`[Federal Register Volume 72, Number 149 (Friday, August 3, 2007)]
[Rules and Regulations]
[Pages 43412-43463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-3784]



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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 409



 Medicare Program; Prospective Payment System and Consolidated Billing 
for Skilled Nursing Facilities for FY 2008; Final Rule

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

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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.

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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 Case-Mix 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, three-phase transition that 
blended a facility-specific rate (reflecting the individual facility's 
historical cost experience) with the Federal case-mix adjusted rate. 
The transition extended through the facility's first three cost 
reporting periods under the PPS, up to and including the one that began 
in FY 2001. Thus, the SNF PPS is no longer operating under the 
transition, as all facilities have been paid at the full Federal rate 
effective with cost reporting periods beginning in FY 2002. As we now 
base payments entirely on the adjusted Federal per diem rates, we no 
longer include adjustment factors related to facility-specific rates 
for the coming fiscal year.
     Coverage. The establishment of the SNF PPS did not change 
Medicare's fundamental requirements for SNF coverage. However, because 
the 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 Sec.  
413.114(d), effective for services furnished in cost reporting periods 
beginning on or after July 1, 2002, to reflect section 408 of the BBRA.

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

    The BIPA 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 
add-on, 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 case-mix 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 post-hospital 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 hospital-based and freestanding SNF cost reports for reporting 
periods beginning in FY 1995. The data used in developing the Federal 
rates also incorporated an estimate of the amounts that would be

[[Page 43415]]

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 case-mix, 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
----------------------------------------------------------------------------------------------------------------
                                                       Forecasted actual    Actual FY 2006
                        Index                          FY 2006 increase*      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 ``high-cost, 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.

[[Page 43416]]

    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 non-therapy 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 non-therapy 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 Medicare-covered 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 Sec.  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
----------------------------------------------------------------------------------------------------------------
                                                                           Therapy-non-case-
         Rate component            Nursing-case-mix    Therapy-case-mix           mix            Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................            $146.62             $110.44              $14.54              $74.83
----------------------------------------------------------------------------------------------------------------


                            Table 3.--FY 2008 Unadjusted Federal Rate Per Diem Rural
----------------------------------------------------------------------------------------------------------------
                                                                           Therapy-non-case-
         Rate component            Nursing-case-mix    Therapy-case-mix           mix            Non-case-mix
----------------------------------------------------------------------------------------------------------------
Per Diem Amount.................            $140.08             $127.35              $15.54              $76.21
----------------------------------------------------------------------------------------------------------------


[[Page 43417]]

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 SNF-specific 
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 SNF-specific 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 MIEA-required 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, labor-intensive 
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 non-labor-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 Sec.  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 Sec.  413.345, we include in each update of the 
Federal payment rates in the Federal Register the designation of those 
specific RUGs under the classification system that represent the 
required SNF level of care, as provided in Sec.  409.30. This 
designation reflects an administrative presumption under the refined 
RUG-53

[[Page 43424]]

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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Wage       Adj.                           Percent    Medicare
                           RUG Group                              Labor      index      Labor    Non-Labor  Adj. Rate     Adj        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 three-phase transition period 
from facility-specific to full Federal rates that started with cost 
reporting periods beginning in July 1998 has expired.
2. Market Basket Forecast Error Adjustment
    As discussed in the June 10, 2003, supplemental proposed rule (68 
FR 34768) and finalized in the August 4, 2003, final rule (68 FR 
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.

[[Page 43425]]

    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 Medicare-allowable 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.

[[Page 43426]]

    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 non-
Medicare 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 dual-eligibles 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 community-based Medicaid drug cost per 
beneficiary per day estimate from the

[[Page 43427]]

MCBS data. First, we took a community-based Medicaid drug cost per 
capita estimate from 2002 (adjusted for under-reporting 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 
community-based 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 Medicare-
specific market basket methodology. This methodology relies on the 
ratio of Medicare to total days and cost-to-charge ratios to derive the 
Medicare-specific 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-to-charge ratio-based methodology 
for the calculation of the pharmacy component of the market basket. We 
had cited the inconsistencies between the cost-to-charge 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 Medicare-allowable 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 cost-to-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 cost-to-charge ratios for the Drugs 
Charged to Patient Cost center. It is possible that the difference 
between the hospital-based and freestanding SNF cost-to-charge 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 non-capital-
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 for-profit 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-to-depreciation 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)

[[Page 43428]]

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 capital-related interest 
cost weight. Therefore, we are adopting our proposed methodology to 
derive the capital-related 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
------------------------------------------------------------------------
                                          Building
                                         and fixed   Movable
                  Year                              equipment   Interest
                                         equipment
------------------------------------------------------------------------
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    .........  .........
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 hospital-based SNFs' percentage of total cost, of the 
actual costs experienced by hospital-based 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 hospital-based 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

[[Page 43429]]

[GRAPHIC] [TIFF OMITTED] TR03AU07.004

BILLING CODE 4120-01-C

[[Page 43430]]

    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 labor-related share for FY 2008, 
which is based on the final rebased and revised SNF market basket.
[GRAPHIC] [TIFF OMITTED] TR03AU07.005


    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 speech-language 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

[[Page 43431]]

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 non-hospital settings indicate a continued 
misunderstanding of the underlying purpose of this provision. As we 
have consistently noted in response to comments on this issue in 
previous years (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 Medicare-participating hospital or critical access 
hospital * * *'' (emphasis added). (See the House Ways and Means 
Committee Report (H. Rep. No. 108-178, Part 2 at 209), and the 
Conference Report (H. Conf. Rep. No. 108-391 at 641).) Therefore, these 
services are excluded from SNF consolidated billing only when furnished 
in the outpatient hospital or CAH setting, and not when furnished in 
other, freestanding (non-hospital or non-CAH) settings.
    Further, 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

[[Page 43432]]

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 ``high-cost, 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 non-CAH 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 non-CAH 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 Sec.  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 Sec.  
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 non-CAH 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.

[[Page 43434]]

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.

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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.
------------------------------------------------------------------------


[[Page 43436]]

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.

0
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

0
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


Sec.  409.30  [Amended]

0
2. In Sec.  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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