43412 Federal Register / Vol. 72, No. 149 / Friday, August 3, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 409 

[CMS–1545–F] 

RIN 0938–AO64 

Medicare Program; Prospective 

Payment System and Consolidated 

Billing for Skilled Nursing Facilities for 

FY 2008 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule updates the 

payment rates used under the 

prospective payment system (PPS) for 

skilled nursing facilities (SNFs) for 

fiscal year (FY) 2008. In addition, this 

final rule revises and rebases the SNF 

market basket, and modifies the 

threshold for the adjustment to account 

for market basket forecast error. This 

final rule also responds to public 

comments submitted on the proposed 

rule and makes a technical correction in 

the regulations text. 

DATES: This final rule becomes effective 

on October 1, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Ellen Berry, (410) 786–4528 (for 

information related to the case-mix 

classification methodology). 

Mollie Knight, (410) 786–7948 (for 

information related to the SNF market 

basket and labor-related share). 

Jeanette Kranacs, (410) 786–9385 (for 

information related to the 

development of the payment rates). 

Bill Ullman, (410) 786–5667 (for 

information related to level of care 

determinations, consolidated billing, 

and general information). 

SUPPLEMENTARY INFORMATION: To assist 

readers in referencing sections 

contained in this document, we are 

providing the following Table of 

Contents. 

Table of Contents 

I. Background 

A. Current System for Payment of Skilled 

Nursing Facility 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. Skilled Nursing Facility Prospective 

Payment System—General Overview 

1. Payment Provisions—Federal Rate 

2. Rate Updates Using the Skilled Nursing 

Facility Market Basket Index 

II. Summary of the Provisions of the FY 2008 

Proposed Rule 

III. Analysis of and Response to Public 

Comments on the FY 2008 Proposed 

Rule 

A. General Comments on the FY 2008 

Proposed Rule 

B. 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 Refinements 

3. Wage Index Adjustment to Federal Rates 

4. Updates to Federal Rates 

5. Relationship of RUG–III Classification 

System to Existing Skilled Nursing 

Facility Level-of-Care Criteria 

6. Example of Computation of Adjusted 

PPS Rates and SNF Payment 

C. The Skilled Nursing Facility Market 

Basket Index 

1. Use of the Skilled Nursing Facility 

Market Basket Percentage 

2. Market Basket Forecast Error Adjustment 

3. Federal Rate Update Factor 

D. Revising and Rebasing the Skilled 

Nursing Facility Market Basket Index 

E. Consolidated Billing 

F. Application of the SNF PPS to SNF 

Services Furnished by Swing-Bed 

Hospitals 

IV. Provisions of the Final Rule 

V. Waiver of Proposed Rulemaking 

VI. Collection of Information Requirements 

VII. Regulatory Impact Analysis 

A. Overall Impact 

B. Anticipated Effects 

C. Accounting Statement 

D. Alternatives Considered 

E. Conclusion 

Addendum: FY 2008 CBSA Wage Index 

Tables (Tables 8 & 9) 

Abbreviations 

In addition, because of the many 

terms to which we refer by abbreviation 

in this final rule, we are listing these 

abbreviations and their corresponding 

terms in alphabetical order below: 

AIDS Acquired Immune Deficiency 

Syndrome 

BBA Balanced Budget Act of 1997, Pub. L. 

105–33 

BBRA Medicare, Medicaid and SCHIP 

Balanced Budget Refinement Act of 

1999, Pub. L. 106–113 

BIPA Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000, Pub. L. 106–554 

CAH Critical Access Hospital 

CBSA Core-Based Statistical Area 

CFR Code of Federal Regulations 

CMS Centers for Medicare & Medicaid 

Services 

ECI Employment Cost Index 

FLSA Fair Labor Standards Act, Pub. L. 75– 

718 

FQHC Federally Qualified Health Center 

FR Federal Register 

FY Fiscal Year 

GAO Government Accountability Office 

GII Global Insight, Inc. 

HCPCS Healthcare Common Procedure 

Coding System 

MCR Medicare Cost Report 

MDS Minimum Data Set 

MEDPAC Medicare Payment Advisory 

Commission 

MEDPAR Medicare Provider Analysis and 

Review File 

MIEA Medicare Improvements and 

Extension Act of 2006, Pub. L. 109–432 

MMA Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003, Pub. L. 108–173 

MSA Metropolitan Statistical Area 

OMB Office of Management and Budget 

PPI Producer Price Index 

PPS Prospective Payment System 

RFA Regulatory Flexibility Act, Pub. L. 96– 

354 

RHC Rural Health Clinic 

RIA Regulatory Impact Analysis 

RUG–III Resource Utilization Groups, 

Version III 

RUG–53 Refined 53-Group RUG–III CaseMix Classification System 

SCHIP State Children’s Health Insurance 

Program 

SNF Skilled Nursing Facility 

STM Staff Time Measurement 

UMRA Unfunded Mandates Reform Act, 

Pub. L. 104–4 

I. Background 

On May 4, 2007, we published a 

proposed rule in the Federal Register 

(72 FR 25526, hereafter referred to as the 

FY 2008 proposed rule), setting forth the 

proposed updates to the payment rates 

used under the prospective payment 

system (PPS) for skilled nursing 

facilities (SNFs) for FY 2008. Annual 

updates to the prospective payment 

system (PPS) rates for skilled nursing 

facilities (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), and 

amended by the Medicare, Medicaid, 

and SCHIP Balanced Budget Refinement 

Act of 1999 (BBRA), the Medicare, 

Medicaid, and SCHIP Benefits 

Improvement and Protection Act of 

2000 (BIPA), and the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA). Our 

most recent annual update occurred in 

an update notice (71 FR 43158, July 31, 

2006) that set forth updates to the SNF 

PPS payment rates for fiscal year (FY) 

2007. We subsequently published a 

correction notice (71 FR 57519, 

September 29, 2006) with respect to 

those payment rate updates. 


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A. Current System for Payment of 

Skilled Nursing Facility Services Under 

Part A of the Medicare Program 

Section 4432 of the Balanced Budget 

Act of 1997 (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 

2008. Major elements of the SNF PPS 

include: 

• Rates. As discussed in section I.F.1 

of the FY 2008 proposed rule, we 

established per diem Federal rates for 

urban and rural areas using allowable 

costs from FY 1995 cost reports. These 

rates also included an estimate of the 

cost of services that, before July 1, 1998, 

had been paid under Part B but 

furnished to Medicare beneficiaries in a 

SNF during a Part A covered stay. We 

update 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. This adjustment utilizes a 

refined, 53-group version of the 

Resource Utilization Groups, version III 

(RUG–III) case-mix classification 

system, based on information obtained 

from the required resident assessments 

using the Minimum Data Set (MDS) 2.0. 

Additionally, as noted in the August 4, 

2005 final rule (70 FR 45028), the 

payment rates at various times have also 

reflected specific legislative provisions, 

including section 101 of the BBRA, 

sections 311, 312, and 314 of the BIPA, 

and section 511 of the MMA. 

• Transition. Under sections 

1888(e)(1)(A) and (e)(11) of the Act, the 

SNF PPS included an initial, threephase transition that blended a facilityspecific 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 RUG–III 

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 output of 

beneficiary assessment and RUG–III 

classifying activities. This approach 

includes an administrative presumption 

that utilizes a beneficiary’s initial 

classification in one of the upper 35 

RUGs of the refined 53-group system to 

assist in making certain SNF level of 

care determinations, as was discussed in 

greater detail in section II.E. of the FY 

2008 proposed rule. 

• Consolidated Billing. The SNF PPS 

includes a consolidated billing 

provision that requires a SNF to submit 

consolidated Medicare bills to its fiscal 

intermediary for almost all of the 

services that its residents receive during 

the course of a covered Part A stay. 

While section 313 of the BIPA repealed 

the Part B aspect of the consolidated 

billing requirement, SNFs maintain 

responsibility for submitting 

consolidated Medicare bills to the fiscal 

intermediary for physical, occupational, 

and speech-language therapy that 

residents receive 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 appeared in section V. 

of the FY 2008 proposed 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 

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 can be 

found in section VI. of the FY 2008 

proposed rule. 

• Technical Correction. We are also 

taking this opportunity to make a 

technical correction in the text of the 

regulations, as discussed in greater 

detail in section IV 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 publish annually in the 

Federal Register: 

1. The unadjusted Federal per diem 

rates to be applied to days of covered 

SNF services furnished during the FY. 

2. The case-mix classification system 

to be applied with respect to these 

services during the FY. 

3. The factors to be applied in making 

the area wage adjustment with respect 

to these services. 

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 RUG–III classification structure 

(see section II.E of the FY 2008 

proposed rule for a discussion of the 

relationship between the case-mix 

classification system and SNF level of 

care determinations). 

Along with a number of other 

revisions outlined later in this 

preamble, this final rule provides the 

annual updates to the Federal rates as 

mandated by the Act. 

C. The Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999 (BBRA) 

There were several provisions in the 

BBRA that resulted in adjustments to 

the SNF PPS. We described these 

provisions in detail in the final rule that 

we published in the Federal Register on 

July 31, 2000 (65 FR 46770). 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 RUG–III 

groups. In accordance with section 

101(c)(2) of the BBRA, this temporary 

payment adjustment expired on January 

1, 2006, with the implementation of 

case-mix refinements (see section I.F.1. 

of this final rule). We included further 

information on BBRA provisions that 

affected the SNF PPS in Program 

Memorandums 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 V. of the FY 2008 proposed rule 

and 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. Further, for 


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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 

July 31, 2001 final rule (66 FR 39562), 

we made conforming changes to the 

regulations at § 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 also included several 

provisions that resulted in adjustments 

to the SNF PPS. We described these 

provisions in detail in the final rule that 

we published in the Federal Register on 

July 31, 2001 (66 FR 39562). 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.hhs.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.hhs.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. The 

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, 

occupational, and speech-language 

therapy) furnished to SNF residents 

during noncovered stays, effective 

January 1, 2001. (A more detailed 

discussion of this provision appears in 

section V. of the FY 2008 proposed 

rule.) 

• Section 314 of the BIPA corrected 

an anomaly involving three of the RUGs 

that 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 with 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. As discussed 

in section III.B.3 of this final rule, this 

has proven not to be feasible due to the 

volatility of existing SNF wage data and 

the significant amount of resources that 

would be required to improve the 

quality of such 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.hhs.gov/transmittals/ 

downloads/a0108.pdf. 

E. The Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) 

The MMA included a provision that 

results 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 resident 

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 ‘‘* * * such date 

as the Secretary certifies that there is an 

appropriate adjustment in the case mix 

* * *.’’ 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.hhs.gov/transmittals/ 

downloads/r160cp.pdf. As discussed in 

the SNF PPS final rule for FY 2006 (70 

FR 45028, August 4, 2005), we did not 

address the certification of the AIDs 

add-on with the implementation of the 

case-mix refinements, thus allowing the 

temporary add-on payment created by 

section 511 of the MMA to continue in 

effect. 

For the limited number of SNF 

residents that qualify for the AIDS addon, implementation of this provision 

results in a significant increase in 

payment. For example, using fiscal year 

2006 data, we identified 2,590 SNF 

residents with a principal or secondary 

diagnosis code of 042 (‘‘Human 

Immunodeficiency Virus (HIV) 

Infection’’). For FY 2008, an urban 

facility with a resident with AIDS in 

RUG group ‘‘SSA’’ would have a casemix adjusted payment of almost $250.65 

(see Table 4) 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 $571.48. 

In addition, section 410 of the MMA 

contained a provision that excluded 

from consolidated billing certain 

practitioner and other services 

furnished to SNF residents by rural 

health clinics (RHCs) and Federally 

Qualified Health Centers (FQHCs). (A 

more detailed discussion of this 

provision appears in section V. of the 

FY 2008 proposed rule, as well as in 

Program Transmittal #390 (Change 

Request #3575), issued December 10, 

2004, which is available online at http:// 

www.cms.hhs.gov/transmittals/ 

downloads/r390cp.pdf.) 

F. Skilled Nursing Facility Prospective 

Payment System—General Overview 

We implemented the Medicare SNF 

PPS effective with cost reporting 

periods beginning on or after July 1, 

1998. This PPS pays SNFs through 

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. 

Covered SNF services include posthospital services for which benefits are 

provided under Part A and all items and 

services that, before July 1, 1998, had 

been paid under Part B (other than 

physician and certain other services 

specifically excluded under the BBA) 

but were furnished to Medicare 

beneficiaries in a SNF during a covered 

Part A stay. A complete 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 updated for inflation to 

the first effective period of the PPS. We 

developed the Federal payment rates 

using allowable costs from hospitalbased 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 


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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 

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 casemix, using a classification system that 

accounts for the relative resource 

utilization of different patient types. 

The RUG–III classification system uses 

beneficiary assessment data from the 

Minimum Data Set (MDS) completed by 

SNFs to assign beneficiaries to one of 53 

RUG–III groups. The original RUG–III 

case-mix classification system included 

44 groups. However, under 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 hierarchy. The May 12, 1998 

interim final rule (63 FR 26252) 

included a complete and detailed 

description of the original 44-group 

RUG–III case-mix classification system. 

A comprehensive description of the 

refined 53-group RUG–III case-mix 

classification system (RUG–53) 

appeared in the proposed and final rules 

for FY 2006 (70 FR 29070, May 19, 

2005, and 70 FR 45026, August 4, 2005). 

Further, in accordance with section 

1888(e)(4)(E)(ii)(IV) of the Act, the 

Federal rates in this final rule reflect an 

update to the rates that we published in 

the July 31, 2006 final rule for FY 2007 

(71 FR 43158) and the associated 

correction notice (71 FR 57519, 

September 29, 2006), equal to the full 

change in the SNF market basket index. 

A more detailed discussion of the SNF 

market basket index and related issues 

appears in sections I.F.2. and III.C of the 

FY 2008 proposed rule. 

2. 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 to update the Federal rates 

on an annual basis. In the FY 2008 

proposed rule, we proposed to revise 

and rebase the market basket to reflect 

2004 Medicare-allowable cost data, as 

detailed in section III.A of that proposed 

rule. The proposed FY 2008 market 

basket increase was 3.3 percent. 

(However, we also noted that both the 

President’s budget and the 

recommendations of the Medicare 

Payment Advisory Commission 

(MedPAC) included a proposal for a 

zero percent update in the SNF market 

basket for FY 2008, and that the 

provisions outlined in the proposed rule 

would need to reflect any legislation 

that the Congress might enact to adopt 

this proposal.) 

In the FY 2008 proposed rule, we also 

proposed to revise the threshold 

percentage that serves to trigger an 

adjustment to account for market basket 

forecast error, which we discuss in 

greater detail in section III.C.2 of this 

final rule. Table 1 below shows the 

forecasted and actual market basket 

amount for FY 2006. 

TABLE 1.—DIFFERENCE BETWEEN THE FORECASTED AND ACTUAL MARKET BASKET INCREASES FOR FY 2006 

Index Forecasted actual 

FY 2006 increase* 

Actual FY 2006 

increase** FY 2006 difference 

SNF ...................................................................................................................... 3.1 3.4 0.3 

*Published in Federal Register; based on the second quarter 2005 Global Insight Inc. forecast (97 index). 

**Based on the second quarter 2007 Global Insight forecast (97 index). 

II. Summary of the Provisions of the FY 

2008 Proposed Rule 

The FY 2008 proposed rule included 

proposed updates to the Federal 

payment rates used under the SNF PPS. 

In accordance with section 

1888(e)(4)(E)(ii)(IV) of the Act, the 

updates reflect the full SNF market 

basket percentage change for the fiscal 

year. We also proposed to revise and 

rebase the SNF market basket (which 

would include updating the base year 

from FY 1997 to FY 2004), and to 

modify the threshold that serves to 

trigger an adjustment to account for 

market basket forecast error. In addition, 

we proposed to specify an area wage 

adjustment methodology for those 

geographic areas that lack hospital wage 

index data. Further, we invited public 

comments on additional HCPCS codes 

that could represent the type of ‘‘highcost, low probability’’ services within 

certain designated service categories 

(that is, chemotherapy and its 

administration, radioisotope services, 

and customized prosthetic devices) that 

section 103 of the BBRA has authorized 

us to exclude from the SNF 

consolidated billing provision. More 

detailed information on each of these 

issues, to the extent that we received 

public comments on them, appears in 

the discussion contained in the 

following sections of this final rule. 

III. Analysis of and Response to Public 

Comments on the FY 2008 Proposed 

Rule 

In response to the publication of the 

May 4, 2007 proposed rule for FY 2008, 

we received 17 timely items of 

correspondence from the public. The 

comments originated primarily from 

various trade associations and major 

organizations, but also from individual 

providers, corporations, and 

government agencies. 

Brief summaries of each proposed 

provision, a summary of the public 

comments we received and our 

responses to the comments are set forth 

below. 

A. General Comments on the FY 2008 

Proposed Rule 

In addition to the comments that 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. 


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Comment: Some commenters asked us 

to consider modifications to the SNF 

PPS payment system that would better 

recognize the specialized care provided 

in hospital-based SNFs. A few 

commenters encouraged us to create a 

SNF outlier policy. Other commenters 

requested that we address perceived 

inadequacies in payment for nontherapy ancillary services, including 

those services relating to the provision 

of ventilator care in SNFs. 

Response: As noted previously in 

section I.F.1 of this final rule, the SNF 

PPS final rule for FY 2006 (70 FR 45034, 

August 4, 2005) introduced a refined 

case-mix classification system as of 

January 1, 2006, which added nine new 

Rehabilitation plus Extensive Service 

groups to the RUG hierarchy to account 

more accurately for patients with both 

rehabilitation needs and extensive 

services. At that time, we described the 

FY 2006 refinements as a first step in 

updating the SNF PPS. We described 

our intent to perform a staff time 

measurement study, in which we would 

survey SNFs and collect data that better 

reflects current practice patterns and 

resource use. We are concerned that 

incentives of the SNF PPS and the 

public reporting of nursing home 

quality measures likely have altered 

industry practices, and have had a 

significant impact on the nursing 

resources required to treat different 

types of patients. 

The Staff Time and Resource Intensity 

Verification (STRIVE) project started 

onsite facility data collection in the 

spring of 2006, and will continue to 

collect data through the summer of 

2007. When complete, the study will 

have collected data from approximately 

200 facilities from approximately 15 

States. While facilities were selected 

largely based on random sampling 

techniques, targeted sampling was also 

performed to ensure adequate 

representation of special populations, 

such as residents in hospital-based 

facilities. In addition to providing us 

with data to analyze and evaluate how 

current industry practices have affected 

the Federal classification system, the 

data will enable us to analyze nontherapy ancillary usage more 

thoroughly, assess the need for a SNF 

outlier policy, and gain a better 

understanding of the resource usage of 

residents in hospital-based SNFs. We 

plan to make available some 

preliminary analysis results in 2008, 

which should aid us in reviewing and 

addressing some of the concerns 

expressed by the commenters. 

B. 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, 2007. The 

schedule incorporates per diem Federal 

rates that provide Part A payment for all 

costs of services furnished to a 

beneficiary in a SNF during a Medicarecovered stay. 

a. Costs and Services Covered by the 

Federal Rates 

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 § 413.85. Under 

section 1888(e)(2) 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 all 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 26295–97)). 

b. Methodology Used for the Calculation 

of the Federal Rates 

The FY 2008 rates reflect an update 

using the full amount of the latest 

market basket index. The FY 2008 

market basket increase factor is 3.3 

percent. A complete description of the 

multi-step process initially appeared in 

the May 12, 1998 interim final rule (63 

FR 26252), as further revised in 

subsequent rules. We note that in 

accordance with section 101(c)(2) of the 

BBRA, the previous, temporary 

increases in the per diem adjusted 

payment rates for certain designated 

RUGs, as specified in section 101(a) of 

the BBRA and section 314 of the BIPA, 

are no longer in effect due to the 

implementation of case-mix refinements 

as of January 1, 2006. However, 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, remains in 

effect. 

We used the SNF market basket to 

adjust each per diem component of the 

Federal rates forward to reflect cost 

increases occurring between the 

midpoint of the Federal fiscal year 

beginning October 1, 2006, and ending 

September 30, 2007, and the midpoint 

of the Federal fiscal year beginning 

October 1, 2007, and ending September 

30, 2008, 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 2008 by 

a factor equal to the full market basket 

index percentage increase. We further 

adjusted 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 2008. 

TABLE 2.—FY 2008 UNADJUSTED FEDERAL RATE PER DIEM URBAN

Rate component Nursing-case-mix Therapy-case-mix Therapy-non-casemix Non-case-mix 

Per Diem Amount ............................................................ $146.62 $110.44 $14.54 $74.83 

TABLE 3.—FY 2008 UNADJUSTED FEDERAL RATE PER DIEM RURAL

Rate component Nursing-case-mix Therapy-case-mix Therapy-non-casemix Non-case-mix 

Per Diem Amount ............................................................ $140.08 $127.35 $15.54 $76.21 


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2. Case-Mix Refinements 

Under the BBA, each update of the 

SNF PPS payment rates must include 

the case-mix classification methodology 

applicable for the coming Federal fiscal 

year. As indicated previously in section 

I.F.1, the payment rates set forth in this 

final rule reflect the use of the refined 

RUG–53 classification system that we 

discussed in detail in the proposed and 

final rules for FY 2006 (70 FR 29070, 

May 19, 2005, and 70 FR 45026, August 

4, 2005). As noted in the FY 2006 final 

rule, we deferred RUG–53 

implementation from the beginning of 

FY 2006 (October 1, 2005) until January 

1, 2006, in order to allow sufficient time 

to prepare for and ease the transition to 

the refinements (70 FR 45034). 

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 (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. We proposed and 

are finalizing that practice for FY 2008, 

as we continue to believe that in the 

absence of SNF-specific wage data, 

using the hospital inpatient wage data 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. 

Comment: A few commenters 

requested that we develop a SNFspecific wage index and subsequently 

allow geographic reclassification. 

Response: The regulations that govern 

the SNF PPS currently do not provide 

a mechanism for allowing providers to 

seek geographic reclassification. 

Moreover, as we have explained on 

numerous occasions in the past (most 

recently, in the SNF PPS final rule for 

FY 2006, 70 FR 45040–45041, August 4, 

2005), while section 315 of the BIPA 

does authorize us to establish such a 

reclassification methodology under the 

SNF PPS, it additionally stipulates that 

such reclassification cannot be 

implemented until we have collected 

the data necessary to establish a SNFspecific wage index. This, in turn, has 

proven not to be feasible 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’’ (70 FR 45041). We 

continue to believe that these factors 

make it unlikely for such an approach 

to yield meaningful improvements in 

our ability to determine facility 

payments, or to justify the significant 

increase in administrative resources as 

well as burden on providers that this 

type of data collection would involve. 

We plan to monitor current research 

efforts on wage index issues 

nonetheless. Section 106(b)(1)(A) of the 

Medicare Improvements and Extension 

Act of 2006 (MIEA, Pub. L. 109–432) 

requires MedPAC to submit a report to 

the Congress on the wage index not later 

than June 30, 2007. MIEA requires the 

report to include any alternatives the 

Commission recommends to the method 

to compute the wage index. MedPAC 

discusses this issue in its Report to the 

Congress entitled ‘‘Promoting Greater 

Efficiency in Medicare’’ (June 2007), 

which is available online at http:// 

www.medpac.gov/documents/ 

Jun07_EntireReport.pdf. The Secretary 

is required to consider MedPAC’s 

recommendations and nine specific 

aspects of the wage index as part of 

making one or more proposals in the 

Hospital Inpatient PPS (IPPS) proposed 

rule for FY 2009. 

Comment: One commenter suggested 

that CMS provide an adjustment to 

certain States due to the impact of the 

new Federal minimum wage on the 

wage index. 

Response: On May 25, 2007, the 

President signed the U.S. Troop 

Readiness, Veterans’ Care, Katrina 

Recovery, and Iraq Accountability 

Appropriations Act, 2007 (Pub. L. 110–

28) that, among other things, amended 

the Fair Labor Standards Act (FLSA, 

Pub. L. 75–718) to increase the Federal 

minimum wage in three steps: to $5.85 

per hour effective July 24, 2007; to $6.55 

per hour effective July 24, 2008; and to 

$7.25 per hour effective July 24, 2009. 

Wage data reflecting the new Federal 

minimum wage will not be available for 

the FY 2008 SNF PPS. We plan to 

monitor current research efforts on all 

wage index issues, including the MIEArequired MedPAC report and the IPPS 

proposed rule for FY 2009. 

In this final rule, we apply the wage 

index adjustment to the labor-related 

portion of the Federal rate, which is 

70.152 percent of the total rate. This 

percentage reflects the labor-related 

relative importance for FY 2008, using 

the revised and rebased FY 2004-based 

market basket. The labor-related relative 

importance for FY 2007 was 75.839, 

using the FY 1997-based market basket, 

as shown in Table 13. 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 

2008. 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, 

the relative importance figure more 

closely reflects the cost share weights 

for FY 2008 than the base year weights 

from the SNF market basket. 

We calculate the labor-related relative 

importance for FY 2008 in four steps. 

First, we compute the FY 2008 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 

2008 price index level for that cost 

category by the total market basket price 

index level. Third, we determine the FY 

2008 relative importance for each cost 

category by multiplying this ratio by the 

base year (FY 1997) weight. Finally, we 

add the FY 2008 relative importance for 

each of the labor-related cost categories 

(wages and salaries, employee benefits, 

nonmedical professional fees, laborintensive services, and a portion of 

capital-related expenses) to produce the 

FY 2008 labor-related relative 

importance. Tables 6 and 7 show the 

Federal rates by labor-related and nonlabor-related components. 

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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 

less than would otherwise be made in 

the absence of the wage adjustment. For 

FY 2008 (Federal rates effective October 

1, 2007), we apply the most recent wage 

index using the hospital inpatient wage 

data, and also 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 factor 

equal to the ratio of the volume 

weighted mean wage adjustment factor 

(using the wage index from the previous 

year) to the volume weighted mean 

wage adjustment factor, using the wage 

index for the FY beginning October 1, 

2007. We use the same volume weights 

in both the numerator and denominator, 

and derive them from the 1997 

Medicare Provider Analysis and Review 

File (MEDPAR) data. 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. The 

budget neutrality factor for this year is 

0.9993. The wage index applicable to 

FY 2008 appears in Tables 8 and 9 of 

this final rule, which are attached as an 

addendum. 

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.html, 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. 

We clarified that 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 are available 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, 

August 4, 2005), subsequent to the 

expiration of this 1-year transition on 

September 30, 2006, we use the full 

CBSA-based wage index values, as 

presented in Tables 8 and 9 of this final 

rule. 

When adopting OMB’s new labor 

market designations, we identified some 

geographic areas where there were no 

hospitals and, thus, no hospital wage 

index data on which to base the 

calculation of the SNF PPS wage index 

(70 FR 29095, May 19, 2005). As in the 

SNF PPS final rule for FY 2006 (70 FR 

45041) and in the SNF PPS update 

notice for FY 2007 (71 FR 43170, July 

31, 2006), we proposed to address two 

situations concerning the wage index in 

the FY 2008 proposed rule. 

First, we proposed a minor change in 

the 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 for the rural area, 

consistent with the policy adopted in 

the CY 2007 Home Health final rule. We 

note that Massachusetts is the only State 

that this change would affect; we did 

not propose to apply this methodology 

to rural Puerto Rico due to the distinct 

economic circumstances that exist there, 

but instead proposed to continue using 

the most recent wage index (0.4047) 

previously available for that area. 

Comment: One commenter supported 

our proposal to use the average wage 

index from all contiguous CBSAs as a 

reasonable proxy for rural 

Massachusetts. 

Response: We agree that the use of the 

average wage index from all contiguous 

CBSAs is a reasonable proxy for rural 

Massachusetts, which is a rural 

geographic area that does not have 

hospitals and, therefore, lacks hospital 

wage data on which to base an area 

wage adjustment for use in the SNF 

PPS. We believe it is appropriate at this 

point to update our methodology. By 

using the average wage index from all 

contiguous CBSAs as a reasonable proxy 

for those rural areas without hospital 

wage data, we are able to meet our goals 

of using pre-floor, pre-reclassified 

hospital wage data that is easy to 

evaluate, updateable from year-to-year, 

and uses the most local data available. 

Therefore, we are adopting our 

proposed policy of using the average 

wage index from all contiguous CBSAs 

as a reasonable proxy for rural 

geographic areas that do not have 

hospitals and, therefore, lack hospital 

wage data on which to base an area 

wage adjustment. We note that, at this 

time, Massachusetts is the only State 

that this change would affect; we are not 

applying this methodology to rural 

Puerto Rico due to the distinct 

economic circumstances that exist there. 

The second situation involved the 

urban CBSA (25980) Hinesville-Fort 

Stewart, GA. Again, under CBSA 

designations there are no urban 

hospitals within that CBSA. For FY 

2006 and FY 2007, we used the average 

wage indexes of all of the urban areas 

within the State to serve as a reasonable 

proxy for the urban area without 

specific hospital wage index data in 

determining the SNF PPS wage index 

for that urban CBSA. In the FY 2008 

proposed rule, we proposed to continue 

this approach for urban areas without 

specific hospital wage index data. 

Therefore, we would calculate the wage 

index for urban CBSA (25980) 

Hinesville-Fort Stewart, GA as the 

average wage index of all urban areas in 

Georgia. We received no comments on 

this particular aspect of the proposed 

rule, and we will continue to use the 

approach that we adopted in FYs 2006 

and 2007. 

We are finalizing the wage index and 

associated policies as proposed for the 

SNF PPS for FY 2008. In addition, we 

note that we plan to evaluate any 

policies adopted in the FY 2008 IPPS 

final rule that affect the wage index, 

including how we treat certain New 

England hospitals under § 601(g) of the 

Social Security Amendments of 1983 

(Pub. L. 98–21). 

4. Updates to the Federal Rates 

In accordance with section 

1888(e)(4)(E) of the Act as amended by 

section 311 of the BIPA, the payment 

rates in this final rule reflect an update 

equal to the full SNF market basket, 

estimated at 3.3 percentage points. We 

will continue to disseminate the rates, 

wage index, and case-mix classification 

methodology through the Federal 

Register before the August 1 that 

precedes the start of each succeeding 

fiscal year. 

5. Relationship of RUG–III Classification 

System to Existing Skilled Nursing 

Facility Level-of-Care Criteria 

As discussed in § 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 § 409.30. This 

designation reflects an administrative 

presumption under the refined RUG–53 


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classification system that beneficiaries 

who are correctly assigned to one of the 

upper 35 of the RUG–53 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 18 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 35 groups during the 

immediate post-hospital period require 

a covered level of care, which would be 

significantly less likely for those 

beneficiaries assigned to one of the 

lower 18 groups. 

In this final rule, we continue the 

designation of the upper 35 groups for 

purposes of this administrative 

presumption, consisting of the following 

RUG–53 classifications: All groups 

within the Rehabilitation plus Extensive 

Services category; all groups within the 

Ultra High Rehabilitation category; all 

groups within the Very High 

Rehabilitation category; all groups 

within the High Rehabilitation category; 

all groups within the Medium 

Rehabilitation category; all groups 

within the Low Rehabilitation category; 

all groups within the Extensive Services 

category; all groups within the Special 

Care category; and, all groups within the 

Clinically Complex category. 

6. Example of Computation of Adjusted 

PPS Rates and SNF Payment 

Using the hypothetical example of 

SNF XYZ described in Table 10, 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 total PPS payment 

would equal $29,758. The Labor and 

Non-labor columns are derived from 

Table 6. 

TABLE 10.—RUG–53 SNF XYZ: LOCATED IN CEDAR RAPIDS, IA (URBAN CBSA 16300) WAGE INDEX: 0.8852 

RUG Group Labor Wage 

index 

Adj. 

Labor 

NonLabor Adj. Rate Percent 

Adj 

Medicare 

Days Payment 

RVX .............................................................. $320.13 0.8852 $283.38 $136.21 $419.59 $419.59 14 $5,874.00 

RLX .............................................................. 220.55 0.8852 195.23 93.84 289.07 289.07 30 8,672.00 

RHA .............................................................. 222.00 0.8852 196.51 94.46 290.97 290.97 16 4,656.00 

CC2 .............................................................. 188.18 0.8852 166.58 80.07 246.65 562.36* 10 5,624.00 

IA2 ................................................................ 125.44 0.8852 111.04 53.37 164.41 164.41 30 4,932.00 

100 29,758.00 

*Reflects a 128 percent adjustment from section 511 of the MMA. 

C. The Skilled Nursing Facility Market 

Basket Index 

Section 1888(e)(5)(A) of the Act 

requires the establishment of 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. 

We are incorporating into this final rule 

updated projections based on the latest 

available projections at the time of 

publication. Accordingly, we have 

developed a 2004-based SNF market 

basket index that encompasses the most 

commonly used cost categories for SNF 

routine services, ancillary services, and 

capital-related expenses. A detailed 

discussion of our proposal to revise and 

rebase the SNF market basket appears in 

section IV. of the FY 2008 proposed rule 

(72 FR 25540–25554, May 4, 2007), and 

our response to the comments that we 

received on this proposal appears in 

section III.D of this final rule. 

Comment: Several commenters asked 

us to develop an adjustment to the SNF 

PPS that would prospectively adjust for 

forthcoming major program and policy 

changes, such as the increase in the 

Federal minimum wage, that affect 

Medicare reimbursement to affected 

providers. They state that the market 

basket update factor for the SNF PPS 

will not reflect the increase in costs 

associated with the Federally-mandated 

minimum wage increase. 

Response: We do not agree with the 

commenter’s suggestion to make 

additional adjustments to the market 

basket update factor to account for the 

increase in the minimum wage. The 

update factor is based on the Global 

Insight, Inc. (GII) second quarter 2007 

(2007q2) forecast with historical data 

through the first quarter of 2007 

(2007q1) for this final rule. GII is a 

nationally recognized economic and 

financial forecasting firm that contracts 

with CMS to forecast the components of 

CMS’s market baskets. Accordingly, the 

SNF market basket forecast already 

reflects inflationary pressures, including 

those associated with increases in the 

minimum wage. 

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, as 

described in the previous section, from 

the average of the prior fiscal year to the 

average of the current fiscal year. 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 2008. We use 

the Global Insight, Inc. (GII, formerly 

DRI–WEFA), 1st quarter 2007 (2007q2) 

forecasted percentage increase in the FY 

2004-based SNF market basket index for 

routine, ancillary, and capital-related 

expenses, described in the previous 

section, to compute the update factor. 

Finally, as discussed previously 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 threephase transition period from facilityspecific 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 46067), the 

regulations at 42 CFR 413.337(d)(2) 

currently 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. Subsequent 

adjustments in succeeding FYs take into 

account the forecast error from the most 

recently available fiscal year for which 

there is final data, and apply whenever 

the difference between the forecasted 

and actual change in the market basket 

exceeds a 0.25 percentage point 

threshold. 


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As discussed in section I.F.2. of the 

FY 2008 proposed rule (72 FR 25530), 

in order to help distinguish between the 

significant forecast errors that gave rise 

to this policy initially and the far more 

typical minor variances that have 

consistently occurred in each of the 

succeeding years (which we view as an 

inherent aspect of this type of statistical 

measurement), we proposed to raise the 

0.25 percentage point threshold for 

forecast error adjustments under the 

SNF PPS to 0.5 percentage point, 

effective with FY 2008. We invited 

comments on various aspects of this 

issue, including the proposed effective 

date. As also discussed in that section, 

the proposed payment rates for FY 2008 

did not include a forecast error 

adjustment, as the difference between 

the estimated and actual amounts of 

increase in the market basket index for 

FY 2006 (the most recently available 

fiscal year for which there is final data) 

does not exceed the proposed 0.5 

percentage point threshold. 

Comment: Several commenters 

expressed concern about the proposal to 

raise the forecast error threshold 

percentage from 0.25 percentage point 

to 0.5 percentage point. Some 

commenters suggested maintaining the 

0.25 percentage point threshold. Some 

commenters stated that we should delay 

the implementation of a higher 

threshold. Other commenters 

maintained that every forecast error, 

however small, should be corrected, and 

that the effect of using any threshold 

would build over time, resulting in 

increasing inaccuracies in the rates. One 

commenter added that the existence of 

any minimum threshold for triggering 

the adjustment forces SNFs to face 

inflation with inadequate payment 

levels. Another commenter did not 

support making adjustments on an 

automatic basis—particularly when 

coupled with automatic market basket 

increases—but agreed that such 

adjustments, when made, should focus 

on correcting major errors. 

Response: For FY 2004, CMS applied 

a one-time, cumulative forecast error 

correction of 3.26 percent (68 FR 

46036). Since that time, the forecast 

errors have been relatively small and 

clustered near zero. We believe the 

forecast error correction should be 

applied only when the forecast error in 

any given year reflects a percentage 

such that the SNF PPS base payment 

rate does not adequately reflect the 

historical price changes faced by SNFs. 

We believe that a threshold of 0.5 

percent represents an appropriate 

amount to draw a distinction between 

the kind of exceptional, unanticipated 

major increases in wages and benefits 

that initially gave rise to this policy, and 

the more typical minor variances that 

are inherent in statistical measurements. 

The 0.5 percentage point threshold for 

triggering a forecast error adjustment 

represents an amount that is sufficiently 

high to screen out these expected minor 

variances in a projected statistical 

methodology, while at the same time 

appropriately serving to trigger an 

adjustment in those instances where it 

is clear that the historical price changes 

are not being adequately reflected, as 

was the case with the initial, cumulative 

3.26 percent adjustment. We believe the 

existing 0.25 percentage point threshold 

is too low for this purpose, as values 

that only slightly exceed it may still 

inappropriately capture the minor 

variations that are inherently associated 

with measuring statistics. Moreover, our 

experience suggests that the forecast 

errors are relatively small, and generally 

clustered around zero. 

MedPAC analysis suggests that 

freestanding SNFs (which represent 

more than 80 percent of all SNFs) have 

received Medicare payments that exceed 

costs by 10.8 percent or more since 

2001, and margins are projected to be 11 

percent in 2007. In the March 2007 

MedPAC report, MedPAC stated that 

SNF payments appear more than 

adequate. 

We believe that raising the threshold 

from 0.25 percentage point to 0.5 

percentage point effective for the FY 

2008 SNF PPS and subsequent years 

furthers our overarching Medicare 

integrity objective of paying the 

appropriate amount at the right time. By 

delaying the implementation, we would 

continue to pay for minor variations 

which would further delay accurate 

payment. 

Moreover, 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. We note that the 

objections to the proposed higher 

threshold primarily concerned its 

projected effect specifically on payment 

in the coming year rather than the 

appropriate role of a forecast error 

adjustment in general. However, we 

believe that delays in implementing 

changes are usually justified by 

establishing that immediate 

implementation would result in severe 

short-term hardship—for example, due 

to inadequate lead time to prepare for an 

administratively complex change. We 

note that we delayed the effective date 

of case-mix refinements from October 1, 

2005, until January 1, 2006 for precisely 

that reason (see the FY 2006 final rule 

at 70 FR 45034, August 4, 2005); 

however, no such conditions apply with 

regard to the revised forecast error 

adjustment threshold. Further, we 

believe that the industry’s continued 

strong profit margins (in the 

neighborhood of 10 percent) should 

help to dampen any potential short-term 

financial effects of immediate 

implementation. Therefore, we will use 

the 0.5 percentage point threshold to 

determine whether a forecast error 

adjustment is appropriate, effective for 

FY 2008 and subsequent years. We note, 

as we did in our original proposal of the 

forecast error adjustment methodology 

(68 FR 34769), that this threshold is 

applied uniformly: Not only in those 

instances where the forecasted percent 

change is lower than the actual percent 

change (as has been the case up to this 

point under the SNF PPS), but also in 

those instances where the forecasted 

percent change is higher than the actual 

percent change. We [further] note that 

the latter circumstance would result in 

SNFs receiving lower than expected 

payments. 

3. Federal Rate Update Factor 

Section 1888(e)(4)(E)(ii)(IV) of the Act 

requires that the update factor used to 

establish the FY 2008 Federal rates be 

at a level equal to the full 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, 2006 through 

September 30, 2007 to the average 

market basket level for the period of 

October 1, 2007 through September 30, 

2008. Using this process, the market 

basket update factor for FY 2008 SNF 

Federal rates is 3.3 percent. We use this 

update factor to compute the Federal 

portion of the SNF PPS rate shown in 

Tables 2 and 3. 

D. Revising and Rebasing the Skilled 

Nursing Facility Market Basket Index 

As discussed in greater detail in 

section IV. of the FY 2008 proposed rule 

(72 FR 25541–25555), we proposed to 

make a number of changes in 

connection with the SNF market basket. 

We proposed to update the base year 

from FY 1997 to FY 2004, and to update 

the market basket inputs as well. In 

addition, we proposed using Medicareallowable total cost data to derive the 

market basket cost weights. This 

represented a change from the existing 

policy of using total facility cost data. 

We also proposed to create two new cost 

categories: Professional liability 

insurance and postage. 


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Comment: One commenter supported 

the rebasing and revising of the SNF 

market basket, but suggested that it 

should occur more frequently. 

Response: Typically, we rebase and 

revise the market basket about every five 

years, as we have found that the cost 

weights do not change substantially 

between one year and the next. 

However, we will continue to monitor 

the appropriateness of the SNF market 

basket and rebase more frequently if 

necessary. 

Comment: Several commenters 

suggested that we treat the market 

basket methodology in this year’s final 

rule as an interim methodology. They 

asserted that a full 60 days to analyze 

the data and prepare comments was not 

available due to the CMS data set 

problems. Similarly, they argued that 

CMS would have only a short time to 

analyze and react to the comments. 

They added that viewing the proposed 

market basket methodology as an 

interim methodology would give CMS 

and other stakeholders the opportunity 

over the next year to further refine and 

improve the market basket component 

methodologies and the wage price 

proxies for the SNF setting without 

locking in the methodology for several 

years. Further, they proposed that the 

nursing home industry and CMS should 

agree to revisit the cost reports to 

improve their utility for a future 

revision of the market basket. 

Response: We do not agree with the 

commenters who asserted that a full 60 

days was not available to analyze the 

proposed market basket methodology 

and that, therefore, we should publish 

an interim final rule rather than a final 

rule. In fact, the FY 2008 proposed rule 

included a detailed discussion of our 

proposal, and the ‘‘CMS data set 

problems’’ that these commenters cite 

pertain solely to the SNF Medicare cost 

report (MCR) public use files that we 

posted on the CMS Web site. These 

public use files, in turn, are not an 

integral part of the proposal itself, but 

merely represent an additional package 

of customized technical information 

that we provide in an effort to 

accommodate the industry. We agree 

that we should continually review the 

market basket methodologies, including 

alternative methodologies proposed by 

the various stakeholders. However, we 

believe that it is necessary to rebase the 

market basket to reflect the changes in 

the average SNF’s cost structure from 

1997 to 2004, as well as to revise the 

market basket to reflect more 

appropriate, industry-specific price 

proxies (such as the blended 

compensation and chemical price 

proxies). We believe our current 

Medicare-allowable methodology, now 

adjusted to include an estimate of 

Medicaid drug expenses (as explained 

in more detail below), represents the 

best available technical methodology at 

this time. However, we will continue to 

work with the industry stakeholders and 

consider their suggestions for 

improvements to further refine and 

revise our market basket methodology, 

as appropriate. We also welcome 

suggestions from the SNF community 

on how the SNF Medicare cost report 

forms can be improved to better capture 

data needed for the market basket 

rebasing and revising process. 

Comment: Several commenters stated 

that if CMS’s ‘‘total allowable cost’’

methodology is utilized, either nursing 

labor costs for the entire facility should 

be included in the computation for the 

nursing labor weight, or labor costs for 

the support service departments should 

only include the portion allocated to the 

SNF unit and ancillary cost centers 

(after step-down). 

Response: The labor costs for the 

support service departments (as 

reported in the general service cost 

centers, otherwise referred to as 

‘‘overhead cost centers’’) did reflect only 

the portion allocated to the SNF unit 

and ancillary cost centers (i.e., 

Medicare-allowable cost centers). 

Specifically, we calculated overhead 

salaries attributable to the non-Medicare 

allowable departments by multiplying 

the ratio of total overhead salaries to 

total facility salaries by total nonMedicare allowable salaries. The 

Medicare-allowable wages and salary 

cost weight prior to excluding these 

non-Medicare allowable overhead 

salaries was one percentage point 

higher. 

Comment: Several commenters 

requested that rather than using the 

proposed CMS total allowable Medicare 

cost methodology for the calculation of 

the pharmacy weight of the market 

basket, we should review, replicate, 

analyze, and adopt the commenter’s 

alternative Medicare-specific 

reimbursable pharmacy cost 

methodology. They noted that the 

proposed pharmaceutical methodology 

assumes that total pharmaceutical costs 

for the facility are captured by the cost 

reports, and claimed this is not accurate, 

because the vast majority of nursing 

facility patients consists of dualeligibles whose FY 2004 pharmaceutical 

costs were directly reimbursed by 

Medicaid. Nursing facilities did not 

submit Medicaid claims for these 

pharmaceuticals because such claims 

were submitted by the dispensing local 

pharmacies instead. 

Response: We acknowledge the 

commenters’ point that Medicaid drug 

expenses are not represented in the 

Medicare-allowable drug cost weight. 

Further, we note that with the exception 

of drug expenses, all of the other cost 

category weights reflect all payers, 

including Medicaid. This is because the 

MCR does not specifically break out 

Medicare expenses by cost category (i.e., 

salaries, benefits, contract labor), but 

rather, reports costs for all patients, 

regardless of payer. In view of this, we 

have adjusted drug expenses and total 

expenses to include an estimate of total 

Medicaid drug costs. (For purposes of 

recalculating the market basket weights, 

because we added Medicaid drug 

expenses—which are not reported in the 

MCR—into the drug costs, we then 

added those same Medicaid drug 

expenses into the market basket total 

costs.) We believe this is technically 

appropriate and achieves greater 

consistency, as all of the other cost 

weights already reflect Medicaid-related 

expenses. As a result of adjusting the 

market basket to include an estimate for 

Medicaid drug expenses, we have 

revised all of the cost weights in the 

proposed 2004-based SNF market 

basket. 

Our estimate of Medicaid drug 

expenses is based on the average 

Medicaid drug expense per day times 

the number of Medicare-allowable 

Medicaid days (as reported on the 

MCR). We examined two primary data 

sources to derive the average Medicaid 

drug expense per beneficiary per day: 

The Medicare Analytic Extract (MAX) 

data and the Medicare Current 

Beneficiary Survey (MCBS) data. The 

MAX data is a set of person-level data 

files on Medicaid eligibility, service 

utilization, and payments extracted 

from the Medicaid Statistical 

Information System (MSIS). The MCBS 

is a survey of a representative sample of 

the Medicare population that CMS 

conducts through a contract with 

Westat, Inc. 

To calculate the institutionalized 

Medicaid drug costs per beneficiary per 

day from the MAX data, we used a 

nationally-representative sample of 

records of Medicaid drug costs for 

nursing home residents for 2003 during 

their institutionalizations. We summed 

the records and then divided by the 

number of resident days to produce a 

cost per day estimate. We then 

extrapolated this result by the PPI for 

prescription drugs to obtain a 2004 

institutionalized Medicaid drug cost per 

beneficiary per day estimate of $13.65. 

We also calculated a communitybased Medicaid drug cost per 

beneficiary per day estimate from the 


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MCBS data. First, we took a communitybased Medicaid drug cost per capita 

estimate from 2002 (adjusted for underreporting as described in the Health 

Care Financing Review article 

‘‘Reporting of Drug Expenditures in the 

MCBS,’’ Volume 25, page 23) and 

converted it to a cost per day measure. 

We then adjusted the cost per day figure 

to add Medicaid drug rebates back into 

the estimate. Finally, we extrapolated 

this result by the PPI for prescription 

drugs to produce a 2004 communitybased Medicaid drug cost per 

beneficiary per day estimate of $9.41. As 

the MCBS does not capture drug 

expenditures for beneficiaries while 

they are institutionalized, we used the 

drug cost per beneficiary per day 

estimate generated from the MCBS 

($9.41) as a consistency check for the 

estimate that we derived from the MAX 

data. 

The adjusted pharmaceutical cost 

weight, representing drug expenditures 

for all patients (Medicare, Medicaid, 

and private payer), is 7.894 percent. 

This is more than twice as large as the 

proposed pharmaceutical cost weight of 

3.209 percent. The inclusion of 

Medicaid drugs into the 2004 market 

basket total costs has an impact on all 

of the cost weights and, therefore, the 

2004-based cost weights presented in 

Table 12 reflect all of the revised cost 

weights. We did not make any 

methodological changes to any of the 

individual cost category weights, except 

those made to the drug cost weight 

described above. 

As additional drug data becomes 

available (such as Medicare Part D drug 

data), we will analyze how this data 

may affect our estimates of Medicare 

and Medicaid drug costs for 

institutionalized dually-eligible 

Medicare and Medicaid beneficiaries 

and how these estimates may affect the 

weights for the SNF market basket. 

Comment: Several commenters 

requested that we adopt a Medicarespecific market basket methodology. 

This methodology relies on the ratio of 

Medicare to total days and cost-tocharge ratios to derive the Medicarespecific cost weights. 

Response: Ideally, we would prefer to 

construct a market basket that is specific 

to the treatment of Medicare 

beneficiaries. We are uncertain whether 

the use of cost-to-charge ratios to 

develop Medicare-specific cost category 

weights is a technically-viable option at 

this time. We will continue to research 

and examine the feasibility and 

appropriateness of using cost-to-charge 

ratios to develop a Medicare-specific 

market basket. We believe our proposed 

Medicare-allowable methodology 

reflects the cost structures of SNFs 

serving Medicare beneficiaries. 

Comment: Several commenters 

recommended that we reexamine and 

reconsider the alternative CMS cost-tocharge ratio-based methodology for the 

calculation of the pharmacy component 

of the market basket. We had cited the 

inconsistencies between the cost-tocharge ratios of freestanding and 

hospital-based SNFs as the reason for 

not adopting this alternative method. 

The commenters contended that the 

primary reason for this difference is 

related to the allocation of overhead. 

Response: As stated in the proposed 

rule, we explored alternative methods 

for calculating the SNF market basket 

drug cost weight. Specifically, we 

researched the viability of calculating a 

Medicare-specific drug cost weight 

based on Medicare drug costs as a 

percent of Medicare total costs. In the 

proposed rule, we inadvertently 

misstated the explanation of the 

methodology used to calculate Medicare 

drugs. The non-salary, non-overhead 

costs from the Drugs Charged to Patients 

cost center was not multiplied by the 

cost-to-charge ratio as stated in the 

proposed rule. Rather, these latter costs 

were multiplied by the ratio of Medicare 

charges to total charges. Following 

publication of the proposed regulation, 

we published the detailed formula on 

the CMS Web site, at http:// 

www.cms.hhs.gov/SNFPPS/Downloads/ 

IndustryData.zip. We continue to 

believe our proposed Medicareallowable methodology adjusted to 

include an estimate of Medicaid drugs 

is the best available technical 

methodology to develop the 

pharmaceutical cost weight. As stated 

above, we are reluctant to rely on costto-charge ratios to develop cost weights. 

This is especially true for the 

pharmaceutical cost weight, given the 

difference between the freestanding and 

hospital-based facilities’ overhead costto-charge ratios for the Drugs Charged to 

Patient Cost center. It is possible that 

the difference between the hospitalbased and freestanding SNF cost-tocharge ratios is the result of overhead 

allocation and, therefore, we plan to 

continue to examine this area. 

Comment: Several commenters 

suggested that we continue efforts to 

identify and develop more appropriate 

and accurate price indexes for tracking 

price changes in the SNF setting, 

particularly as they relate to SNF wages 

and salaries, benefits, professional 

liability insurance, and capital. 

Response: We agree with the 

commenters’ suggestion and plan to 

continually monitor the appropriateness 

of the price proxies used in all of the 

CMS market baskets, including the one 

for SNFs. 

Comment: One commenter 

recommended that we revise our 

approach to the capital weight. 

Response: Although the commenter 

was not specific about which capital 

cost-weight methodology we should 

revise, we assume based on other 

comments from the industry that the 

commenter was referring to the interest 

cost weight methodology and the use of 

Worksheet A, line 53 of the SNF 

Medicare cost report (MCR). The MCR 

instructions do not specify which 

interest expenses are reported in that 

cost center. Although some of these 

interest expenses could represent noncapital-related expenses, we believe that 

the majority of the interest expenses 

reported in this line are capital-related. 

We are unable to find any alternative 

data sources for capital-related interest 

expenses. 

We did research the feasibility of 

developing a capital-related interest cost 

weight based on the depreciation cost 

weight (which comes directly from the 

MCR). To develop the alternative 

interest cost weight, we first determined 

separate interest schedules (that is, the 

interest expenses for each year over the 

useful life of an asset) for fixed and 

movable equipment. We constructed 

these interest schedules (which 

included both not-for-profit and forprofit debt) by multiplying the weighted 

averages of the average yield for 

Moody’s AAA Corporate Bonds and the 

average yield for Municipal Bonds from 

the Bond Buyer Index by a fixed asset 

amount. We then calculated separate 

accumulated depreciation schedules for 

fixed and movable equipment. The 

accumulated depreciation schedules 

reflected the different useful lives of 

fixed versus movable equipment (22 and 

9 years) and a double-declining balance 

method, a generally accepted 

depreciation practice. For each year, for 

both fixed equipment and moveable 

equipment, we calculated an interest-todepreciation expense ratio. We then 

averaged these ratios over the useful life 

period. Next, we weighted the average 

interest-to-depreciation ratios for fixed 

and movable equipment by the fixed 

and movable equipment split (derived 

from the MCR), to create a final 

weighted ratio. We then multiplied this 

ratio by the depreciation cost weight to 

produce an interest cost weight. The 

result was a capital-related interest cost 

weight of 2.88, less than 0.3 percentage 

points different from our proposed 

methodology of 2.59. We note that the 

capital-related interest cost weight 

presented in Table 13 of the FY 2008 

SNF proposed rule (72 FR 25544) 


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reflected interest expenses with 

allocated leasing expenses. 

We also determined an average 

interest-to-depreciation expense ratio 

using depreciation expenses based on a 

straight-line depreciation method, also a 

generally accepted depreciation 

practice. This resulted in an interest 

cost weight of 3.51, which is almost one 

percentage point higher than our 

proposed interest cost weight of 2.59. 

Given that our current methodology 

uses the MCR, our lack of other data 

sources, and the variability of our 

alternative methodology results, we 

believe our current methodology is the 

most technically appropriate 

methodology for calculating the capitalrelated interest cost weight. Therefore, 

we are adopting our proposed 

methodology to derive the capitalrelated interest cost weight. 

As stated in the proposed rule, we 

researched the feasibility and 

appropriateness of using the ratio of 

total ancillary costs (that is, therapy and 

non-therapy ancillary costs) to routine 

costs to develop the movable equipment 

vintage weights (72 FR 25546). We 

found that incorporating therapy costs 

was somewhat problematic because of 

the dramatic decrease in therapy 

expenses between 1998 and 1999. 

Therapy ancillary costs decreased 

approximately 40 percent from 1998 to 

1999—a likely impact of 

implementation of the SNF PPS. 

However, we still believe that the 

vintage weights should reflect therapy 

equipment purchases and, therefore, we 

are going to adopt the use of this ratio 

of total ancillary costs to total routine 

costs as the proxy for changes in 

intensity of SNF services that would 

cause SNFs to purchase movable 

equipment. We believe the drop in 

therapy expenses from 1998 to 1999 

does not necessarily indicate a drop in 

movable equipment purchases, but 

rather, reflects other behavioral changes 

as a result of the then-new Medicare 

policies enacted in the BBA. As a result, 

we are going to begin incorporating the 

data on a best percent change-basis 

beginning with 2000 data. (The best 

percent change-basis method involves 

several steps. First, we apply the 

percent change of the ratio of total 

ancillary to routine costs for 2000 to the 

ratio of non-therapy ancillary to routine 

costs for 1999. Then, we apply the 2001 

percent change of the ratio of total 

ancillary costs to routine costs to the 

2000 ratio produced in Step 1. We then 

repeat this latter step for the 2002 

through 2004 time period.) Again, we 

believe it is necessary to incorporate 

therapy costs into the vintage weight 

methodology in order to reflect therapy 

equipment purchases. The revision to 

the movable equipment vintage weights 

in the nine-year useful life period due 

to the incorporation of therapy costs 

does not exceed one-hundredth of a 

percentage point. Below is a table 

presenting the vintage weights for 2004- 

based SNF PPS capital-related price 

proxies, including the revised 

moveable-equipment vintage weights. 

TABLE 11.—VINTAGE WEIGHTS FOR

2004-BASED SNF PPS CAPITAL-RELATED PRICE PROXIES

Year 

Building 

and fixed 

equipment 

Movable 

equipment Interest 

1 ............ 0 .078 0 .136 0 .039 

2 ............ 0 .073 0 .155 0 .039 

3 ............ 0 .071 0 .134 0 .04 

4 ............ 0 .066 0 .080 0 .04 

5 ............ 0 .06 0 .077 0 .042 

6 ............ 0 .05 0 .092 0 .043 

7 ............ 0 .046 0 .102 0 .045 

8 ............ 0 .042 0 .105 0 .047 

9 ............ 0 .037 0 .120 0 .049 

10 .......... 0 .034 ................ 0 .052 

11 .......... 0 .035 ................ 0 .055 

12 .......... 0 .037 ................ 0 .057 

13 .......... 0 .037 ................ 0 .058 

14 .......... 0 .036 ................ 0 .057 

15 .......... 0 .035 ................ 0 .054 

16 .......... 0 .035 ................ 0 .054 

17 .......... 0 .035 ................ 0 .055 

18 .......... 0 .036 ................ 0 .056 

19 .......... 0 .037 ................ 0 .057 

20 .......... 0 .039 ................ 0 .059 

21 .......... 0 .04 ................ ................

TABLE 11.—VINTAGE WEIGHTS FOR

2004-BASED SNF PPS CAPITAL-RELATED PRICE PROXIES—Continued 

Year 

Building 

and fixed 

equipment 

Movable 

equipment Interest 

22 .......... 0 .042 ................ ................

Total *1 .000 *1 .000 *1 .000 

Sources: 2004 SNF Medicare Cost Reports; 

CMS. * Note: Totals may not sum to 1.000 due to 

rounding. 

Comment: One commenter suggested 

that we reconsider our policy of using 

only data from freestanding SNFs to 

calculate the SNF market basket. The 

commenter recommended that we apply 

a percentage, proportionate to hospitalbased SNFs’ percentage of total cost, of 

the actual costs experienced by hospitalbased SNFs. 

Response: While the commenter was 

not more specific in what was being 

sought, we believe the commenter is 

suggesting that CMS develop separate 

cost weights for hospital-based and 

freestanding SNFs, and then combine 

them together (based upon hospitalbased SNFs’ and freestanding SNFs’

share of total SNF costs) to create a 

unified set of SNF cost weights. 

As stated in the proposed rule (72 FR 

25542, May 4, 2007), we maintain our 

policy of using data from freestanding 

SNFs because freestanding SNF data 

reflect the actual cost structure faced by 

the SNF itself. In contrast, expense data 

for a hospital-based SNF reflect the 

allocation of overhead over the entire 

institution. Due to this method of 

allocation, total expenses will be 

correct, but the individual components’

expenses may be skewed. If data from 

hospital-based SNFs were included, the 

resultant cost structure might be 

unrepresentative of the costs that we 

believe a typical SNF experiences. 

Table 12 presents the final 2004-based 

SNF Market Basket Index. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 


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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 13 summarizes the updated laborrelated share for FY 2008, which is 

based on the final rebased and revised 

SNF market basket. 

Note: In Table 17 of the proposed rule (72 

FR 25549), the cost weights for the for-profit 

and not-for-profit interest were inadvertently 

mislabeled. The for-profit interest cost weight 

was displayed as the not-for-profit cost 

weight. We have corrected this in the final 

rule, and the 2004-based SNF market basket 

update factor reflects this revision. 

E. Consolidated Billing 

As established by section 4432(b) of 

the BBA, the consolidated billing 

requirement places with the SNF the 

Medicare billing responsibility for 

virtually all of the services that the 

SNF’s residents receive, except for a 

small number of services that the statute 

specifically identifies as being excluded 

from this provision. Section 103 of the 

BBRA amended this provision by 

further excluding a number of high-cost, 

low probability services (identified by 

Healthcare Common Procedure Coding 

System (HCPCS) codes) within several 

broader categories that otherwise 

remained subject to the provision. 

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 does not 

cover. (However, physical and 

occupational therapy, and speechlanguage pathology services remain 

subject to consolidated billing, 

regardless of whether the resident who 

receives these services is in a covered 

Part A stay.) In addition, section 313 of 

the BIPA specified that consolidated 

billing applies only to services 

furnished to those individuals residing 

in an institution (or portion of an 

institution) that is actually certified by 

Medicare as a SNF. Further, as noted in 

section I.E. of this final rule, section 410 

of the MMA revised the SNF 

consolidated billing requirement as it 

relates to certain services furnished on 

or after January 1, 2005, by rural health 

clinics (RHCs) and Federally qualified 

health centers (FQHCs). To date, the Congress has enacted no 

further legislation affecting the 

consolidated billing provision. 

However, as we noted in the April 10, 

2000 proposed rule (65 FR 19232), 

section 1888(e)(2)(A)(iii) of the Act, as 

added by 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 

gives the Secretary the authority to 

designate additional, individual services 

for exclusion within each of the 

specified service categories.’’ In the FY 

2001 proposed rule, we also noted that 

the BBRA Conference Report (H.R. Conf. 

Rep. No. 106–479 at 854) 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 * * *.’’ By contrast, we noted that 

the Congress declined to designate for 

exclusion any of the remaining services 

within those four categories (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 July 

31, 2000 final rule (65 FR 46790), any 

additional service codes that we might 

designate for exclusion under our 

discretionary authority must meet the 

same criteria that the Congress 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. 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 view of the amount of time 

that has elapsed since we last invited 

comments on this issue, we invited 

public comments in the FY 2008 SNF 

PPS proposed rule on codes in any of 

these four service categories which 

represent recent medical advances that 

might meet the BBRA criteria for 

exclusion from SNF consolidated billing 

(72 FR 25556). 

Comment: In response to our 

invitation in the proposed rule, some 


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commenters submitted lists of 

additional chemotherapy codes that 

they recommended for exclusion from 

consolidated billing. 

Response: We note that the law (at 

section 1888(e)(2)(A)(iii)(II) of the Act) 

describes the chemotherapy code ranges 

that the BBRA identified for exclusion 

in terms of the version of the HCPCS 

codes that was in existence ‘‘as of July 

1, 1999.’’ In the SNF PPS final rule for 

FY 2006 (70 FR 45048, August 4, 2005), 

we reiterated our belief that the 

authority granted by the BBRA to 

identify additional codes for exclusion 

within this category was ‘‘* * * 

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)’’

(emphasis added). Accordingly, we 

view this discretionary authority as 

applying only to codes that were created 

subsequent to that point, and not to 

those codes that were in existence as of 

July 1, 1999. A review of the particular 

chemotherapy codes that commenters 

submitted in response to the proposed 

rule’s invitation revealed that one of the 

codes, J9180 (Epirubicin hydrochloride 

(HCL), 50 mg), has been discontinued as 

of December 31, 2003 (we note that 

J9178 (Epirubicin HCL, 2 mg), a 

currently-existing code for the same 

medication in a different quantity, is in 

fact excluded). Another code that 

commenters submitted, J9219 

(Leuprolide acetate implant, 65 mg), is 

a hormonal agent which is clinically 

analogous to other existing codes that 

have not been designated for exclusion; 

moreover, as this drug is used in 

treating the commonly-occurring 

condition of prostate cancer, we believe 

that it is unlikely to meet the criterion 

of ‘‘low probability’’ specified in the 

BBRA. Moreover, the rest of the codes 

that commenters submitted were 

themselves already in existence as of 

July 1, 1999, but did not fall within the 

specific code ranges statutorily 

designated for exclusion in the BBRA. 

As the statute does not specifically 

exclude these already-existing codes, we 

are not adding them to the exclusion 

list. 

Comment: Although the FY 2008 SNF 

PPS proposed rule specifically invited 

comments on possible exclusions within 

the particular service categories 

identified in the BBRA legislation, a 

number of commenters took this 

opportunity to reiterate concerns about 

other aspects of consolidated billing. 

For example, some commenters 

reiterated past suggestions that we 

unbundle additional service categories, 

such as specialized wound care 

procedures (including hyperbaric 

oxygen therapy) and ambulance 

services. 

Response: As we have consistently 

stated (see, for example, the SNF PPS 

final rule for FY 2006, at 70 FR 45049 

(August 4, 2005)), the BBRA authorizes 

us to identify additional services for 

exclusion only within those particular 

service categories—chemotherapy and 

its administration; radioisotope services; 

and, customized prosthetic devices—

that it has designated for this purpose, 

and does not give us the authority to 

create additional categories of excluded 

services beyond those specified in the 

law. Accordingly, as the particular 

services that these commenters 

recommended for exclusion do not fall 

within one of the specific service 

categories designated for this purpose in 

the statute itself, these services remain 

subject to consolidated billing. 

Comment: Other commenters took 

this opportunity to revisit the existing 

set of administrative exclusions for 

certain high-intensity outpatient 

hospital services under the regulations 

in 42 CFR 411.15(p)(3)(iii), and once 

again expressed the view that these 

exclusions should not be limited to only 

those services that actually occur in the 

hospital setting, but rather, should also 

encompass services performed in other, 

non-hospital settings as well. As 

examples, they cited services such as 

magnetic resonance imaging (MRIs) and 

computerized axial tomography (CT) 

scans furnished in freestanding imaging 

centers, and radiation therapy furnished 

in physicians’ clinics or ambulatory care 

centers, all of which may be less 

expensive and more accessible in 

certain particular localities (such as 

rural areas) than those furnished by 

hospitals. A few commenters 

additionally described certain instances 

in which MRIs and CT scans failed to 

qualify for exclusion even when they 

actually did occur in the hospital 

setting, because the hospital chose to 

have them performed under contract 

with an independent supplier that 

submitted the Medicare bill. 

Response: We believe the comments 

that reflect previous suggestions for 

expanding this administrative exclusion 

to encompass services furnished in nonhospital 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 (most recently, in the SNF PPS 

final rule for FY 2006 at 70 FR 45049 

(August 4, 2005)), and as also explained 

in Medicare Learning Network (MLN) 

Matters article SE0432 (available online 

at http://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 in the legislative history 

accompanying the MMA, the Conferees 

characterized these exclusions as 

specifically limited to ‘‘* * * certain 

outpatient services from a Medicareparticipating 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 (nonhospital or non-CAH) settings. 

Further, this underlying concept of 

service intensity also affects the manner 

in which a hospital can involve another 

entity in the actual performance of an 

excluded outpatient hospital service. 

Sections 1832(a)(2)(B) and 1861(s)(2)(C) 

of the Act authorize a hospital to furnish 

outpatient diagnostic procedures under 

arrangements with another entity; 

moreover, MRIs or CT scans that are 

furnished in this manner are excluded 

from SNF consolidated billing, and 

would be separately billable by the 

hospital under Part B. However, in order 

for the hospital’s ‘‘arrangement’’ with 

the other entity to be a valid one, the 

hospital cannot act merely as a billing 

conduit, but must actually exercise 

professional responsibility and control 

over the arranged-for service, as 

specified in the guidelines on 

arrangements that appear in the CMS 

Internet-Only Manual, Pub. 100–1, 

Chapter 5, section 10.3, available online 

at http://www.cms.hhs.gov/Manuals/ 

IOM/list.asp. Therefore, in a situation 

where the other, non-hospital entity 

assumes the Medicare billing role, a 

valid arrangement between the hospital 

and that entity would no longer exist, so 

that the hospital effectively relinquishes 

its professional responsibility and 

control over the service to the other 

entity. In this situation, because the 

service is no longer being furnished by 

the hospital itself—either directly, or 

under a valid arrangement with another 

entity—it would not qualify for the 

administrative exclusion from 

consolidated billing as a high-intensity 

outpatient hospital service, and the 


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billing responsibility for the service 

would remain with the SNF. 

Comment: Some other commenters 

reiterated previous suggestions on 

expanding the existing chemotherapy 

exclusion to encompass related drugs 

that are commonly administered in 

conjunction with chemotherapy in order 

to treat the side effects of the 

chemotherapy drugs. The commenters 

cited examples such as anti-emetics 

(anti-nausea drugs) and erythropoietin 

(EPO). 

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 SNF PPS 

final rule for FY 2006 at 70 FR 45049 

(August 4, 2005)), the BBRA authorizes 

us to identify additional services for 

exclusion only within those particular 

service categories—chemotherapy and 

its administration; 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 themselves inherently 

chemotherapeutic in nature and, 

consequently, do not fall within the 

excluded chemotherapy category 

designated in the BBRA. With regard to 

EPO, we additionally note that among 

the service categories that section 

1888(e)(2)(A)(ii) of the Act already 

specifies as being excluded from SNF 

consolidated billing are items and 

services described in section 

1861(s)(2)(O) of the Act—that is, those 

items and services that meet the 

requirements for coverage under the 

separate Part B EPO benefit. This means 

that the scope of coverage under the Part 

B EPO benefit effectively serves as well 

to determine the scope of the EPO 

exclusion under the consolidated billing 

provision. However, section 

1861(s)(2)(O) of the Act, in turn, 

specifically limits coverage under this 

benefit to EPO that is furnished to 

dialysis patients, and does not provide 

for coverage in any other, non-dialysis 

situations such as chemotherapy. 

Comment: Another commenter 

indicated that we should make it 

‘‘financially feasible’’ for patients to 

receive dialysis that is performed at 

bedside in the SNF, either by a dialysis 

facility or by the SNF itself—

presumably, by expanding the 

consolidated billing provision’s existing 

dialysis exclusion to encompass such 

services. 

Response: As with the EPO services 

discussed above, the Part B dialysis 

services described in section 

1861(s)(2)(F) of the Act are included 

among the service categories that 

section 1888(e)(2)(A)(ii) of the Act 

specifies as being excluded from SNF 

consolidated billing. Once again, this 

means that the scope of coverage under 

the Part B dialysis benefit effectively 

serves as well to determine the scope of 

the dialysis exclusion under the 

consolidated billing provision. Thus, 

the commenter’s suggestion regarding 

the further unbundling of dialysis 

services actually represents a request to 

expand existing coverage under the Part 

B dialysis benefit, an issue that is 

beyond the scope of this final rule. 

Comment: An additional commenter 

recommended that we exclude Reclast, 

a new osteoporosis drug that is 

administered via a once-yearly infusion. 

The commenter noted that several of the 

criteria (such as high cost, infrequent 

use, and inelastic demand) that 

historically have served to identify 

certain exceptionally intensive 

outpatient hospital services for 

exclusion would apply to Reclast as 

well, but also indicated that while the 

Food and Drug Administration (FDA) 

approved Reclast for the treatment of 

Paget’s disease in April 2007, it has not 

yet announced its determination 

regarding the use of this drug in treating 

osteoporosis. 

Response: We note that even if the 

FDA were to grant Reclast approval for 

this additional application, excluding 

such osteoporosis drugs from 

consolidated billing cannot be 

accomplished administratively under 

our existing authority. As we have noted 

previously, the BBRA’s existing 

authority for excluding certain ‘‘highcost, low probability’’ services from SNF 

consolidated billing applies solely to the 

types of services specified in the 

legislation itself (see, for example, the 

discussion in the SNF PPS final rule for 

FY 2006 (70 FR 45048, August 4, 2005)). 

With regard to drugs, this authority 

would encompass only the categories of 

chemotherapy and radioisotope 

services. As osteoporosis drugs such as 

Reclast do not fall within either of those 

two categories, we cannot 

administratively exclude them under 

this authority as it is currently 

constituted. Moreover, we again note 

that the outpatient hospital exclusion 

that the commenter cited applies 

exclusively to those types of services 

that are so far beyond the normal scope 

of SNF care plans as to require the 

intensity of the hospital setting in order 

to be furnished safely and effectively; by 

contrast, it would be medically feasible 

to administer drugs such as Reclast in 

the SNF itself. 

Further, in contrast to the SNF PPS, 

we note that in the context of 

Medicare’s home health benefit, the 

statute specifically addresses the 

treatment of osteoporosis drugs under a 

PPS. For purposes of the home health 

PPS, section 1861(kk) of the Act 

provides Part B coverage for injectable 

osteoporosis drugs, and section 

4603(c)(2) of the BBA specifically 

amended section 1833(a)(2) of the Act to 

make such drugs separately payable 

outside the home health PPS’s bundled 

payment for an episode of care. 

Accordingly, we believe that in terms of 

the SNF PPS, excluding drugs such as 

Reclast from the bundled per diem 

payment would require a similar 

statutory framework—first, to establish 

Part B coverage specifically for those 

osteoporosis drugs that are administered 

through infusion rather than injection, 

and additionally, to exclude such drugs 

from the SNF PPS’s bundled per diem 

payment. 

F. 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 CAHs on a 

reasonable cost basis for SNF services 

furnished under a swing-bed agreement, 

as indicated in sections I.A. and I.D. of 

this final rule. 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 nonCAH 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 

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). 

The latest changes in the MDS for nonCAH swing-bed rural hospitals appear 

on our SNF PPS Web site, http:// 

www.cms.hhs.gov/snfpps. We received 

no comments on this aspect of the 

proposed rule. 


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IV. Provisions of the Final Rule 

In this final rule, we are adopting the 

provisions as set forth in the May 4, 

2007 proposed rule, with one change. 

We are changing our approach to the 

calculation of the market basket’s 

pharmaceutical cost weight by 

including an adjustment for Medicaid 

drug expenditures, as discussed in 

section III.D of this final rule. 

In addition, as noted previously in 

section I.A of this final rule, we are 

taking this opportunity to make a 

technical correction in the regulations 

text. The correction involves 

§ 409.30(a)(2), which originally 

stipulated that in order for a hospital 

stay to qualify a beneficiary for coverage 

of posthospital SNF care, discharge from 

the hospital stay must occur in or after 

the month that the beneficiary becomes 

eligible for ‘‘hospital insurance 

benefits’’—the statutory term for 

Medicare Part A. However, on May 26, 

1993 (58 FR 30666), we made a global 

revision of the word ‘‘hospital’’ in this 

provision and elsewhere in the 

regulations by adding a reference to 

rural primary care hospitals (RPCHs), 

and in the process, we inadvertently 

revised the term ‘‘hospital insurance 

benefits’’ in this section so that it 

incorrectly read ‘‘hospital or RPCH 

insurance benefits.’’ When RPCHs 

subsequently became known as critical 

access hospitals (CAHs), we once again 

made a global revision in order to revise 

‘‘RPCH’’ to read ‘‘CAH’’ wherever it 

appeared (62 FR 46037, August 29, 

1997), so that this term now incorrectly 

reads ‘‘hospital or CAH insurance 

benefits.’’ In this final rule, we are 

revising the regulations text at 

§ 409.30(a)(2) in order to restore the 

original, correct wording of this term, 

which is ‘‘hospital insurance benefits.’’

V. Waiver of Proposed Rulemaking 

Regarding the technical correction to 

Part 409 of the regulations that we 

discuss in the preceding section, we 

note that we would ordinarily publish a 

notice of proposed rulemaking in the 

Federal Register to provide a period for 

public comment before a revision in the 

regulations text would take effect; 

however, we can waive this procedure 

if we find good cause that a notice and 

comment procedure is impracticable, 

unnecessary, or contrary to the public 

interest and incorporate a statement of 

the finding and its reasons in the notice 

issued. We find it unnecessary to 

undertake notice and comment 

rulemaking in connection with this 

particular revision, as it merely provides 

a technical correction to the regulations, 

without making any substantive 

changes. Therefore, for good cause, we 

waive notice and comment procedures 

for the revision that we are making to 

the regulations text in Part 409. 

VI. Collection of Information 

Requirements 

This document does not impose any 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501). 

VII. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impacts of this 

final rule as required by Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

Regulatory Flexibility Act (RFA, Pub. L. 

96–354, September 16, 1980), section 

1102(b) of the Social Security Act (the 

Act), the Unfunded Mandates Reform 

Act of 1995 (UMRA, Pub. L. 104–4), and 

Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which only 

reassigns responsibility of duties) 

directs 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). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any one year). 

This final rule is major, as defined in 

Title 5, United States Code, section 

804(2), because we estimate the impact 

of the standard update will be to 

increase payments to SNFs by 

approximately $690 million. 

The update set forth in this final rule 

would apply to payments in FY 2008. 

Accordingly, the analysis that follows 

describes the impact of this one year 

only. 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. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and 

government agencies. Most SNFs and 

most other providers and suppliers are 

small entities, either by their nonprofit 

status or by having revenues of $11.5 

million or less in any one year. For 

purposes of the RFA, approximately 53 

percent of SNFs are considered small 

businesses according to the Small 

Business Administration’s latest size 

standards, with total revenues of $11.5 

million or less in any one year (for 

further information, see 65 FR 69432, 

November 17, 2000). Individuals and 

States are not included in the definition 

of a small entity. In addition, 

approximately 29 percent of SNFs are 

nonprofit organizations. 

This final rule updates the SNF PPS 

rates published in the update notice for 

FY 2007 (71 FR 43158, July 31, 2006) 

and the associated correction notice (71 

FR 57519, September 29, 2006), thereby 

increasing aggregate payments by an 

estimated $690 million. As indicated in 

Table 14 of this final rule, the effect on 

facilities will be an aggregate positive 

impact of 3.3 percent. We note that 

some individual providers may 

experience larger increases in payments 

than others due to the distributional 

impact of the FY 2008 wage indexes and 

the degree of Medicare utilization. 

While this final rule is considered 

major, its overall impact is extremely 

small; that is, less than 3 percent of total 

SNF revenues from all payor sources. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis 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. Because the 

increase in SNF payment rates set forth 

in this final rule also applies to rural 

non-CAH hospital swing-bed services, 

we believe that this final rule would 

have a positive fiscal impact on nonCAH swing-bed rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 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. 

That threshold level is currently 

approximately $120 million. This final 

rule would not have a substantial effect 

on State, local, or tribal governments, or 

on private sector costs. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it issues regulations 

that impose substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 


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As stated above, this final rule would 

have no substantial effect on State and 

local governments. 

B. Anticipated Effects 

This final rule sets forth updates of 

the SNF PPS rates contained in the 

update notice for FY 2007 (71 FR 43158, 

July 31, 2006) and the associated 

correction notice (71 FR 57519, 

September 29, 2006). Based on the 

above, we estimate the FY 2008 impact 

will be a net increase of $690 million in 

payments to SNF providers. The impact 

analysis of this final rule represents the 

projected effects of the changes in the 

SNF PPS from FY 2007 to FY 2008. We 

estimate the effects by estimating 

payments while holding all other 

payment variables constant. We use the 

best data available, but we do not 

attempt to predict behavioral responses 

to these changes, and we do not make 

adjustments for future changes in such 

variables as days or case-mix. 

We note that certain events may 

combine to limit the scope or accuracy 

of our impact analysis, because such an 

analysis is future-oriented and, thus, 

very susceptible to forecasting errors 

due to other changes in the forecasted 

impact time period. Some examples of 

such possible events include new 

legislation requiring funding changes to 

the Medicare program, or legislative 

changes that specifically affect SNFs. In 

addition, changes to the Medicare 

program may continue to be made as a 

result of the BBA, the BBRA, the BIPA, 

the MMA, or new statutory provisions. 

Although these changes may not be 

specific to the SNF PPS, the nature of 

the Medicare program is such that the 

changes may interact, and 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) of the Act, we update the 

payment rates for FY 2008 by a factor 

equal to the full market basket index 

percentage increase to determine the 

payment rates for FY 2008. 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. As 

noted previously in section I.E of this 

final rule, FY 2006 data indicate that 

there are less than 2,600 SNF residents 

overall with a principal or secondary 

diagnosis of 042 (HIV Infection). The 

impact to Medicare is included in the 

‘‘total’’ column of Table 14. In updating 

the rates for FY 2008, 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). These revisions increase 

payments to SNFs by approximately 

$690 million. 

The impacts are shown in Table 14. 

The breakdown of the various categories 

of data in the table follows. 

The first column shows the 

breakdown of all SNFs by urban or rural 

status, hospital-based or freestanding 

status, and census region. 

The first row of figures in the first 

column describes 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 twenty-six rows show the 

effects on urban versus rural status by 

census region. 

The second column in the table shows 

the number of facilities in the impact 

database. 

The third column of the table 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 fourth column shows the effect of 

all of the changes on the FY 2008 

payments. The market basket increase of 

3.3 percentage points is constant for all 

providers and, though not shown 

individually, is included in the total 

column. It is projected that aggregate 

payments will increase by 3.3 percent in 

total, assuming facilities do not change 

their care delivery and billing practices 

in response. As can be seen from this 

table, the combined effects of all of the 

changes vary by specific types of 

providers and by location. For example, 

though facilities in the rural Outlying 

region receive no change in payment, 

some providers (such as those in the 

urban Outlying region) show a 

significant increase of 9.6 percent. 

Payment increases for facilities in the 

urban Outlying area of the country are 

the highest for any provider category. 

However, we note that as there are only 

a small number of providers in both the 

rural and urban Outlying areas, changes 

to just a few providers can have a large 

impact on the region as a whole. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

C. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in Table 15 below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of this final rule. This table 

provides our best estimate of the change 

in Medicare payments under the SNF 

PPS as a result of the policies in this 

final rule based on the data for 15,271 

SNFs in our database. All expenditures 

are classified as transfers to Medicare 

providers (that is, SNFs). 

TABLE 15.—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE 2007 SNF PPS RATE

YEAR TO THE 2008 SNF PPS RATE YEAR (IN MILLIONS) 

Category Transfers 

Annualized Monetized Transfers .............................................................. $690 

From Whom To Whom? ........................................................................... Federal Government to SNF Medicare Providers. 


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D. Alternatives Considered 

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, such as 

case-mix classification methodology, the 

MDS assessment schedule, a 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 fiscal year 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 pursuing alternatives with respect to 

the payment methodology as discussed 

above. 

Because we have determined that this 

final rule will have a significant impact 

on SNFs, we will discuss the 

alternatives we considered. We 

reviewed the options considered in the 

proposed rule and took into 

consideration comments received 

during the public comment period as 

discussed in the preamble. 

The final rule raises the threshold for 

triggering a forecast error adjustment 

under the SNF PPS from the current 

0.25 percentage point to 0.5 percentage 

point, effective for FY 2008 and 

subsequent years. However, as 

discussed in sections I.F.2 and III.B of 

the FY 2008 proposed rule, we also 

considered a higher threshold for the 

forecast error adjustment (up to 1.0 

percentage point), as well as delaying 

implementation of this change until FY 

2009. Recalibrating the specified 

threshold for a forecast error adjustment 

from 0.25 percentage point to 0.5 

percentage point should help to 

distinguish between the major forecast 

errors that gave rise to this policy 

initially and the far more typical minor 

variances that occur in a projected 

statistical measurement. We believe that 

raising the threshold from 0.25 

percentage point to 0.5 percentage point 

for FY 2008 and subsequent years 

furthers our overarching Medicare 

integrity objective of paying the 

appropriate amount at the right time. 

This final rule also revises and 

rebases the SNF Market Basket. As an 

alternative, we could have considered 

delaying rebasing and/or revising the 

market basket. However, we believe that 

it is necessary to rebase the market 

basket to reflect the changes in the 

average SNF’s cost structure from 1997 

to 2004, as well as to revise the market 

basket to reflect more appropriate, 

industry-specific price proxies (such as 

the blended compensation and chemical 

price proxies). We believe our current 

Medicare-allowable methodology, 

adjusted to include an estimate of 

Medicaid drug expenses, represents the 

best available technical methodology at 

this time. 

E. Conclusion 

Overall, estimated payments for SNFs 

in FY 2008 are projected to increase by 

3.3 percent compared with those in FY 

2007. We estimate that SNFs in urban 

areas would experience a 3.1 percent 

increase in estimated payments 

compared with FY 2007. We estimate 

that SNFs in rural areas would 

experience a 4.3 percent increase in 

estimated payments compared with FY 

2007. Facilities in the rural Outlying 

region are the only providers that do not 

experience a payment increase, 

payments for these facilities remain the 

same. This is due to the changes in the 

wage index compared to FY 2007. 

Facilities in the urban Outlying region 

show the largest payment increase, 9.6 

percent. We did not receive public 

comments on the impact analysis 

methodology. 

Finally, in accordance with the 

provisions of Executive Order 12866, 

this regulation was reviewed by the 

Office of Management and Budget. 

List of Subjects in 42 CFR Part 409 

Health facilities, Medicare. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as follows: 

PART 409—HOSPITAL INSURANCE 

BENEFITS 

■ 1. The authority citation for part 409 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

Subpart D—Requirements for 

Coverage of Posthospital SNF Care 

§ 409.30 [Amended] 

■ 2. In § 409.30(a)(2), the term ‘‘hospital 

or CAH insurance benefits’’ is revised to 

read ‘‘hospital insurance benefits’’. 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare-Hospital 

Insurance Program; and No. 93.774, 

Medicare-Supplementary Medical Insurance 

Program) 

Dated: July 18, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Dated: July 24, 2007. 

Michael O. Leavitt, 

Secretary. 

Note: The following addendum will not 

appear in the Code of Federal Regulations. 

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[FR Doc. 07–3784 Filed 7–31–07; 4:00 pm] 

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