's 
qualifying hospital stay reflects actual provider behavior and patient 
acuity changes, or merely a failure on the part of facilities to 
complete certain items on the MDS, we believe that an adjustment for 
any such potential factors would be inappropriate given its limited 
impact. We expect that facilities will report all necessary items on 
the MDS to capture accurately the patient's clinical and medical needs, 
rather than only coding those items relevant to the patient's payment 
level. Finally, we note that, as we discussed previously, we believe 
using FY 2011 data to determine the necessary recalibration factor 
controls for patient acuity, as the recalibration of the parity 
adjustment compares payments under the two case-mix systems using data 
from the same time period (FY 2011).
    Comment: Many commenters questioned the appropriateness of the 
recalibration based on the potential impact of other proposed changes 
discussed in the proposed rule, such as the allocation of group therapy 
and other changes to the MDS 3.0. These commenters stated that reducing 
payments through a recalibration of the CMIs without accounting for the 
potential impact of other changes to the MDS will constitute a ``double 
hit'' on facilities. Some commenters requested that the recalibration 
be withdrawn until the impact of these other changes proposed for FY 
2012 is better known.
    Response: As illustrated by OACT baseline expenditure data from 
2006 through 2011 (which can be ascertained by dividing the aggregate 
dollar impact of a rule for a given year by the aggregate percent 
impact listed in the impact table for the same rule), the SNF baseline 
has increased by over 40 percent between 2006 and 2011. Additionally, 
for 3 of the past 6 years, specifically in FY 2006, FY 2010, and FY 
2011, we have attempted to restore budget neutrality in the transition 
to a

[[Page 48498]]

new case-mix classification system by applying a parity adjustment. In 
both case-mix transitions (from RUG-44 to RUG-53 and from RUG-53 to 
RUG-IV), we found that, rather than achieving budget neutrality, 
application of the parity adjustment to the new case-mix system 
resulted in excess payments to providers, because actual utilization 
patterns under the new case-mix system were different than we 
originally projected, thus necessitating a recalibration of the 
adjustment. After reviewing the effect of the FY 2011 RUG-IV policies, 
we have found that despite the adoption of clinical policies and coding 
changes, utilization patterns (as evidenced by the distribution of RUG 
groups) have not changed significantly in response to these policy 
revisions in ways that could be expected based on past operational and 
reporting practices. For example, while we anticipated certain changes 
in the case-mix distribution in response to the implementation of RUG-
IV and the allocation of concurrent therapy along with several other 
policy and reporting changes, the percentage of residents classified 
into a rehab category between FY 2010 and FY 2011 remained stable at 
approximately 92 percent; moreover, the percentage of patients 
classified into the highest paying rehabilitation RUG category, Ultra 
High Rehabilitation, actually increased from 43 percent to 45 percent 
over the same period.
    This analysis revealed that it can be difficult to predict provider 
behavior in response to any given policy changes. As a result, given 
the ability of facilities and stakeholders to adapt quickly to the 
changes in the SNF system in ways that maintain payments and consistent 
utilization patterns, from a practical and policy perspective, we do 
not believe it would be appropriate to attempt to consider the 
potential impact of other policy changes for FY 2012 as part of the FY 
2011 recalibration calculation. Accordingly, given that it is unclear 
whether the FY 2012 changes to the MDS will have an effect on 
utilization patterns and the extent of any such effect, we do not agree 
that recalibrating the CMIs without accounting for such changes would 
necessarily result in a ``double hit.''
    Further, consistent with past practice during a major case-mix 
system transition (that is, the transition from RUG-44 to RUG-53 in FY 
2006 and the transition from RUG-53 to RUG-IV in FY 2011), aggregate 
payments under the new system have been adjusted to ensure parity with 
payments under the previous system. In the case of the transition from 
RUG-44 to RUG-53, the data used to recalibrate the parity adjustment 
were based on data from CY 2006 (the year the transition was first 
implemented), even though the recalibration was not made until FY 2010. 
As such, major changes in the SNF PPS case-mix classification system 
have been historically accompanied by a parity adjustment recalibration 
which uses data from the year in which the transition took place. In 
this case, consistent with past practice, the most appropriate data for 
recalibrating the FY 2011 parity adjustment are data from FY 2011, the 
year in which RUG-IV was implemented. If we were to use data from other 
years (including projected data for a future year such as FY 2012), 
this could skew the results due to changes in patient acuity, volume, 
or provider behavior, or other changes in SNF PPS policy.
    Accordingly, because the policy refinements contained in this final 
rule (such as those related to the MDS 3.0) would apply starting in FY 
2012, we believe that these changes should not be factored into the FY 
2011 recalibration. As discussed above, we believe that it would be 
inappropriate to try to manipulate the FY 2011 recalibration to account 
for potential and unpredictable changes in payments resulting from 
policies to be implemented in FY 2012. As in prior years, policy 
refinements that do not constitute changes to the case-mix 
classification system as a whole are not necessarily made in a budget-
neutral manner. Consistent with our past practice when implementing new 
policies, we will monitor utilization patterns and provider behaviors 
in response to the changes discussed in this final rule.
    Comment: Several commenters suggested that CMS consider the 
possibility of phasing-in a recalibration over the course of several 
years. A few commenters further suggested that such a phase-in should 
also take into account the effects of any finalized FY 2012 policies.
    Response: As discussed in section XII.A.5 of the proposed rule, we 
considered how the recalibration might be implemented so as to mitigate 
the economic impact of the recalibration on facilities. Specifically, 
we considered mitigating the impact of the recalibration by phasing in 
the negative adjustments prospectively over multiple years until parity 
was achieved. However, as noted in the proposed rule (76 FR 26404), 
phasing-in the recalibration would continue to reimburse facilities at 
levels that significantly exceed intended SNF payments. Further, as 
discussed in response to a preceding comment and elsewhere in this 
preamble, MedPAC found in 2009 that the aggregate Medicare margin for 
freestanding SNFs, which represent more than 90 percent of all SNF 
facilities, was 18.1 percent, up from 16.6 percent in 2008. Given these 
high Medicare margins, we do not believe that a phase-in approach is 
justified. It is also important to note that this recalibration would 
serve to remove an unintended spike in payments rather than decreasing 
an otherwise appropriate payment amount. Thus, we do not believe that 
the recalibration should negatively affect facilities, beneficiaries, 
or quality of care, or create an undue hardship on providers. In fact, 
notwithstanding the recalibration, the FY 2012 payment rates will 
actually be higher than the rates established for FY 2010, the period 
immediately preceding the unintended spike in payment levels. We 
continue to believe that in implementing RUG-IV, it is essential that 
we stabilize the baseline as quickly as possible without creating a 
significant adverse effect on the industry or to beneficiaries.
    Furthermore, in response to the comment suggesting that a phase-in 
should take into account the effects of other policies finalized in FY 
2012, as discussed in response to the previous comment, we do not 
believe it would be appropriate to take into account in the 
recalibration calculation, potential and unpredictable changes in 
payments resulting from policies to be implemented in FY 2012.
    Comment: Several commenters stated that a shift in patients from 
Inpatient Rehabilitation Facilities (IRFs) to SNFs results in savings 
to the Medicare Trust Fund and that the current SNF spending levels are 
needed to treat higher-acuity patients that are now being treated in 
SNFs rather than in IRFs. Also, several commenters claimed that that 
providing increased levels of therapy has led to shorter lengths of 
stay for SNF residents, decreased the rate of hospital readmissions and 
increased discharges to the community, thereby creating significant 
savings for the Medicare program.
    Response: We note that, in the absence of supporting evidence, and 
given the significant excess payments identified in FY 2011 and the 
Medicare profit margins for facilities identified by various sources, 
such as MedPAC, it is difficult to see how evolving utilization 
patterns have created savings for the Medicare program. In fact, 
MedPAC's analysis of recent quality measure data related to 
rehospitalizations, for example, which appears in their March 2011 
Report to Congress (available at http://www.medpac.gov/documents/Mar11_EntireReport.pdf), suggests that

[[Page 48499]]

quality of care within SNFs has not been improving. On the topic of 
rehospitalizations, in its March 2011 report, MedPAC states:

    ``The quality of care furnished to patients during a Medicare-
covered SNF stay continued to show mixed results. * * * Since 2000, 
one outcome measure * * * (the risk-adjusted rate of 
rehospitalization for any of five care-sensitive conditions) 
exhibited almost no change.''

    Moreover, a basic principle of the SNF PPS is to pay appropriately 
for the services provided. CMS data are consistent with the commenters' 
statements that some patients formerly treated within IRFs are now 
being treated in SNFs. In fact, our data show that a portion of 
patients needing rehabilitation have always been treated at SNFs and 
other non-IRF post-acute care settings. The FY 2011 utilization data 
used to recalibrate the case-mix adjustments reflect an increase in 
rehabilitation patients, and likely includes patients who alternatively 
might have been admitted to IRFs prior to CMS enforcement of the IRF 
coverage criteria and more intensive medical review of IRF claims. 
However, we do not agree with the commenters' statement that these 
patients represent a higher level of acuity than the type of patients 
historically treated in SNFs. For some time, utilization data have 
demonstrated that nearly 90 percent of all SNF payment days are for 
rehabilitation services, with over 40 percent of those days falling 
into the Ultra High Rehabilitation category. For the former IRF 
patients who are appropriate for SNF care, we must pay the appropriate 
rate for the SNF services provided and cannot use a reduction in IRF 
payments as a reason to increase payments to SNFs arbitrarily. It is 
important to note that, as discussed above, recalibrating the case-mix 
system does not change the basic SNF PPS structure which provides 
higher payments for patients using more staff resources and services.
    Finally, as one commenter highlighted, shifting IRF patients toward 
SNF care does not necessarily improve the quality of care provided to 
the beneficiaries. A March 2005 report in the Archives of Physical 
Medicine and Rehabilitation (available at http://www.archives-pmr.org/article/PIIS0003999304012493/abstract) found that 81.1 percent of IRF 
patients were discharged to home, compared to 45.5 percent of SNF 
residents. Additionally, IRF patients appeared to have shorter lengths 
of stay, averaging approximately a 13-day stay, compared to the average 
36-day stay for a SNF resident. Finally, when patients discharged from 
each setting were reviewed 24 weeks after discharge, IRF patients had 
consistently better outcomes and displayed a faster rate of recovery. 
Given these findings, we do not agree with those commenters who would 
assume that shifting patients from the IRF setting to a SNF setting is 
necessarily more beneficial to the patient or the Medicare Trust Fund. 
We do, however, intend to conduct additional research to update these 
findings with more recent data. Any changes in utilization patterns, 
length of stay, and/or care outcomes will be addressed during future 
rule-making.
    Comment: We received a number of comments related to our decision 
to apply the parity adjustment to only the nursing CMIs for therapy 
RUG-IV groups. Some commenters focused on reasons the parity adjustment 
should be applied to both the nursing and therapy indexes, while other 
suggested that the adjustment should be applied to the nursing CMIs for 
all RUG groups, as it has been applied in the past.
    Response: We considered a variety of alternative applications of 
the parity adjustment, such as applying the adjustment to both the 
nursing and therapy CMIs, to all the nursing CMIs, or to the therapy 
CMIs only. However, we still believe it is most appropriate to apply 
the adjustment to the nursing CMIs within the therapy groups only. Even 
for RUG-IV therapy groups, the nursing component is a much larger 
portion of the associated per diem payment. When we tested adjusting 
only the therapy CMIs, we found that the reduction necessary to achieve 
parity was so significant as to reduce some of the recalibrated therapy 
CMIs to nearly a zero index, while reducing the relative differences 
between therapy groups significantly. To maintain the appropriate 
relative difference between each therapy group CMI, we found it best to 
apply the adjustment to the nursing CMIs for those therapy groups. 
Additionally, as the original parity adjustment discussed in the FY 
2011 notice with comment period (75 FR 42886) was applied to the 
nursing CMIs, we considered it most appropriate to apply a 
recalibration of that adjustment to the nursing CMIs, albeit of select 
RUG-IV groups, rather than to apply the recalibration to the therapy 
CMIs or some combination of the nursing and therapy CMIs.
    As discussed in the FY 2012 proposed rule (76 FR 26371), given that 
the most notable differences between expected and actual utilization 
patterns occurred within the therapy RUG categories, we believe it most 
appropriate to recalibrate the parity adjustment only as it applied to 
the RUG-IV therapy groups. As discussed in the proposed rule (76 FR 
26372), we did evaluate the impact of applying a recalibration to all 
of the nursing CMIs, but found that rates for the complex medical 
groups were disproportionately affected negatively, in comparison to 
the therapy groups that represent 90 percent of SNF payment days. Since 
the vast majority of SNF residents are classified into a RUG-IV therapy 
group, and because the greatest differences between expected and actual 
utilization patterns could be found among the RUG-IV therapy groups, we 
believe that the most appropriate method for applying the recalibration 
is to apply it only to the RUG-IV therapy groups.
    Comment: A few commenters discussed alternative parity adjustment 
methodologies, and recommended that instead of applying a fixed 
percentage increase to the nursing CMI (as is done in the case of the 
parity adjustment discussed in this final rule), we should apply a 
fixed percentage increase, or decrease presumably, to the final payment 
rates for each RUG group under the new classification system. CMS would 
then recalculate the appropriate nursing CMI necessary to reach the new 
total RUG payment. According to these commenters, this methodology 
would ensure that the relative difference in payments for each RUG 
group would remain the same.
    Response: We agree that such a methodology would maintain the 
relative difference in the payments for each RUG category. However, the 
basic principle of the SNF PPS is to pay accurately for services based 
on the relative differences in resource and staff costs. The data 
underlying the RUG-IV CMIs, primarily the STRIVE study, are used to 
determine the relative difference between RUG groups with regard to 
their resource use. By applying the parity adjustment to the nursing 
CMIs, we are able to maintain the relative difference in resource use 
among the RUG-IV groups, rather than focusing on differences in 
payment. Ultimately, the prospective nature of the program demands that 
we focus more on predicting costs through relative utilization of 
resources, which are represented in the CMIs, rather than focusing 
solely on maintaining relative differences in the total payments for 
each RUG group.
    Comment: A few commenters recommended that in lieu of or in 
addition to pursuing a recalibration, CMS should consider greater fraud 
and abuse monitoring, with one commenter suggesting that CMS consider 
medical review and audits of FY 2011 claims

[[Page 48500]]

and MDS data. One commenter pointed to the lack of program monitoring 
activities as an indication that there are no problems with the current 
parity adjustment.
    Response: We appreciate these commenters' suggestions regarding the 
need for greater fraud and abuse monitoring and the need for audits of 
SNF records. We have increased our fraud and abuse monitoring efforts 
for SNFs and for the Medicare program in general. In fact, the Office 
of the Inspector General (OIG) has started a review of the increased 
frequency with which patients are assigned to the highest therapy 
groups. As discussed previously, OIG's initial research results also 
corroborate changes in SNF patterns of care that may have resulted in 
an inappropriate number of beneficiaries being classified into the 
highest-paying therapy groups. We will continue to work with OIG and 
with CMS contractors to provide greater monitoring of SNF utilization 
and reporting trends. (This research is available at http://oig.hhs.gov/oei/reports/oei-02-09-00204.asp.) Nevertheless, while we 
believe this monitoring activity is necessary, we also believe that it 
is necessary to implement the recalibration of the parity adjustment in 
FY 2012 to prevent continued reimbursement in amounts that 
significantly exceed our intended policy.
    Accordingly, for the reasons specified in the FY 2012 proposed rule 
(76 FR 26370 through 26377) and the reasons discussed in this final 
rule, we are implementing the option discussed in the proposed rule to 
recalibrate the parity adjustment to the RUG-IV case-mix indexes to 
restore the intended parity in overall payments between the RUG-53 
model and the RUG-IV model, using the methodology discussed in the 
proposed rule. As discussed previously, the parity adjustment finalized 
in this final rule is based on 8 months of FY 2011 claims and MDS 3.0 
data. Thus, for FY 2012, the aggregate impact of this recalibration 
would be the difference between payments calculated using the original 
FY 2011 total nursing CMI increase for all RUG-IV groups of 61 percent, 
and payments calculated using the recalibrated total nursing CMI 
increase for all therapy RUG-IV groups of 19.84 percent, while 
maintaining the original 61 percent total nursing CMI increase for all 
non-therapy RUG-IV groups. The total difference is a decrease in 
payments of $4.47 billion (on an incurred basis) for FY 2012. We also 
note that the $4.47 billion reduction would be partly offset by the FY 
2012 MFP-adjusted market basket update of 1.7 percent, or $600 million, 
with a net result of a 11.1 percent reduction, or $3.87 billion, in 
overall payments for FY 2012. As discussed previously, we are 
implementing the recalibration on a prospective basis beginning October 
1, 2011, to restore payments to their intended levels and to end the 
current outflow of excess dollars. While the original FY 2011 system 
calibration had to be based on estimated data, this recalibration uses 
actual FY 2011 RUG-IV claims data, which we believe provide the best 
picture of the actual resources used under RUG-IV and result in more 
accurate payment. Consistent with past policy, we will continue to 
monitor utilization for the rest of FY 2011, but we do not anticipate 
that the remaining four months of FY 2011 will present a significantly 
different picture of SNF utilization patterns than using the first 8 
months of data.
    We list the case-mix adjusted payment rates separately for urban 
and rural SNFs in Tables 4 and 5, with the corresponding case-mix 
values. These tables do not reflect the AIDS add-on enacted by section 
511 of the MMA, which we apply only after making all other adjustments, 
such as wage and case-mix.
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3. Wage Index Adjustment to Federal Rates
    Section 1888(e)(4)(G)(ii) of the Act requires that we adjust the 
Federal rates to account for differences in area wage levels, using a 
wage index that we find appropriate. Since the inception of a PPS for 
SNFs, we have used hospital wage data in developing a wage index to be 
applied to SNFs.
    In the FY 2012 proposed rule, we proposed to continue that practice 
as we continue to believe that in the absence of SNF-specific wage 
data, using the hospital inpatient wage index is appropriate and 
reasonable for the SNF PPS. As explained in the update notice for FY 
2005 (69 FR 45786, July 30, 2004), the SNF PPS does not use the 
hospital area wage index's occupational mix adjustment, as this 
adjustment serves specifically to define the occupational categories 
more clearly in a hospital setting; moreover, the collection of the 
occupational wage data also excludes any wage data related to SNFs. 
Therefore, we believe that using the updated wage data exclusive of the 
occupational mix adjustment continues to be appropriate for SNF 
payments.
    In the FY 2012 proposed rule, we also proposed to continue using 
the same methodology discussed in the SNF PPS final rule for FY 2008 
(72 FR 43423) to address those geographic areas in which there are no 
hospitals and, thus, no hospital wage index data on which to base the 
calculation of the FY 2012 SNF PPS wage index. For rural geographic 
areas that do not have hospitals and, therefore, lack hospital wage 
data on which to base an area wage adjustment, we proposed to use the 
average wage index from all contiguous CBSAs as a reasonable proxy. 
This methodology was used to construct the wage index for rural 
Massachusetts for FY 2011. However, as indicated in the FY 2012 
proposed rule (76 FR 26378), there is now a rural hospital with wage 
data upon which to base an area wage index for rural Massachusetts. 
Therefore, it is not necessary to apply this methodology to rural 
Massachusetts for FY 2012. Furthermore, we indicated that we would not 
apply this methodology to rural Puerto Rico due to the distinct 
economic circumstances that exist there, but instead would continue 
using the most recent wage index previously available for that area. 
For urban areas without specific hospital wage index data, we proposed 
to use the average wage indexes of all of the urban areas within the 
State to serve as a reasonable proxy for the wage index of that urban 
CBSA. At the time of the proposed rule, both CBSA 49700, Yuba City, CA, 
and CBSA 25980, Hinesville-Fort Stewart, GA, did not have wage index 
data. However, for this final rule, Yuba City, CA now has wage index 
data. Therefore, the only urban area without wage index data available 
is CBSA 25980, Hinesville-Fort Stewart, GA.
    The comments that we received on the wage index adjustment to the 
Federal rates, and our responses to those comments, appear below.
    Comment: A commenter recommended that CMS improve its area wage 
index methodology, and recommended that any design, development, or 
implementation of a revised hospital wage index must consider other 
post-acute care settings. The commenter noted research by the Medicare 
Payment Advisory Commission (MedPAC) and Acumen, LLC (Acumen) to 
support its concern regarding areas such as reclassification, SNF-
specific wage index, the use of U.S. Bureau of Labor Statistics (BLS), 
and commuting patterns of health care workers employed by SNFs.
    Response: As several commenters noted, we have research currently 
under way to examine alternatives to the wage index methodology, 
including the issues the commenters mentioned about ensuring that the 
wage index minimizes fluctuations, matches the costs of labor in the 
market, and provides for a single wage index policy. Section 3137 of 
the Affordable Care Act provides that the Secretary of Health and Human 
Services shall submit a report to Congress by December 31, 2011, that 
includes a plan to reform the hospital wage index system. Section 3137 
of the Affordable Care Act further instructs the Secretary to take into 
account MedPAC's recommendations on the Medicare wage index 
classification system, and to include one or more proposals to revise 
the wage index adjustment applied under section 1886(d)(3)(E) of the 
Act for purposes of the IPPS. The proposal(s) are to consider each of 
the following:
     The use of Bureau of Labor Statistics data or other data 
or methodologies to calculate relative wages for each geographic area.
     Minimizing variations in wage index adjustments between 
and within MSAs and statewide rural areas.
     Methods to minimize the volatility of wage index 
adjustments while maintaining the principle of budget neutrality.
     The effect that the implementation of the proposal would 
have on health care providers in each region of the country.
     Issues relating to occupational mix, such as staffing 
practices and any evidence on quality of care and patient safety, 
including any recommendations for alternative calculations to the 
occupational mix.
     Provide for a transition.
    To assist us in meeting the requirements of section 106(b)(2) of 
the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432, enacted on 
December 20, 2006) (TRHCA), in February 2008, we awarded a Task Order 
under our Expedited Research and Demonstration Contract to Acumen, LLC. 
Acumen, LLC conducted a study of both the current methodology used to 
construct the Medicare wage index and the recommendations reported to 
Congress by MedPAC. Parts 1 and 2 of Acumen's final report, which 
analyzes the strengths and weaknesses of the data sources used to 
construct the CMS and MedPAC indexes, is available online at http://www.acumenllc.com/reports/cms.
    MedPAC's recommendations were presented in the FY 2009 IPPS final 
rule (available online at http://edocket.access.gpo.gov/2008/pdf/E8-17914.pdf). We plan to monitor these efforts closely, and to determine 
what impact or influence they may have on the SNF PPS wage index. At 
this time, we will continue to use the wage index policies and 
methodologies described in this final rule to adjust the SNF PPS 
Federal rates for differences in area wage levels. However, we will 
continue to monitor MedPAC and Acumen's progress on any revisions to 
the IPPS wage index to identify any policy changes that may be 
appropriate for SNFs and potential changes may be presented in a future 
proposed rule. We discuss the Federal rates by labor-related and non-
labor related components for FY 2012 below.
    To calculate the SNF PPS wage index adjustment, we apply the wage 
index adjustment to the labor-related portion of the Federal rate, 
which is 68.693 percent of the total rate. This percentage reflects the 
labor-related relative importance for FY 2012, using the revised and 
rebased FY 2004-based market basket. The labor-related relative 
importance for FY 2011 was 69.311, as shown in Table 9. We calculate 
the labor-related relative importance from the SNF market basket, and 
it approximates the labor-related portion of the total costs after 
taking into account historical and projected price changes between the 
base year and FY 2012. The price proxies that move the different cost 
categories in the market basket do not necessarily change at the same 
rate, and the relative importance captures these changes. Accordingly,

[[Page 48504]]

the relative importance figure more closely reflects the cost-share 
weights for FY 2012 than the base-year weights from the SNF market 
basket.
    We calculate the labor-related relative importance for FY 2012 in 
four steps. First, we compute the FY 2012 price index level for the 
total market basket and each cost category of the market basket. 
Second, we calculate a ratio for each cost category by dividing the FY 
2012 price index level for that cost category by the total market 
basket price index level. Third, we determine the FY 2012 relative 
importance for each cost category by multiplying this ratio by the base 
year (FY 2004) weight. Finally, we add the FY 2012 relative importance 
for each of the labor-related cost categories (wages and salaries, 
employee benefits, non-medical professional fees, labor-intensive 
services, and a portion of capital-related expenses) to produce the FY 
2012 labor-related relative importance. Tables 6 and 7 show the case-
mix adjusted RUG-IV Federal rates by labor-related and non-labor-
related components.
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BILLING CODE 4120-01-C
    Section 1888(e)(4)(G)(ii) of the Act also requires that we apply 
this wage index in a manner that does not result in aggregate payments 
that are greater or

[[Page 48507]]

less than would otherwise be made in the absence of the wage 
adjustment. For FY 2012 (Federal rates effective October 1, 2011), we 
apply an adjustment to fulfill the budget neutrality requirement. We 
meet this requirement by multiplying each of the components of the 
unadjusted Federal rates by a budget neutrality factor equal to the 
ratio of the weighted average wage adjustment factor for FY 2011 to the 
weighted average wage adjustment factor for FY 2012. For this 
calculation, we use the same 2010 claims utilization data for both the 
numerator and denominator of this ratio. We define the wage adjustment 
factor used in this calculation as the labor share of the rate 
component multiplied by the wage index plus the non-labor share of the 
rate component. The budget neutrality factor for this year is 1.0007. 
The wage index applicable to FY 2012 is set forth in Tables A and B, 
which appear in the Addendum of this final rule, and is also available 
on the CMS Web site at http://www.cms.gov/SNFPPS/04_WageIndex.asp.
    Comment: One commenter estimated SNF reimbursements using both the 
FY 2012 SNF wage index in the proposed rule and in the absence of a 
wage index using simulation. The commenter found that SNF reimbursement 
was about $400 million lower with the wage index adjustment than 
without it. The commenter believes that CMS is incorrectly adjusting 
for the wage index and that payments during the 2002 to 2011 timeframe 
are nearly $3 billion too low.
    Response: As previously stated in the final rule for FY 2010 (74 FR 
40303), the intent of the wage index budget neutrality factor is to 
make sure that aggregate payments using the updated wage index are not 
greater or less than aggregate payments would be using the previous 
year`s wage index. Because the wage index is based on the pre-floor, 
pre-reclassified, no occupational mix hospital wage index, the weighted 
average wage index would be equal to 1.0000 for hospitals. However, 
there are often multiple SNFs within a wage area with varying 
utilization levels. The weighted average wage index across all SNF 
providers may not be equal to 1.0000 for any given fiscal year, so 
payments could go up or down as a result of their application. 
Estimation of payments relies on the combination of the geographic wage 
index value for providers along with their distribution of service 
days. The change in the wage index values along with the utilization 
within each urban or rural area determines the change in aggregate 
payments related to the previous year, and therefore, the budget 
neutrality factor. The application of the budget neutrality factor 
ensures that aggregate payments will not increase or decrease due to 
the year-to-year change in the wage index. Therefore, we do not agree 
with the methodology used by the commenter, and believe that the 1.0007 
budget neutrality factor will ensure equal payments after updating to 
the FY 2012 SNF PPS wage index, prior to any other policy changes.
    In the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 
2005), we adopted the changes discussed in the Office of Management and 
Budget (OMB) Bulletin No. 03-04 (June 6, 2003), available online at 
http://www.whitehouse.gov/omb/bulletins_b03-04, which announced 
revised definitions for Metropolitan Statistical Areas (MSAs), and the 
creation of Micropolitan Statistical Areas and Combined Statistical 
Areas. In addition, OMB published subsequent bulletins regarding CBSA 
changes, including changes in CBSA numbers and titles. As indicated in 
the FY 2008 SNF PPS final rule (72 FR 43423, August 3, 2007), this and 
all subsequent SNF PPS rules and notices are considered to incorporate 
the CBSA changes published in the most recent OMB bulletin that applies 
to the hospital wage data used to determine the current SNF PPS wage 
index. The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.
    In adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, we provided for a 1-year transition with a blended wage 
index for all providers. For FY 2006, the wage index for each provider 
consisted of a blend of 50 percent of the FY 2006 MSA-based wage index 
and 50 percent of the FY 2006 CBSA-based wage index (both using FY 2002 
hospital data). We referred to the blended wage index as the FY 2006 
SNF PPS transition wage index. As discussed in the SNF PPS final rule 
for FY 2006 (70 FR 45041), subsequent to the expiration of this 1-year 
transition on September 30, 2006, we used the full CBSA-based wage 
index values, as now presented in Tables A and B in the Addendum of 
this final rule.
4. Updates to Federal Rates
    In accordance with section 1888(e)(4)(E) of the Act, as amended by 
section 311 of the BIPA, and section 1888(e)(5)(B) of the Act, as 
amended by section 3401(b) of the Affordable Care Act, the payment 
rates in this final rule reflect an update equal to the full market 
basket, estimated at 2.7 percentage points, reduced by the MFP 
adjustment. As discussed in sections I.G.2 and VI.C of the FY 2012 
proposed rule (76 FR 26368 through 26369 and 26394 through 26396), the 
annual update includes a reduction to account for the MFP adjustment 
described in the latter section. As discussed in section III.F.3 of 
this final rule, the final MFP adjustment is 1.0 percent, for a net 
update of 1.7 percent for FY 2012.
5. Relationship of RUG-IV Case-Mix Classification System to Existing 
Skilled Nursing Facility Level-of-Care Criteria
    As discussed in Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. As set forth 
in the FY 2011 SNF PPS notice with comment period (75 FR 42910, July 
22, 2010), this designation reflects an administrative presumption 
under the 66-group RUG-IV system that beneficiaries who are correctly 
assigned to one of the upper 52 RUG-IV groups on the initial 5-day, 
Medicare-required assessment are automatically classified as meeting 
the SNF level of care definition up to and including the assessment 
reference date on the 5-day Medicare-required assessment.
    A beneficiary assigned to any of the lower 14 RUG-IV groups is not 
automatically classified as either meeting or not meeting the 
definition, but instead receives an individual level of care 
determination using the existing administrative criteria. This 
presumption recognizes the strong likelihood that beneficiaries 
assigned to one of the upper 52 RUG-IV groups during the immediate 
post-hospital period require a covered level of care, which would be 
less likely for those beneficiaries assigned to one of the lower 14 
RUG-IV groups.
    In this final rule, we are continuing the designation of the upper 
52 RUG-IV groups for purposes of this administrative presumption, 
consisting of all groups encompassed by the following RUG-IV 
categories:
     Rehabilitation plus Extensive Services;
     Ultra High Rehabilitation;
     Very High Rehabilitation;
     High Rehabilitation;
     Medium Rehabilitation;
     Low Rehabilitation;
     Extensive Services;
     Special Care High;
     Special Care Low; and,
     Clinically Complex.
    However, we note that this administrative presumption policy does

[[Page 48508]]

not supersede the SNF's responsibility to ensure that its decisions 
relating to level of care are appropriate and timely, including a 
review to confirm that the services prompting the beneficiary's 
assignment to one of the upper 52 RUG-IV groups (which, in turn, serves 
to trigger the administrative presumption) are themselves medically 
necessary. As we explained in the FY 2000 SNF PPS final rule (64 FR 
41667, July 30, 1999), the administrative presumption

* * * is itself rebuttable in those individual cases in which the 
services actually received by the resident do not meet the basic 
statutory criterion of being reasonable and necessary to diagnose or 
treat a beneficiary's condition (according to section 1862(a)(1) of 
the Act). Accordingly, the presumption would not apply, for example, 
in those situations in which a resident's assignment to one of the 
upper * * * groups is itself based on the receipt of services that 
are subsequently determined to be not reasonable and necessary.

Moreover, we want to stress the importance of careful monitoring for 
changes in each patient's condition to determine the continuing need 
for Part A SNF benefits after the assessment reference date of the 5-
day assessment, after which the administrative presumption no longer 
applies.

    Comment: One commenter stated that certain instructions contained 
in version 3.0 of the Long-Term Care Facility Resident Assessment 
Instrument (RAI) User's Manual (available online at https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp) 
are inconsistent with the SNF level of care presumption. Specifically, 
the commenter cited instructions in Chapter 3 (``Overview to the Item-
by-Item Guide to the MDS 3.0''), Section O (``Special Treatments, 
Procedures, and Programs (V1.05)''), which provide that tracheostomy 
care may be coded on the assessment when performed by residents 
themselves. Similarly, these instructions provide for coding oxygen 
therapy when a resident places or removes his or her own oxygen mask/
cannula, as well as when a resident performs his or her own dialysis. 
The commenter stated that allowing these items to be coded under such 
circumstances compromises not only the definition of ``skilled 
services'' but the entire RUG-IV case-mix classification system.
    Response: We believe that the commenter errs in assuming that all 
of the ``special procedures'' described in this section of the manual 
necessarily equate directly to skilled services. For example, even 
though dialysis is a critically important, life-sustaining procedure, 
its various component tasks simply do not generally require the 
involvement of skilled personnel--as evidenced by the many instances in 
which beneficiaries can be successfully trained to self-dialyze (or 
where a friend or family member with no prior caregiving experience or 
training can readily be taught to perform the dialysis for them). 
Moreover, while it is true that dialysis is one of the discrete 
indicators for assignment to a RUG within the Special Care Low 
category--a category to which the level of care presumption applies for 
a short period of time at the start of a SNF stay--it is the totality 
of items and services included within a given RUG, not any one specific 
coded service, that actually serves to justify the presumption. As 
explained in the FY 2000 SNF PPS final rule (64 FR 41667, July 30, 
1999), it is this entire cluster of services, when combined with the 
``tendency * * * for the initial portion of an SNF stay to be the most 
intensive and unstable'' that provides the basis for making the level 
of care presumption, as triggered by a resident's assignment to one of 
the designated upper RUGs on the initial 5-day, Medicare-required 
assessment.
6. Example of Computation of Adjusted PPS Rates and SNF Payment
    Using the hypothetical SNF XYZ described in Table 8, the following 
shows the adjustments made to the Federal per diem rate to compute the 
provider's actual per diem PPS payment. SNF XYZ's 12-month cost 
reporting period begins October 1, 2011. As illustrated in Table 8, SNF 
XYZ's total PPS payment would equal $40,053.06. We derive the Labor and 
Non-labor columns from Table 6 of this final rule.

                                         Table 8--RUG-IV SNF XYZ: Located in Cedar Rapids, IA (Urban CBSA 16300)
                                                                  [Wage index: 0.8831]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Adjusted                  Adjusted     Percent      Medicare
                  RUG-IV group                       Labor      Wage index     labor      Non-labor       rate      adjustment      days       Payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
RVX.............................................      $450.67      $0.8831      $397.99      $205.39      $603.38      $603.38           14    $8,447.32
ES2.............................................       361.85       0.8831       319.55       164.92       484.47       484.47           30    14,534.10
RHA.............................................       227.35       0.8831       200.77       103.62       304.39       304.39           16     4,870.24
CC2 *...........................................       209.59       0.8831       185.09        95.52       280.61       639.79           10     6,397.90
BA2.............................................       144.49       0.8831       127.60        65.85       193.45       193.45           30     5,803.50
                                                                                                                                        100    40,053.06
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Reflects a 128 percent adjustment from section 511 of the MMA.

C. Resource Utilization Groups, Version 4 (RUG-IV)

1. Prospective Payment for SNF Non-Therapy Ancillary Costs
    The FY 2012 proposed rule discussed the issue of payment for NTA 
costs under the SNF PPS (76 FR 26381 through 26384). This discussion 
described the previous research that has been conducted in this area, 
as well as current policy and analysis. Specifically, this discussion 
referenced the ongoing development of a two-part NTA component payment, 
as well as the conceptual analysis for the types of conditions and MDS-
driven variables which may be used to predict and pay for patient NTA 
costs accurately. Finally, this discussion included reference to the 
impact of an NTA component payment as it relates to the temporary AIDS 
add-on payment established by section 511 of the MMA (as discussed in 
section I.E of this final rule). The comments that we received on this 
topic both this year and in response to the FY 2011 notice with comment 
period, and our responses, appear below.
    Comment: All of the comments we received in response to this 
discussion supported CMS's broad objective to develop a new method for 
paying for NTAs received in the SNF, as well as the basic structure 
described in the proposed rule for a potential NTA rate component. The 
commenters also expressed their interest in working with CMS to develop 
an appropriate NTA rate component that is properly tailored to capture 
facility NTA costs accurately. Similarly, in response to the FY 2011 
notice with comment period, several commenters also expressed their

[[Page 48509]]

support for development of a separate NTA component in line with CMS's 
current research.
    Response: We appreciate the broad support that we received for the 
objective and overall model for designing a separate NTA rate 
component. The comments we received provided a number of interesting 
and creative ideas which will be considered during the research and 
development process. We look forward to working with providers and 
stakeholders in the future as we continue to develop this refinement to 
the SNF PPS.
    Comment: A few commenters stated that the NTA rate component 
research should be updated to reflect data gathered on the MDS 3.0. One 
commenter asked that CMS consider the potential interplay between an 
NTA component and those drugs and services which may be subject to, or 
excluded from, consolidated billing. Several commenters also said that, 
given CMS's discussion related to reallocating some portion of the 
nursing component to fund the NTA component, CMS should ensure that the 
nursing component still reflects resource cost and utilization after 
the carve-out is done. Finally, one commenter, in response to the FY 
2011 notice with comment period, requested that CMS pay special 
attention to NTA costs associated with providing ventilator services 
within the SNF.
    Response: We agree with the commenters that our research must be 
aligned with continuous improvements made to the SNF PPS, particularly 
the MDS 3.0. We expect that, as more MDS 3.0 data become available, our 
NTA researchers will be able to incorporate these data into our 
analysis. Similarly, we are cognizant of the potential relationship 
between the NTA research and services and drugs which fall under 
consolidated billing. As we continue our analysis, we expect that such 
relationships will be considered in determining the appropriateness of 
the NTA component.
    With regard to ensuring the adequacy of the nursing component after 
carving out a separate NTA component, we intend to ensure that the 
introduction of a new rate component for NTAs does not undermine the 
adequacy of payments for nursing services, and we will continue to 
monitor the adequacy of payments after any new rate component is 
implemented. It should be noted that any new carved-out NTA component 
would, in effect, remove from the nursing component only the costs of 
the NTA services themselves, which we would then adjust separately from 
nursing costs based on information that may better predict NTA costs.
    Finally, as discussed in the FY 2010 final rule (74 FR 40341), 
ventilator patients are addressed to some extent within the RUG-IV 
system (through payments under the Extensive Services group), and we 
are continuing to monitor the adequacy of payments for this subset of 
SNF residents. Currently, payments for these services are still 
integrated into the nursing costs paid for the relevant case-mix group, 
but in our NTA research, we are considering a variety of special NTA 
subsets, including ventilator use, which might deserve special 
attention as part of the highest-tiered payment within the non-routine 
NTA tier system.
    Comment: One commenter believed that the Post Acute Care Payment 
Reform Demonstration (PAC-PRD) and data collected as part of the 
research on the CARE tool would not serve as an appropriate source of 
data for the NTA research we are conducting. This commenter stated that 
it would be premature for CMS to make use of such data before it has 
been subject to both agency and Congressional review.
    Response: We appreciate the commenter's concern regarding the use 
of these data and will certainly consider it as the research moves 
forward. We would note that data sources, such as the PAC-PRD, are 
being considered for their potential utility as part of developing an 
NTA component which would more accurately reimburse facilities for 
incurred NTA costs, though no final decision has been made as to what 
are the most appropriate sources. In the end, we will ensure that all 
data sources have been thoroughly reviewed for their accuracy and 
applicability within the SNF setting.
    Comment: Several commenters discussed the possibility of including 
a cost pass-through for high-cost drugs and services as part of the 
outlier development.
    Response: While we appreciate comments on the development of an SNF 
outlier policy, we would note that we do not have statutory authority 
to implement an outlier payment for certain NTA services.

D. Ongoing Initiatives Under the Affordable Care Act

1. Value-Based Purchasing (Section 3006)
    In the FY 2012 proposed rule (76 FR 26384), we noted that section 
3006(a) of the Affordable Care Act directs the Secretary to develop a 
plan to implement a value-based purchasing (VBP) program for SNFs, and 
submit a Report to Congress by October 1, 2011. As stated in the 
proposed rule, VBP is designed to tie payment to performance in such a 
way as to reduce inappropriate or poorly provided care and identify and 
reward those who provide effective and efficient patient care. We also 
stated that, in accordance with section 3006(a) of the Affordable Care 
Act, we would consult with stakeholders in developing the 
implementation plan, and consider the outcomes of any recent 
demonstration projects related to VBP which we believe might be 
relevant to the SNF setting. The comments we received on this topic, 
along with our responses, appear below.
    Comment: We received some comments in response to our description 
of the requirements of section 3006(a) of the Affordable Care Act to 
develop a plan to implement a VBP program for SNFs, and to submit to 
Congress a report by October 1, 2011. Commenters supported our efforts 
to consider a VBP program for SNFs, and made suggestions for the 
content and timing of the Report to Congress.
    Response: Between December 2010 and January 2011, we held 
discussions with key stakeholders representing consumers, providers, 
and research organizations about the development of a plan to implement 
a VBP program for SNFs and the Report to Congress. We also held an Open 
Door Forum on March 10, 2011, in which more than 700 stakeholders 
participated in the call. A number of organizations submitted follow-up 
written comments, which we will share with the VBP project team.
    We are in the process of developing the SNF VBP plan to address 
areas required by the statute. As required by the statute, in 
developing the plan, we will consider, among other things, measures of 
quality and efficiency in SNFs, reporting, collection, and validation 
of quality data, the structure of VBP adjustments, including the 
determination of thresholds or improvements in quality that would 
substantiate a payment adjustment, the size of such payments, and the 
sources of funding for bonus payments. We plan to submit the Report to 
Congress by the statutory deadline of October 1, 2011.
2. Payment Adjustment for Hospital-Acquired Conditions (Section 3008)
    One of the ongoing Affordable Care Act initiatives that we 
discussed in the FY 2012 SNF PPS proposed rule (76 FR 26384) is the 
payment adjustment added by section 3008(a) of the Affordable Care Act, 
which is intended to provide an incentive to reduce the occurrence of 
certain preventable hospital-acquired conditions. While this hospital 
provision is itself beyond the scope of the SNF PPS, in the proposed 
rule, we

[[Page 48510]]

additionally mentioned a study required under section 3008(b) of the 
Affordable Care Act, which directs the Secretary to evaluate possibly 
expanding the HAC policy from acute care hospitals to a variety of 
other settings, including SNFs, and to submit a report to Congress 
containing the results of the study by January 1, 2012.
    Comment: We received a number of comments regarding the study 
referenced in the proposed rule that is required by section 3008(b) of 
the Affordable Care Act, which directs the Secretary to undertake a 
study and send a Report to Congress considering the feasibility of 
extending the Hospital Acquired Conditions-Present on Admission (HAC-
POA) program to the other types of facilities. The commenters urged CMS 
to evaluate carefully the types of facility-acquired conditions that 
would be relevant to SNFs, and to avoid simply applying all of the 
hospital-acquired conditions to the postacute setting.
    Response: We appreciate the comments we received on the issues that 
we should consider in the study and Report to Congress required by 
section 3008(b) of the Affordable Care Act. We are considering a broad 
range of issues related to extending the HAC-POA program to the other 
types of facilities specified in the Affordable Care Act. The required 
study and Report to Congress are currently in progress, and we intend 
to issue the report by the statutory deadline.
3. Nursing Home Transparency and Improvement (Section 6104)
    In the FY 2011 proposed rule (76 FR 26385), we discussed section 
6104 of the Affordable Care Act, which requires SNFs to report 
expenditures separately for direct care staff wages and benefits on the 
Medicare cost report, for cost reporting periods beginning on or after 
2 years after enactment, and also requires the Secretary to perform 
certain related activities. We received no comments on this provision.

E. Other Issues

1. Required Disclosure of Ownership and Additional Disclosable Parties 
Information (Section 6101)
    In the SNF PPS proposed rule for FY 2012 (76 FR 26364), we proposed 
to revise the reporting requirements that Medicare SNFs and Medicaid 
nursing facilities must disclose at the time of enrollment and when any 
change in ownership occurs, in accordance with section 6101 of the 
Affordable Care Act.
    In certain regulations that apply to Medicare SNFs and Medicaid 
nursing facilities, we proposed to add a definition for ``additional 
disclosable party'' and ``organizational structure'' and to revise the 
definition for ``managing employee.'' These proposed definitions were 
consistent with the requirements set forth in section 6101 of 
Affordable Care Act. Given the arguably broad nature of the term 
``additional disclosable parties,'' we solicited comments on how best 
to narrow the scope of the definition for this term. We also proposed 
to revise Sec.  424.516 to implement certain new disclosure 
requirements that pertain to Medicare SNFs and to amend Sec.  455.104 
to implement certain new disclosure requirements that pertain to 
Medicaid nursing facilities. Furthermore, we requested comments on a 
potential alternative approach in which we would collect certain 
information from Medicare SNFs only upon revalidation consistent with 
the requirements set forth in Sec.  424.515. In accordance with Sec.  
424.515, Medicare SNFs generally would be subject to revalidation 
requirements every 5 years. Section 424.515(d), however, provides for 
off-cycle revalidations. We received a number of comments on this 
potential alternative approach.
    To respond properly to all of the comments received related to the 
disclosure of information requirements, we will publish a separate 
final rule specifically addressing these provisions at a later date. In 
accordance with the statutory requirements of section 6101 of the 
Affordable Care Act, we intend to publish that final rule early in CY 
2012. Accordingly, we are not implementing these provisions in this SNF 
PPS final rule.
2. Therapy Student Supervision
    In the FY 2012 proposed rule (76 FR 26385 through 26386), we 
proposed to revise a policy that had appeared previously in the 
preamble to the FY 2000 final rule, which had specified that a therapy 
student in the SNF setting must ``* * * be under the `line-of-sight' 
level of supervision of the professional therapist'' (64 FR 41661, July 
30, 1999). We proposed that line-of-sight supervision should no longer 
be required in the SNF setting. We proposed that, instead, each SNF 
would determine for itself the appropriate manner of supervision of 
therapy students consistent with applicable State and local laws and 
practice standards. We advanced this proposal in the interest of 
promoting greater conformity with the other inpatient settings under 
Part A (for example, acute care hospitals and IRFs), which already 
permit each provider to determine for itself the most appropriate 
manner of supervision in this context, consistent with applicable State 
and local laws and practice standards. The comments we received on this 
topic, along with our responses, may be found below.
    Comment: The great majority of commenters were supportive of this 
revision, with some criticizing the existing policy as creating 
difficulty in securing therapy students in the SNF setting. One 
commenter expressed the belief that supervising therapists will now be 
able to offer an increased quality of care in the SNF setting, and that 
students will experience an elevated quality of learning that will 
prepare future clinicians to work in the SNF setting. Many commenters 
were concerned with how the time spent by therapy students with SNF 
patients could be billed, if at all. Several of the therapy trade 
associations offered detailed guidelines on therapy student 
supervision, with some of those also indicating that once a supervising 
therapist deems the student capable of treating a patient without line-
of-sight supervision, the student's time should then be separately 
counted as skilled therapy minutes, over and above the therapist's own 
time. By contrast, another commenter stressed the importance of making 
clear that only the line-of-sight supervision requirement itself is 
being changed, to avoid triggering an inordinate increase in therapy 
student minutes that would create another distortion in the payment 
system. Several commenters suggested that CMS publish specific criteria 
that facilities should use to determine whether a student is capable to 
treat patients without line-of-sight supervision. Others suggested that 
beyond the specific criteria, CMS should specifically state that the 
supervising therapist, rather than the facility, should be the only 
entity to determine whether a student is capable of treating patients 
without line-of-sight supervision. However, two commenters were 
completely opposed to rescinding the line-of-sight requirement: One 
stated that eliminating this requirement would be inconsistent with 
existing Part B therapy instructions appearing in Sec.  230 of the 
Medicare Benefit Policy Manual (MBPM), Chapter 15, while the other 
expressed concern that it could result in SNFs inappropriately 
misclassifying therapy time to increase reimbursement.
    Response: Regarding the Part B instructions that one of the 
commenters cited in the MBPM, we note that these particular 
instructions do not actually mandate line-of-sight supervision for 
therapy students, but merely specify

[[Page 48511]]

that the services ``* * * performed by a student are not reimbursed 
even if provided under `line of sight' supervision of the therapist'' 
(emphasis added). Further, with regard to the concerns over potential 
distortions in reimbursement, we wish to clarify that the change we 
have proposed would solely address the specific manner of supervision 
for a therapy student in this setting, but would in no way alter that 
individual's basic status as a student operating under the therapist's 
supervision. Thus, this policy change would not change the manner in 
which therapy minutes currently are recorded on the MDS or cause the 
student's time to become separately reimbursable.
    In response to those commenters concerned with how to bill therapy 
student time spent with SNF patients, consistent with our existing 
policy as set forth in the RAI Manual, Chapter 3, Section O (pages O-20 
through O-22), as the therapy student is under the direction of the 
supervising therapist (even if no longer required to be under line-of-
sight supervision), the time the student spends with a patient will 
continue to be billed as if it were the supervising therapist alone 
providing the therapy. In other words, the therapy student, for the 
purpose of billing, is treated as simply an extension of the 
supervising therapist rather than being counted as an additional 
practitioner. It should be noted that all policies and definitions 
related to the type of therapy provided (individual, concurrent, and 
group) apply to the supervising therapist and therapy student as set 
forth in the RAI manual, Chapter 3, Section O (pages O-20 through O-22) 
even if the student is no longer required to be under line-of-sight 
supervision.
    Finally, we agree that students who treat SNF residents without 
line-of-sight supervision should be qualified based on specific 
guidelines. As we stated in the proposed rule, ``* * * each SNF would 
determine for itself the appropriate manner of supervision of therapy 
students, consistent with applicable State and local laws and practice 
standards'' (76 FR 26835). We expect that professional associations, 
State and local licensing boards, and facilities should have very 
specific guidelines related to student clinicians' level of education 
and experience. Additionally, we expect that every student clinician 
should meet these standards and guidelines and that once met, the 
supervising therapist should have ultimate authority to determine 
whether a student clinician is adequately prepared to treat patients 
without line-of-sight supervision. In this context, we appreciate the 
detailed supervision guidelines that several of the trade associations 
have developed, which we recognize as playing a significant role in 
helping to define the applicable standards of practice on which 
providers rely in this context. However, we believe that the question 
of counting the student's time is actually a separate issue apart from 
providing guidance on appropriate supervisory practices themselves. As 
noted previously, a therapy student's time was not separately 
reimbursable prior to the elimination of the requirement for line-of-
sight supervision, nor does it become so now as a result of this 
change.
    Therefore, for the reasons outlined in this final rule and in the 
FY 2012 proposed rule (76 FR 26385 through 26386), we are finalizing 
our proposed revision to the line-of-sight supervision requirements as 
they pertain to students in a SNF setting. Accordingly, in this final 
rule, we are hereby discontinuing the policy announced in the FY 2000 
final rule's preamble requiring line-of-sight supervision of therapy 
students in SNFs, as set forth in the FY 2012 proposed rule. Instead, 
effective October 1, 2011, as with other inpatient settings, each SNF 
will determine for itself the appropriate manner of supervision of 
therapy students consistent with State and local laws and practice 
standards. We will be monitoring student participation in SNFs and 
expect that facilities will ensure that students, though no longer 
required to be under line-of-sight supervision, will still be properly 
supervised for both the student's and patient's benefit.
3. Group Therapy and Therapy Documentation
    Under our current policy, group therapy is the practice of one 
professional therapist treating multiple patients (up to a maximum of 
four) at the same time while the patients are performing either the 
same or similar activities, consistent with the policies first set 
forth in the FY 2000 SNF PPS final rule (64 FR 41662). In the FY 2012 
proposed rule (76 FR 26386 through 26388), we proposed to make certain 
changes relating to the definition of group therapy and payment of 
group therapy services.
    We noted that, using our STRIVE data as a baseline, we identified 
two significant changes in provider behavior related to the provision 
of therapy services to Medicare beneficiaries in SNFs under RUG-IV. 
First, we saw a major decrease in the amount of concurrent therapy 
performed in SNFs, the minutes for which are divided between the two 
concurrent therapy participants when determining the patient's 
appropriate RUG classification. At the same time, we found a 
significant increase in the amount of group therapy services, which are 
currently not subject to the allocation requirement. Given this 
increase in group therapy services, we expressed concern that the 
current method for reporting group therapy on the MDS creates an 
inappropriate payment incentive to perform the group therapy in place 
of individual therapy, because the current method of reporting group 
therapy time does not require allocation among patients, as noted by 
several commenters. In addition, the allocation of concurrent therapy 
minutes effective FY 2011 may have created an incentive to perform 
group therapy in place of concurrent therapy in situations where 
concurrent therapy otherwise may have been appropriate. In the proposed 
rule, we proposed to change our policies relating to group therapy as 
further discussed below.
    First, we proposed to establish a standard that defines group 
therapy as therapy provided simultaneously to four patients who are 
performing the same or similar therapy activities (76 FR 26386 through 
26387). As we stated in the proposed rule (76 FR 26386), because in 
group therapy patients are performing similar activities, in contrast 
to concurrent therapy, group therapy gives patients the opportunity to 
benefit from each other's therapy regimen by observing and interacting 
with one another, and applying the lessons learned from others to one's 
own therapy program in order to progress. Large groups, such as those 
of five or more participants, can make it difficult for the 
participants to engage with one another over the course of the session. 
In addition, we have long believed that individual therapists could not 
adequately supervise large groups, and since the inception of the SNF 
PPS in July 1998, we have capped the number of residents at four.
    Furthermore, we believe that groups of fewer than four participants 
do not maximize the group therapy benefit for the participants. As we 
stated in the FY 2012 proposed rule (76 FR 26386), we believe that in 
groups of 2 or 3 participants, the opportunities for patients in the 
group to interact and learn from each other are significantly 
diminished given the small size of the group. Thus, we believe that 
groups of two or three participants, given their small size, 
significantly limit the ability of patients to derive the unique 
benefits associated with group therapy. In such small groups, these 
limitations become even more accentuated whenever one or two patients 
are absent from the therapy

[[Page 48512]]

session (in fact, with groups of two participants, if one patient is 
absent from the session, there are no longer any patients with whom the 
remaining participant can interact, thereby eliminating any benefit 
that could be derived from participation in a group). Thus, for the 
reasons discussed above and in the FY 2012 proposed rule (76 FR 26386 
through 26387), we believe that the most appropriate group therapy size 
for the SNF setting is four, which we believe is the size that permits 
the therapy participants to derive the maximum benefit from the group 
therapy setting. Accordingly, we proposed to define group therapy as 
therapy provided simultaneously to four patients who are performing 
similar therapy activities (76 FR 26387).
    In addition, we proposed to allocate group therapy among the four 
group therapy participants. As we stated in the FY 2012 proposed rule 
(76 FR 26387), the SNF PPS is based on resource utilization and costs. 
We believe that when a therapist treats four patients in a group for an 
hour, it does not cost the SNF four times the amount (or four hours of 
a therapist's salary) to provide those services. The therapist would 
appropriately receive one hour's salary for the hour of therapy 
provided. Accordingly, we believe that allocating group therapy minutes 
among the four group therapy participants would best capture the 
resource utilization and cost. For therapists treating patients in a 
group setting, the full time spent by the therapist with these patients 
would be divided by 4 (the number of patients that comprise a group). 
As we stated in the FY 2012 proposed rule (76 FR 26387), as is 
currently the procedure, the SNF would report the total unallocated 
group therapy minutes on the MDS 3.0 for each patient. In terms of RUG-
IV classification, this total time would be allocated (that is, 
divided) among the four group therapy participants to determine the 
appropriate number of RTM and, therefore, the appropriate RUG-IV 
therapy group and payment level, for each participant. We stated in the 
FY 2012 proposed rule that the 25 percent cap on group therapy minutes, 
as defined in the July 30, 1999 final rule (64 FR 41662) will remain in 
effect, as we continue to believe that group therapy should serve only 
as an adjunct to individual therapy. The 25 percent cap would be 
applied to the patient's reimbursable group therapy minutes. In 
addition, consistent with our current policy (64 FR 41662), the 
supervising therapist may not be supervising any individuals other than 
the four individuals who are in the group at the time of the therapy 
session.
    Additionally, we made a number of clarifications with regard to 
clinical documentation requirements related to a patient's plan of care 
(76 FR 26387 through 26388). In the proposed rule, we discussed these 
requirements and clarified a number of regulatory provisions related to 
documentation within the SNF setting (see 76 FR 26387 through 26388 for 
a full discussion). Specifically, we noted (76 FR 26387) that SNFs are 
currently required to follow a prescribed plan of care for the therapy 
provided to a SNF resident (Sec.  409.23) and that the plan must meet 
the requirements of the regulations in Sec.  409.17(b) through (d). We 
further clarified that supporting medical record documentation is 
needed so that SNFs can verify that the plan of care is being followed, 
and can identify when significant changes in a patient's medical 
condition occur. In addition, we stated that such supporting medical 
record documentation has always been required so that contractors can 
verify medical necessity when they review SNF claims (76 FR 26387). One 
example of appropriate documentation would be to use time stamps to 
indicate the exact start and ending time of a therapy session. These 
time stamps could be tracked on a beneficiary's record to determine 
what discipline and mode of therapy they received. If necessary, these 
time stamps could be compared with a therapist's log in order to 
streamline the medical review process. We also clarified that providers 
should ensure that skilled therapy services are appropriate to the 
goals of a patient's individualized plan of care, and that it should be 
clear, based on the patient's medical record, therapy notes, and/or 
other related documentation, how the prescribed skilled therapy 
services contribute to the patient's anticipated progress toward the 
prescribed goals (76 FR 26388). We discussed the relationship between 
this documentation and the use of group therapy, clarifying that group 
therapy is not appropriate for every patient or for all conditions. 
Accordingly, SNFs should include justification for using group therapy 
as part of the patient's plan of care, to permit verification of the 
medical necessity and the appropriateness of the prescribed therapy 
plan (76 FR 26388). Finally, we discussed the need to update the 
patient's plan of care when changes occur that would affect the 
prescribed therapy plan or patient's condition, and clarified that any 
such changes in the therapy plan must be justified by changes in the 
beneficiary's underlying health condition, and that the provider is 
expected to describe in the plan of care the reasons for deviating from 
the original plan (76 FR 26388). We received a number of comments on 
these proposals and clarifications which, along with our responses, 
appear below.
    Comment: Several commenters expressed support for the proposed 
change to allocate the group therapy minutes. Many others had general 
concerns about the allocation of group therapy. One commenter believed 
that during a group therapy session, every patient benefits for the 
full time of the session, rather than only one quarter of the session 
as the allocation of group time would suggest. Additionally, several 
commenters have expressed that there are psychosocial and functional 
benefits of group therapy and are concerned that residents will be 
negatively affected by the allocation of group therapy. We have 
received multiple comments claiming that the allocation of group 
therapy minutes will disincentivize therapists from performing group 
therapy in cases where group therapy may be the preferred mode of 
treatment, since their payments will decrease if they continue to 
provide the same volume of group therapy. Several commenters stated 
that planning and implementing group therapy tasks is a very time-
consuming and challenging process, and that to allocate the group 
therapy minutes would mean that payment would not accurately reflect 
the time spent preparing for these therapy sessions and the additional 
costs of providing group therapy. One commenter stated it is more 
expensive to provide group therapy than individual or concurrent 
therapy.
    Response: As we noted in the proposed rule (76 FR 26387), the 
allocation of group therapy time is based on accurately paying for the 
therapist's time, not the resident's time. During a one-hour group 
therapy session with four patients, while all four patients may receive 
a full hour of benefit from the therapy session, this still only 
constitutes one hour of the therapist's time. Given that the SNF PPS is 
based on resource utilization and cost, the payment for these services 
should reflect the amount of the therapist's time that was utilized as 
part of the therapy session.
    As stated in our proposal, we agree with the commenters that there 
are unique benefits to group therapy. We do not believe that the 
allocation of group therapy minutes should be considered a deterrent to 
having group therapy

[[Page 48513]]

sessions or should negatively affect beneficiaries. Instead, allocation 
of group therapy brings Medicare payments in line with resource 
utilization and cost for these services and is intended to ensure that 
the therapist's time is being appropriately counted and reimbursed. We 
would expect therapists to continue to provide the mode of therapy that 
is most clinically appropriate for each patient.
    Regarding the statement that the preparation for group therapy is a 
high-cost, time-consuming, and challenging process requiring careful 
evaluation of each patient, we agree that special care should be taken 
to plan for the most appropriate group therapy program for the 
designated patients. However, we expect that therapists will utilize 
high-quality standards of practice that require careful planning and 
documentation for all modes of therapy.
    Moreover, these costs were included in the establishment of the per 
diem base rate, and are already being reimbursed as part of the SNF 
PPS. Additionally, while some commenters did maintain that group 
therapy costs more to provide than individual or concurrent therapy, 
other commenters believed the opposite, with one commenter stating the 
following regarding the allocation policy, ``The policy would undercut 
efficiency, while pushing patients into higher cost modes of care.'' We 
note that in allocating group therapy minutes, we are not dictating the 
mode of therapy that a SNF should provide to its patients. Instead, as 
discussed above, this policy brings Medicare payments more in line with 
resource utilization and cost for these services. Determinations 
regarding the appropriate mode of therapy should be made by the 
therapist based on the clinical needs of each patient.
    Comment: Several commenters raised concerns regarding the strict 
allocation of group therapy minutes by four. The most common question 
we received from commenters was for clarification of why four was 
chosen to be the divisor, regardless of the number of participants in 
the group. Some commenters stated that using a hard divisor of four for 
group therapy minutes, rather than proposing to have facilities report 
the number of participants in the group and divide accordingly, 
contradicts CMS's reasoning that the allocation of group therapy is 
based on resource cost and utilization. These commenters also inquired 
as to how the facility should report the therapy time if four residents 
were scheduled for a group therapy session and one of the participants 
fell ill and was unable to participate. Several commenters asserted 
that we created a financial incentive to provide group therapy when we 
allocated concurrent therapy and did not address group therapy.
    One commenter stated that as a rural provider, it is very rare ever 
to have a 4-person group. Another commenter discussed the ability of 
therapists to transition patients from a concurrent therapy environment 
to a group environment, and indicated that dividing by four makes it 
more difficult for providers to transition patients properly between 
concurrent and group therapy. Several commenters encouraged CMS to 
consult with clinical experts and professional therapy associations to 
determine the most appropriate number of group therapy participants 
based on clinical standards.
    Response: Contrary to commenters' assertions, we did not propose to 
divide group therapy minutes by four regardless of the number of 
participants in the group. We proposed to divide by four in allocating 
group therapy minutes because we had proposed a definition of group 
therapy which requires four participants. In the FY 2012 proposed rule, 
we proposed to define group therapy as therapy provided simultaneously 
to four patients who are performing the same or similar activities. (76 
FR 26387) Thus, based on our proposed definition of group therapy 
(which we are finalizing in this rule), we expect group therapy to be a 
structured, planned program with four participants for whom group 
therapy has been determined appropriate. As we stated in the proposed 
rule, we proposed ``allocating group therapy minutes among the four 
group therapy participants'' (76 FR 26387, emphasis added). Thus, given 
this definition of group therapy, dividing group therapy minutes by 
four captures resource utilization and cost associated with providing 
this mode of therapy, as under our proposed policy, groups would be 
required to have four participants. We note that, in situations where 
the definition of group therapy is not met, those minutes may not be 
coded on the MDS as group therapy.
    We recognize that in some situations, one or more of the scheduled 
group therapy participants may not be able to attend a group session 
due to illness or otherwise, or may be unable to finish participating 
in the entire group session. Based on our definition of group therapy 
as finalized in this rule, we expect group therapy to be a structured, 
planned program with four participants. However, if one or more of the 
four participants are unexpectedly absent from a session or cannot 
finish participating in the entire session, rather than discontinuing 
payment or requiring the session to be rescheduled, we will continue to 
deem the therapy session as meeting the definition of group therapy as 
long as the therapy program originally had been planned for four 
patients. In this situation, we will continue to assume that there are 
four patients and, therefore, will divide the therapy minutes by four 
in allocating group therapy minutes among the group therapy 
participants. As discussed above, we believe the most appropriate size 
for group therapy in a SNF setting is four participants and, thus, we 
believe dividing by four reflects the resource utilization and cost 
associated with group therapy as we have defined it in this rule and as 
we expect it to be structured based on this definition.
    Commenters have suggested that we recognize an alternative to 
allocating group therapy by four and, instead, divide the therapy 
minutes by the number of patients in the group. However, one commenter 
stated, ``Such an approach does not recognize the additional burdens 
and costs associated with the provision of group services, however, nor 
the difficulty providers and therapists would have in tracking the 
number of people in a group at all times and accurately counting 
minutes when patients are dropping in and dropping out throughout the 
session.'' As we stated above and in the FY 2012 proposed rule (76 FR 
26387), we believe that most appropriate group therapy size in a SNF 
setting is four participants and, thus, we have defined group therapy 
accordingly. Given this definition, we believe that it is appropriate 
to allocate group therapy minutes among the participants by dividing by 
four. We note that the apparent lack of structure and discontinuity of 
the group interventions, as noted by the commenter, suggests that 
facilities may need to reassess their methods of providing group 
therapy services. In addition, we agree with many commenters that the 
implementation of RUG-IV created a payment incentive to provide group 
therapy and that the increase in group therapy may have been due to 
payment rather than clinical considerations. We note that by allocating 
group therapy among the four group therapy participants, we are also 
equalizing the reimbursement incentive across the modes of therapy. We 
believe this will once again encourage clinicians to choose the mode of 
therapy based on clinical rather than financial reasons. Several 
commenters agreed with this concept and one stated that ``Payments for 
different modalities of

[[Page 48514]]

therapy (concurrent, group, and individual) should reflect the 
different costs to provide the services. Otherwise providers will have 
financial incentives to furnish one modality over another, regardless 
of whether the modality is the most clinically appropriate for the 
patient.'' It is also important to keep in mind that every payment 
system has multiple incentives, both positive and negative. The 
management in each facility is faced with making cost/benefit choices 
on an almost daily basis. However, these choices must keep patient 
needs at the forefront of the decision-making process, and the 
existence of a payment incentive does not in itself justify the 
provision of a lower or less appropriate level of care merely in order 
to reduce facility costs.
    We continue to believe that the provision of group therapy should 
be initiated only after determining that group therapy services are 
appropriate for each patient who receives them and that the group 
therapy provided is appropriate to the individual plans of care. As we 
noted in the proposed rule (76 FR 26388),

    It is incumbent upon providers to ensure that skilled therapy 
services provided to a given SNF resident are appropriate to the 
goals of the patient's individualized plan of care * * * Because 
group therapy is not appropriate for either all patients or all 
conditions, and in order to verify that group therapy is medically 
necessary and appropriate to the needs of the beneficiary, SNFs 
should include justification for the use of group, rather than 
individual or concurrent therapy. This description should include, 
but need not be limited to, the specific benefits to that particular 
patient of including the documented type and amount of group 
therapy; that is, how the prescribed type and amount of group 
therapy will meet the patient's needs and assist the patient in 
reaching the documented goals.

    Therefore, we believe that to every extent possible, group therapy 
sessions should not fluctuate in size and membership. As we stated 
above, we believe the most appropriate group therapy size in a SNF 
setting is four participants, and thus we are defining group therapy 
accordingly. Thus, as we are defining group therapy as consisting of 
four participants, we believe that allocating the minutes among the 
four participants best captures resource utilization and cost.
    As discussed above, one commenter discussed the ability of 
therapists to transition patients from a concurrent therapy environment 
to a group environment, and indicated that dividing by four makes it 
more difficult for providers to transition patients properly between 
concurrent and group therapy. Historically, prior to the implementation 
of the RUG-IV system, SNFs reported a low utilization of group therapy. 
The limited use of group therapy programs may well be related to the 
logistical difficulties mentioned by this commenter, such as 
transitioning the patients properly between concurrent and group 
therapy. However, we do not see how allocating group therapy minutes 
would make it more difficult to transition patients from one therapy 
mode to another, as such transitions should be based on clinical 
determinations. The purpose of our allocation policy is to provide 
payment that better reflects resource utilization and cost, and we do 
not believe this policy should affect clinical determinations regarding 
the appropriate mode of therapy provided to a patient. We recognize the 
unique challenges that rural facilities face, but as we discussed above 
and in the FY 2012 proposed rule, we believe that the most appropriate 
group therapy size for a SNF setting is four. We believe that group 
therapy should be used to supplement individual therapy when suitable. 
In facilities where fewer than four patients are consistently being 
treated with the same or similar therapeutic interventions, group 
therapy programs may not always be appropriate. We expect all 
facilities to make the best clinical decisions when providing group 
therapy.
    For the reasons discussed above and in the FY 2012 proposed rule 
(76 FR 26386 through 26388), as proposed, effective October 1, 2011, 
group therapy will be defined as therapy provided simultaneously to 
four patients who are performing the same or similar activities, and 
group therapy time will be divided by four in determining the 
reimbursable therapy minutes for each group therapy participant and, 
therefore, the appropriate RUG-IV group.
    As discussed above and in the FY 2012 proposed rule, we believe it 
is appropriate to define group therapy as consisting of four 
participants. However, we will continue to monitor group therapy 
utilization and will continue to consult with clinical experts, 
professional therapy associations, and other stakeholders on this 
issue.
    Comment: Many commenters questioned our choice of four as the most 
appropriate number of participants in a therapy group. Several 
commenters disagreed that the optimal number for patients in a group is 
four and stated that there is no research data to support this notion. 
Additionally, commenters stated that there are many instances when 2 or 
3-person groups are more effective than 4-person groups and that in 
some specific instances, a 4-person group might pose serious patient 
risks. Many commenters stated that the choice of four as the optimal 
number for group therapy undermines the clinical judgment of 
therapists, and that CMS does not have the authority to dictate the 
practice of therapy and, therefore, cannot instruct therapists to 
allocate group therapy.
    Response: For the reasons discussed above and in the FY 2012 
proposed rule (76 FR 26386 through 26387), we believe the most 
appropriate size for group therapy in a SNF setting is four 
participants, which we believe is the size that permits the therapy 
participants to derive the maximum benefit from the group therapy 
setting. Although we conducted a literature search and were unable to 
find research data to support any prescribed number of participants in 
a therapy group, for the reasons stated above and in the FY 2012 
proposed rule, we continue to believe it is appropriate to establish a 
standard that defines group therapy as therapy provided simultaneously 
to four participants performing the same or similar therapy activities.
    In defining group therapy as therapy provided to four patients 
simultaneously who are performing the same or similar activities, we 
are not attempting to dictate clinical practice. Each therapist should 
use his or her best clinical judgment in determining the mode and 
manner in which to provide therapy services to patients. We understand 
that at times the therapist may decide in his or her clinical judgment 
to treat 2 or 3 patients simultaneously, and we are not prohibiting 
therapists from making this clinical decision. However, for purposes of 
Medicare payment policy, for the reasons discussed above and in the FY 
2012 proposed rule, we are defining group therapy as therapy provided 
simultaneously to four patients who are performing the same or similar 
therapy activities. Further, we are allocating group therapy minutes by 
dividing the total minutes by four, the number of participants in a 
group therapy session as defined above. Our goal in allocating group 
therapy is to pay appropriately based on resource utilization and cost, 
not to dictate the practice of therapy.
    Regarding the concept that groups of 4 may pose serious patient 
risks, we conducted a literature review and did not find any evidence 
that a group of 4 would pose any more of a patient risk than treating 
any other specific number of patients at a time. As discussed above, we 
expect therapists to use their best clinical judgment when choosing

[[Page 48515]]

which mode of therapy to use. If they believe that a particular mode of 
therapy would pose an increased degree of risk to a patient, we would 
expect them not to use that mode of therapy.
    Comment: Several commenters stated that with the implementation of 
RUG-IV and its related policies, such as the allocation of concurrent 
therapy, we created a financial incentive for facilities to shift 
patients receiving concurrent therapy into group therapy, as long as 
the patient's therapy needs were still being met. These commenters 
stated that CMS should have expected some shift in the modes of therapy 
services provided. Additionally, these commenters believed that the 
data we used were inconclusive, since no data were collected on the 
modality of therapy delivered under MDS 2.0 and RUG-III. Others have 
stated that CMS' decision to use data from the STRIVE study is unsound 
because the STRIVE study was flawed. One commenter suggested that CMS 
should not allocate group therapy minutes until we have a full year's 
worth of data under the RUG-IV and MDS 3.0 system.
    Response: We agree that the decision to allocate concurrent therapy 
inadvertently created an inappropriate financial incentive for 
facilities to emphasize more group therapy and that these incentives 
have resulted in excess Medicare expenditures. Accordingly, to fulfill 
our responsibilities to ensure appropriate payment based on resource 
utilization and cost, we proposed the allocation of group therapy 
minutes, which equalizes the reimbursement incentives across modes of 
therapy.
    The statement that no data were collected to address the modality 
of therapy delivered under MDS 2.0 and RUG-III is incorrect. STRIVE 
collected data from the MDS 2.0 and RUG-III to examine the different 
modes of therapy delivery. Regarding the statement that the STRIVE 
study was flawed, we addressed this general concern in the FY 2010 
final rule (74 FR 40304).
    One commenter suggested that we defer allocating group therapy 
minutes until we have received more data. However, we believe we do not 
need a full year's worth of data before making changes to allocate 
group therapy. Regardless of whether the initial trends for utilization 
of group therapy continue, we believe that the group therapy allocation 
policy finalized in this final rule will increase the accuracy of our 
payments by more closely basing payments on actual resource utilization 
and cost and, thus, we believe that it is appropriate to finalize our 
policy regarding allocation of group therapy minutes effective October 
1, 2011, as proposed.
    Comment: Many commenters recognized the need to make changes to 
group therapy but suggested alternatives to the allocation of group 
therapy. Several commenters recommended that to reduce the incentive to 
overutilize group therapy, we should examine the current 25 percent cap 
on group therapy and make the necessary adjustments. One commenter 
suggested that we limit patients to one group therapy session per week.
    Response: We appreciate the suggested alternatives to our proposal. 
We should note that the 25 percent cap for group therapy was designed 
to ensure that group therapy is utilized as an adjunct to individual 
(and concurrent) therapy. Conversely, the allocation of therapy minutes 
will be used to pay accurately for the therapy provided in a group 
therapy session based on resource utilization and cost. We also 
appreciate the suggestion to limit patients to one group therapy 
session per week and may explore this alternative or similar 
alternatives in the future in assessing the amounts of group therapy 
that may be beneficial to SNF patients.
    Comment: Several commenters stated that the allocation of group 
therapy will cause operational inefficiencies in SNFs and will cause 
SNFs to need to hire more therapists in a field that currently has a 
significant shortage of professionals.
    Response: We do not believe that the allocation of group therapy 
would cause operational inefficiencies or cause SNFs to hire more 
therapists. We note that the personnel decisions of SNFs are 
essentially private business arrangements that are outside the scope of 
this rule. Moreover, the allocation of group therapy does not require a 
change in MDS reporting procedures. As we stated in the FY 2012 
proposed rule (76 FR 26387), as is currently the procedure, the SNF 
would report the total unallocated group therapy minutes on the MDS 3.0 
for each patient. Then this total time would be automatically divided 
among the four group therapy participants to determine the appropriate 
number of RTM, and thus the RUG-IV classification and payment level for 
each patient. Thus, the allocation of group therapy will not require 
extra work on the part of SNF staff. Accordingly, we do not believe 
that allocation of group therapy minutes will cause operational 
inefficiencies in SNFs.
    Comment: In the proposed rule, we solicited comments on types of 
patients for whom group therapy might be appropriate. We received 
several comments in response to this solicitation, which included 
different diagnoses (for example, aphasia) and treatment types (for 
example, a functional communication group). One commenter stated that 
while there are specific conditions that might prompt the consideration 
for group therapy, it is important for group therapy to be part of an 
integrated plan of care established under medical direction. Commenters 
noted that not all patients would benefit from group therapy, nor would 
all conditions be appropriate to incorporate into a group therapy 
program.
    Response: We appreciate the comments which suggested various 
diagnoses and treatment types that might benefit from group therapy. As 
we stated in the proposed rule (76 FR 26387), group therapy is not 
appropriate for either all patients or all conditions and is primarily 
effective as a supplement to individual therapy. We agree with the 
comment noting that while there are specific conditions that might 
prompt the consideration of group therapy, it is important for group 
therapy to be part of an integrated plan of care established under 
medical direction. Additionally, we believe that diagnoses and 
treatment techniques (such as communication or feeding groups) should 
not be the sole basis for choosing to initiate group therapy. 
Therapists should determine for each resident, regardless of diagnosis 
or condition, whether the resident is a good candidate for group 
therapy based on functional level and treatment potential, and whether 
this particular form of treatment is in the patient's best interest and 
within the goals of the overall plan of care. We will take the 
commenters' suggestions under consideration in assessing the 
appropriate use of group therapy in SNFs and may address this further 
in future rulemaking.
    Comment: One commenter requested clarification of a sentence in the 
proposed rule, which stated that ``As is currently the procedure, the 
SNF would report the total unallocated group therapy minutes on the MDS 
3.0 (60 minutes in the scenario above) for each patient'' (76 FR 
26387). The commenter believed that the number of group therapy minutes 
stated in the parentheses of the above sentence, given the scenario 
referred to in that sentence, should be 120.
    Response: After reviewing the sentence quoted above from the 
proposed rule (76 FR 26387), we agree with this commenter and wish to 
clarify that there is an error in this sentence. In the above-quoted 
sentence from the FY

[[Page 48516]]

2012 proposed rule, the minutes referred to in the parentheses should 
read 120 minutes rather than 60 minutes, given the immediately 
preceding scenario to which it refers. Thus, this sentence should have 
stated, ``As is currently the procedure, the SNFs would report the 
total unallocated group therapy minutes on the MDS 3.0 (120 minutes in 
the scenario above) for each patient.''.
    Comment: One commenter suggested that an inconsistency of CMS's 
definition of group therapy between the FY 2010 final rule (74 FR 
40315) and the MDS RAI Manual (Chapter 3, Section O) may have led to 
the increase in group therapy utilization. The commenter specifically 
references the words ``same'' versus ``similar'' as regards to type of 
group therapy services/activities. This commenter recommended that CMS 
make the definitions of group therapy consistent between the 
regulations and the RAI Manual.
    Response: In the FY 2010 final rule (76 FR 40315), we stated that 
group therapy is therapy where a ``therapist provides the same services 
to everyone in the group.'' We note that later in the preamble of the 
FY 2010 final rule (74 FR 40317), we define group therapy as 
``consisting of 2 to 4 patients (regardless of payer source) who are 
performing similar activities * * *'' In the RAI Manual (Chapter 3, 
Section O)], group therapy is also defined as ``the treatment of 2 to 4 
residents, regardless of payer source, who are performing similar 
activities, * * *.'' We do not believe that this inconsistency in the 
definition may have led to the increase in group therapy utilization as 
we are not aware of evidence to support this claim. Additionally, we 
provided extensive training to providers both prior to and after the 
implementation of MDS 3.0. At the time of training, we did not receive 
questions on this issue, suggesting that there was not a significant 
amount of confusion on this point. To clarify, from this point forward, 
the definition of group therapy will be consistent in regulation and in 
the RAI manual. For the purposes of coding group therapy for Medicare 
Part A SNF payment, the existing definition of group therapy has been: 
2-4 patients (regardless of payer source) who are simultaneously 
performing the same or similar activities and are supervised by a 
therapist (or assistant) who is not supervising any other individuals. 
However, as discussed in this final rule, beginning October 1, 2011, 
this definition will be: 4 patients (regardless of payer source) who 
are simultaneously performing the same or similar activities and are 
supervised by a therapist (or assistant) who is not supervising any 
other individuals. For purposes of coding concurrent therapy for 
Medicare Part A SNF payment, the definition of concurrent therapy will 
remain: therapy consisting of 2 patients who are not performing the 
same or similar activity (regardless of payer source), both of whom 
must be in line-of-sight of the treating therapist (or assistant).
    Comment: Several commenters supported the clarification of our 
expectations for documenting group therapy services. Some commenters 
stated that rehabilitation professionals need to support the work they 
do through documentation, and that the documentation should reflect the 
need for skilled care as well as demonstrate how the therapy provision 
will support patients' needs and goals. Further, professional therapy 
associations commented on the documentation clarifications, stating 
that the requirement for adequate documentation to justify the use of 
each mode of therapy is necessary and that there should be no 
additional burden to provide this documentation, as it should be a 
standard part of any documentation. Others expressed concern that we 
proposed new and stricter guidelines for documenting group therapy. 
Some commenters stated that requiring a therapist to document why a 
specific mode of therapy was chosen for a patient would create an undue 
burden on the therapist. One commenter stated that requiring an 
additional, separate plan of care for group therapy would not improve 
the quality or efficacy of this mode of therapy delivery, and that it 
would be a disincentive for clinicians to perform group therapy due to 
the increased paperwork.
    Response: We would like to clarify that we did not propose new 
documentation requirements for group therapy provision. In fact, these 
documentation requirements have been in place all along, and the intent 
of the discussion in the proposed rule was to clarify our expectations. 
Contrary to the commenter's statement, we are not requiring an 
additional, separate plan of care for group therapy. The regulations at 
Sec.  409.17(c) and Sec.  409.23(c) require that, in order for Medicare 
to pay for therapy in a SNF, a therapy plan of care must be in place 
and that it must include certain information. In the FY 2012 proposed 
rule (76 FR 26387 through 26388), and as discussed previously, we 
simply clarified what we expect to be included in the plan of care and 
supporting medical record documentation in cases where group therapy is 
provided.
    Therefore, as this discussion in the proposed rule simply clarified 
existing expectations, we do not agree that these documentation 
guidelines will increase or create undue burden on therapists, or that 
these guidelines create a disincentive for clinicians to perform group 
therapy due to increased paperwork. As the commenters above suggested, 
there should be no additional burden to provide this documentation, as 
it should be a standard part of any documentation. We agree with those 
commenters who stated that rehabilitation professionals need to support 
the work they do through documentation, and that the documentation 
should reflect the need for skilled care and the mode of therapy 
provided, as well as demonstrate how the therapy provision will support 
patients' needs and goals.
    Comment: One commenter stated that the clarification of CMS 
coverage and documentation expectations included in the proposed rule 
inappropriately broadens the documentation requirements of group 
therapy by applying standards beyond those found in the current law and 
regulations for SNF care. Specifically, the commenter indicated that 
the clarification incorrectly applies hospital regulations and 
inaccurately characterizes guidelines set forth in program manuals as 
binding for SNFs. This commenter recommended that CMS clarify therapy 
documentation requirements using only SNF law and regulations.
    Response: We do not agree with the claim that the requirement to 
establish structured and well-documented group therapy programs applies 
to hospitals but not to SNFs. We would note that while it is the 
regulations themselves from which legal authority derives, the program 
manuals and other interpretive guidelines can serve to clarify or 
interpret the regulations set forth in the Code of Federal Regulations 
(CFR). The clarifications set forth in the FY 2012 proposed rule (76 FR 
26387 through 26388) are based on regulations at Sec.  409.17 and Sec.  
409.23, and interpretive guidance in the RAI Manual, all of which are 
applicable to SNFs. While the cited regulations in the proposed rule, 
specifically Sec.  409.17(b) through (d), fall within Part 409, Subpart 
B (Inpatient Hospital Services and Inpatient Critical Access Hospital 
Services), these particular regulations also apply to SNFs with regard 
to their patients' plans of care and for guidance on specific 
documentation requirements. Specifically, Sec.  409.23, which is 
located in Part 409, Subpart C (Posthospital SNF

[[Page 48517]]

Care), states that Medicare pays for SNF therapy services if they are 
furnished, among other things, in accordance with a plan of care that 
meets the requirements of Sec.  409.17(b) through (d), thereby making 
Sec.  409.17(b) through (d) applicable to SNFs. When we initially 
revised the SNF therapy regulations at Sec.  409.23(c) to incorporate 
these plan of care requirements in the Medicare Physician Fee Schedule 
final rule for Calendar Year (CY) 2008 (72 FR 66331, November 27, 
2007), we noted our belief that ``* * * therapy services should be 
provided according to the same standards and policies in all settings, 
to the extent possible and consistent with statute.'' Moreover, in the 
Medicare Physician Fee Schedule final rule for CY 2011 (75 FR 73583, 
November 29, 2010), we revised the hospital regulations at Sec.  
409.17(d) on therapy treatment plans--to which the corresponding SNF 
therapy regulations cross-refer--specifically to clarify that those 
particular hospital regulations also apply to SNFs. Thus, our 
clarifications do not exceed the current law and regulations applicable 
to SNFs.
    Further, we do not agree with the commenter's implicit assumption 
that program guidelines are not relevant to this process. We note that 
such guidelines are based on the provisions of the regulations, and are 
made available to each provider to advise it of those provisions as 
well as of CMS's or the surveyor's expectations. While these guidelines 
are disseminated to providers, all providers are nevertheless expected 
to comply fully with the regulations on which the guidelines are based.
    For the reasons discussed in section V.C of the FY 2012 proposed 
rule (76 FR 26386 through 26388), and for the reasons discussed in this 
final rule above, we are finalizing our proposed policies related to 
group therapy effective October 1, 2011. First, we are defining group 
therapy as therapy provided simultaneously to four patients (regardless 
of payer source) who are performing the same or similar activities and 
are supervised by a therapist (or assistant) who is not supervising any 
other individuals (76 FR 26386 through 26387). In addition, we are 
finalizing our proposed policies related to the reporting and 
allocation of group therapy minutes as discussed above and in the FY 
2012 proposed rule (76 FR 26387). As is currently the procedure, the 
SNF will report the total unallocated group therapy minutes on the MDS 
3.0. In terms of RUG-IV classification, this total time will be 
allocated (that is, divided) among the four group therapy participants 
to determine the appropriate number of RTM and, therefore, the 
appropriate RUG-IV therapy group and payment level, for each 
participant. In addition, as discussed above, if one or more of the 
four group therapy participants are unexpectedly absent from a session 
or cannot finish participating in the entire group session, rather than 
discontinuing payment or requiring the session to be rescheduled, we 
will continue to deem the therapy session as meeting the definition of 
group therapy as long as the therapy program originally had been 
planned for four patients. In this situation, we will continue to 
assume that there are four patients, and therefore will divide the 
therapy minutes by four in allocating group therapy minutes among the 
group therapy participants.
4. Proposed Changes to the MDS 3.0 Assessment Schedule and Other 
Medicare-Required Assessments
    In the FY 2012 proposed rule (76 FR 26388 through 26393), we 
proposed to make certain modifications to the MDS assessment schedule 
and to the types of assessments to be completed. To receive proper 
payment for services provided during Part A Medicare SNF stays, SNFs 
must complete patient assessments in accordance with the assessment 
schedule established by CMS at Sec.  413.343(b) and in the RAI Manual, 
version 3.0, Chapter 2. As we explained in the FY 2012 proposed rule 
(76 FR 26388 through 26389), we proposed to modify the current 
Medicare-required assessment schedule to incorporate new assessment 
windows and grace days to capture more appropriately the changes in 
patients' status and in services and treatments provided over the 
course of a stay, and to reduce the possibility that information from 
the same days of the patient's stay may be used on different scheduled 
MDS assessments. The current MDS assessment schedule and the proposed 
MDS assessment schedule may be found in Tables 10A and 10B in the 
proposed rule (76 FR 26389).
    Additionally, regarding the completion of unscheduled PPS 
assessments, in the proposed rule (76 FR 26389 through 26390), we 
clarified the End of Therapy (EOT) OMRA policy (which first appeared in 
the FY 2010 final rule (74 FR 40347 through 40348)) by stating that the 
ARD for an EOT-OMRA must be set for 1 to 3 days after the 
discontinuation of all therapies, regardless of the reason for the 
discontinuation. Further, in determining the ARD for the EOT OMRA, we 
clarified that, as finalized in the FY 2010 final rule (74 FR 40348), 
currently days are counted differently for facilities that regularly 
provide therapy services 5 days per week as compared to facilities that 
regularly provide therapy services 7 days a week. Following the 
publication of the FY 2010 final rule, some SNFs expressed concern over 
the use of the phrase ``discontinuation of therapy services,'' as well 
as the distinction between 5- and 7-day-a-week facilities in 
determining the ARD for the EOT OMRA. In the FY 2012 proposed rule (76 
FR 26389), we clarified that the term ``discontinuation of therapy 
services'' referred to both temporary, unplanned and planned 
discontinuations of therapy services. Accordingly, in the FY 2012 
proposed rule (76 FR 26389 through 26390), we clarified that providers 
must complete an EOT OMRA for a patient classified in a RUG-IV therapy 
group if the patient goes 3 consecutive days without therapy, 
regardless of the reason for the discontinuation. Moreover, to mitigate 
confusion related to the distinction between 5-day and 7-day-a-week 
facilities, we proposed to eliminate the distinction altogether. We 
proposed that, effective October 1, 2011, an EOT OMRA would be required 
for a patient classified in a RUG-IV therapy group if that patient is 
not furnished any therapy services for 3 consecutive calendar days, 
regardless of whether the facility is a 5-day or 7-day facility. As we 
stated in the FY 2012 proposed rule (76 FR 26390), we believe that this 
policy appropriately reflects that the frail and vulnerable populations 
within SNFs require consistent therapy without significant breaks in 
services, and is consistent with Sec.  409.34(b) (which states that a 
break of one or two days would not necessarily result in a provider 
having to complete an EOT OMRA).
    In addition, in the proposed rule (76 FR 26390 through 26391), we 
addressed suggestions that the completion of an EOT OMRA and a 
subsequent Start-of-Therapy (SOT) OMRA may not be necessary for all 
patients, particularly in cases where therapy services resume at the 
same mode and intensity as the patient was receiving before the 
discontinuation of therapy. Therefore, for the reasons discussed in the 
proposed rule (76 FR 26390 through 26391), we proposed that, effective 
for services provided on or after October 1, 2011, when an EOT OMRA has 
been completed and therapy subsequently resumes, SNFs may complete an 
End-of-Therapy-Resumption (EOT-R) OMRA rather than an SOT OMRA, in 
cases where the resumption of therapy date is no more than 5 
consecutive calendar days after the last day of therapy provided, and 
the therapy services have

[[Page 48518]]

resumed at the same RUG-IV classification level that had been in effect 
prior to the EOT OMRA. In the FY 2012 proposed rule, we stated that in 
the situation where therapy services have resumed within such a short 
period of time at the same RUG-IV classification level, we do not 
believe that a new therapy evaluation and SOT OMRA would be necessary 
to reclassify the patient back into a RUG-IV therapy group because, 
given that the therapy resumed at the same RUG-IV classification level, 
it is likely that the patient's clinical condition has not changed.
    In addition, as discussed in the proposed rule (76 FR 26391), we 
have found some cases where therapy services recorded on a given PPS 
assessment did not provide an accurate account of the therapy provided 
to a given resident outside the observation window used for the most 
recent assessment. We believe that when service levels change, whether 
inside or outside the observation period, such changes should be based 
on medical evidence. However, we believe that the current range of PPS 
assessments may not permit SNFs adequate flexibility to report such 
changes in therapy services outside the observation window. As 
discussed in the FY 2012 proposed rule (76 FR 26392), we believe that 
such changes in resident status outside the observation window do not 
always generate an unscheduled assessment because the changes, while 
significant for payment, do not always rise to the level of a 
significant change in clinical status under Sec.  483.20(b)(2)(ii). 
Accordingly, we proposed (76 FR 26392) that, effective for services 
provided on or after October 1, 2011, SNFs would be required to 
complete a Change of Therapy (COT) OMRA, for patients classified into a 
RUG-IV therapy group, whenever the intensity of therapy (that is, the 
total reimbursable therapy minutes, or RTM delivered) changes to such a 
degree that it would no longer reflect the RUG-IV classification and 
payment assigned for a given SNF resident based on that resident's most 
recent assessment used for Medicare payment. The COT OMRA would be a 
new type of required PPS assessment. The ARD of the COT OMRA would be 
set for Day 7 of a COT observation period, which is a successive 7-day 
window beginning on the day following the ARD set for the most recent 
scheduled or unscheduled PPS assessment (or beginning the day therapy 
resumes in cases where an EOT-R OMRA is completed), and ending every 7 
calendar days thereafter. We proposed that SNFs would be required to 
complete a COT OMRA only if a patient's total RTM changes to such an 
extent that the patient's RUG classification, based on their last PPS 
assessment, is no longer an accurate representation of their current 
level of therapy.
    We received a number of comments on these proposals and 
clarifications which, along with our responses, appear below.
    Comment: Many commenters supported the changes to the MDS 
assessment schedule and agreed that the current assessment schedule 
does allow providers to use information from the same days of the 
patient's stay on different scheduled MDS assessments intended to 
capture changes in the patient's condition over time.
    Others suggested that CMS conduct a detailed analysis to determine 
the efficacy of the proposed changes prior to implementation. These 
commenters opposed changes to the assessment schedule based on their 
belief that the changes would not reduce the frequency with which 
information from the same days of the patient's stay is used on 
different scheduled MDS assessments. Other commenters raised concerns 
that the proposed changes to the assessment schedule would limit 
flexibility in scheduling assessments and would be burdensome because 
the shorter window for providers to set the ARD for a scheduled PPS 
assessment would reduce the SNF staff's ability to stagger MDS due 
dates among residents.
    One commenter stated that the proposed changes to the MDS schedule 
and assessments will take the clinical judgment away from licensed 
therapists. This commenter stated that the use of clinical judgment is 
crucial in ensuring that the patients receive needed services for which 
they qualify and that produce a positive clinical outcome. One 
commenter expressed concern that the proposed changes to the MDS 
assessments and schedules would impose an additional burden on software 
vendors, billing offices, and medical records personnel. Furthermore, 
the commenter stated that the proposed changes would affect MDS 
scheduling tools, calendars, billing effective dates, budget, and 
billing reports.
    Response: We are pleased with the comments received in support of 
the proposed changes. Prior to proposing changes to the assessment 
schedule, we did conduct a detailed analysis on the likely effect of 
the updated policies. For this reason, we do not agree that the 
proposed changes to the MDS assessment schedule should be withdrawn 
until another study is completed. However, as with all new and revised 
policies, we will monitor the effects of the changes, and make any 
necessary modifications through future rulemaking. We recognize that, 
while the proposed changes eliminated most of the overlap in setting 
the observation periods for Medicare-required scheduled assessments, it 
is impossible to eliminate totally the potential for information from 
the same days of the patient's stay to be used on different scheduled 
MDS assessments, since changes in a beneficiary's condition can also 
require completion of several different types of unscheduled 
assessments (such as OMRAs, discharge assessments, significant change 
assessments, etc.) within short periods of time. However, as discussed 
in the proposed rule (76 FR 26388 through 26389), we believe by making 
the proposed changes to the assessment schedule (that is, by narrowing 
the assessment and grace day windows), we reduce the amount of 
information from the same days of the patient's stay that may be used 
on different scheduled MDS assessments while still allowing providers 
some flexibility in setting the ARD.
    In terms of regular scheduled PPS assessments, the 5-day and 14-day 
scheduled Medicare assessments are used to determine payment for the 
first 30 days of a SNF stay. Under the current policy, it is possible 
that the clinical characteristics of a resident on days 5 through 8 of 
the resident's stay could be used on both the 5-day and 14-day 
assessments. In such a case, this effectively reduces the number of 
days that clinical information is collected and used to observe changes 
in the patient's condition over time. In cases where this overlap is 
used, payment is established for the first 30 days of the patient's 
stay based on only 10 days of service, with 4 days overlapping between 
observation windows, rather than the intended 14 days of service with 
little to no overlap between observation periods. We are confident that 
the proposed changes allow sufficient time to perform all required 
assessments, allow for flexibility in scheduling the assessments, and 
provide a more accurate method for determining payment across the 
entire 30-day period. As discussed above, we believe that these changes 
are necessary to reduce the possibility that information from the same 
days of the patient's stay may be used on different scheduled MDS 
assessments and to allow us to capture more appropriately the changes 
to patients' status and in

[[Page 48519]]

services and treatments provided over the course of a SNF stay and, as 
such, these changes will allow us to reimburse more accurately for SNF 
services.
    Additionally, we do not agree that our proposed changes to the MDS 
schedule and assessments would take away clinical judgment from 
therapists. As discussed in the FY 2010 final rule, we are responsible 
for determining Medicare coverage and payment policy, that is, ``the 
scope of services that will be paid for by the Medicare program under 
the SNF PPS and the manner in which those services will be reported and 
paid'' (74 FR 40316). It is true that our proposed changes to the MDS 
assessments and schedules will affect the reporting and reimbursement 
of SNF services, including therapy services; however, we have not 
mandated the manner of providing these services. We agree that the 
licensed therapists are to use their clinical judgment to treat the 
patients in the most appropriate manner, and to maintain professional 
standards while providing all necessary services.
    With regard to commenters' concern related to the burden arising 
from changes in the MDS assessment schedule and assessments, we would 
note that we gave draft specifications to vendors as soon as possible 
after we published the proposed rule. We acknowledge that the proposed 
changes to the MDS schedule and assessments may affect items listed by 
the commenter (scheduling tools, calendars, billing effective dates, 
budget, and billing reports), but believe that, for the reasons 
outlined here and in the proposed rule, such changes are nevertheless 
necessary to provide appropriate payment for services provided to 
residents, to enhance the reliability of the MDS, and to ensure the 
stability of the SNF PPS.
    Comment: One commenter stated that in practice, by reducing the 
length of the assessment windows, we have minimized the usefulness of 
grace days to providers, and suggested that we officially eliminate the 
concept of grace days. Other commenters requested that we remove the 
grace days from the assessment schedule completely, and combine them 
with the ARD days. On the other hand, several commenters recommended 
expanding the assessment window to allow providers more flexibility in 
using grace days when determining the observation period. These 
commenters were concerned that, as CMS has stated that grace days 
should be used sparingly, any claim which makes use of an assessment 
where grace days are used might be considered as potentially 
inappropriate and subject to medical audit.
    Response: Grace days are a longstanding part of the SNF PPS in 
order to allow clinical flexibility when setting the ARD dates of 
scheduled PPS assessments. We agree that in practice, there is no 
difference between regular ARD windows and grace days and we encourage 
the use of grace days if their use will allow a facility more clinical 
flexibility or will more accurately capture therapy and other 
treatments. Thus, we do not intend to penalize any facility that 
chooses to use the grace days for assessment scheduling or to audit 
facilities based solely on their regular use of grace days. We may 
explore the option of incorporating the grace days into the regular ARD 
window in the future; nevertheless, we will retain them as part of the 
assessment schedule at the present time consistent with the current 
policy and the new assessment schedule proposed in the proposed rule.
    Comment: Many commenters supported the proposed change to consider 
all facilities 7-day facilities for purposes of setting the ARD for the 
EOT OMRA and the clarification that facilities are required to complete 
an EOT OMRA to classify residents into non-therapy RUG categories when 
therapy has been missed for 3 consecutive days. Others believed that an 
EOT OMRA should only be required if three scheduled days of therapy are 
missed, rather than unscheduled days, since it may be possible for a 
patient to receive the required amount of weekly therapy while still 
not being provided with any therapy for 3 consecutive days. Many 
commenters stated that it would not be unusual for patients to have 3-
day lapses in therapy, especially if a weekend were involved. The 
commenters explained that it is common for patients in the SNF 
population to have brief episodes of illness or refusals, doctor 
appointments, or religious holidays that may cause a missed therapy day 
on a Friday or Monday, and that requiring an EOT OMRA following 3 
consecutive calendar days of missed therapy is not logical, as it will 
entail a provider burden of additional paperwork.
    Response: We are pleased that some commenters supported the 
proposal to eliminate the distinction between 5-day and 7-day 
facilities and to apply a uniform policy in setting the ARD for the EOT 
OMRA. However, we do not agree with comments that an EOT OMRA should 
only be required if 3 scheduled days of therapy are missed, rather than 
any three consecutive day periods. As stated in Sec.  409.31(b)(1), to 
meet the skilled level of care requirement for coverage of post-
hospital SNF care, ``the beneficiary must require skilled nursing or 
skilled rehabilitation services, or both, on a daily basis.'' 
Additionally, the criteria for ``daily basis'' under Sec.  409.34(a)(2) 
state, '' As an exception, if skilled rehabilitation services are not 
available 7 days a week those services must be needed and provided at 
least 5 days a week.'' Therefore, according to these regulations, while 
a facility may determine that it does not have adequate resources to 
provide therapy 7 days a week, the facility is still required to ensure 
that therapy is provided for at least five days a week. In addition, 
the policy requiring an EOT OMRA to be completed when therapy has been 
discontinued for 3 consecutive calendar days is consistent with our 
discussion of Sec.  409.34(b) in the FY 2010 final rule (74 FR 40348), 
in which we stated that a break of 1 or 2 days would not necessarily 
result in a provider having to complete an EOT OMRA. As we stated in 
the FY 2012 proposed rule (76 FR 26390), we believe that the policy of 
requiring all SNFs to set the ARD for the EOT OMRA by the third 
consecutive calendar day after the last day of therapy was provided 
appropriately reflects that the frail and vulnerable populations within 
SNFs require consistent therapy without significant breaks in service. 
Accordingly, we believe that regardless of whether the missed therapy 
day was scheduled, and no matter what the reason was for the missed 
therapy, if the resident missed 3 consecutive calendar days of therapy, 
we believe an EOT OMRA should be completed.
    Commenters cited several specific examples of situations that would 
cause a resident to miss therapy. We realize that there may be a 
variety of reasons that therapy would be missed, whether the reason for 
the missed therapy was planned or unplanned. At the same time, it is 
the facility's responsibility to ensure that patients receive ongoing, 
rather than sporadic, care to promote each patient reaching his or her 
full potential. Thus, we emphasize that the EOT OMRA should be 
completed if therapy was missed for 3 consecutive calendar days for any 
reason, planned or unplanned. Additionally, the idea that a resident 
can receive the required amount of weekly therapy while still not being 
provided therapy for 3 consecutive days, as suggested by the commenter, 
assumes that there is a prescribed ``Medicare therapy week''. It should 
be noted, however, that there is no prescribed ``Medicare therapy 
week''

[[Page 48520]]

that spans across any specific days. Therapy utilization is measured 
across a rolling 7-day period as reported on the MDS assessments. Thus, 
for the reasons discussed above, the EOT OMRA should always be 
completed when a resident misses 3 consecutive calendar days of 
therapy.
    Comment: One commenter recommended that CMS recalibrate the therapy 
thresholds, specifically in the Ultra High and Very High Rehabilitation 
RUG categories to distribute minutes more accurately and to establish 
more realistic sub-categories.
    Response: We appreciate the commenter's recommendation. We intend 
to monitor these policies as well as provider behavior and we may 
consider such approaches in the future.
    Comment: Several commenters requested additional guidance and 
clarification on the requirements for providing a SNF Advance 
Beneficiary Notice of Noncoverage (SNF ABN) or an expedited 
determination notice, also known as the Notice of Medicare Non-Coverage 
(NOMNC) when a beneficiary misses 3 consecutive days of skilled therapy 
and will enter into a noncovered stay because they will no longer be 
receiving skilled services. One commenter thought that CMS required a 
SNF ABN to be issued 48 hours prior to the delivery of noncovered care. 
The commenter was concerned that this 48-hour SNF ABN delivery 
``requirement'' could not be met when a beneficiary receives no therapy 
on a weekend and refuses therapy on Monday.
    Response: The SNF ABN is issued prior to delivering services for 
which Medicare might not pay because they are not medically reasonable 
and necessary and/or constitute custodial care, and the beneficiary is 
expected to receive these services and possibly incur financial 
liability. The policy for issuance of the SNF ABN has not changed in 
light of the policies being finalized in this rule. Please see the 
current manual instructions for the SNF ABN in the Medicare Claims 
Processing Manual, IOM 100-04, Chapter 30, Section 70, which can be 
accessed via this link: http://www.cms.gov/Manuals/IOM/list.asp.
    There is no ``48-hour notice'' requirement associated with the SNF 
ABN. However, the SNF ABN should be given in a timely manner to provide 
the beneficiary or the representative sufficient time to make an 
informed decision about whether to receive care that may not be covered 
by Medicare, and/or make other arrangements for care. SNF providers 
should issue the SNF ABN as soon as it is clear that the beneficiary 
may enter into a non-covered stay.
    We appreciate the commenters' concerns regarding understanding the 
requirements for the issuance of the SNF ABN in light of this rule; 
however, as noted previously, our policies related to issuance of the 
SNF ABN remain unchanged. Specifically, the timing of SNF ABN delivery 
remains unchanged, and as per current policy and as discussed above, it 
should be given prior to delivery of care for which Medicare might not 
pay, allowing the beneficiary or the representative a reasonable amount 
of time to make an informed decision about whether to receive the care 
and/or make other arrangements for care. Finally, we note that where 
the beneficiary misses 3 consecutive days of skilled therapy and will 
enter into a noncovered stay, either because therapy is not offered on 
those days or the beneficiary refuses or declines therapy, or any 
combination of the preceding, it is unlikely that a provider will need 
to issue the NOMNC. The NOMNC is a notice issued prior to the 
termination of Medicare-covered services, when the provider determines 
that such services are no longer covered based on Medicare coverage 
policies (see 42 CFR Sec. Sec.  405.1200 and 405.1202). The NOMNC 
informs the beneficiary of the right to appeal the discontinuation of 
covered services. Our policies regarding issuance of an NOMNC have not 
changed in light of this rule. Consistent with current policy, if SNF 
covered services end solely because a beneficiary fails to meet the 
consecutive days of therapy requirement for the reasons set forth 
above, the NOMNC would not be issued. The NOMNC is a provider notice of 
termination of services and is not issued when a beneficiary initiates 
the end of care. The NOMNC is also not issued when care ends for 
provider business reasons, such as when a SNF does not offer therapy on 
certain days. We intend to publish guidance on NOMNC delivery in the 
Medicare Claims Processing Manual in the near future. We will also 
include further clarification on NOMNC delivery in other vehicles, such 
as CMS Open Door Forums, as deemed necessary.
    Comment: Several commenters have stated that the requirement of the 
EOT OMRA after discontinuation of therapy for 3 consecutive days 
inhibits facilities from gradually reducing therapy services as 
residents approach the end of their SNF stay. The commenters explained 
that it is common to reduce the frequency and intensity of treatment 
prior to facility discharge to assure the resident will maintain their 
current level of function without the need for daily therapy.
    Response: We do not agree that the requirements to complete an EOT 
OMRA following discontinuation of therapy for three consecutive 
calendar days discourages facilities from gradually reducing therapy 
services prior to discharge. The EOT OMRA would only need to be 
completed if 3 consecutive calendar days of all three therapy 
disciplines were missed. We believe that it is likely to be 
inconsistent with good clinical judgment for practitioners to purposely 
not provide any rehabilitation services in a 3-day period prior to an 
imminent discharge, especially given the frail and vulnerable nature of 
SNF populations.
    Comment: Several commenters remarked that the requirement to 
complete an EOT OMRA after 3 consecutive days of missed therapy will 
negatively affect residents who are classified into Low Rehabilitation 
RUG groups. They stated that facilities might be required to complete 
an EOT OMRA on a weekly basis if these residents do not receive therapy 
on a Monday or Friday.
    Response: Residents who fall into the Rehabilitation Low RUG groups 
continue to benefit from skilled therapy. Even though their conditions 
indicate that they only need to receive therapy for a minimum of 45 
minutes per week over at least 3 days to be classified into these RUG 
groups, we believe that a significant break in therapy services may 
still be detrimental to their therapy goals and recovery. For example, 
if a facility treats one of these residents on a Monday, Tuesday, and 
Wednesday and they do not have another treatment session until the 
following Monday or Tuesday, this resident will go for 4 or 5 
consecutive calendar days without therapy services. We believe that 
this significant break in therapy may cause this resident to regress 
from functional gains made during therapy thus far. For this reason, we 
require that an EOT OMRA also be completed for residents who are in the 
Rehabilitation Low RUG groups, when therapy services have been 
discontinued for 3 consecutive calendar days.
    Comment: We have received numerous comments stating that providing 
7-day-a-week therapy for rural facilities is very difficult. The 
commenters stated that it is quite possible that the EOT OMRA would be 
triggered frequently by 3 missed days of therapy over the weekend plus 
the adjoining days. The commenters suggested that the policy that 
requires an EOT OMRA in the event of 3 missed

[[Page 48521]]

days of therapy should be revised to at least 4 missed days.
    Response: We recognize the concern of the rural facilities. 
However, our primary concern is that the SNF residents receive daily 
skilled rehabilitation as required under Sec. Sec.  409.31 and 409.34. 
We expect that rural facilities and SNFs that cannot meet the ``daily 
basis'' requirement under Sec.  409.34 will revisit their hiring and 
staffing practices as well as recruitment and retention options to 
assure they have the appropriate amount of staff to ensure that daily 
skilled care can be provided. Additionally, if facilities are having 
difficulty meeting the daily skilled needs of the residents in their 
care, they should also revisit their admissions policies and determine 
if they are accepting patients for whom they have the resources to 
provide the necessary daily skilled therapy services.
    We do not agree with the suggestion to allow SNFs to discontinue 
therapy for 4 consecutive days prior to completing the EOT OMRA. As 
stated above, Sec.  409.34 requires skilled nursing and/or 
rehabilitation services on a daily basis. We have made limited 
allowances for facilities that are unable to provide therapy services 7 
days a week based on logistical constraints; however, we still expect 
SNFs to provide an adequate amount of skilled rehabilitation services 
to meet the patient's clinical needs. Allowing 4 missed days of therapy 
prior to completion of the EOT OMRA would undermine this concept. As we 
stated previously, the EOT OMRA policy we proposed and are finalizing 
in this final rule reflects that the frail and vulnerable populations 
in SNFs require consistent therapy without significant breaks in 
service.
    Comment: One commenter asked if it is possible for computer 
software to calculate the appropriate RUG when therapy ends without 
another MDS being completed.
    Response: The information needed to calculate a non-therapy RUG-IV 
group when therapy is discontinued is only reported on the MDS. The 
only option for automating the recalculation of the RUG-IV group would 
be to use a previously-submitted MDS. Since that assessment would 
reflect the beneficiary's condition in a prior period rather than the 
patient's condition when therapy ended, there would be no way to 
determine the most appropriate non-therapy RUG category for the patient 
from that assessment.
    Comment: Many commenters stated that the proposed COT OMRA could 
accommodate for the missed 3-day treatment scenarios that necessitate 
EOT OMRA completion.
    Response: We do not agree that the COT OMRA could address both 
changes in therapy provision and missed therapy days. The intent of the 
EOT OMRA is to pay SNFs the per diem medical RUG rate for the 
consecutive days that the resident did not receive therapy services. 
The COT OMRA addresses changes in minutes of therapy provided, not 
missed days.
    Comment: Several commenters asked us to define the term ``treatment 
day'' for purposes of the EOT OMRA. These commenters asked us if a 
resident received less than 15 minutes of therapy a day, whether this 
time could still count toward the definition of a ``treatment day'' 
rather than as a missed therapy day.
    Response: For purposes of determining when an EOT OMRA must be 
completed, a treatment day is defined exactly the same way as in the 
RAI Manual in Chapter 3, Section O, page O-16: 15 minutes of therapy a 
day. If a resident receives less than 15 minutes of therapy in a day, 
it is not coded on the MDS and it cannot be considered a day of 
therapy.
    Comment: Several commenters expressed confusion about the process 
of re-starting therapy after an EOT OMRA was completed. Some were 
unsure about when to complete an SOT OMRA or an EOT-R OMRA. Others 
asked whether a new therapy evaluation is necessary in all cases of 
resumption. Additionally, although many commenters supported the 
proposal to implement the optional EOT-R OMRA, and approved of this 
option to lessen the burden of SNFs when the need to complete the EOT 
OMRA arose, many others expressed confusion and/or requested 
clarification as to whether the EOT-R OMRA is a new assessment type or 
a modification of an old assessment.
    Response: As explained in the proposed rule (76 FR 26389 through 
26390), the ARD for the EOT OMRA must be set 1 to 3 consecutive 
calendar days following the last day of therapy. Under current policy, 
if the patient was discharged from therapy with no expectation for it 
to continue or restart, then the EOT OMRA would classify the resident 
into a non-therapy RUG group which would be the basis of payment until 
the next PPS assessment. However, even if the resident was not 
discharged from therapy services and missed 3 or more consecutive days 
of therapy, an EOT OMRA still would have to be completed to classify 
the resident into a non-therapy RUG group for those days of missed 
therapy.
    As explained in the FY 2012 proposed rule (76 FR 26390 through 
26391), we recognize that the completion of an EOT OMRA and subsequent 
SOT OMRA may not be necessary for all patients. This may be the case 
where therapy was discontinued (for example, due to non-clinical 
reasons such as scheduling conflicts), and resumes shortly thereafter 
at the same RUG classification level. Therefore, we proposed the option 
to complete an EOT with Resumption or an EOT-R OMRA, rather than an SOT 
OMRA, in cases where the therapy resumption date is no more than 5 
consecutive calendar days following the last day of therapy provided 
and the therapy services have resumed at the same RUG-IV classification 
level that had been in effect prior to the discontinuation of therapy 
services. As we stated in the FY 2012 proposed rule (76 FR 26390), in 
the situation where therapy services have resumed within such a short 
period of time at the same RUG-IV classification level, we do not 
believe that a new therapy evaluation and SOT OMRA would be necessary 
to reclassify the patient back into a RUG-IV therapy group because, 
given that the therapy resumed at the same RUG-IV classification level, 
it is likely that the patient's clinical condition has not changed. We 
appreciate the support for the proposal of the EOT-R OMRA.
    We would like to clarify that the EOT-R OMRA is not a new 
assessment type. As explained in the FY 2012 proposed rule (76 FR 
26390), it is an EOT OMRA with two additional items (O0450A and O0450B) 
to indicate whether therapy is expected to resume and the date of 
resumption of therapy. As stated above, an EOT-R OMRA may be used when 
therapy has been missed for at least 3 consecutive calendar days and is 
expected to resume (and actually does resume) within 5 calendar days 
following the last day of therapy. For example: Mr. A. received therapy 
every day Monday through Friday. He missed therapy on Saturday and 
Sunday because the SNF he was in did not provide therapy during the 
weekend. On Monday, Mr. A.'s family came to visit and he refused 
therapy. At this point, Mr. A. missed three days of therapy and an EOT 
OMRA would be required. He also missed therapy on Tuesday, due to a 
scheduled doctor's appointment. The interdisciplinary team made the 
determination that Mr. A.'s missed therapy did not result in a change 
in clinical condition that would make him tolerate less therapy and 
change his RUG-IV classification. Therefore, the facility completed an 
EOT OMRA on Monday indicating that

[[Page 48522]]

therapy had not occurred for at least three days. Then, on Wednesday, 
the EOT is modified into an EOT-R by reporting the actual date of 
resumption, which was Wednesday. In this case, a new therapy evaluation 
was not required and Mr. A resumed therapy on Wednesday at the same 
RUG-IV classification level.
    If the reason for missed therapy was clinical in nature (meaning 
there was a possibility that the resident's clinical therapy status was 
affected by the missed therapy), it may not be appropriate for the 
facility to complete an EOT-R OMRA. In cases where the patient resumes 
therapy more than 5 consecutive calendar days after discontinuation of 
therapy services or where the patient resumes therapy at a different 
RUG classification level (even if it is no more than 5 consecutive 
calendar days after the date the last therapy service was furnished), 
an EOT-R OMRA cannot be used. In this case, the facility could either 
complete an optional SOT-OMRA and new therapy evaluation if therapy 
resumes, or wait until the completion of the next scheduled PPS 
assessment to classify the resident into a RUG-IV group. If the 
facility chooses not to complete an SOT OMRA and if the next scheduled 
PPS assessment is used to classify the patient into a therapy RUG 
group, a new therapy evaluation would also be required. Thus, in 
situations where an EOT OMRA was completed and therapy subsequently 
resumes, a new therapy evaluation is required when either an SOT OMRA 
or a scheduled PPS assessment is used to classify the resident into a 
RUG-IV therapy group. For example: Mr. B. received therapy every day 
Wednesday through Monday. On Tuesday, he felt ill and missed therapy 
that day and Wednesday. He then went to dialysis on Thursday and missed 
therapy that day as well. He missed a total of 3 days of therapy. Due 
to his illness and dialysis, he could not immediately resume therapy at 
the same level he was receiving prior to the three missed days. 
However, on Friday he felt well enough to start therapy again. The 
facility completed an EOT OMRA on Thursday to classify Mr. B. into a 
non-rehabilitation RUG group and to get paid the non-rehabilitation RUG 
rate for Tuesday, Wednesday, and Thursday. As Mr. B. could not resume 
therapy at the same RUG-IV classification level, a new therapy 
evaluation was completed by each discipline (physical therapy, 
occupational therapy, and/or speech therapy) treating Mr. B. and then 
an SOT OMRA was completed, and he was placed back into a rehabilitation 
RUG group. The facility was paid at the rehabilitation RUG rate from 
the day therapy restarted until the next PPS assessment was completed.
    Comment: One commenter highlighted a potential error in an example 
we provided on page 26392 of the proposed rule, where we stated that 
``* * * paid for Days 36 through 39 at the corresponding non-therapy 
rate, based on the patient's clinical condition reported on the 30-day 
assessment (because therapy services were discontinued on Day 36 and an 
EOT OMRA was completed) * * *'' (76 FR 26392). According to this 
commenter, the phrase ``30-day assessment'' should be replaced by ``EOT 
OMRA'' because the non-therapy RUG on the EOT OMRA is used to establish 
the payment for services during the period where no therapy services 
are provided.
    Response: After careful review of the example in the proposed rule 
cited by the commenter, we agree with the commenter that we misstated 
the relevant assessment that would determine payment for Days 36 
through 39 in the example provided. The text quoted above on page 26392 
of the proposed rule should read ``* * * paid for Days 36 through 39 at 
the corresponding non-therapy rate, based on the patient's clinical 
condition reported on the EOT OMRA (because therapy services were 
discontinued on Day 36 and an EOT OMRA was completed) * * *'', as this 
accurately reflects how the payment for this resident would be 
calculated. We have reviewed the remainder of the example and found no 
additional errors.
    Comment: Several commenters questioned whether therapy service 
changes outside of the MDS observation window are a significant issue. 
One commenter requested evidence that there is a widespread instance of 
misreporting therapy services. One commenter suggested that if this 
were such a major threat to the Medicare program, they would assume CMS 
would have involved the Recovery Audit Contractors (RACs), the Medicare 
Administrative Contractors (MACs), and CMS surveyors in the medical 
review process to address this issue.
    Response: As we stated in the FY 2012 proposed rule (76 FR 26391), 
we have found some cases where therapy services recorded on a given PPS 
assessment did not provide an accurate account of the therapy provided 
to a given SNF resident outside the observation window for the most 
recent assessment. While in some of these cases, a patient's clinical 
status may have changed outside of the observation window requiring an 
adjustment to the intensity of therapy during that time, we have also 
been presented with a multitude of anecdotal evidence claiming the 
misreporting of therapy services. In addition, the Office of the 
Inspector General (OIG) of the Department of Health and Human Services 
conducted an independent study into questionable billing practices in 
SNFs. Report No: OEI-02-09-00204 (available online at http://oig.hhs.gov/oei/reports/oei-02-09-00204.asp) demonstrates that the OIG 
concurs with our statements in the FY 2012 proposed rule and supports 
the changes we have proposed to curb these practices. As cited in the 
OIG Report (page 11), ``Lastly, the data highlight the need for further 
changes to make RUGs and Medicare payments more consistent with 
beneficiaries' care and resource needs. These changes could include 
requiring SNFs to recalculate a beneficiary's RUG whenever his or her 
level of therapy changes substantially, as well as reducing the overlap 
that occurs in assessment periods.'' We agree with the commenter that 
we should utilize all of our available tools to identify and correct 
abusive practices. These issues have been referred to the appropriate 
entities for more intensive monitoring.
    Comment: We received several comments supporting the addition of 
the COT OMRA. These commenters agreed that the COT OMRA would improve 
the accuracy of reimbursement for therapy services and quality of care 
to SNF patients. The commenters also believed that the implementation 
of the COT OMRA would help ensure that Medicare payments more 
accurately reflect the differences in resources utilized for patient 
care. However, many commenters stated that the COT OMRA would create an 
undue burden for facilities. Several commenters stated that the COT 
OMRA would increase supply costs associated with completing the actual 
form and that the additional paperwork required would affect the 
``green'' efforts of many facilities. Some commenters stated that the 
additional assessments would reduce actual patient care due to the 
amount of time spent regulating and monitoring these assessments during 
the SNF stay. Some commenters expressed concern that the COT OMRA would 
require facilities to add new evaluation processes to monitor RTM. One 
commenter stated that the COT OMRA would increase confusion about the 
MDS process. One comment expressed concern that when the COT OMRA 
causes a resident to classify into a lower RUG category, this would 
cause facility workloads to

[[Page 48523]]

increase without an increase in personnel reimbursement.
    Response: We would like to stress that SNFs would be required to 
complete a COT OMRA only if the intensity of therapy changes to such an 
extent that the patient's RUG classification, based on their last PPS 
assessment, is no longer an accurate representation of the patient's 
current clinical condition. Regarding the need for a new evaluation 
process to monitor and count RTM, we believe that facilities currently 
have processes in place that monitor the total amount of therapy 
minutes provided over any given period of time. Therefore, we do not 
agree that the process of evaluating RTM will add a significant time 
burden to facilities or reduce actual patient care. We would like to 
stress that if facilities tailor treatment time to the needs of each 
individual patient and continue to provide that therapy outside of the 
assessment window, facilities will be less likely to be required to 
complete as many COT OMRAs.
    We cannot assess the accuracy of the statement that the COT OMRA 
will increase supply costs for form completion and affect the green 
efforts of facilities, as it depends on the facility management and 
environmental efforts of each specific facility. Nevertheless, we 
believe the COT OMRA is an appropriate measure to enhance the accuracy 
of payments and patient care. As we stated in the proposed rule (76 FR 
26392), we believe the COT OMRA will allow us to track changes in the 
patient's condition and in the provision of therapy services more 
accurately, allowing reimbursement to reflect resource use more 
accurately, thereby improving the accuracy of reimbursement. Also, we 
believe that the ability to track changes in the patient's condition 
and in the provision of service more accurately will enhance a SNF's 
ability to provide quality care to residents.
    We do not believe that the COT OMRA will increase confusion about 
the MDS process. As we have done in the past, we will update the RAI 
Manual to incorporate the changes and instructions for assessments and 
we will provide training opportunities prior to the October 1, 2011 
implementation. Finally, we do not agree with the commenter who stated 
that when a COT OMRA causes a resident to classify into a lower RUG 
category, this will cause facility workload to increase without an 
increase in personnel reimbursement. We note that RUG-IV classification 
is based on resource utilization and cost. If a patient is classified 
into a lower therapy RUG category based on a change to the therapy 
delivered during the COT observation period, then the SNF would 
appropriately be paid the lower rate associated with that RUG category. 
The SNF PPS rates are designed to cover the costs of providing care, 
including related administrative costs.
    Comment: Several commenters have asked whether the COT OMRA should 
be completed in cases of an increase in RTM to classify a resident into 
a higher RUG category in addition to cases where the resident would be 
classified into a lower RUG category based on the provision of RTM in 
the COT look-back period. One commenter asked if a COT OMRA would be 
required if there were a scheduled decrease in therapy provision (such 
as one that was caused by the discontinuation of one therapy 
discipline) or if the COT OMRA would be required for any reason that 
would cause a decrease in therapy. Additionally, commenters have 
questioned whether a resident's ADL score should be taken into account 
when determining whether a COT OMRA is required. One commenter asked 
whether COT OMRA requirements, including the COT observation period 
requirement, would apply if a resident was receiving therapy but was 
classified into a nursing RUG because of index maximization.
    Response: As we stated in the FY 2012 proposed rule (76 FR 26392), 
a COT OMRA would be completed for a patient in a therapy RUG, if a 
patient's RTM has changed during the COT observation period to such a 
degree that the patient's current RUG classification, based on their 
last PPS assessment, is no longer an accurate representation of the 
patient's clinical condition (and the patient should be placed in a 
different RUG category). This applies whether the change in RTM is a 
scheduled change or an unscheduled or unplanned change, and whether the 
different RUG category is higher or lower than the RUG category in 
which the resident is currently placed. In addition, in response to the 
comment regarding whether other therapy changes such as the 
discontinuation of a particular therapy discipline would be sufficient 
to require a COT OMRA, upon further consideration, we believe that a 
COT OMRA should be required in any case where there is a change in the 
provision of therapy such that the patient's current RUG classification 
based on their last PPS assessment, is no longer an accurate 
representation of the patient's clinical condition and the patient 
should be placed in a different RUG-IV category. As we stated in the 
proposed rule (76 FR 26392) and in this final rule above, the purpose 
of the COT OMRA is to track changes in a patient's condition and in the 
provision of therapy services more accurately to ensure that the 
patient is placed in the appropriate RUG category, thereby improving 
the accuracy of reimbursement. Based on comments received in response 
to the proposed rule, we will require that the COT OMRA be completed 
where the provision of therapy services has changed in any manner as 
observed during the COT observation period such that the patient should 
be placed in a different RUG category (not just in cases where the RTM 
has changed). Therefore, if a therapy discipline is discontinued and 
this results in a patient no longer meeting the required number of 
therapy disciplines for the patient's current RUG category then a COT 
OMRA would be required. In addition, if a patient fails to receive the 
requisite number of days of therapy required for classification into 
the RUG category, then a COT OMRA would be required to change the 
patients' RUG category as appropriate. As discussed previously, the 
purpose of the COT OMRA is to ensure that the patient is placed in the 
appropriate therapy RUG category based on therapy services needed and 
received and to ensure more accurate payment. For example, a facility 
is evaluating whether a COT OMRA is required for a resident who was 
placed in a Very-High Rehabilitation RUG group after the last PPS 
assessment. Upon informal evaluation at the end of the COT observation 
period, the facility determines that the resident has had 720 minutes 
of therapy during the COT look-back period and meets all of the other 
criteria for classification in an Ultra-High Rehabilitation RUG group. 
A COT OMRA would be completed to place that resident into an Ultra High 
Rehabilitation RUG group. In response to the commenter's question 
regarding whether a resident's ADL score should be taken into account 
when determining whether a COT OMRA is required, ADL scores are not 
considered when deciding whether a COT OMRA needs to be completed as 
they are a refined grouping within the RUG category. However, when the 
COT OMRA is completed, the ADL score will be used in determining the 
appropriate RUG group in the grouper.
    Additionally, one commenter asked whether a SNF would be required 
to comply with the COT OMRA requirements, including the COT observation 
period requirement, in cases where a resident is receiving therapy but 
is classified into a nursing RUG because of index maximization. Upon

[[Page 48524]]

consideration of this comment, we believe that the COT OMRA 
requirements, including the COT observation period requirement, should 
also apply in cases where a resident is receiving therapy but is 
classified into a nursing RUG because of index maximization. While this 
type of index maximization will affect only a small subset of 
beneficiaries receiving therapy, because such patients are receiving 
therapy services sufficient for classification into a therapy RUG and 
would be classified into a therapy RUG if index maximization had not 
been applied, we believe that it is appropriate to apply the COT OMRA 
policy as finalized in this rule to these patients as well, so that any 
changes in the intensity of therapy services delivered to the patient 
may be captured. For example, the evaluation performed at the end of 
the COT observation period for such a patient may indicate an increase 
in RTM delivered, which may necessitate placing the patient into a 
rehabilitation RUG category. Therefore, the COT OMRA policy, as 
finalized in this rule, will also apply to patients who are receiving a 
level of therapy sufficient for classification into a therapy RUG 
category, but are classified into a nursing RUG because of index 
maximization.
    Comment: Many comments requested clarification about the COT OMRA. 
Specifically, several commenters asked whether the COT OMRA could 
replace or be combined with other scheduled PPS assessments. Also, one 
commenter asked us to clarify whether, if the ARD for the COT OMRA were 
not set for Day 7, a missed or late assessment penalty would be 
applied.
    Response: As specified in Chapter 6, Section 30.3 of the Medicare 
Claims Processing Manual (CMS Pub. 100-04, which is available online at 
http://www.cms.gov/manuals/downloads/clm104c06.pdf), special billing 
requirements apply when there are multiple assessments within one 
Medicare-required assessment window. Consistent with our current 
policy, if an unscheduled PPS assessment (OMRA, Significant Change in 
Status Assessment (SCSA), or Significant Correction of a Prior 
Assessment (SCPA)) is required while in the assessment window of a 
scheduled PPS assessment that has not yet been completed, then 
facilities must combine the scheduled and unscheduled assessments by 
setting the ARD of the scheduled assessment for the same day that the 
unscheduled assessment is required. In such cases, facilities should 
provide the proper response to A0310 items to indicate which 
assessments are being combined, as completion of the combined 
assessment will be taken to fulfill the requirements for both the 
scheduled and unscheduled assessments. The purpose of this policy is to 
minimize the number of assessments required for SNF PPS payment 
purposes and to ensure that the assessments used for payment provide 
the most accurate picture of the patient's clinical condition and 
service needs. In practice, in cases where the COT OMRA is combined 
with a regularly scheduled assessment, the facility would complete the 
scheduled assessment, rather than the COT OMRA, since the COT OMRA only 
includes a subset of the required MDS data. This single full MDS 
assessment is then used to determine payment for both the COT OMRA 
observation period and the regular payment window for the scheduled 
assessment. Thus, for example, in cases where Day 7 of the COT 
observation period falls within the ARD window of the 30-day PPS 
assessment, a provider would set the ARD for the 30-day assessment on 
day 7 of the COT OMRA observation period, and code the reasons for 
assessment as both the 30-day and the COT OMRA assessment (MDS items 
A0310(B) and A0310(C)). Consistent with the COT OMRA policy we proposed 
in the FY 2012 proposed rule (76 FR 26392), the HIPPS code derived from 
the combined COT OMRA and scheduled PPS assessment would be effective 
starting the first day of the COT observation period (for example, for 
the first COT observation period after the previous assessment used for 
Medicare payment, the first day of the COT observation period is the 
day after the ARD of the previous assessment used for Medicare payment) 
and would remain in effect until the end of the payment window for the 
30-day assessment (that is, day 60) or until a new unscheduled 
assessment (an OMRA, SCSA, or SCPA) is completed.
    The ARD for the COT OMRA is Day 7 following the last scheduled or 
unscheduled PPS assessment or Day 7 following the end of the last COT 
observation period (in cases where therapy had not changed sufficiently 
to require a COT OMRA assessment to be performed for the previous COT 
observation period). If a COT OMRA is required but is completed late, 
the facility is still required to submit the late COT OMRA to CMS. The 
facility will be paid at the default rate for any days not in 
compliance with the ARD requirement. The ARD of the late COT OMRA 
restarts the 7-day review period for the next COT OMRA. Since SNFs are 
only permitted to bill after the appropriate assessment has been 
accepted into the CMS data base, failure to submit a required 
assessment while continuing to bill for services that would be covered 
by the assessment, would subject the claim to denial.
    Comment: Many commenters offered suggestions and alternatives to 
the COT OMRA. Several commenters offered the general suggestion that 
CMS should seek alternate, less burdensome options to address the issue 
of therapy service level changes outside of the MDS observation 
windows. More specifically, commenters recommended that if we move 
forward with this proposal, we should allow flexibility in the choice 
of the ARD of the COT OMRA. One commenter suggested that we do this by 
allowing for grace days either at the beginning or end of the 7-day 
window for the COT observation period. Similarly, one commenter 
suggested that we incorporate the concept of ``grace minutes'' to offer 
facilities the flexibility to allow for an unexpected decrease in 
therapy minutes outside of the assessment window. Additionally, we 
received suggestions that the COT OMRA should be required only after 
the first 30 days of a patient's SNF stay.
    Response: We appreciate the suggestions and alternatives offered. 
However, we believe that allowing flexibility in the choice of ARD by 
adding grace days and by allowing grace minutes, as suggested by the 
commenter, would defeat the purpose and intent of the COT OMRA, which 
is to determine whether the therapy provided during a successive 7-day 
window of therapy following the ARD of a scheduled or unscheduled PPS 
assessment (the COT observation period) corresponds to the resident's 
RUG-IV classification as reflected on the most recent PPS assessment. 
Adding grace days would allow facilities to provide a count of therapy 
minutes that may not be an accurate reflection of the actual therapy 
minutes provided during the successive 7-day period discussed above, 
contrary to the intent of the COT OMRA. Furthermore, we believe that 
allowing grace minutes would allow the facility to provide less therapy 
than anticipated with the expectation that CMS will reimburse the 
facility at a higher rate than appropriate. Additionally, the concept 
of ``grace minutes'' would indicate that providers are targeting a 
minimum threshold of minutes to qualify for a specific RUG category. We 
stress that there are not ``minimum minutes'' that should be met when 
determining how much therapy a resident will receive. We expect that 
facilities are determining the therapy minutes provided based on the 
needs of

[[Page 48525]]

each individual resident. Furthermore, we do not agree that we should 
require the COT OMRA only after the first 30 days of the SNF stay; 
instead, accurate payment should occur throughout the SNF stay. The 
majority of Medicare A Part stays are an average of 30 days in length, 
and thus, a COT OMRA that was only completed after day 30 would not 
adequately monitor for changes in therapy services during the Medicare 
Part A stay, which is the purpose of the COT OMRA.
    Comment: Several commenters stated that the implementation of the 
COT OMRA implies that SNF payment is no longer prospective in nature. 
One commenter suggested that the retrospective nature of the COT OMRA 
undermines the principles of risk sharing inherent in a prospective 
payment system. One commenter suggested that rather than changing the 
nature of the PPS, we should modify the case-mix indexes (CMIs) and 
payment rates associated with the Rehabilitation RUG categories.
    Response: As noted previously, we believe that the SNF PPS payments 
should reflect, as accurately as possible, resource utilization and 
cost. Classification of patients into therapy RUGs and payment for 
therapy services have always been based on the therapy services 
provided and reported on the MDS, and we do not view the COT OMRA as 
changing this. In implementing the COT OMRA, we are attempting to 
ensure that the therapy reported on the MDS and the therapy regimen 
chosen for the patient are a better reflection of the therapy needs of 
the patient, thereby ensuring more accurate payment. We appreciate the 
suggestion regarding modifying the CMIs and payment rates associated 
with the Rehabilitation RUG categories, and may consider this in the 
future to the extent appropriate. As stated in the proposed rule, CMS 
is considering a number of possible future initiatives that may help to 
ensure the long-term stability of the SNF PPS and further improve the 
accuracy of the rate-setting process. A discussion of these possible 
future initiatives is included in section III.E.5 below.
    Comment: Several commenters raised concerns regarding the inability 
of the COT OMRA to account for the natural progression in a patient's 
therapy regimen. One commenter stated that as patients approach the end 
of their skilled therapy program, it is common practice to taper 
therapy down to prepare for discharge. Another commenter alleged that 
the requirement for the ARD of the COT OMRA to be set on Day 7 is 
arbitrary and that during any given payment period, clinical changes 
occur daily, especially at the beginning and end of the SNF stay. Other 
commenters were concerned that adhering to a strict 7-day evaluation 
schedule could prompt a patient's RUG category to change for as little 
as one lost minute of therapy.
    Response: We believe that the COT OMRA, while based on changes in a 
therapy regimen, is primarily intended to capture the patient's 
appropriate RUG classification and, therefore, the payment level. 
Therapists should exercise their professional discretion with regard to 
the appropriate amount and modality of the therapy provided to a 
resident during a given SNF stay. We acknowledge the natural 
progression of a patient's therapy needs throughout a stay, and do not 
believe that the COT OMRA precludes therapists from having the freedom 
to tailor their provision of therapy services to the individual 
patient.
    We do not agree that setting the ARD of the COT OMRA on Day 7 
following the last PPS assessment or Day 7 of any succeeding COT 
observation period is arbitrary. The resident is placed in a 
Rehabilitation or Rehabilitation Plus Extensive Services RUG category 
partially based the amount of therapy that was received during a 7-day 
look-back period. One of the basic principles underlying the SNF PPS is 
that an assessment completed in one time period can be used in 
accurately calculating reimbursement for a future period. While we 
realize that there will be changes based on individual needs, it is 
expected that, on average, residents will receive approximately the 
same amount of therapy within the next 7-day period after a PPS 
assessment. The COT OMRA is an instrument that will better align 
payment with the amount of therapy that a resident actually needs and 
receives. Our analysis of therapy utilization across Medicare Part A 
stays indicates that patients tend to remain in the same therapy groups 
for the first 30 days of care; that is, as reported on the 5-day and 
14-day assessments. Since the average length of stay is approximately 
30 days, facilities that maintain a stable therapy schedule should not 
see a large volume of COT OMRAs. While it is more common to see changes 
in therapy and RUG-IV groups during longer stays, the volume of 
patients receiving Medicare Part A SNF care for stays exceeding 30 days 
is much lower.
    In response to the comment that a strict 7-day evaluation schedule 
could prompt a patient's RUG category to change for as little as one 
lost minute of therapy, this is theoretically possible if the plan of 
care is designed to provide only the minimum number of minutes that 
qualify the patient for a specific therapy category. As noted above, 
the purpose of the COT OMRA is to determine whether the therapy 
provided during the 7 days of therapy following the ARD of a scheduled 
or unscheduled PPS assessment (and any succeeding COT observation 
period) correspond to the resident's RUG-IV classification, as 
reflected on the most recent PPS assessment. Slight variations during 
the 7-day period are expected, and it is up to the therapist to ensure 
that the patient receives the amount of therapy appropriate to his/her 
condition.
    Accordingly, for the reasons discussed in this final rule and in 
the FY 2012 proposed rule (76 FR 26388 through 26393), we are 
finalizing our proposed policies related to the MDS Assessment 
Schedule, the EOT-OMRA, the EOT-R OMRA, and the COT OMRA. Specifically, 
effective October 1, 2011, as discussed in the proposed rule and in the 
final rule above, we are revising the Medicare-required assessment 
schedule in the manner set forth in Table 10B of the proposed rule (76 
FR 26389); removing the distinction between 5-day and 7-day facilities 
for purposes of setting the ARD for the EOT OMRA, and requiring all 
facilities to set the ARD for the EOT ORMA by the third consecutive 
calendar day after a patient's therapy services have been discontinued 
(76 FR 26390); and permitting providers the option to complete an EOT-R 
OMRA rather than the optional SOT OMRA, in cases where the therapy 
resumption date is no more than 5 consecutive calendar days following 
the last day of therapy provided, and therapy services have resumed at 
the same RUG-IV classification level that had been in effect prior to 
the EOT OMRA (76 FR 26390 through 26391). In addition, effective 
October 1, 2011, we are requiring facilities to complete a COT OMRA for 
patients classified into a RUG-IV therapy category, whenever the 
intensity of therapy (that is, the total RTM delivered or other therapy 
category qualifiers, such as the number of days the patient received 
therapy during the week or the number of therapy disciplines) changes 
to such a degree that it would no longer reflect the RUG-IV 
classification and payment assigned for a given SNF resident based on 
the most recent assessment used for Medicare payment (as proposed, the 
need for a COT OMRA will be based on therapy services delivered during 
the COT observation period) (76 FR 26391 through 26393). In addition, 
as proposed, the new RUG-IV group resulting from the COT OMRA would be

[[Page 48526]]

billed starting the first day of the COT observation period for which 
the COT OMRA was completed, and would remain at this level until a new 
assessment is completed which changes the patient's RUG-IV 
classification. Finally, as discussed above, the COT OMRA policy, as 
finalized in this rule, will also apply to patients who are receiving a 
level of therapy sufficient for classification into a therapy RUG, but 
are classified into a nursing RUG because of index maximization.
5. Discussion of Possible Future Initiatives
    In the FY 2012 proposed rule (76 FR 26393), we discussed some 
possible future initiatives that may help to ensure the long-term 
stability of the SNF PPS and further improve the accuracy of the rate-
setting process. Specifically, we discussed three possible future 
initiatives. First, we discussed the possibility of evolving the manner 
in which we pay for therapy services toward a model that has previously 
been advocated by MedPAC, which would base payments for therapy 
services on the patient's characteristics. Similarly, we discussed the 
possibility of making partial prospective payments for therapy 
services, based on patient characteristics, and then reconciling 
payments after the services have been verified. Lastly, we discussed 
the possibility of annual recalibrations of the CMIs to account for 
fluctuations in provider practices, and MedPAC's analysis regarding the 
possibility of rebasing the system. As we stated in the FY 2012 
proposed rule, we were not proposing any new Medicare policy in this 
discussion, as we recognized that depending on how such modifications 
are ultimately formulated, their implementation may require new 
statutory authority.
    The comments we received related to this discussion, along with our 
responses, appear below.
    Comment: We received a few general comments related to this 
discussion, the majority of which stated their support for working with 
CMS in the future on any future initiatives. We did not receive any 
comments about any specific initiatives discussed.
    Response: We appreciate the support we received from commenters for 
considering these future initiatives and will continue to work with 
stakeholders on developing policies and programs that we consider 
necessary and appropriate to improve the SNF PPS.

F. The Skilled Nursing Facility Market Basket Index

    Section 1888(e)(5)(A) of the Act requires us to establish a SNF 
market basket index (input price index), that reflects changes over 
time in the prices of an appropriate mix of goods and services included 
in the SNF PPS. In the FY 2012 proposed rule, we stated that the 
proposed rule incorporates the latest available projections of the SNF 
market basket. In this final rule, we are updating projections based on 
the latest available projections of the SNF market basket index at the 
time of publication. Accordingly, we have developed a SNF market basket 
index that encompasses the most commonly used cost categories for SNF 
routine services, ancillary services, and capital-related expenses.
    Each year, we calculate a revised labor-related share based on the 
relative importance of labor-related cost categories in the input price 
index. Table 9 summarizes the updated labor-related share for FY 2012.

     Table 9--Labor-Related Relative Importance, FY 2011 and FY 2012
------------------------------------------------------------------------
                                       Relative            Relative
                                  importance, labor-  importance, labor-
                                   related, FY 2011    related, FY 2012
                                    10:2 forecast *    11:2 forecast **
------------------------------------------------------------------------
Wages and salaries..............              50.654              50.129
Employee benefits...............              11.511              11.502
Nonmedical professional fees....                1.32                1.31
Labor-intensive services........               3.427               3.394
Capital-related (.391)..........               2.399               2.358
                                 ---------------------------------------
    Total.......................              69.311              68.693
------------------------------------------------------------------------
* Published in Federal Register; based on second quarter 2010 IHS Global
  Insight Inc. forecast.
** Based on the second quarter 2011 IHS Global Insight forecast, with
  historical data through the first quarter 2011.

1. Use of the Skilled Nursing Facility Market Basket Percentage
    Section 1888(e)(5)(B) of the Act defines the SNF market basket 
percentage as the percentage change in the SNF market basket index from 
the average of the previous FY to the average of the current FY. For 
the Federal rates established in this final rule, we use the percentage 
increase in the SNF market basket index to compute the update factor 
for FY 2012. This is based on the IGI (formerly DRI-WEFA) second 
quarter 2011 forecast (with historical data through the first quarter 
2011) of the FY 2012 percentage increase in the FY 2004-based SNF 
market basket index for routine, ancillary, and capital-related 
expenses, which is used to compute the update factor in this final 
rule. As discussed in section III.F.3 of this final rule, this market 
basket percentage change is reduced by the MFP adjustment as required 
by section 1888(e)(5)(B)(ii) of the Act. Finally, as discussed in 
section I.A of this final rule, we no longer compute update factors to 
adjust a facility-specific portion of the SNF PPS rates, because the 
initial three-phase transition period from facility-specific to full 
Federal rates that started with cost reporting periods beginning in 
July 1998 has expired.
2. Market Basket Forecast Error Adjustment
    As discussed in the June 10, 2003, supplemental proposed rule (68 
FR 34768) and finalized in the August 4, 2003, final rule (68 FR 46057 
through 46059), the regulations at Sec.  413.337(d)(2) provide for an 
adjustment to account for market basket forecast error. The initial 
adjustment applied to the update of the FY 2003 rate for FY 2004, and 
took into account the cumulative forecast error for the period from FY 
2000 through FY 2002, resulting in an increase of 3.26 percent. 
Subsequent adjustments in succeeding FYs take into account the forecast 
error from the most recently available FY for which there is final 
data, and apply whenever the difference between the forecasted and 
actual change in the market basket exceeds a specified threshold. We 
originally used a 0.25 percentage point threshold for this purpose; 
however, for the reasons

[[Page 48527]]

specified in the FY 2008 SNF PPS final rule (72 FR 43425, August 3, 
2007), we adopted a 0.5 percentage point threshold effective with FY 
2008. As discussed previously in section I.G.2 of this final rule, as 
the difference between the estimated and actual amounts of increase in 
the market basket index for FY 2010 (the most recently available FY for 
which there is final data) does not exceed the 0.5 percentage point 
threshold, the payment rates for FY 2012 do not include a forecast 
error adjustment.
    Comment: Several commenters suggested that CMS apply a cumulative 
forecast error adjustment to account for all of the variations in the 
market basket forecasts since FY 2004. These commenters stated that 
while the industry has accepted the adjustment process, the lack of any 
cumulative adjustment in recent years violates the precedent set by CMS 
in 2003 when the last cumulative adjustment was made and that the 
cumulative adjustment in 2003 demonstrated recognition by CMS of the 
cumulatively erosive effect of multi-year forecasting errors. The 
commenters recommended that CMS adopt a policy which recognizes the 
cumulative effect of multi-year market basket forecast errors and that 
adjustment be made to account for the cumulative errors, estimated at 
0.7 percent, thus far.
    Response: For FY 2004, we applied a one-time, cumulative forecast 
error correction of 3.26 percent (68 FR 46036, 46058). Since that time, 
the forecast errors have been relatively small and clustered near zero. 
As we stated in the FY 2004 final rule, we believe the forecast error 
correction should be applied only when the degree of forecast error in 
any given year is such that the SNF base payment rate does not 
adequately reflect the historical price changes faced by SNFs. 
Accordingly, we continue to believe that the forecast error adjustment 
mechanism should appropriately be reserved for the type of major, 
unexpected change that initially gave rise to this policy, rather than 
the minor variances that are a routine and inherent aspect of this type 
of statistical measurement. Further, we note that all of the Medicare 
prospective systems use an annual market basket adjustment factor to 
update rates to reflect inflation in the prices of goods and services 
used by providers.
3. Multifactor Productivity Adjustment
    Section 3401(b) of the Affordable Care Act requires that, in FY 
2012 (and in subsequent FYs), the market basket percentage under the 
SNF payment system as described in section 1888(e)(5)(B)(i) is to be 
reduced annually by the productivity adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act. As explained in the Senate Finance 
Committee report that accompanied S. 1796 (``America's Healthy Future 
Act of 2009,'' the Senate's initial version of the health care reform 
legislation), the purpose of this type of productivity adjustment is to 
help ensure that the market basket update, in accounting for changes in 
the costs of goods and services used to provide patient care, also 
reflects ``* * * increases in provider productivity that could reduce 
the actual cost of providing services (such as through new technology, 
fewer inputs, etc.)'' (S. Rep. No. 111-89 at 261). Specifically, 
section 3401(a) of the Affordable Care Act amends section 1886(b)(3)(B) 
of the Act to add clause (xi)(II), which sets forth the definition of 
this productivity adjustment. The statute defines the productivity 
adjustment to be equal to the 10-year moving average of changes in 
annual economy-wide private nonfarm business multi-factor productivity 
(MFP) (as projected by the Secretary for the 10-year period ending with 
the applicable fiscal year, year, cost reporting period, or other 
annual period) (the ``MFP adjustment''). The Bureau of Labor Statistics 
(BLS) is the agency that publishes the official measure of private 
nonfarm business MFP. Please see http://www.bls.gov/mfp to obtain the 
BLS historical published MFP data. The projection of MFP is currently 
produced by IGI, an economic forecasting firm. To generate a forecast 
of MFP, IGI replicated the MFP measure calculated by the BLS, using a 
series of proxy variables derived from IGI's U.S. macroeconomic models. 
These models take into account a very broad range of factors that 
influence the total U.S. economy. IGI forecasts the underlying proxy 
components, such as Gross Domestic Product (GDP), capital, and labor 
inputs required to estimate MFP, and then combines those projections 
according to the BLS methodology. In Table 10, we identify each of the 
major MFP component series employed by the BLS to measure MFP. We also 
provide the corresponding concepts forecasted by IGI and determined to 
be the best available proxies for the BLS series.

   Table 10--Multifactor Productivity Component Series Employed by the
            Bureau of Labor Statistics and IHS Global Insight
------------------------------------------------------------------------
               BLS series                           IGI series
------------------------------------------------------------------------
Real value-added output, constant 2005   Non-housing non-government non-
 dollars.                                 farm real GDP, Billions of
                                          chained 2005 dollars--annual
                                          rate.
Private non-farm business sector labor   Hours of all persons in private
 input; 2005 = 100.00.                    nonfarm establishments, 2005 =
                                          100.00, adjusted for labor
                                          composition effects.
Aggregate capital inputs; 2005 = 100.00  Real effective capital stock
                                          used for full employment GDP,
                                          Billions of chained 2005
                                          dollars.
------------------------------------------------------------------------

    IGI found that the historical growth rates of the BLS components 
used to calculate MFP and the IGI components identified are consistent 
across all series and, therefore, suitable proxies for calculating MFP. 
We have included below a more detailed description of the methodology 
used by IGI to construct a forecast of MFP, which is aligned closely 
with the methodology employed by the BLS. For more information 
regarding the BLS method for estimating productivity, please see the 
following link: http://www.bls.gov/mfp/mprtech.pdf.
    At the time of this final rule, the BLS has published a historical 
time series of private nonfarm business MFP for 1987 through 2010, with 
2010 being a preliminary value. Using this historical MFP series and 
the IGI forecasted series, IGI developed a forecast of MFP for 2011 
through 2021, as described below.
    To create a forecast of BLS' MFP index, the forecasted annual 
growth rates of the ``non-housing, nongovernment, non-farm, real GDP,'' 
``hours of all persons in private nonfarm establishments adjusted for 
labor composition,'' and ``real effective capital stock'' series 
(ranging from 2011 to 2021) are used to ``grow'' the levels of the 
``real value-added output,'' ``private non-farm business sector labor 
input,''

[[Page 48528]]

and ``aggregate capital input'' series published by the BLS. 
Projections of the ``hours of all persons'' measure are calculated 
using the difference between the projected growth rates of real output 
per hour and real GDP. This difference is then adjusted to account for 
changes in labor composition in the forecast interval. Using these 
three key concepts, MFP is derived by subtracting the contribution of 
labor and capital inputs from output growth. However, to estimate MFP, 
we need to understand the relative contributions of labor and capital 
to total output growth. Therefore, two additional measures are needed 
to operationalize the estimation of the IGI MFP projection: Labor 
compensation and capital income. The sum of labor compensation and 
capital income represents total income. The BLS calculates labor 
compensation and capital income (in current dollar terms) to derive the 
nominal values of labor and capital inputs. IGI uses the 
``nongovernment total compensation'' and ``flow of capital services 
from the total private non-residential capital stock'' series as 
proxies for the BLS's income measures. These two proxy measures for 
income are divided by total income to obtain the shares of labor 
compensation and capital income to total income. To estimate labor's 
contribution and capital's contribution to the growth in total output, 
the growth rates of the proxy variables for labor and capital inputs 
are multiplied by their respective shares of total income. These 
contributions of labor and capital to output growth are subtracted from 
total output growth to calculate the ``change in the growth rates of 
multifactor productivity'' using the following formula:

MFP = Total output growth -; ((labor input growth*labor compensation 
share) + (capital input growth * capital income share))

    The change in the growth rates (also referred to as the compound 
growth rates) of the IGI MFP are multiplied by 100 to calculate the 
percent change in growth rates (the percent change in growth rates is 
published by the BLS for its historical MFP measure). Finally, the 
growth rates of the IGI MFP are converted to index levels based to 2005 
to be consistent with the BLS' methodology. For benchmarking purposes, 
the historical growth rates of IGI's proxy variables were used to 
estimate a historical measure of MFP, which was compared to the 
historical MFP estimate published by the BLS. The comparison revealed 
that the growth rates of the components were consistent across all 
series and, therefore, validated the use of the proxy variables in 
generating the IGI MFP projections. The resulting MFP index was then 
interpolated to a quarterly frequency using the Bassie method for 
temporal disaggregation. The Bassie technique utilizes an indicator 
(pattern) series for its calculations. IGI uses the index of output per 
hour (published by the BLS) as an indicator when interpolating the MFP 
index.
a. Incorporating the Multifactor Productivity Adjustment Into the 
Market Basket Update
    According to section 1888(e)(5)(A) of the Act, the Secretary 
``shall establish a skilled nursing facility market basket index that 
reflects changes over time in the prices of an appropriate mix of goods 
and services included in covered skilled nursing facility services.'' 
As described in section I.G.2 of this final rule, we estimate the SNF 
PPS market basket percentage for FY 2012 under section 1888(e)(5)(B)(i) 
of the Act based on the FY 2004-based SNF market basket. Section 
3401(b) of the Affordable Care Act amends section 1888(e)(5)(B) of the 
Act, in part, by adding a new clause (ii), which requires that for FY 
2012 and each subsequent FY, after determining the market basket 
percentage described in section 1888(e)(5)(B)(i) of the Act, ``the 
Secretary shall reduce such percentage by the productivity adjustment 
described in section 1886(b)(3)(B)(xi)(II)'' (which we refer to as the 
MFP adjustment). Section 1888(e)(5)(B)(ii) of the Act further states 
that the reduction of the market basket percentage by the MFP 
adjustment may result in the market basket percentage being less than 
zero for a FY, and may result in payment rates under section 1888(e) of 
the Act for a FY being less than such payment rates for the preceding 
FY. Thus, if the application of the MFP adjustment to the market basket 
percentage calculated under section 1888(e)(5)(B)(i) results in an MFP-
adjusted market basket percentage that is less than zero, then the 
annual update to the unadjusted Federal per diem rates under section 
1888(e)(4)(E)(ii) would be negative, and such rates would decrease 
relative to the prior FY.
    We received the following comment on the incorporation of the MFP 
adjustment into the SNF market basket which, along with our response, 
appears below.
    Comment: One commenter proposed to remove the statutory language 
requiring a multi-factor productivity adjustment to the SNF market 
basket increase and recommended an alternative approach to measuring 
productivity. The commenter recommended that CMS achieve productivity 
gains by implementing a mechanism that recognizes that the average 
length of stay in SNFs can be reduced, potentially resulting in 
aggregate savings.
    Response: The commenter's proposal would require a change to the 
existing statute governing the SNF PPS and, therefore, the request is 
outside the scope of rulemaking. As stated previously, section 3401(b) 
of the Affordable Care Act requires that, in FY 2012 (and in subsequent 
FYs), the market basket percentage under the SNF payment system as 
described in section 1888(e)(5)(B)(i) of the Act is to be reduced 
annually by the productivity adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act.
    Accordingly, we are finalizing the methodology for calculating the 
MFP adjustment, and the incorporation of the MFP adjustment into the 
SNF market basket as discussed in this section of the final rule, and 
in section VI.C of the FY 2012 proposed rule (76 FR 26394 through 
26396).
    To calculate the MFP-adjusted update for the SNF PPS, we subtract 
the MFP percentage adjustment from the FY 2012 market basket percentage 
calculated using the FY 2004-based SNF market basket. In the FY 2012 
proposed rule (76 FR 26395), we proposed that the end of the 10-year 
moving average of changes in the MFP would coincide with the end of the 
appropriate FY update period. Since the market basket percentage is 
reduced by the MFP adjustment to determine the annual update for the 
SNF PPS, we believe it is appropriate for the numbers associated with 
both components of the calculation (the market basket percentage and 
the productivity adjustment) to be projected as of the same end date so 
that changes in market conditions are aligned. Therefore, for the FY 
2012 update, the MFP adjustment is calculated as the 10-year moving 
average of changes in MFP for the period ending September 30, 2012. We 
round the final annual adjustment to the one-tenth of one percentage 
point level up or down as applicable according to conventional rounding 
rules (that is, if the number we are rounding is followed by 5, 6, 7, 
8, or 9, we round the number up; if the number we are rounding is 
followed by 0, 1, 2, 3, or 4, we round the number down).
    In accordance with section 1888(e)(5)(B)(i) of the Act, the market 
basket percentage for FY 2012 for the SNF PPS is based on the 2nd 
quarter 2011 forecast of the FY 2004-based SNF

[[Page 48529]]

market basket update, which is estimated to be 2.7 percent. In 
accordance with section 1888(e)(5)(B)(ii) of the Act (as added by 
section 3401(b) of the Affordable Care Act), this market basket 
percentage is then reduced by the MFP adjustment (the 10-year moving 
average of changes in MFP for the period ending September 30, 2012) of 
1.0 percent, which is calculated as described above and based on IGI's 
2nd quarter 2011 forecast. The resulting MFP-adjusted market basket 
increase factor is equal to 1.7 percent, or 2.7 percent less 1.0 
percentage points.
    Furthermore, we proposed that in fiscal years where a forecast 
error adjustment is applicable, we would first apply the forecast error 
adjustment to the market basket percentage, before applying the MFP 
adjustment. As discussed previously, in determining whether a forecast 
error adjustment should be applied, CMS compares the forecasted market 
basket percentage computed under section 1888(e)(5)(B)(i) of the Act 
for the most recently available fiscal year for which there is final 
data to the actual market basket percentage for that fiscal year. 
Because the forecast error adjustment is intended to address errors in 
the forecast of the market basket percentage, we believe that this 
adjustment is part of the establishment of the appropriate market 
basket percentage under section 1888(e)(5)(B)(i) of the Act. Section 
1888(e)(5)(B)(ii) of the Act (as added by section 3401(b) of the 
Affordable Care Act) requires the MFP adjustment to be applied ``after 
determining the percentage described in clause (i)''. Thus, we will 
apply the forecast error adjustment (when applicable) to the market 
basket percentage prior to applying the MFP adjustment, to determine 
the update to the unadjusted Federal per diem rates for a fiscal year.
    As discussed in the FY 2012 proposed rule (76 FR 26396), we 
proposed to revise Sec.  413.337 to reflect the policies discussed 
above and to conform the regulations to the corresponding statutory 
requirements at section 1888(e)(4)(E) of the Act. As we did not receive 
any comments on our proposed changes to Sec.  413.337, we are 
finalizing these changes as proposed in the FY 2012 proposed rule, 
subject to the technical correction noted below. Accordingly, as we 
proposed in the FY 2012 proposed rule, we are revising Sec.  413.337 by 
adding a new paragraph (d)(3) to require, for FY 2012 and each 
subsequent FY, that the market basket index percentage change (as 
modified by any applicable forecast error adjustment) be reduced by the 
MFP adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act in 
determining the annual update of the unadjusted Federal per diem rates. 
Consistent with section 1888(e)(5)(B)(ii) of the Act (as added by 
section 3401(b) of the Affordable Care Act), as we proposed, we are 
further revising Sec.  413.337(d)(3) to state that the reduction of the 
market basket index percentage change by the MFP adjustment may result 
in the market basket index percentage change being less than zero for a 
fiscal year, and may result in the unadjusted Federal payment rates for 
a fiscal year being less than such payment rates for the preceding 
fiscal year. We note that we have made a technical correction to the 
language we proposed for Sec.  413.337(d)(3). In the last sentence, we 
are replacing the term ``market basket percentage change'' with 
``market basket index percentage change'' to be consistent with the 
terminology used in the first sentence of Sec.  413.337(d)(3) and in 
Sec.  413.337(d)(1).
    In addition, as we proposed, we are revising existing paragraphs 
(d)(1) and (d)(2) of Sec.  413.337, as discussed below. First, we are 
revising Sec.  413.337(d)(1) so that the text more accurately tracks 
the corresponding statutory requirements at section 1888(e)(4)(E) of 
the Act. As we stated in the FY 2012 proposed rule (76 FR 26396), 
currently, Sec.  413.337(d)(1) does not reflect the amendments made to 
section 1888(e)(4)(E)(ii) by section 311 of the BIPA (see section I.D 
of this final rule). While we have always updated the unadjusted 
Federal per diem rates in accordance with the requirements set forth in 
section 1888(e)(4)(E)(ii) of the Act as amended by section 311 of the 
BIPA, we inadvertently failed to update the regulation text to conform 
with the BIPA requirements. Therefore, we are now revising Sec.  
413.337(d)(1) to conform with the current statutory language in section 
1888(e)(4)(E) as amended by section 311 of the BIPA. Second, as we 
proposed, we are revising Sec.  413.337(d)(2) to specify the existing 
thresholds we employ in determining whether a forecast error adjustment 
is applicable.
b. Federal Rate Update Factor
    Section 1888(e)(4)(E)(ii)(IV) of the Act requires that the update 
factor used to establish the FY 2012 unadjusted Federal rates be at a 
level equal to the market basket percentage change. Accordingly, to 
establish the update factor, we determined the total growth from the 
average market basket level for the period of October 1, 2010 through 
September 30, 2011 to the average market basket level for the period of 
October 1, 2011 through September 30, 2012. Using this process, the 
market basket update factor for FY 2012 SNF PPS unadjusted Federal 
rates is 2.7 percent. As required by section 1888(e)(5)(B) of the Act, 
this market basket percentage is then reduced by the MFP adjustment 
(the 10-year moving average of changes in MFP for the period ending 
September 30, 2012) of 1.0 percent as described in section III.F.3. The 
resulting MFP-adjusted market basket increase factor is equal to 1.7 
percent, or 2.7 percent less 1.0 percentage point. We used this MFP-
adjusted market basket update factor to compute the SNF PPS rate shown 
in Tables 2 and 3.

G. Consolidated Billing

    Section 4432(b) of the BBA established a consolidated billing 
requirement that places the Medicare billing responsibility for 
virtually all of the services that the SNF's residents receive with the 
SNF, except for a small number of services that the statute 
specifically identifies as being excluded from this provision. As noted 
previously in section I. of this final rule, subsequent legislation 
enacted a number of modifications in the consolidated billing 
provision.
    Specifically, section 103 of the BBRA amended this provision by 
further excluding a number of individual ``high-cost, low probability'' 
services, identified by the Healthcare Common Procedure Coding System 
(HCPCS) codes, within several broader categories (chemotherapy and its 
administration, radioisotope services, and customized prosthetic 
devices) that otherwise remained subject to the provision. We discuss 
this BBRA amendment in greater detail in the proposed and final rules 
for FY 2001 (65 FR 19231 through 19232, April 10, 2000, and 65 FR 46790 
through 46795, July 31, 2000), as well as in Program Memorandum AB-00-
18 (Change Request 1070), issued March 2000, which is 
available online at http://www.cms.hhs.gov/transmittals/downloads/ab001860.pdf.
    Section 313 of the BIPA further amended this provision by repealing 
its Part B aspect; that is, its applicability to services furnished to 
a resident during a SNF stay that Medicare Part A does not cover. 
(However, physical, occupational, and speech-language therapy remain 
subject to consolidated billing, regardless of whether the resident who 
receives these services is in a covered Part A stay.) We discuss this 
BIPA amendment in greater detail in the proposed and final rules for FY 
2002 (66 FR 24020 through 24021, May

[[Page 48530]]

10, 2001, and 66 FR 39587 through 39588, July 31, 2001).
    In addition, section 410 of the MMA amended this provision by 
excluding certain practitioner and other services furnished to SNF 
residents by RHCs and FQHCs. We discuss this MMA amendment in greater 
detail in the update notice for FY 2005 (69 FR 45818-45819, July 30, 
2004), as well as in Medicare Learning Network (MLN) Matters article 
MM3575, issued December 10, 2004, which is available online at http://www.cms.gov/MLNMattersArticles/downloads/MM3575.pdf.
    Further, while not substantively revising the consolidated billing 
requirement itself, a related provision was enacted in the Medicare 
Improvements for Patients and Providers Act of 2008 (MIPPA) (Pub. L. 
110-275, enacted July 15, 2008). Specifically, section 149 of MIPPA 
amended section 1834(m)(4)(C)(ii) of the Act to create a new subclause 
(VII), which adds SNFs (as defined in section 1819(a) of the Act) to 
the list of entities that can serve as a telehealth ``originating 
site'' (that is, the location at which an eligible individual can 
receive, through the use of a telecommunications system, services 
furnished by a physician or other practitioner who is located elsewhere 
at a ``distant site'').
    As explained in the Medicare Physician Fee Schedule (PFS) final 
rule for CY 2009 (73 FR 69726, 69879, November 19, 2008), a telehealth 
originating site receives a facility fee which is always separately 
payable under Part B outside of any other payment methodology. Section 
149(b) of MIPPA amended section 1888(e)(2)(A)(ii) of the Act to exclude 
telehealth services furnished under section 1834(m)(4)(C)(ii)(VII) of 
the Act from the definition of ``covered skilled nursing facility 
services'' that are paid under the SNF PPS. Thus, a SNF ``* * * can 
receive separate payment for a telehealth originating site facility fee 
even in those instances where it also receives a bundled per diem 
payment under the SNF PPS for a resident's covered Part A stay'' (73 FR 
69881). By contrast, under section 1834(m)(2)(A) of the Act, a 
telehealth distant site service is payable under Part B to an eligible 
physician or practitioner only to the same extent that it would have 
been so payable if furnished without the use of a telecommunications 
system. Thus, as explained in the CY 2009 PFS final rule, eligible 
distant site physicians or practitioners can receive payment for a 
telehealth service that they furnish

    * * * only if the service is separately payable under the PFS 
when furnished in a face-to-face encounter at that location. For 
example, we pay distant site physicians or practitioners for 
furnishing services via telehealth only if such services are not 
included in a bundled payment to the facility that serves as the 
originating site (73 FR 69880).

This means that in those situations where a SNF serves as the 
telehealth originating site, the distant site professional services 
would be separately payable under Part B only to the extent that they 
are not already included in the SNF PPS bundled per diem payment and 
subject to consolidated billing. Thus, for a type of practitioner whose 
services are not otherwise excluded from consolidated billing when 
furnished during a face-to-face encounter, the use of a telehealth 
distant site would not serve to unbundle those services. In fact, 
consolidated billing does exclude the professional services of 
physicians, along with those of most of the other types of telehealth 
practitioners that the law specifies at section 1842(b)(18)(C) of the 
Act, that is, physician assistants, nurse practitioners, clinical nurse 
specialists, certified registered nurse anesthetists, certified nurse 
midwives, and clinical psychologists (see section 1888(e)(2)(A)(ii) of 
the Act and Sec.  411.15(p)(2)). However, the services of clinical 
social workers, registered dietitians and nutrition professionals 
remain subject to consolidated billing when furnished to a SNF's Part A 
resident and, thus, cannot qualify for separate Part B payment as 
telehealth distant site services in this situation. Additional 
information on this provision appears in Program Transmittal 
1635 (Change Request 6215), issued November 14, 2008, 
which is available online at http://www.cms.hhs.gov/transmittals/downloads/R1635CP.pdf.
    To date, the Congress has enacted no further legislation affecting 
the consolidated billing provision. However, as noted above and 
explained in the proposed rule for FY 2001 (65 FR 19232, April 10, 
2000), the amendments enacted in section 103 of the BBRA not only 
identified for exclusion from this provision a number of particular 
service codes within four specified categories (that is, chemotherapy 
items, chemotherapy administration services, radioisotope services, and 
customized prosthetic devices), but also gave the Secretary ``* * * the 
authority to designate additional, individual services for exclusion 
within each of the specified service categories.'' In the proposed rule 
for FY 2001, we also noted that the BBRA Conference Report (H.R. Rep. 
No. 106-479 at 854 (1999) (Conf. Rep.)) characterizes the individual 
services that this legislation targets for exclusion as ``* * * high-
cost, low probability events that could have devastating financial 
impacts because their costs far exceed the payment [SNFs] receive under 
the prospective payment system * * *''. According to the conferees, 
section 103(a) ``is an attempt to exclude from the PPS certain services 
and costly items that are provided infrequently in SNFs. For example * 
* * specific chemotherapy drugs * * * not typically administered in a 
SNF, or * * * requiring special staff expertise to administer * * *.'' 
By contrast, the remaining services within those four categories are 
not excluded (thus leaving all of those services subject to SNF 
consolidated billing), because they are relatively inexpensive and are 
furnished routinely in SNFs.
    As we further explained in the final rule for FY 2001 (65 FR 46790, 
July 31, 2000), and as our longstanding policy, any additional service 
codes that we might designate for exclusion under our discretionary 
authority must meet the same statutory criteria used in identifying the 
original codes excluded from consolidated billing under section 103(a) 
of the BBRA: They must fall within one of the four service categories 
specified in the BBRA, and they also must meet the same standards of 
high cost and low probability in the SNF setting, as discussed in the 
BBRA Conference report. Accordingly, we characterized this statutory 
authority to identify additional service codes for exclusion ``* * * as 
essentially affording the flexibility to revise the list of excluded 
codes in response to changes of major significance that may occur over 
time (for example, the development of new medical technologies or other 
advances in the state of medical practice)'' (65 FR 46791). In the FY 
2012 proposed rule, we specifically invited public comments identifying 
codes in any of these four service categories (chemotherapy items, 
chemotherapy administration services, radioisotope services, and 
customized prosthetic devices) representing recent medical advances 
that might meet our criteria for exclusion from SNF consolidated 
billing (76 FR 26397). The comments that we received on this subject, 
and our responses, appear below.
    Comment: A review of the particular codes that commenters submitted 
in response to the proposed rule's solicitation for comment revealed 
that a significant number were identical to

[[Page 48531]]

codes that had already been submitted for consideration during the 
public comment period on the FY 2010 SNF PPS proposed rule or in 
earlier years, and which we had already decided previously not to 
exclude. These included items such as hyperbaric oxygen treatments, 
total parenteral nutrition, wound care devices, blood products, and 
``chemotherapy'' drugs that are actually used in treating diseases 
other than cancer. Other codes that commenters submitted did fall 
within the particular service categories that the BBRA authorizes for 
exclusion; however, these were codes that were already in existence as 
of the BBRA's enactment, but did not fall within the specific statutory 
code ranges that the BBRA designated for exclusion. Examples would 
include customized prosthetic device codes L5010 (``partial foot, 
molded socket, ankle height, with toe filler''), L5020 (``partial foot, 
molded socket, tibial tubercle height, with toe filler''), and L5987 
(``all lower extremity prosthesis, shank foot system with vertical 
loading pylon'').
    Response: As discussed in the applicable prior final rules, we 
decline to add to the exclusion list those services submitted by 
commenters that have already been considered and not excluded in 
previous years based on their being outside the particular service 
categories that the statute authorizes for exclusion. These services 
include hyperbaric oxygen treatments as discussed previously in the SNF 
PPS final rules for FY 2001 (65 FR 46790-91, July 31, 2000), FY 2002 
(66 FR 39588, July 31, 2001), FY 2004 (68 FR 46060-62, August 4, 2003), 
FY 2006 (70 FR 45048-50, August 4, 2005), FY 2008 (72 FR 43430-32, 
August 3, 2007), FY 2009 (73 FR 46435-37, August 8, 2008), and FY 2010 
(74 FR 40353-56, August 11, 2009); total parenteral nutrition as 
discussed previously in the SNF PPS final rules for FY 2002, FY 2004, 
and FY 2006; and wound care devices as discussed previously in the SNF 
PPS final rules for FY 2004 and FY 2006. For the same reason--that is, 
being outside the particular service categories that the statute 
authorizes for exclusion--we decline to adopt the suggestion to exclude 
certain blood products, hemophilia clotting factor and intravenous 
infusion of immunoglobulin (IVIG). With respect to the reiteration of 
previous requests to exclude as chemotherapy drugs certain medications 
that are actually used to treat diseases other than cancer, we note 
that as indicated previously in the FY 2010 SNF PPS final rule (74 FR 
40354, August 11, 2009), such medications do not fall within the scope 
of ``chemotherapy'' drugs for purposes of this exclusion. In addition, 
regarding those particular codes (such as the three L codes specified 
above) that were already in existence as of the BBRA's enactment, we 
explained previously in the FY 2010 SNF PPS final rule (74 FR 40354, 
August 11, 2009) that our position has always been that the BBRA's 
discretionary authority to exclude codes within certain designated 
service categories applies solely to codes that were created subsequent 
to the BBRA's enactment, and not to those codes that were already in 
existence as of July 1, 1999 (the date that the legislation itself uses 
as the reference point for identifying the codes that it designates for 
exclusion). As we explained in the FY 2010 final rule (74 FR 40354), 
this position reflects the assumption that if a particular code was 
already in existence as of that date but not designated for exclusion, 
this meant that it was intended to remain within the SNF PPS bundle, 
subject to the BBRA Conference Report's provision for a GAO review of 
the code set that was conducted the following year (H.R. Rep. No. 106-
479 at 854 (1999) (Conf. Rep.)). Accordingly, we decline to add these 
codes to the exclusion list.
    Comment: One commenter requested us to consider a particular 
chemotherapy drug, TREANDA[supreg] (HCPCS code J9033), that the 
commenter recommended as meeting the BBRA's ``high-cost, low 
probability'' criteria for exclusion.
    Response: We note that in one respect, this drug would appear to be 
similar to the three L codes discussed in the preceding comment, in 
that it falls within one of the particular service categories (that is, 
chemotherapy items) that the BBRA authorizes for exclusion, but the 
excluded code ranges specified in the BBRA skip over the particular 
code number to which it was assigned. However, in contrast to those L 
codes, code J9033 was not in use at the time of the BBRA's enactment; 
in fact, this drug did not actually come into existence until almost a 
decade later. Accordingly, as there is no basis for assuming at the 
outset that this particular code's omission from the excluded ranges 
indicated an intent for it to remain bundled, it then becomes 
appropriate for us to consider the possibility of excluding the drug 
from consolidated billing. We have determined that this drug does, in 
fact, qualify for exclusion in that its cost is comparable to other 
excluded chemotherapy drugs and it is rarely administered to SNF 
inpatients. Thus, it meets the ``high-cost, low probability'' standard 
in the SNF setting, as discussed in the BBRA Conference Report. 
Accordingly, this new exclusion will appear in a forthcoming 
consolidated billing update, with an effective date of October 1, 2011.
    Comment: Some commenters suggested that we consider the exclusion 
of PROVENGE[supreg] (Sipuleucel-T, HCPCS code Q2043), which is used in 
treating certain cases of metastatic prostate cancer. PROVENGE[supreg] 
is made by selectively removing leukocytes (white blood cells) from the 
patient's blood and sending them to a factory, which adds a protein 
commonly found in prostate cancer and an immune stimulating agent to 
the leukocytes. All three are mixed with lactated ringers and then sent 
back to the physician to administer to the patient. The commenters 
cited this drug as meeting the applicable standards for exclusion of 
high cost and low probability.
    Response: We note that in accordance with the National Coverage 
Determination that was released on June 30, 2011 (available online at 
http://www.cms.gov/medicare-coverage-database/details/nca-decision-memo.aspx?NCAId=247&fromdb=true), PROVENGE[supreg] is not classified as 
a drug for purposes of this particular coverage, but rather, as a 
service that is furnished as an incident to the physician's 
professional services. As such, it remains subject to SNF consolidated 
billing, consistent with the longstanding policy that we first 
enunciated in the May 12, 1998 interim final rule (63 FR 26297):

    * * * while the SNF Consolidated Billing provision does not 
apply to the professional services that a physician or other exempt 
practitioner performs personally, it does apply to those services 
that are furnished to an SNF resident by someone other than the 
practitioner, as an incident to the practitioner's professional 
service. This position is consistent with the approach that has long 
been taken under the hospital bundling requirement, as well as with 
section 1888(e)(2)(A)(ii) of the Act, which specifically identifies 
``physicians' services'' themselves as the service category that is 
excluded from SNF Consolidated Billing. Physicians' services, in 
turn, are covered by Part B under section 1861(s)(1) of the Act and 
are defined in section 1861(q) as being performed by a physician, 
while ``incident to'' services are covered under a separate 
statutory authority (section 1861(s)(2)(A) of the Act) and are, by 
definition, not performed by a physician * * * We believe that to do 
otherwise with regard to these ``incident to'' services would 
effectively create a loophole through which a potentially broad and 
diverse array of services could be unbundled, merely by virtue of 
being furnished under the general auspices of such practitioners. 
This, in turn, would ultimately defeat the very

[[Page 48532]]

purpose of the SNF Consolidated Billing provision--that is, to make 
the SNF itself responsible for billing Medicare for essentially all 
of its residents' services, other than those identified in a small 
number of narrow and specifically delimited exclusions. Further, as 
noted above, both the Consolidated Billing and SNF PPS provisions 
employ the same statutory list of excluded services. Thus, the 
approach we are adopting with regard to the limited range of 
services that qualify for exclusion is essential not only to 
safeguard the integrity of the Consolidated Billing requirement, but 
also that of the SNF PPS itself.

    Comment: Some commenters reiterated previous suggestions on 
expanding the existing chemotherapy exclusion to encompass related 
drugs that are commonly administered in conjunction with chemotherapy 
to ameliorate the side effects of the chemotherapy drugs, such as anti-
emetics (anti-nausea drugs).
    Response: As we have noted previously in this final rule and in 
response to comments on this issue in the past (most recently, in the 
August 11, 2009 SNF PPS final rule for FY 2010 (74 FR 40354)), the BBRA 
authorizes us to identify additional service codes for exclusion only 
within those particular service categories--chemotherapy items; 
chemotherapy administration services; radioisotope services; and, 
customized prosthetic devices--that it has designated for this purpose, 
and does not give us the authority to exclude other services which, 
though they may be related, fall outside of the specified service 
categories themselves. Thus, while anti-emetics, for example, are 
commonly administered in conjunction with chemotherapy, they are not 
inherently chemotherapeutic in nature (that is, they are not themselves 
oncolytic drugs that actively destroy cancer cells) and, consequently, 
do not fall within the excluded chemotherapy category designated in the 
BBRA.
    Comment: One commenter repeated calls from previous years to expand 
the existing exclusion for certain high-intensity outpatient hospital 
services to encompass services furnished in other, nonhospital 
settings, stating that such nonhospital services may be cheaper and 
more accessible in certain localities (such as rural settings) than 
those furnished by hospitals. In urging us to expand the administrative 
exclusion in this manner, the commenter also advanced the view that the 
test of service intensity under this exclusion was intended to be 
applied independently, regardless of whether the service in question is 
actually being furnished in the hospital setting.
    Response: We have included in a number of previous rules an 
explanation of the setting-specific nature of the exclusion for certain 
high-intensity outpatient hospital services--most recently, in the FY 
2010 SNF PPS final rule (74 FR 40355, August 11, 2009):

    We believe the comments that reflect previous suggestions for 
expanding this administrative exclusion to encompass services 
furnished in non-hospital settings indicate a continued 
misunderstanding of the underlying purpose of this provision. As we 
have consistently noted in response to comments on this issue in 
previous years * * * and as also explained in Medicare Learning 
Network (MLN) Matters article SE0432 (available online at 
www.cms.hhs.gov/MLNMattersArticles/downloads/SE0432.pdf), the 
rationale for establishing this exclusion was to address those types 
of services that are so far beyond the normal scope of SNF care that 
they require the intensity of the hospital setting in order to be 
furnished safely and effectively.
    Moreover, we note that when the Congress enacted the 
consolidated billing exclusion for certain RHC and FQHC services in 
section 410 of the MMA, the accompanying legislative history's 
description of present law acknowledged that the existing exclusions 
for exceptionally intensive outpatient services are specifically 
limited to ``* * * certain outpatient services from a Medicare-
participating hospital or critical access hospital * * *'' (emphasis 
added). (See the House Ways and Means Committee Report (H. Rep. No. 
108-178, Part 2 at 209), and the Conference Report (H. Conf. Rep. 
No. 108-391 at 641).) Therefore, these services are excluded from 
SNF consolidated billing only when furnished in the outpatient 
hospital or CAH setting, and not when furnished in other, 
freestanding (non-hospital or non-CAH) settings.

Further, the authority for us to establish a categorical exclusion for 
these services that would apply irrespective of the setting in which 
they are furnished does not exist in current law.
    Finally, we do not agree with the commenter's analysis regarding 
the applicable standard for determining service intensity under this 
exclusion. Contrary to that commenter's statement, when we originally 
established the administrative exclusion for certain designated 
categories of high-intensity outpatient services, we did not envision 
creating a separate standard of service intensity that would exist 
independently from the service's performance in the hospital setting. 
In fact, the applicable discussion in the May 12, 1998 interim final 
rule (63 FR 26298) clearly indicates that this exclusion was created 
within the specific context of the concurrent development of a new PPS 
specifically for outpatient hospital services, reflecting the need ``* 
* * to delineate the respective areas of responsibility for the SNF 
under the Consolidated Billing provision, and for the hospital under 
the outpatient bundling provision, with regard to these services'' 
(emphasis added). This point was further reinforced in the subsequent 
SNF PPS final rule for FY 2000 (64 FR 41676, July 30, 1999), where we 
noted that

    * * * a key concern underlying the development of the 
consolidated billing exclusion of certain outpatient hospital 
services specifically involves the need to distinguish those 
services that comprise the SNF bundle from those that will become 
part of the outpatient hospital bundle that is currently being 
developed in connection with the outpatient hospital PPS. 
Accordingly, we are not extending the outpatient hospital exclusion 
from consolidated billing to encompass any other, freestanding 
settings.

    Comment: One commenter noted that the administrative exclusion from 
consolidated billing for certain designated, highly intensive 
outpatient hospital services (such as emergency services) also serves 
to encompass an associated, medically necessary ambulance roundtrip 
from the SNF. The commenter requested clarification on whether this 
exclusion would still apply to an ambulance trip returning to the SNF 
following the receipt of emergency services, even though the emergency 
condition itself would have already been stabilized by that point.
    Response: The return ambulance trip would still be excluded from 
consolidated billing in this scenario. As explained on page 3 of 
Medicare Learning Network (MLN) Matters Special Edition article 
SE0433 (available online at http://www.cms.gov/MLNMattersArticles/downloads/SE0433.pdf),

    Since a beneficiary's departure from the SNF to receive one of 
these excluded types of outpatient hospital services is considered 
to end the beneficiary's status as an SNF resident for CB 
[consolidated billing] purposes with respect to those services, any 
associated ambulance trips are, themselves, excluded from CB as 
well. Therefore, an ambulance trip from the SNF to the hospital for 
the receipt of such services should be billed separately under Part 
B by the outside supplier. Moreover, once the beneficiary's SNF 
resident status has ended in this situation, it does not resume 
until the point at which the beneficiary actually arrives back at 
the SNF; accordingly, the return ambulance trip from the hospital to 
the SNF would also be excluded from CB (emphasis added).

    Comment: One commenter requested that all chemotherapy drugs and 
customized prosthetic devices be excluded from consolidated billing, as 
well as transportation relating to the receipt of excluded radiation 
therapy services.
    Response: As indicated previously in this final rule, in creating a 
statutory

[[Page 48533]]

carve-out for several designated types of services, the BBRA did not 
categorically exclude all such services from SNF consolidated billing. 
Instead, the legislation specifically identified individual excluded 
services within designated categories, by Healthcare Common Procedure 
Coding System (HCPCS) code. The BBRA's Conference Report explained that 
this legislation specifically targeted those ``high-cost, low 
probability'' items and services that ``* * * are not typically 
administered in a SNF, or are exceptionally expensive, or are given as 
infusions, thus requiring special staff expertise to administer'' (H.R. 
Conf. Rep. No. 106-479 at 854). By contrast, other types of services 
within those categories that ``* * * are relatively inexpensive and are 
administered routinely in SNFs'' remain subject to SNF consolidated 
billing under this legislation.
    Regarding the comment concerning transports related to radiation 
therapy, we note that radiation therapy is one of the administratively 
excluded categories of high-intensity outpatient hospital services. As 
indicated in the preceding comment, this exclusion already encompasses 
not only the service itself, but also any associated, medically 
necessary ambulance transportation between the SNF and the hospital.

H. Application of the SNF PPS to SNF Services Furnished by Swing-Bed 
Hospitals

    In accordance with section 1888(e)(7) of the Act, as amended by 
section 203 of the BIPA, Part A pays critical access hospitals (CAHs) 
on a reasonable cost basis for SNF services furnished under a swing-bed 
agreement. However, effective with cost reporting periods beginning on 
or after July 1, 2002, the swing-bed services of non-CAH rural 
hospitals are paid under the SNF PPS. As explained in the final rule 
for FY 2002 (66 FR 39562, July 31, 2001), we selected this effective 
date consistent with the statutory provision to integrate swing-bed 
rural hospitals into the SNF PPS by the end of the SNF transition 
period, June 30, 2002.
    Accordingly, all non-CAH swing-bed rural hospitals have come under 
the SNF PPS as of June 30, 2003. Therefore, all rates and wage indexes 
outlined in earlier sections of this final rule for the SNF PPS also 
apply to all non-CAH swing-bed rural hospitals. A complete discussion 
of assessment schedules, the MDS and the transmission software (RAVEN-
SB for Swing Beds) appears in the final rule for FY 2002 (66 FR 39562, 
July 31, 2001) and in the final rule for FY 2010 (74 FR 40288, August 
11, 2009). As finalized in the FY 2010 SNF PPS final rule (74 FR 40356-
57), effective October 1, 2010, non-CAH swing-bed rural hospitals are 
required to complete an MDS 3.0 swing-bed assessment which is limited 
to the required demographic, payment, and quality items. The latest 
changes in the MDS for swing-bed rural hospitals appear on the SNF PPS 
Web site, http:[sol][sol]www.cms.gov/snfpps. We received no comments on 
this aspect of the proposed rule.

IV. Analysis of and Responses to Public Comments on the FY 2011 Update 
Notice With Comment

    In addition to responding to comments received on the FY 2012 
proposed rule, we are also taking the opportunity to respond in this 
section to those comments not addressed elsewhere in this final rule 
that were received on the FY 2011 notice with comment period, as 
discussed in the FY 2012 proposed rule (76 FR 26368).
    Comment: We received a number of comments related to the delayed 
implementation of RUG-IV, the implementation of HR-III, and the 
transition from RUG-IV to HR-III. Many commenters asked for details on 
how the transition would be done and how claims would be reprocessed 
upon successful implementation of HR-III. One commenter requested 
further detail on educational materials that would be made available to 
providers to ease the system transition once the HR-III grouper has 
been developed. Some commenters asked that CMS be as transparent as 
possible in its management of the transition to HR-III.
    Response: As discussed in section I.F of this final rule, section 
202 of the ``Medicare and Medicaid Extenders Act of 2010'' (Pub. L. 
111-309), enacted December 15, 2010, repealed section 10325 of the 
Affordable Care Act, effectively leaving in place the RUG-IV system as 
implemented on October 1, 2010. Therefore, HR-III is no longer 
necessary and there will be no reprocessing of claims related to HR-
III. Moreover, as we also noted previously in the FY 2012 SNF PPS 
proposed rule (76 FR 26368), the repeal of this provision ``* * * 
effectively renders moot any further discussion of public comments that 
we had invited on our planned implementation'' of the transition to the 
HR-III system.

V. Provisions of the Final Rule

    In this final rule, in addition to accomplishing the required 
annual update of the SNF PPS payment rates, we are also finalizing the 
following revisions to the regulation text:
    As discussed previously in section III.F.3.a of this final rule, we 
are implementing section 3401(b) of the Affordable Care Act by revising 
Sec.  413.337. We are adding a new paragraph (d)(3) to that section to 
require that, for FY 2012 and each subsequent FY, the market basket 
index percentage change (as modified by any applicable forecast error 
adjustment) be reduced by the MFP adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act in determining the annual update of 
the unadjusted Federal per diem rates. In addition, consistent with 
section 1888(e)(5)(B)(ii) of the Act (as added by section 3401(b) of 
the Affordable Care Act), revised Sec.  413.337(d)(3) also states that 
the reduction of the market basket index percentage change by the MFP 
adjustment may result in the market basket index percentage change 
being less than zero for a fiscal year, and may result in the 
unadjusted Federal payment rates for a fiscal year being less than such 
payment rates for the preceding fiscal year.
    Further, as discussed in section III.F.3, we are also revising 
existing paragraphs (d)(1) and (d)(2) of Sec.  413.337 so that the text 
more accurately tracks the corresponding statutory requirements at 
section 1888(e)(4)(E) of the Act (Sec.  413.337(d)(1)), and to specify 
the existing thresholds that we apply in determining whether a forecast 
error adjustment is appropriate (Sec.  413.337(d)(2)).

VI. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the OMB for review and approval. In order to fairly evaluate whether an 
information collection should be approved by OMB, section 3506(c)(2)(A) 
of the PRA requires that we solicit comment on the following issues:
     Need for the information collection and its usefulness in 
carrying out the proper functions of our agency.
     Accuracy of our estimate of the information collection 
burden.
     Quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The information collection requirements referenced in this final 
rule with regard to resident assessment information used to determine 
facility

[[Page 48534]]

payments are currently approved under OMB control number (OCN): 0938-
0739, which relates to the Medicare PPS Assessment Form (MPAF) 
information collection, and OCN: 0938-0872, which relates to the 
Minimum Data Set for Swing-Bed Hospitals. We note that this final rule 
will not affect the burden associated with either of those collections.
    Section III.E.4 of this final rule contains a discussion of 
information collections related to a new required resident assessment, 
the COT OMRA. The following is a discussion of this new required PPS 
assessment.
    As discussed previously in section III.E.4 of this final rule, we 
are making certain modifications in the existing requirements for 
completing OMRAs. We introduced a new COT OMRA, to be completed 
whenever the intensity of therapy changes to such an extent that it 
would no longer reflect the RUG-IV classification and payment assigned 
for a given SNF resident, based on the resident's most recent 
assessment used for Medicare payment. This will help to ensure that the 
SNF's payments accurately reflect the amount of therapy actually being 
provided.
    SNFs are required to complete a COT OMRA only when the intensity of 
therapy actually being furnished changes to such a degree that it would 
no longer reflect the RUG-IV classification and payment assigned for a 
given SNF resident based on the most recent assessment used for 
Medicare payment. The burden associated with this requirement is the 
time and effort necessary to complete the COT OMRA, coding the 
appropriate responses, and data reporting timeframes. Because providers 
currently are not required to report therapy changes that occur outside 
the observation window of a given PPS assessment, we do not have the 
relevant data to predict with certainty the number of COT OMRAs that 
may be required per year. However, we have attempted to use the 
administrative data currently available as a reasonable proxy to 
determine estimates of provider burden. We estimate that, based on 
average burden associated with the EOT OMRA, which uses the same basic 
item set as the COT OMRA, it will take 50 minutes (0.83 hours) to 
collect the information necessary for coding a COT OMRA, 10 minutes 
(0.17 hours) to code the responses, and 2 minutes (0.03 hours) to 
transmit the results, or a total of 62 minutes (1.03 hours) to complete 
a single COT OMRA. The estimated cost per COT OMRA is $33.84, as 
discussed below.
    Based on information from the Bureau of Labor Statistics of May, 
2009, and a 30 percent benefits rate, we estimated hourly wage rates 
for a Registered Nurse (RN), and for a data operator. MDS preparation 
costs were estimated using RN hourly wage rates based on $56,060 per 
year, which amounts to $0.45 per minute without consideration of 
employee benefits, and $0.58 per minute after increasing the rate by 30 
percent to account for employee benefit compensation. For coding 
functions, we used a blended rate of $41,090; this was the average for 
RNs ($56,060/year) and data operators ($26,120/year). The blended rate 
calculates to $0.33 per minute without consideration of employee 
benefits, and $0.43 per minute after increasing the rate by 30 percent 
to account for employee benefit compensation. The blended rate of RN 
and data operator wages reflects that SNF providers historically have 
used both RN and support staff for the data entry function. For 
transmission personnel, we used data operator wages of $26,120 per 
year, or $0.21 per minute without consideration of employee benefits, 
and $0.27 per minute after increasing the rate by 30 percent to account 
for employee benefit compensation. The total amount of time for a 
single COT OMRA is 62 minutes (1.03 hours), consisting of 50 minutes 
(0.8333 hours) of RN time for preparation, 10 minutes (0.1667 hours) of 
blended RN/data operator time for coding, and 2 minutes (0.0333 hours) 
of data operator time for transmission. This results in an average 
estimated cost per COT OMRA of $33.84.
    The number of stays for 2009 was approximately 2.26 million. Based 
on a 30-day average length of stay for RUG-IV, we believe the average 
number of times that a COT OMRA would need to be completed due to a 
decrease in therapy is once per stay. Based on our review of the first 
eight months of FY 2011 data, we found that approximately 40 percent of 
the claims resulted in assignment to a higher-than-projected 
Rehabilitation RUG. A possible reason for the difference between 
projected and actual FY 2011 RUG-IV case-mix utilization could involve 
instances where the intensity of therapy actually being furnished 
changed (that is, decreased) within the payment period to such a degree 
that it no longer reflected the RUG-IV classification and payment 
assigned for a given SNF resident based on the most recent assessment 
used for Medicare payment. As discussed previously, if such changes or 
decreases in therapy utilization occur outside the observation window 
of a given PPS assessment, such changes currently are not captured on a 
resident assessment, and the provider would continue to be reimbursed 
under a higher-paying Rehabilitation RUG until the next PPS assessment.
    For FY 2012, providers will be required to complete a COT OMRA in 
these situations. Although we believe that only some of the 40 percent 
difference is likely attributable to these instances, the 40 percent 
would provide a quantifiable maximum burden estimate for these cases. 
At this time, we are unable to determine other quantifiable estimates 
for decreases in therapy utilization necessitating a COT OMRA. Using 
the percentage of claims resulting in a higher-than-projected 
Rehabilitation RUG as a way to estimate the maximum number of times 
that a therapy decrease could result in the need for a COT OMRA, 40 
percent or 813,074 stays could be affected. The total number of 
estimated COT OMRAs per SNF for FY 2011 would be 57.
    In addition, the COT OMRA will also be used when providers find 
that the therapy provided a given resident warrants the resident being 
classified into a higher therapy RUG category. As stated above, 
providers currently are not required to report therapy changes that 
occur outside the observation window of a given PPS assessment; 
therefore, we do not have the relevant data to predict with certainty 
the number of COT OMRAs that may be required per year due to an 
increase in therapy. We have used the historical data available at this 
time to quantify situations where an increase in therapy occurs. The 
Start-of-Therapy (SOT) OMRA represents situations where therapy has 
increased to a level significant enough to change the RUG to a therapy 
RUG. The estimate for the possible number of times that a COT OMRA 
would be required due to an increase in therapy uses the number of SOT 
OMRAs as a proxy. Using the number of SOT OMRAs completed in the first 
eight months of FY 2011 projected for the entire year, we estimate that 
the total COT OMRAs required due to an increase in therapy would be 
71,330, or 5 times per facility per year. Therefore, the estimated 
total number of COT OMRAs per facility per year is 62. The total annual 
hour burden for completing COT OMRAs is estimated to be 737,003 hours 
for reporting, 147,401 hours for coding, and 29,480 hours for 
transmission, for a total burden of 913,884 hours for all 14,266 SNFs. 
Based on an average estimated cost per COT OMRA of $33.84, we estimate 
that the additional annual cost across all SNFs would be approximately 
$29.93 million, or $2,097.87 per facility.

[[Page 48535]]

    Further, we note that the completion of an EOT-R OMRA, as discussed 
in section III.E.4, would be entirely voluntary on the part of the 
facility and, thus, would not represent the imposition of a mandatory 
burden.

VII. Economic Analyses

A. Regulatory Impact Analysis

1. Introduction
    We have examined the impacts of this final rule as required by 
Executive Order 12866 on Regulatory Planning and Review (September 30, 
1993), Executive Order 13563 on Improving Regulation and Regulatory 
Review (January 18, 2011), the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA, March 
22, 1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 
4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated an economically significant 
rule, under section 3(f)(1) of Executive Order 12866. Accordingly, we 
have prepared a regulatory impact analysis (RIA) as further discussed 
below. Also, the rule has been reviewed by the Office of Management and 
Budget.
2. Statement of Need
    This final rule updates the SNF prospective payment rates for 
fiscal year 2012 as required under section 1888(e)(4)(E) of the Act. It 
also responds to section 1888(e)(4)(H) of the Act, which requires the 
Secretary to ``provide for publication in the Federal Register'' before 
the August 1 that precedes the start of each fiscal year, the 
unadjusted Federal per diem rates, the case-mix classification system, 
and the factors to be applied in making the area wage adjustment. As 
these statutory provisions prescribe a detailed methodology for 
calculating and disseminating payment rates under the SNF PPS, we do 
not have the discretion to adopt an alternative approach.
3. Overall Impacts
    We estimate the aggregate impact of the FY 2012 final rule would be 
a net decrease of $3.87 billion in payments to SNFs, resulting from a 
$600 million increase from the update to the payment rates and a $4.47 
billion reduction from the recalibration of the case-mix adjustment. 
Accordingly, we have prepared a RIA that, to the best of our ability, 
presents the costs and benefits of the rulemaking.
    The update set forth in this final rule applies to payments in FY 
2012. Accordingly, the analysis that follows only describes the impact 
of this single year. In accordance with the requirements of the Act, we 
will publish a notice for each subsequent FY that will provide for an 
update to the payment rates and include an associated impact analysis.
4. Detailed Economic Analysis
    This final rule sets forth updates of the SNF PPS rates contained 
in the update notice for FY 2011 (75 FR 42886, July 22, 2010) and the 
associated correction notice (75 FR 55801, September 14, 2010). Based 
on the above, we estimate that the FY 2012 aggregate impact would be a 
net decrease of $3.87 billion in payments to SNFs, resulting from a 
$600 million increase from the update to the payment rates and a $4.47 
billion reduction from the recalibration of the case-mix adjustment. 
The impact analysis of this final rule represents the projected effects 
of the changes in the SNF PPS from FY 2011 to FY 2012. We assess the 
effects by estimating payments while holding all other payment-related 
variables constant. Although the best data available are utilized, 
there is no attempt to predict behavioral responses to these changes, 
or to make adjustments for future changes in such variables as days or 
case-mix.
    Certain events may occur to limit the scope or accuracy of our 
impact analysis, as this analysis is future-oriented and, thus, very 
susceptible to forecasting errors due to certain events that may occur 
within the assessed impact time period. Some examples of possible 
events may include newly legislated general Medicare program funding 
changes by the Congress, or changes specifically related to SNFs. In 
addition, changes to the Medicare program may continue to be made as a 
result of previously enacted legislation, or new statutory provisions. 
Although these changes may not be specific to the SNF PPS, the nature 
of the Medicare program is that the changes may interact and, thus, the 
complexity of the interaction of these changes could make it difficult 
to predict accurately the full scope of the impact upon SNFs.
    In accordance with section 1888(e)(4)(E) and (e)(5) of the Act, we 
update the FY 2011 payment rates by a factor equal to the market basket 
index percentage increase adjusted by the FY 2010 forecast error 
adjustment (if applicable) and the MFP adjustment to determine the 
payment rates for FY 2012. As discussed previously, for FY 2012 and 
each subsequent FY, as required by section 1888(e)(5)(B) of the Act as 
amended by section 3401(b) of the Affordable Care Act, the market 
basket percentage is reduced by the MFP adjustment. The special AIDS 
add-on established by section 511 of the MMA remains in effect until 
``* * * such date as the Secretary certifies that there is an 
appropriate adjustment in the case mix. * * *'' We have not provided a 
separate impact analysis for the MMA provision. Our latest estimates 
indicate that there are fewer than 3,500 beneficiaries who qualify for 
the AIDS add-on payment. The impact to Medicare is included in the 
``total'' column of Table 11. In updating the rates for FY 2012, we 
made a number of standard annual revisions and clarifications mentioned 
elsewhere in this final rule (for example, the update to the wage and 
market basket indexes used for adjusting the Federal rates).
    We estimate that the aggregate impact for the FY 2012 updates 
discussed in this final rule would be a net decrease of $3.87 billion 
in payments to SNFs, resulting from a $600 million increase from the 
update to the payment rates and a $4.47 billion reduction from the 
recalibration of the case-mix adjustment. The FY 2012 impacts are 
presented in Table 11.
    The breakdown of the various categories of data in Table 11 is as 
follows.
    The first column shows the breakdown of all SNFs by urban or rural 
status, hospital-based or freestanding status, and census region.
    The ``total'' row shows the estimated effects of the various 
changes on all facilities. The next six rows show the effects on 
facilities split by hospital-based, freestanding, urban, and rural 
categories. The urban and rural designations are based on the location 
of the facility under the CBSA designation. The next 19 rows show the 
effects on urban versus rural status by census region. The last 3 rows 
show the effects on ownership by government, profit and non-profit 
status.
    The second column in Table 11 shows the number of facilities in the 
impact database.

[[Page 48536]]

    The third column in Table 11 shows the effects of recalibrating the 
nursing CMIs of the RUG-IV therapy groups. As explained previously in 
section III.B.2 of this final rule, we are implementing the 
recalibration so that the CMIs more accurately reflect parity in 
expenditures under the RUG-IV system introduced in FY 2011 relative to 
payments under the previous RUG-53 system, based on our review of the 
initial eight months of FY 2011 claims and MDS data. The total impact 
of this change is a decrease of 12.6 percent. We note that some 
individual providers may experience larger or smaller decreases in 
payment than others due to case-mix utilization.
    The fourth column of Table 11 shows the effect of the annual update 
to the wage index. This represents the effect of using the most recent 
wage data available. The total impact of this change is zero percent; 
however, there are distributional effects of the change.
    The fifth column of Table 11 shows the effect of all of the changes 
on the FY 2012 payments. The update of 1.7 percent, consisting of the 
market basket increase of 2.7 percentage points, reduced by the 1.0 
percentage point MFP adjustment is constant for all providers and, 
though not shown individually, is included in the total column. It is 
projected that aggregate payments will decrease by 11.1 percent, 
assuming that facilities do not change their care delivery and billing 
practices in response.
    As shown in Table 11, the combined effects of all of the changes 
vary by specific types of providers and by location.

                          Table 11--RUG-IV Projected Impact to the SNF PPS for FY 2012
----------------------------------------------------------------------------------------------------------------
                                                                                                  Total FY 2012
                                              Number of       Revised CMIs    Update wage data       change
                                             facilities          percent                            (percent)
----------------------------------------------------------------------------------------------------------------
Group:
    Total...............................            14,706             -12.6               0.0             -11.1
    Urban...............................            10,321             -12.8               0.0             -11.3
    Rural...............................             4,385             -11.9               0.1             -10.3
    Hospital based urban................               454             -12.4               0.1             -10.8
    Freestanding urban..................             9,867             -12.8               0.0             -11.3
    Hospital based rural................               341             -11.3               0.0              -9.8
    Freestanding rural..................             4,044             -11.9               0.1             -10.3
Urban by region:
    New England.........................               807             -12.6               0.0             -11.1
    Middle Atlantic.....................             1,436             -12.9               0.1             -11.3
    South Atlantic......................             1,714             -12.8              -0.1             -11.4
    East North Central..................             2,001             -12.9              -0.5             -11.8
    East South Central..................               493             -12.7              -0.4             -11.6
    West North Central..................               848             -12.8               0.2             -11.1
    West South Central..................             1,167             -12.6               0.5             -10.7
    Mountain............................               472             -12.9               0.1             -11.3
    Pacific.............................             1,378             -12.8               0.3             -11.1
    Outlying............................                 5              -8.9               1.2              -6.3
Rural by region:
    New England.........................               142             -11.7               1.0              -9.3
    Middle Atlantic.....................               236             -12.3              -0.1             -10.9
    South Atlantic......................               558             -11.8              -0.2             -10.4
    East North Central..................               891             -12.1              -0.2             -10.7
    East South Central..................               464             -11.7              -0.5             -10.7
    West North Central..................             1,043             -12.0               0.4             -10.1
    West South Central..................               713             -11.7               0.8              -9.5
    Mountain............................               219             -11.8               0.3             -10.0
    Pacific.............................               119             -11.8               1.0              -9.4
Ownership:
    Government..........................               769             -12.4              -0.1             -11.0
    Profit..............................            10,172             -12.6               0.0             -11.1
    Non-profit..........................             3,765             -12.7               0.0             -11.2
----------------------------------------------------------------------------------------------------------------
Note: The Total column includes the 2.7 percent market basket increase, reduced by the 1.0 percentage point MFP
  adjustment. Additionally, we found no SNFs in rural outlying areas.

5. Alternatives Considered
    As described above, the aggregate impact for FY 2012 of the updates 
discussed in this final rule would be a net decrease of $3.87 billion 
in payments to SNFs, resulting from a $600 million increase from the 
update to the payment rates and a $4.47 billion reduction from the 
recalibration of the case-mix adjustment. In view of the potential 
economic impact, we considered the alternatives described below.
    Section 1888(e) of the Act establishes the SNF PPS for the payment 
of Medicare SNF services for cost reporting periods beginning on or 
after July 1, 1998. This section of the statute prescribes a detailed 
formula for calculating payment rates under the SNF PPS, and does not 
provide for the use of any alternative methodology. It specifies that 
the base year cost data to be used for computing the SNF PPS payment 
rates must be from FY 1995 (October 1, 1994, through September 30, 
1995). In accordance with the statute, we also incorporated a number of 
elements into the SNF PPS (for example, case-mix classification 
methodology, market basket index, a wage index, and the urban and rural 
distinction used in the development or adjustment of the Federal 
rates). Further, section 1888(e)(4)(H) of the Act specifically requires 
us to disseminate the payment rates for each new FY through the Federal 
Register, and to do so before the August 1 that precedes the start of 
the new fiscal year. Accordingly, we are not

[[Page 48537]]

pursuing alternatives for the payment methodology as discussed above.
    Using our authority to establish an appropriate adjustment for case 
mix under section 1888(e)(4)(G)(i) of the Act, this final rule 
finalizes a recalibration of the adjustment to the nursing case-mix 
indexes based on actual FY 2011 data. In the FY 2010 SNF PPS final rule 
(74 FR 40339), we committed to monitoring the accuracy and 
effectiveness of the parity adjustment to maintain budget neutrality. 
We believe that using actual FY 2011 claims data to perform the 
recalibration analysis results in case-mix weights that better reflect 
the resources used, produces more accurate payment, and represents an 
appropriate case-mix adjustment. Using FY 2011 data is consistent with 
our intent to make the change from the RUG-53 model to the RUG-IV model 
in a budget neutral manner.
    In reviewing our initial projections, we found that the disparity 
between projected RUG-IV utilization for FY 2011 and actual RUG-IV 
utilization in FY 2011, which formed the basis for our considering a 
recalibration of the nursing case-mix indexes, was at least partially 
the result of a shift in the mode of therapy provided to beneficiaries 
in a Part A stay under RUG-IV. The amount of concurrent therapy 
decreased significantly from historical levels, with a significant 
portion of the SNFs reporting 0 minutes of concurrent therapy for all 
MDS 3.0 assessments submitted for FY 2011. Many of these facilities 
reported large increases in the amount of group therapy provided during 
the same time period.
    For the proposed rule, we used 3 months of data (first quarter FY 
2011) to calculate the initial parity adjustment and stated that we 
would observe utilization trends for a greater period of FY 2011 to 
confirm our preliminary assessment. We have now used 8 months of FY 
2011 data as the basis for the recalibration discussed in section 
III.B.2 above and the data have confirmed our preliminary assessment. 
Therefore, as discussed in section III.B.2 of this final rule, we are 
implementing a recalibration of the nursing CMIs of the RUG-IV therapy 
groups based on eight months of FY 2011 MDS and claims data.
    Both during development of the proposed rule (76 FR 26372, 26404) 
and in response to comments we received on the proposed rule, as 
discussed in section III.B.2 above, we considered various alternatives 
for implementing a recalibrated case-mix adjustment. Most notably, as 
discussed in section III.B.2 of this final rule, we considered applying 
the recalibration to all of the nursing CMIs, rather than just the 
nursing CMIs for the RUG-IV therapy groups as we have finalized in this 
final rule.
    However, as noted in the proposed rule (76 FR 26372, 26404), we 
found that an across-the-board recalibration of the nursing CMIs that 
included the complex medical groups (approximately 8 percent of the 
total SNF Part A population), would affect patients in these complex 
medical groups disproportionately and negatively. Moreover, we are 
concerned that reducing payment rates for both the therapy and the 
complex medical patients could inadvertently create an access problem 
for beneficiaries with complex medical care needs. The increasing 
volume of therapy patients during the past several years, in 
combination with the increasing SNF Medicare profit margins, suggests 
that the care needs for therapy patients may be more predictable and 
less costly than those for beneficiaries with severe medical 
conditions. In reviewing FY 2011 MDS assessment data, we found that 
approximately 30 percent of the SNF Part A patients did not have a 
medical need that would qualify them for coverage under the SNF PPS. 
Reducing the rates paid for beneficiaries with complex medical 
conditions at the same time therapy rates are being adjusted may create 
access problems for patients with complex medical and rehabilitation 
needs. Thus, while we considered an across-the-board recalibration of 
the nursing CMIs, we decided it would be more prudent to keep the 
payment levels for the low-volume complex medical services at their 
present levels for 2012. We plan to reassess the adequacy of the 
complex medical payment rates as part of the development of the NTA 
component discussed in section III.C.1 of this final rule. We believe 
that applying the recalibration to only the nursing CMIs of the RUG-IV 
therapy groups will restore the system to the intended budget 
neutrality and ensure adequate access to quality SNF care for the 
important subset of Medicare beneficiaries needing complex medical 
care.
    As described in section III.B.2 of this final rule and in sections 
XII.A.5 and II.B.2 of the proposed rule, we also considered how the 
recalibration might be implemented so as to mitigate the economic 
impact of the recalibration on facilities. Specifically, we considered 
mitigating the impact of the recalibration by phasing in the negative 
adjustments prospectively over multiple years until parity was 
achieved. However, as discussed elsewhere in this preamble, we believe 
that in implementing RUG-IV, it is essential that we stabilize the 
baseline as quickly as possible without creating a significant adverse 
effect on the industry or to beneficiaries. For the reasons discussed 
in section II.B.2 of this final rule, we do not believe that 
implementation of the full recalibration in FY 2012 should negatively 
impact facilities, beneficiaries or quality of care. Moreover, 
implementing the recalibration over a multi-year period would continue 
the significant overpayments observed in FY 2011 and could further 
destabilize the SNF PPS.
    We received a number of comments on the impact analysis contained 
in the proposed rule which, along with our responses, appear below.
    Comment: Several commenters believed that CMS did not consider 
adequately possible alternative methodologies for applying or 
implementing the recalibration of the case-mix indexes. Specifically, 
commenters believed that CMS should consider a phase-in approach for 
the recalibration, if it were to be finalized.
    Response: We believe that the discussion of alternatives in this 
section above, in section III.B.2 above, as well as in the FY 2012 
proposed rule (76 FR 26372, 26403 through 26404) provides sufficient 
consideration of alternatives as well as appropriate justification for 
our finalized changes. Regarding a phase-in approach, we noted in 
section III.B.2 above our belief that the 18.1 percent SNF profit 
margins for Medicare even before the FY 2011 overpayments occurred 
would justify a full recalibration in FY 2012. It is also important to 
note that this recalibration would serve to remove an unintended spike 
in payments rather than decreasing an otherwise appropriate payment 
amount; thus, we do not believe that the recalibration should 
negatively affect facilities, beneficiaries, or quality of care, or 
create an undue hardship on providers. In fact, notwithstanding the 
recalibration, the FY 2012 payment rates will actually be 3.4 percent 
higher than the rates established for FY 2010, the last period prior to 
the unintended spike in payment levels. We continue to believe that in 
implementing RUG-IV, it is essential that we stabilize the baseline as 
quickly as possible without creating a significant adverse effect on 
the industry or to beneficiaries. Utilizing a phase-in approach would 
only add to, rather than reduce, the cumulative excess payments.
    Comment: Several commenters expressed concern that the impact 
analysis presented in the proposed rule did not account adequately for 
the total

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economic impact of the policy changes discussed in the FY 2012 proposed 
rule. One commenter stated specifically that the implementation of the 
proposed changes could lead the U.S. economy back into a deep 
recession.
    Response: As indicated in Table 11 above, the changes due to the 
recalibration of the CMIs (which is arguably the only proposed change 
which would have a definitive negative impact on current facility 
payments) are expected to result in a decrease in Medicare payments to 
SNFs of 12.6 percent. We note that the recalibration is only intended 
to restore budget neutrality between the RUG-53 and RUG-IV case-mix 
systems, which effectively will align overall payments under RUG-IV in 
FY 2012 with those under RUG-III, not accounting for subsequent 
increases associated with the annual market basket increase.
    Based on a comparative analysis of the actual payment amounts 
reflected on claims paid in FY 2010 and in FY 2011, payments to 
facilities increased in FY 2011 by an average of approximately $66 per 
day per resident for all providers. Furthermore, as noted in section 
III.B.2 of this final rule, the aggregate Medicare margin for 
freestanding SNFs in FY 2009, prior to the implementation of the parity 
adjustment in FY 2011 and the resulting overpayments, was 18.1 percent, 
up from 16.6 percent in 2008. Therefore, given these high Medicare 
margins coupled with the fact that Medicare payments represent a small 
percentage of aggregate facility revenues (considering all payers), we 
do not believe it can be concluded that a return to the intended 
payment levels after the FY 2011 short-term spike in payments will 
result in a direct and significant negative macroeconomic effect on the 
U.S. economy. For these reasons, we believe that the regulatory impact 
analysis both in this final rule and in the proposed rule adequately 
assesses the economic impact of the changes to the RUG-IV system.
6. Accounting Statement
    As required by OMB Circular A-4 (available online at http://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf), in Table 12, we have prepared an accounting statement 
showing the classification of the expenditures associated with the 
provisions of this final rule. Tables 12 provides our best estimate of 
the possible changes in Medicare payments under the SNF PPS as a result 
of the policies in this final rule, based on the data for 14,706 SNFs 
in our database. All expenditures are classified as transfers to 
Medicare providers (that is, SNFs).

       Table 12--Accounting Statement: Classification of Estimated
   Expenditures, From the 2011 SNF PPS Fiscal Year to the 2012 SNF PPS
                               Fiscal Year
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  -$3.87 billion.*
From Whom To Whom?.....................  Federal Government to SNF
                                          Medicare Providers.
------------------------------------------------------------------------
* The net decrease of $3.87 billion in transfer payments is a result of
  the decrease of $4.47 billion due to the recalibration of the case mix
  adjustment, together with the increase of $600 million due to the MFP-
  adjusted market basket update.

7. Conclusion
    The overall estimated payments for SNFs in FY 2012 are projected to 
decrease by $3.87 billion, or 11.1 percent, compared with those in FY 
2011. We estimate that under RUG-IV, SNFs in urban and rural areas 
would experience, on average, an 11.3 and 10.3 percent decrease, 
respectively, in estimated payments compared with FY 2011. Providers in 
the urban East North Central region would experience the largest 
estimated decrease in payments of approximately 11.8 percent. In order 
to have achieved parity between the RUG-53 and RUG-IV case-mix systems 
in FY 2011, aggregated payments would have had to have been 11.1 
percent lower. It should also be noted that the FY 2012 payment rates, 
which remove the unanticipated excess payments resulting from the FY 
2011 parity adjustment, are still 3.4 percent higher than the FY 2010 
rates, the last fiscal year before the introduction of RUG-IV.

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) requires agencies to analyze 
options for regulatory relief of small entities, if a rule has a 
significant impact on a substantial number of small entities. For 
purposes of the RFA, small entities include small businesses, non-
profit organizations, and small governmental jurisdictions. Most SNFs 
and most other providers and suppliers are small entities, either by 
their non-profit status or by having revenues of $13.5 million or less 
in any 1 year. For purposes of the RFA, approximately 91 percent of 
SNFs are considered small businesses according to the Small Business 
Administration's latest size standards, with total revenues of $13.5 
million or less in any 1 year. (For details, see the Small Business 
Administration's Web site at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=2465b064ba6965cc1fbd2eae60854b11&rgn=div8&view=text&node=13:1.0.1.1.16.1.266.9&idno=13). Individuals and States are not included 
in the definition of a small entity. In addition, approximately 21 
percent of SNFs classified as small entities are non-profit 
organizations. Finally, the estimated number of small business entities 
does not distinguish provider establishments that are within a single 
firm and, therefore, the number of SNFs classified as small entities 
may be higher than the estimate above.
    This final rule updates the SNF PPS rates published in the update 
notice for FY 2011 (75 FR 42886, July 22, 2010) and the associated 
correction notice (75 FR 55801, September 14, 2010). We estimate that 
implementing the recalibration discussed in section II.B.2 above would 
result in a net decrease of $3.87 billion in payments to SNFs for FY 
2012. This reflects a $600 million increase from the update to the 
payment rates and a $4.47 billion reduction from the recalibration of 
the case-mix adjustment. As indicated in Table 11, the estimated effect 
of the recalibration on facilities for FY 2012 would be an aggregate 
negative impact of 11.1 percent. While it is projected in Table 11 that 
all providers would experience a net decrease in payments, we note that 
some individual providers may experience larger decreases in payments 
than others due to the distributional impact of the FY 2012 wage 
indexes and the degree of Medicare utilization.
    Guidance issued by the Department of Health and Human Services on 
the proper assessment of the impact on small entities in rulemakings, 
utilizes a cost or revenue impact of 3 to 5 percent as a significance 
threshold under the RFA. According to MedPAC, Medicare covers 
approximately 12 percent of total patient days in freestanding 
facilities and 23 percent of facility revenue (March 2011). However, it 
is worth

[[Page 48539]]

noting that the distribution of days and payments is highly variable. 
That is, the majority of SNFs have significantly lower Medicare 
utilization. As a result, for most facilities, when all payers are 
included in the revenue stream, the overall impact effect to total 
revenues should be substantially less than those presented in Table 11. 
Therefore, the Secretary has determined that this final rule may have a 
significant impact on a substantial number of small entities.
    We offer an analysis of the alternatives considered in section 
VII.A.4 of this final rule. The analysis above, together with the 
remainder of this preamble, constitutes the final regulatory 
flexibility analysis.
    In addition, section 1102(b) of the Social Security Act requires us 
to prepare a regulatory impact analysis (RIA) if a rule may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. This analysis must conform to the provisions of 
section 603 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside of 
a Metropolitan Statistical Area and has fewer than 100 beds. This final 
rule will affect small rural hospitals that (a) furnish SNF services 
under a swing-bed agreement or (b) have a hospital-based SNF. We 
anticipate that the impact on small rural hospitals would be similar to 
the impact on SNF providers overall. Therefore, the Secretary has 
determined that this final rule may have a significant impact on the 
operations of a substantial number of small rural hospitals.
    Comment: One commenter believed that the RFA analysis and RIA 
discussed in the proposed rule did not sufficiently account for the 
impact of the proposed changes, specifically the recalibration of the 
case-mix indexes, on small entities. Also, the commenter pointed out 
that the portion of SNFs which may be characterized properly as small 
entities may, in fact, be higher than our estimates. The commenter 
asserted that in evaluating the effect of the proposed changes on small 
entities ``as a whole,'' the analysis must necessarily consider their 
effect on the entity's overall margins. This commenter also asserted 
that CMS failed to provide sufficient discussion of possible 
alternatives. The commenter further suggested that the RIA cannot also 
serve to meet the requirements of the RFA.
    Response: We do not agree with the commenter's assertion that the 
RFA or RIA discussions in the proposed rule were insufficient. First, 
we would note that, as discussed above, approximately 91 percent of all 
SNFs may be classified as small entities. As the commenter pointed out, 
the portion of SNFs which may be characterized properly as small 
entities may, in fact, be higher than our estimates. Therefore, any 
discussion of impacts throughout the proposed rule, as well as in this 
final rule, may be directly characterized as an analysis of the impact 
of the FY 2012 changes to the SNF PPS on small entities. Moreover, the 
focus on small entities in this instance (a category that would include 
the small rural hospitals that are the subject of a RIA) also means 
that the analyses required under the RIA and the RFA are, in fact, 
directly interlinked in this situation, as essentially the same factors 
are being examined in both contexts. Also, guidance issued by the 
Department of Health and Human Services on the proper assessment of the 
impact on small entities in rulemakings, utilizes a total cost or 
revenue impact of 3 to 5 percent as a significance threshold under the 
RFA analysis and not overall margins. As a result, the addition of 
other (non-Medicare) revenue streams effectively dilutes the impact of 
any Medicare changes, as we noted previously in this discussion as well 
as in the proposed rule: ``* * * for most facilities, when all payers 
are included in the revenue stream, the overall impact effect [of the 
Medicare changes] to total revenues should be substantially less * * 
*'' (76 FR 26405).
    Furthermore, we would note that we provided additional data on our 
Web site on therapy utilization trends for the different types of SNF 
providers (profit, non-profit, and government), which are available 
online at http://www.cms.gov/SNFPPS/02_Spotlight.asp. This additional 
data, as well as our impact analysis in the proposed rule, illustrated 
that all SNFs, including small entities and non-profits, have 
experienced a significant increase in payments in FY 2011. We do not 
believe that the recalibration constitutes a rate cut but instead 
represents a return to the appropriate level of SNF payments, which 
have been found to be more than adequate for SNFs and small entities 
within the SNF industry. This information, as well as the discussion of 
alternatives in section XII.A.5 of the proposed rule, is sufficient to 
fulfill our obligations under the RFA.
    Finally, given our discussion of alternatives in section VIII.D of 
this final rule and elsewhere in this preamble, and our analysis of the 
potential impacts on the SNF industry as a whole, we believe that the 
requirements under the RFA for providing this final RFA analysis have 
been properly addressed.

C. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2011, that 
threshold is approximately $136 million. This final rule would not 
impose spending costs on State, local, or Tribal governments in the 
aggregate, or by the private sector, of $136 million.

D. Federalism Analysis

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that impose substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This final rule would have no substantial direct effect 
on State and local governments, preempt State law, or otherwise have 
Federalism implications.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED 
PAYMENT RATES FOR SKILLED NURSING FACILITIES

0
1. The authority citation for part 413 continues to read as follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of 
Public Law 106-133 (113 Stat. 1501A-332).

Subpart J--Prospective Payment for Skilled Nursing Facilities

0
2. Section 413.337 is amended by--
0
A. Revising paragraphs (d)(1) and (d)(2).
0
B. Adding paragraph (d)(3).
    The revisions and addition read as follows:

[[Page 48540]]

Sec.  413.337   Methodology for calculating the prospective payment 
rates.

* * * * *
    (d) * * *
    (1) Update formula. The unadjusted Federal payment rate shall be 
updated as follows:
    (i) For the initial period beginning on July 1, 1998, and ending on 
September 30, 1999, the unadjusted Federal payment rate is equal to the 
rate computed under paragraph (b)(5)(iii) of this section increased by 
a factor equal to the SNF market basket index percentage change for 
such period minus 1.0 percentage point.
    (ii) For fiscal year 2000, the unadjusted Federal payment rate is 
equal to the rate computed for the initial period described in 
paragraph (d)(1)(i) of this section increased by a factor equal to the 
SNF market basket index percentage change for that period minus 1.0 
percentage point.
    (iii) For fiscal year 2001, the unadjusted Federal payment rate is 
equal to the rate computed for the previous fiscal year increased by a 
factor equal to the SNF market basket index percentage change for the 
fiscal year.
    (iv) For fiscal years 2002 and 2003, the unadjusted Federal payment 
rate is equal to the rate computed for the previous fiscal year 
increased by a factor equal to the SNF market basket index percentage 
change for the fiscal year involved minus 0.5 percentage points.
    (v) For each subsequent fiscal year, the unadjusted Federal payment 
rate is equal to the rate computed for the previous fiscal year 
increased by a factor equal to the SNF market basket index percentage 
change for the fiscal year involved.
    (2) Forecast error adjustment. Beginning with fiscal year 2004, an 
adjustment to the annual update of the previous fiscal year's rate will 
be computed to account for forecast error. The initial adjustment (in 
fiscal year 2004) to the update of the previous fiscal year's rate will 
take into account the cumulative forecast error between fiscal years 
2000 and 2002. Subsequent adjustments in succeeding fiscal years will 
take into account the forecast error from the most recently available 
fiscal year for which there is final data. The forecast error 
adjustment applies whenever the difference between the forecasted and 
actual percentage change in the SNF market basket index exceeds the 
following threshold:
    (i) 0.25 percentage points for fiscal years 2004 through 2007; and
    (ii) 0.5 percentage points for fiscal year 2008 and subsequent 
fiscal years.
    (3) Multifactor productivity (MFP) adjustment. For fiscal year 2012 
and each subsequent fiscal year, the SNF market basket index percentage 
change for the fiscal year (as modified by any applicable forecast 
error adjustment under paragraph (d)(2) of this section) shall be 
reduced by the MFP adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act. The reduction of the market basket 
index percentage change by the MFP adjustment may result in the market 
basket index percentage change being less than zero for a fiscal year, 
and may result in the unadjusted Federal payment rates for a fiscal 
year being less than such payment rates for the preceding fiscal year.
* * * * *

    Authority: (Catalog of Federal Domestic Assistance Program No. 
93.773, Medicare--Hospital Insurance; and Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: July 21, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: July 27, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.

    Note: The following Addendum will not appear in the Code of 
Federal Regulations.

Addendum--FY 2012 CBSA Wage Index Tables

    In this addendum, we provide the wage index tables referred to in 
the preamble to this final rule. Tables A and B display the CBSA-based 
wage index values for urban and rural providers.
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[FR Doc. 2011-19544 Filed 7-29-11; 4:15 pm]
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