Friday, 

May 4, 2007 

Part IV 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Part 413 

Medicare Program; Prospective Payment 

System and Consolidated Billing for 

Skilled Nursing Facilities for FY 2008; 

Proposed Rule 


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25526 Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 413 

[CMS–1545–P] 

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: Proposed rule. 

SUMMARY: This proposed rule would 

update the payment rates used under 

the prospective payment system (PPS) 

for skilled nursing facilities (SNFs), for 

fiscal year (FY) 2008. In addition, this 

proposed rule would revise and rebase 

the SNF market basket, and would 

modify the threshold for the adjustment 

to account for market basket forecast 

error. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on June 29, 2007. 

ADDRESSES: In commenting, please refer 

to file code CMS–1545–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. Click 

on the link ‘‘Submit electronic 

comments on CMS regulations with an 

open comment period.’’ (Attachments 

should be in Microsoft Word, 

WordPerfect, or Excel; however, we 

prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–1545– 

P, P.O. Box 8016, Baltimore, MD 21244– 

8016. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–1545–P, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

9994 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

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: 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–1545–P 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://www.cms.hhs.gov/ 

eRulemaking. Click on the link 

‘‘Electronic Comments on CMS 

Regulations’’ on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

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 SNF 

Services Under Part A of the Medicare 

Program 

B. Requirements of the Balanced Budget 

Act of 1997 (BBA) for Updating the 

Prospective Payment System for Skilled 

Nursing Facilities 

C. The Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 1999 

(BBRA) 

D. The Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA) 

E. The Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) 

F. 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. Annual Update of Payment Rates Under 

the Prospective Payment System for 

Skilled Nursing Facilities 

A. Federal Prospective Payment System 

1. Costs and Services Covered by the 

Federal Rates 

2. Methodology Used for the Calculation of 

the Federal Rates 

B. Case-Mix Refinements 

C. Wage Index Adjustment to Federal Rates 

D. Updates to Federal Rates 

E. Relationship of RUG–III Classification 

System to Existing Skilled Nursing 

Facility Level-of-Care Criteria 

F. Example of Computation of Adjusted 

PPS Rates and SNF Payment 

III. The Skilled Nursing Facility Market 

Basket Index 

A. Use of the Skilled Nursing Facility 

Market Basket Percentage 

B. Market Basket Forecast Error 

Adjustment 

C. Federal Rate Update Factor 

IV. Revising and Rebasing the Skilled 

Nursing Facility Market Basket Index 

A. Background 

B. Rebasing and Revising the Skilled 

Nursing Facility Market Basket 

C. Price Proxies Used to Measure Cost 

Category Growth 


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1. Wages and Salaries 

2. Employee Benefits 

3. All Other Expenses 

4. Capital-Related 

D. Proposed Market Basket Estimate for the 

FY 2008 SNF Update 

V. Consolidated Billing 

VI. Application of the SNF PPS to SNF 

Services Furnished by Swing-Bed 

Hospitals 

VII. Provisions of the Proposed Rule 

VIII. Collection of Information Requirements 

IX. 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 proposed rule, we are listing 

these abbreviations and their 

corresponding terms in alphabetical 

order below: 

ADL Activity of Daily Living 

AIDS Acquired Immune Deficiency 

Syndrome 

ARD Assessment Reference Date 

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 

BLS Bureau of Labor Statistics 

CAH Critical Access Hospital 

CBSA Core-Based Statistical Area 

CFR Code of Federal Regulations 

CMS Centers for Medicare & Medicaid 

Services 

CPT (Physicians’) Current Procedural 

Terminology 

DRA Deficit Reduction Act of 2005, 

Pub. L. 109–171 

DRG Diagnosis Related Group 

ECI Employment Cost Index 

FI Fiscal Intermediary 

FQHC Federally Qualified Health 

Center 

FR Federal Register 

FY Fiscal Year 

GAO Government Accountability 

Office 

HCPCS Healthcare Common Procedure 

Coding System 

HIT Health Information Technology 

ICD–9–CM International Classification 

of Diseases, Ninth Edition, Clinical 

Modification 

IFC Interim Final Rule with Comment 

Period 

MDS Minimum Data Set 

MEDPAC Medicare Payment Advisory 

Commission 

MEDPAR Medicare Provider Analysis 

and Review File 

MMA Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003, Pub. L. 108–173 

MSA Metropolitan Statistical Area 

NAICS North American Industrial 

Classification System 

OIG Office of the Inspector General 

OMB Office of Management and 

Budget 

OMRA Other Medicare Required 

Assessment 

PPI Producer Price Index 

PPS Prospective Payment System 

RAI Resident Assessment Instrument 

RAP Resident Assessment Protocol 

RAVEN Resident Assessment 

Validation Entry 

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 

SIC Standard Industrial Classification 

System 

SNF Skilled Nursing Facility 

STM Staff Time Measurement 

UMRA Unfunded Mandates Reform 

Act, Public Law 104–4 

I. Background 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘BACKGROUND’’ at the 

beginning of your comments.] 

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) 

relating to Medicare payments and 

consolidated billing for SNFs. 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. 

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 proposed rule, we propose to 

update 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 this 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 adjust the 

rates annually using a SNF market 

basket index, and we adjust them by the 

hospital inpatient wage index to 

account for geographic variation in 

wages. We also apply a case-mix 

adjustment to account for the relative 

resource utilization of different patient 

types. This adjustment utilizes a 

refined, 53-group version of the 

Resource Utilization Groups, version III 

(RUG–III) case-mix classification 

system, based on information obtained 

from the required resident assessments 

using the Minimum Data Set (MDS) 2.0. 

Additionally, as noted in the August 4, 

2005 final rule (70 FR 45028), the 

payment rates at various times have also 

reflected specific legislative provisions, 

including section 101 of the BBRA, 

sections 311, 312, and 314 of the BIPA, 

and section 511 of the MMA. 

• Transition. Under sections 

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

SNF PPS included an initial, threephase transition that blended a facilityspecific rate (reflecting the individual 

facility’s historical cost experience) with 

the Federal case-mix adjusted rate. The 

transition extended through the 

facility’s first three cost reporting 

periods under the PPS, up to and 

including the one that began in FY 

2001. Thus, the SNF PPS is no longer 

operating under the transition, as all 

facilities have been paid at the full 

Federal rate effective with cost reporting 

periods beginning in FY 2002. As we 

now base payments entirely on the 

adjusted Federal per diem rates, we no 

longer include adjustment factors 


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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 discussed in 

greater detail in section II.E. of this 

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 appears in section V. 

of this 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 appears in 

section VI. of this proposed 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 this 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 proposed later in this 

preamble, this proposed 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, upon the implementation of 

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

of this proposed 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 IV of this proposed rule. 

Further, for swing-bed hospitals with 

more than 49 (but less than 100) beds, 

section 408 of the BBRA provided for 

the repeal of certain statutory 

restrictions on length of stay and 

aggregate payment for patient days, 

effective with the end of the SNF PPS 

transition period described in section 

1888(e)(2)(E) of the Act. In the July 31, 

2001 final rule (66 FR 39562), we made 

conforming changes to the regulations at 

§ 413.114(d), effective for services 

furnished in cost reporting periods 

beginning on or after July 1, 2002, to 

reflect section 408 of the BBRA. 

D. The Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA) 

The BIPA also included several 

provisions that resulted in adjustments 

to the SNF PPS. We described these 

provisions in detail in the final rule that 

we published in the Federal Register on 

July 31, 2001 (66 FR 39562). In 

particular: 

• Section 203 of the BIPA exempted 

CAH swing-beds from the SNF PPS. We 

included further information on this 

provision in Program Memorandum 

A–01–09 (Change Request #1509), 

issued January 16, 2001, which is 

available online at 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 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 General 

Accounting 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 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 this 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 

proposed rule. (As noted previously, in 

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


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BBRA, this temporary payment 

adjustment expired upon the 

implementation of case-mix refinements 

on January 1, 2006.) 

• Section 315 of the BIPA authorized 

us to establish a geographic 

reclassification procedure that is 

specific to SNFs, but only after 

collecting the data necessary to establish 

a SNF wage index that is based on wage 

data from nursing homes. At this time, 

this has proven to be infeasible due to 

the volatility of existing SNF wage data 

and the significant amount of resources 

that would be required to improve the 

quality of that data. 

We included further information on 

several of the BIPA provisions in 

Program Memorandum A–01–08 

(Change Request #1510), issued January 

16, 2001, which is available online at 

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 

www.cms.hhs.gov/transmittals/ 

downloads/r160cp.pdf. As discussed in 

the SNF PPS final rule for FY 2006 (70 

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

address the certification of the AIDs 

add-on with the implementation of the 

case-mix refinements, thus allowing the 

temporary add-on payment created by 

section 511 of the MMA to continue in 

effect. 

For the limited number of SNF 

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

results in a significant increase in 

payment. For example, using 2005 data, 

we identified 1276 SNF residents with 

a principal diagnosis code of 042 

(‘‘Human Immunodeficiency Virus 

(HIV) Infection’’). For FY 2008, an urban 

facility with a resident with AIDS in 

RUG group ‘‘SSA’’ would have a casemix adjusted payment of almost $250.91 

(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 $572.07. 

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 this 

proposed rule.) 

F. Skilled Nursing Facility Prospective 

Payment System—General Overview 

We implemented the Medicare SNF 

PPS effective with cost reporting 

periods beginning on or after July 1, 

1998. This PPS pays SNFs through 

prospective, case-mix adjusted per diem 

payment rates applicable to all covered 

SNF services. These payment rates 

cover all costs of furnishing covered 

skilled nursing services (routine, 

ancillary, and capital-related costs) 

other than costs associated with 

approved educational activities. 

Covered SNF services include posthospital services for which benefits are 

provided under Part A and all items and 

services that, before July 1, 1998, had 

been paid under Part B (other than 

physician and certain other services 

specifically excluded under the BBA) 

but were furnished to Medicare 

beneficiaries in a SNF during a covered 

Part A stay. A complete discussion of 

these provisions appears in the May 12, 

1998 interim final rule (63 FR 26252). 

1. Payment Provisions—Federal Rate 

The PPS uses per diem Federal 

payment rates based on mean SNF costs 

in a base year updated for inflation to 

the first effective period of the PPS. We 

developed the Federal payment rates 

using allowable costs from hospitalbased and freestanding SNF cost reports 

for reporting periods beginning in FY 

1995. The data used in developing the 

Federal rates also incorporated an 

estimate of the amounts that would be 

payable under Part B for covered SNF 

services furnished to individuals during 

the course of a covered Part A stay in 

a SNF. 

In developing the rates for the initial 

period, we updated costs to the first 

effective year of the PPS (the 15-month 

period beginning July 1, 1998) using a 

SNF market basket index, and then 

standardized for the costs of facility 

differences in case-mix and for 

geographic variations in wages. In 

compiling the database used to compute 

the Federal payment rates, we excluded 

those providers that received new 

provider exemptions from the routine 

cost limits, as well as costs related to 

payments for exceptions to the routine 

cost limits. Using the formula that the 

BBA prescribed, we set the Federal rates 

at a level equal to the weighted mean of 

freestanding costs plus 50 percent of the 

difference between the freestanding 

mean and weighted mean of all SNF 

costs (hospital-based and freestanding) 

combined. We computed and applied 

separately the payment rates for 

facilities located in urban and rural 

areas. In addition, we adjusted the 

portion of the Federal rate attributable 

to wage-related costs by a wage index. 

The Federal rate also incorporates 

adjustments to account for facility casemix, using a classification system that 

accounts for the relative resource 

utilization of different patient types. 

The RUG–III classification system uses 

beneficiary assessment data from the 

Minimum Data Set (MDS) completed by 

SNFs to assign beneficiaries to one of 53 

RUG–III groups. The original RUG–III 

case-mix classification system included 

44 groups. However, under refinements 

that became effective on January 1, 

2006, we added nine new groups—

comprising a new Rehabilitation plus 

Extensive Services category—at the top 

of the RUG hierarchy. The May 12, 1998 

interim final rule (63 FR 26252) 

included a complete and detailed 

description of the original 44-group 

RUG–III case-mix classification system. 

A comprehensive description of the 

refined 53-group RUG–III case-mix 

classification system (RUG–53) 

appeared in the proposed and final rules 

for FY 2006 (70 FR 29070, May 19, 

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

Further, in accordance with section 

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

Federal rates in this proposed 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. 

of this 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. For FY 2008, we 

propose to revise and rebase the market 

basket to reflect 2004 total cost data as 

detailed in section III.A. The proposed 


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FY 2008 market basket increase is 3.3 

percent. (However, we note that both 

the President’s budget and the 

recommendations of the Medicare 

Payment Advisory Commission 

(MedPAC) include a proposal for a zero 

percent update in the SNF market 

basket for FY 2008, and that the 

provisions outlined in this proposed 

rule would need to reflect any 

legislation that the Congress enacts to 

adopt this proposal.) 

As explained in the final rule for FY 

2004 (66 FR 46058, August 4, 2003), the 

annual update of the payment rates 

includes, as appropriate, an adjustment 

to account for market basket forecast 

error. When we initially proposed the 

forecast error adjustment (68 FR 34768, 

June 10, 2003), we noted that significant 

previous forecast errors had resulted 

from wages and benefits for SNF 

workers increasing more rapidly than 

expected. In the SNF PPS final rule for 

FY 2004, we then proceeded to correct 

for those forecast errors with a one-time, 

cumulative adjustment relating to the 

FYs 2000 through 2002 updates, 

resulting in a 3.26 percentage point 

addition to the market basket update. 

We also provided for subsequent 

adjustments in succeeding fiscal years 

whenever the difference between the 

forecasted and actual market basket 

increases exceeds a specified threshold, 

which we indicated at the time would 

likely be 0.25 percentage point. 

However, we believe that it is now 

appropriate 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 much smaller 

variances between forecasted and actual 

change that more typically occur from 

year to year, in recognition that a certain 

level of imprecision is inherently 

associated with measuring statistics. In 

general, the SNF market basket is 

expected to reasonably project 

inflationary price pressures. Further, 

according to MedPAC analysis, we note 

that freestanding SNFs (which represent 

more than 80 percent of all SNFs) have 

received Medicare payments that 

exceeded costs by 10.8 percent or more 

since 2001, and Medicare margins are 

projected to be 11 percent in 2007. 

Moreover, following the initial, 

cumulative 3.26 percent forecast error 

adjustment relating to FYs 2000 through 

2002 updates, the differences between 

the forecasted and actual increases in 

the market basket for each of the 

subsequent fiscal years have been far 

smaller in magnitude (0.3 percentage 

point or less) than the ones that 

originally had prompted the adoption of 

this policy. 

Accordingly, we believe it would be 

appropriate at this point to recalibrate 

the specified threshold for triggering a 

forecast error adjustment, in a manner 

that distinguishes between the major 

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. As indicated in our original 

proposal for a forecast error adjustment, 

we believe that establishing a minimum 

threshold for making such adjustments 

reflects the concept that there is 

generally a minimal amount of 

imprecision that is inherently associated 

with measuring statistics, and that any 

such threshold should be sufficiently 

high to screen out small variations that 

may arise from this imprecision. At this 

point, however, we are concerned that 

the existing 0.25 percentage point 

threshold may not be high enough to 

accomplish this and to focus instead on 

the more significant variations—those of 

a magnitude that would indicate a 

failure to reflect accurately the actual 

historical price changes faced by 

SNFs—which the forecast error 

adjustment was originally created to 

address. 

We believe that a threshold of 0.5 

percentage point represents an amount 

that is sufficiently high to screen out the 

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. Therefore, this proposed rule 

would raise 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 with FY 2008. 

We are also considering a higher 

threshold for the forecast error 

adjustment, up to 1.0 percentage point. 

This would be consistent with the 

relative magnitude of forecast error that 

is addressed by the inpatient hospital 

capital PPS forecast error adjustment. 

Both the SNF and inpatient hospital 

capital PPS forecast error adjustments 

currently utilize a 0.25 percent 

threshold. However, the inpatient 

hospital capital PPS’s average annual 

forecasted market basket update from 

FY 1996 through FY 2006 (the period of 

historical data used for forecast error 

adjustments to date) was approximately 

0.9 percent. In contrast, the SNF PPS’s 

average annual forecasted market basket 

update from FY 2000 through FY 2006 

(the period of historical data used for 

forecast error adjustments to date) was 

approximately 3.1 percent. Thus, the 

0.25 percentage point threshold 

addressed forecast errors equaling 28 

percent or more of the average annual 

forecasted market basket update under 

the inpatient hospital capital PPS, 

compared with 8 percent of the average 

annual forecasted market basket update 

under the SNF PPS. Utilizing a 1 

percentage point forecast error 

adjustment threshold under the SNF 

PPS would address forecast errors 

equaling 32 percent or more of the 

average annual forecasted market basket 

update, which is more consistent with 

the relative magnitude of forecast error 

for which adjustment is made under the 

inpatient hospital capital PPS. 

While this rule proposes applying the 

new threshold in FY 2008, we are also 

considering delaying implementation of 

this change to FY 2009. We specifically 

invite comments on increasing the 

forecast error adjustment threshold and 

making the proposal effective in FY 

2009. 

As the difference between the 

estimated and actual amount of change 

falls below the proposed 0.5 percentage 

point threshold, no forecast error 

adjustment is appropriate in FY 2008. 

For FY 2006 (the most recently available 

fiscal year for which there is final data), 

the estimated increase in the market 

basket index was 3.1 percentage points, 

while the actual increase was 3.4 

percentage points, resulting in a 0.3 

percentage point difference. Table 1 

below shows the forecasted and actual 

market basket amount for FY 2006. 

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

Index Forecasted Actual FY 2006 

increase* Actual FY 2006 increase** FY 2006 difference 

SNF 3.1 3.4 0.3 

*Published in FEDERAL REGISTER; based on second quarter 2005 Global Insight Inc. forecast (97 index). 

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


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II. Annual Update of Payment Rates 

Under the Prospective Payment System 

for Skilled Nursing Facilities 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Annual Update’’ at the 

beginning of your comments.] 

A. Federal Prospective Payment System 

This proposed 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. 

1. Costs and Services Covered by the 

Federal Rates 

The Federal rates apply to all costs 

(routine, ancillary, and capital-related) 

of covered SNF services other than costs 

associated with approved educational 

activities as defined in § 413.85. Under 

section 1888(e)(2) of the Act, covered 

SNF services include post-hospital SNF 

services for which benefits are provided 

under Part A (the hospital insurance 

program), as well as all items and 

services (other than those services 

excluded by statute) that, before July 1, 

1998, were paid under Part B (the 

supplementary medical insurance 

program) but furnished to Medicare 

beneficiaries in a SNF during a Part A 

covered stay. (These excluded service 

categories are discussed in greater detail 

in section V.B.2. of the May 12, 1998 

interim final rule (63 FR 26295–97)). 

2. Methodology Used for the Calculation 

of the Federal Rates 

The proposed FY 2008 rates would 

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 

adjust the rates by a wage index budget 

neutrality factor, described later in this 

section. Tables 2 and 3 reflect the 

updated components of the unadjusted 

Federal rates for FY 2008. 

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

Rate component Nursing—

case-mix 

Therapy—

case-mix 

Therapy—noncase-mix Non-case-mix 

Per Diem Amount ............................................................................................ $146.77 $110.55 $14.56 $74.90 

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

Rate component Nursing—

case-mix 

Therapy—

case-mix 

Therapy—noncase-mix Non-case-mix 

Per Diem Amount ............................................................................................ $140.22 $127.48 $15.55 $76.29 

B. 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 in section I.F.1. of 

this proposed rule, the payment rates set 

forth herein reflect the use of the refined 

RUG–53 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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C. 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 propose to 

continue 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. 

We would apply the wage index 

adjustment to the labor-related portion 

of the Federal rate, which is 73.757 

percent of the total rate. This percentage 

reflects the labor-related relative 

importance for FY 2008, using the 

proposed 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 11. We 

calculate the labor-related relative 

importance from the SNF market basket, 

and it approximates the labor-related 

portion of the total costs after taking 

into account historical and projected 

price changes between the base year and 

FY 2008. The price proxies that move 

the different cost categories in the 

market basket do not necessarily change 

at the same rate, and the relative 

importance captures these changes. 

Accordingly, the relative importance 

figure more closely reflects the cost 

share weights for FY 2008 than the base 

year weights from the SNF market 

basket. 

We calculate the labor-related relative 

importance for FY 2008 in four steps. 

First, we compute the FY 2008 price 

index level for the total market basket 

and each cost category of the market 

basket. Second, we calculate a ratio for 

each cost category by dividing the FY 

2008 price index level for that cost 

category by the total market basket price 

index level. Third, we determine the FY 

2008 relative importance for each cost 

category by multiplying this ratio by the 

base year (FY 1997) weight. Finally, we 

add the FY 2008 relative importance for 

each of the labor-related cost categories 

(wages and salaries, employee benefits, 

nonmedical professional fees, laborintensive services, and a portion of 

capital-related expenses) to produce the 

FY 2008 labor-related relative 

importance. Tables 6 and 7 below show 

the Federal rates by labor-related and 

non-labor-related components. 

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BILLING CODE 4210–01–C 

Section 1888(e)(4)(G)(ii) of the Act 

also requires that we apply this wage 

index in a manner that does not result 

in aggregate payments that are greater or 

less than would otherwise be made in 

the absence of the wage adjustment. For 

FY 2008 (Federal rates effective October 

1, 2007), we would apply the most 

recent wage index using the hospital 

inpatient wage data, and would also 

apply an adjustment to fulfill the budget 

neutrality requirement. We would 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, 2006. 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 proposed budget 

neutrality factor for this year is 1.0003. 

The wage index applicable to FY 2008 

appears in Tables 8 and 9 of this 

proposed rule. 

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 

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 wish to clarify that this and all 

subsequent SNF PPS rules and notices 

are considered to incorporate the CBSA 


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changes published in the most recent 

OMB bulletin that applies to the 

hospital wage data used to determine 

the current SNF PPS wage index. The 

OMB bulletins may be accessed online 

at http://www.whitehouse.gov/omb/ 

bulletins/index.html. 

In adopting the OMB Core-Based 

Statistical Area (CBSA) geographic 

designations, we provided for a 1-year 

transition with a blended wage index for 

all providers. For FY 2006, the wage 

index for each provider consisted of a 

blend of 50 percent of the FY 2006 

MSA-based wage index and 50 percent 

of the FY 2006 CBSA-based wage index 

(both using FY 2002 hospital data). We 

referred to the blended wage index as 

the FY 2006 SNF PPS transition wage 

index. As discussed in the SNF PPS 

final rule for FY 2006 (70 FR 45041), 

subsequent to the expiration of this 

1-year transition on September 30, 2006, 

we used the full CBSA-based wage 

index values, as now presented in 

Tables 8 and 9 of this proposed 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 now address two 

situations concerning the wage index. 

The first situation involves rural 

locations in Massachusetts and Puerto 

Rico. Under the CBSA labor market 

areas, there are no rural hospitals in 

those locations. Because there was no 

rural proxy for more recent rural data 

within those areas, we used the FY 2005 

wage index value in both FY 2006 and 

FY 2007 for rural Massachusetts and 

rural Puerto Rico. 

Because we have used the same wage 

index value (from FY 2005) for these 

areas for the previous two fiscal years, 

we believe it is appropriate at this point 

to consider alternatives in our 

methodology to update the wage index 

for rural areas without hospital wage 

index data. We believe that the best 

imputed proxy would (1) use pre-floor, 

pre-reclassified hospital data, (2) use the 

most local data available, (3) be easy to 

evaluate, and (4) be easily updateable 

from year-to-year. Although our current 

methodology uses local, rural pre-floor, 

pre-reclassified hospital wage data, this 

method is not updateable from year-toyear. 

Therefore, in cases where there is a 

rural area without hospital wage data, 

we propose using the average wage 

index from all contiguous CBSAs to 

represent a reasonable proxy for the 

rural area. This approach uses pre-floor, 

pre-reclassified hospital wage data, is 

easy to evaluate, is updateable from 

year-to-year, and uses the most local 

data available. 

In determining an imputed rural wage 

index, we interpret the term 

‘‘contiguous’’ to mean sharing a border. 

For example, in the case of 

Massachusetts, the entire rural area 

consists of Dukes and Nantucket 

counties. We have determined that the 

borders of Dukes and Nantucket 

counties are ‘‘contiguous’’ with 

Barnstable and Bristol counties. Under 

the proposed methodology, the wage 

indexes for the counties of Barnstable 

(CBSA 12700, Barnstable Town, MA- 

(1.2539)) and Bristol (CBSA 39300, 

Providence-New Bedford-Fall River, RIMA-(1.0783)) are averaged, resulting in 

an imputed rural wage index of 1.1665 

for rural Massachusetts for FY 2008. 

While we believe that this policy could 

be readily applied to other rural areas 

that lack hospital wage data (possibly 

due to hospitals converting to a different 

provider type, such as a CAH, that does 

not submit the appropriate wage data), 

should a similar situation arise in the 

future, we may re-examine this policy. 

However, we do not believe that this 

policy is appropriate for Puerto Rico. 

There are sufficient economic 

differences between hospitals in the 

United States and those in Puerto Rico 

(including the payment of hospitals in 

Puerto Rico using blended Federal/ 

Commonwealth-specific rates) to 

warrant establishing a separate and 

distinct policy specifically for Puerto 

Rico. Consequently, any alternative 

methodology for imputing a wage index 

for rural Puerto Rico would need to take 

into account those differences. Our 

policy of imputing a rural wage index 

based on the wage index(es) of CBSAs 

contiguous to the rural area in question 

does not recognize the unique 

circumstances of Puerto Rico. While we 

have not yet identified an alternative 

methodology for imputing a wage index 

for rural Puerto Rico, we will continue 

to evaluate the feasibility of using 

existing hospital wage data and, 

possibly, wage data from other sources. 

Accordingly, we propose to continue 

using the most recent wage index 

previously available for rural Puerto 

Rico; that is, a wage index of 0.4047. 

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 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. 

We propose to continue this approach 

for urban areas without specific hospital 

wage index data. Therefore, the wage 

index for urban CBSA (25980) 

Hinesville-Fort Stewart, GA is 

calculated as the average wage index of 

all urban areas in Georgia. 

We solicit comments on these 

approaches to calculating the wage 

index values for areas without hospitals 

for FY 2008 and subsequent years. 

D. 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 proposed 

payment rates in this proposed 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. 

E. Relationship of RUG–III Classification 

System to Existing Skilled Nursing 

Facility Level-of-Care Criteria 

As discussed in § 413.345, we include 

in each update of the Federal payment 

rates in the Federal Register the 

designation of those specific RUGs 

under the classification system that 

represent the required SNF level of care, 

as provided in § 409.30. This 

designation reflects an administrative 

presumption under the refined RUG–53 

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 proposed rule, we are 

continuing the designation of the upper 

35 groups for purposes of this 

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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. 

F. Example of Computation of Adjusted 

PPS Rates and SNF Payment 

Using the SNF XYZ described in 

Table 10 below, 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 

$29,656. The Labor and Non-labor 

columns are derived from Table 6 of this 

proposed rule. 

TABLE 10.—RUG–53 SNF XYZ: LOCATED IN CEDAR RAPIDS, IA (URBAN CBSA 16300) WAGE INDEX: 0.8853 

RUG group Labor Wage index Adj. labor Non-labor Adj. rate Percent adj Medicare 

days Payment 

RVX .................................. $336.93 0.8853 $298.28 $119.88 $418.16 $418.16 14 $5,854.00 

RLX .................................. 232.12 0.8853 205.50 82.59 288.09 288.09 30 8,643.00 

RHA .................................. 233.65 0.8853 206.85 83.13 289.98 289.98 16 4,640.00 

CC2 .................................. 198.05 0.8853 175.33 70.47 245.80 *560.43 10 5,604.00 

IA2 .................................... 132.02 0.8853 116.88 46.97 163.85 163.85 30 4,915.00 

.................... .................... .................... .................... .................... .................... 100 29,656.00 

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

III. The Skilled Nursing Facility Market 

Basket Index 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Market Basket Index’’ at the 

beginning of your comments.] 

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

requires us to establish a SNF market 

basket index (input price index) that 

reflects changes over time in the prices 

of an appropriate mix of goods and 

services included in the SNF PPS. This 

proposed rule incorporates the latest 

available projections of the SNF market 

basket index. We will incorporate into 

the SNF final rule updated projections 

based on the latest available projections 

at that time. Accordingly, we have 

developed a SNF market basket index 

that encompasses the most commonly 

used cost categories for SNF routine 

services, ancillary services, and capitalrelated expenses. A discussion of our 

proposal to revise and rebase the SNF 

market basket appears in section IV. of 

this proposed rule. 

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 11 below summarizes the 

proposed updated labor-related share 

for FY 2008, which is based on the 

proposed rebased and revised SNF 

market basket. 

TABLE 11.—LABOR-RELATED RELATIVE IMPORTANCE, FY 2007 AND FY 2008 

Relative 

importance, 

labor-related, 

FY 2007 

(1997-based 

index) 

0:2 forecast 

Relative 

importance, 

labor-related, 

FY 2008 

(2004-based 

index) 

07:41 forecast 

Wages and salaries ..................................................................................................................................... 54.231 53.628 

Employee benefits ....................................................................................................................................... 11.903 12.299 

Nonmedical professional fees ..................................................................................................................... 2.721 1.442 

Labor-intensive services .............................................................................................................................. 4.035 3.746 

Capital-related (.391) ................................................................................................................................... 2.949 2.642 

Total ...................................................................................................................................................... 75.839 73.757 

Source: Global Insight, Inc., formerly DRI–WEFA. 

A. 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 

proposed 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. 

(formerly DRI–WEFA), 1st quarter 2007 

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 in 

this proposed rule. Finally, as discussed 

in section I.A. of this proposed rule, we 

no longer compute update factors to 

adjust a facility-specific portion of the 

SNF PPS rates, because the initial threephase transition period from facilityspecific to full Federal rates that started 

with cost reporting periods beginning in 

July 1998 has expired. 

B. 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. 


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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. As also discussed previously 

in section I.F.2. of this proposed rule, 

we are proposing 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, and we invite comments on 

increasing the forecast error adjustment 

threshold and its effective date, as well 

as other aspects of this proposed rule. 

As also discussed in that section, the 

payment rates for FY 2008 do 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. 

C. 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 proposed 

market basket update factor for FY 2008 

SNF Federal rates is 3.3 percent. We 

used this revised proposed update factor 

to compute the Federal portion of the 

SNF PPS rate shown in Tables 2 and 3. 

IV. Revising and Rebasing the Skilled 

Nursing Facility Market Basket Index 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Revising and Rebasing’’ at the 

beginning of your comments.] 

A. Background 

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

Security Act requires the Secretary to 

establish a market basket index that 

reflects the changes over time in the 

prices of an appropriate mix of goods 

and services included in the SNF PPS. 

Effective for cost reporting periods 

beginning on or after July 1, 1998, we 

revised and rebased our 1977 routine 

costs input price index and adopted a 

total expenses SNF input price index 

using FY 1992 as the base year. In 2001 

we rebased and revised the market 

basket to a base year of FY 1997. This 

year, in 2007, we propose to revise and 

rebase the SNF market basket to a base 

year of FY 2004. 

The term ‘‘market basket’’ technically 

describes the mix of goods and services 

needed to produce SNF care, and is also 

commonly used to denote the input 

price index that includes both weights 

(mix of goods and services) and price 

factors. The term ‘‘market basket’’ used 

in this proposed rule refers to the SNF 

input price index. 

The proposed FY 2004-based SNF 

market basket represents routine costs, 

costs of ancillary services, and capitalrelated costs. The percentage change in 

the market basket reflects the average 

change in the price of a fixed set of 

goods and services purchased by SNFs 

in order to furnish all services. For 

further background information, see the 

May 12, 1998 interim final rule (63 FR 

26289) and the July 31, 2001 final rule 

(66 FR 39582). 

For purposes of the SNF PPS, the SNF 

market basket is a fixed-weight 

(Laspeyres-type) price index. A 

Laspeyres-type index compares the cost 

of purchasing a specified mix of goods 

and services in a selected base period to 

the cost of purchasing that same group 

of goods and services at current prices. 

We construct the market basket in 

three steps. The first step is to select a 

base period and estimate total base 

period expenditure shares for mutually 

exclusive and exhaustive spending 

categories. We use total costs for routine 

services, ancillary services, and capital. 

These shares are called ‘‘cost’’ or 

‘‘expenditure’’ weights. The second step 

is to match each expenditure category to 

a price/wage variable, called a price 

proxy. We draw these price proxy 

variables from publicly available 

statistical series published on a 

consistent schedule, preferably at least 

quarterly. The final step involves 

multiplying the price level for each 

spending category by the cost weight for 

that category. The sum of these products 

(that is, weights multiplied by proxy 

index levels) for all cost categories 

yields the composite index level of the 

market basket for a given quarter or 

year. Repeating the third step for other 

quarters and years produces a time 

series of market basket index levels, 

from which we can calculate rates of 

growth. 

The market basket represents a fixedweight index because it answers the 

question of how much more or less it 

would cost, at a later time, to purchase 

the same mix of goods and services that 

was purchased in the base period. The 

effects on total expenditures resulting 

from changes in the quantity or mix of 

goods and services purchased 

subsequent or prior to the base period 

are, by design, not considered. 

As discussed in the May 12, 1998 

interim final rule (63 FR 26252) and in 

the July 31, 2001 final rule (66 FR 

39582), to implement section 

1888(e)(5)(A) of the Act we propose to 

revise and rebase the market basket so 

the cost weights and price proxies 

reflect the mix of goods and services 

that SNFs purchased for all costs 

(routine, ancillary, and capital-related) 

included in the SNF PPS for FY 2004. 

B. Rebasing and Revising the Skilled 

Nursing Facility Market Basket 

The terms ‘‘rebasing’’ and ‘‘revising’’, 

while often used interchangeably, 

actually denote different activities. 

Rebasing means shifting the base year 

for the structure of costs of the input 

price index (for example, for this 

proposed rule, we propose to shift the 

base year cost structure from fiscal year 

1997 to fiscal year 2004). Revising 

means changing data sources, cost 

categories, price proxies, and/or 

methodology used in developing the 

input price index. 

We are proposing both to rebase and 

revise the SNF market basket to reflect 

2004 Medicare allowable total cost data 

(routine, ancillary, and capital-related). 

Medicare allowable costs are costs that 

could be reimbursed under the SNF 

PPS. For example, the SNF market 

basket excludes home health aide costs 

as these costs would be reimbursed 

under the HHA PPS and, therefore, 

these costs are not SNF Medicare 

allowable costs. 

The 1997-based SNF market basket is 

based on total facility costs, which 

includes costs not reimbursed under the 

SNF PPS (such as nursing facility, longterm care, HHA, and intermediate care 

facility costs). Due to insufficient data, 

we were unable to separate Medicare 

allowable costs from total facility costs 

during the 1997-based SNF market 

basket rebasing and other previous 

rebasings. For this current rebasing 

analysis, we compared a 2004-based 

SNF market basket based on Medicare 

allowable costs to one based on total 

facility cost methodologies and found 

the cost weights to be similar. We 

believe that using only Medicare 

allowable costs better reflects the cost 

structure of SNFs serving Medicare 

beneficiaries, and permits us to apply 

the same methodology used to calculate 

the Inpatient Prospective Payment 


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System (IPPS), Rehabilitation, 

Psychiatric, and Long-term Care (RPL), 

and Home Health Agency (HHA) market 

baskets. 

We selected FY 2004 as the new base 

year because 2004 is the most recent 

year for which relatively complete 

Medicare cost report data are available. 

In developing the proposed market 

basket, we reviewed SNF expenditure 

data from Medicare cost reports for FY 

2004 for each freestanding SNF that 

reported Medicare expenses and 

payments. The FY 2004 cost reports are 

those with cost reporting periods 

beginning after September 30, 2003 and 

before October 1, 2004. We maintained 

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 a typical SNF experiences. We 

show in table 16 a comparison of the 

proposed 2004-based Medicare 

allowable and total facility SNF market 

baskets. 

We developed cost category weights 

for the proposed 2004-based market 

basket in two stages. First, we derived 

base weights for seven major categories 

(wages and salaries, employee benefits, 

contract labor, pharmaceuticals, 

professional liability insurance, capitalrelated, and a residual ‘‘all other’’) using 

edited SNF Medicare cost reports. We 

edited the Medicare costs reports to 

remove reports where the data were 

deemed unreliable (for example, when 

total costs were not greater than zero). 

We divided the residual ‘‘all other’’ cost 

category into subcategories, using U.S. 

Department of Commerce Bureau of 

Economic Analysis’ 1997 Benchmark 

Input-Output (I–O) tables for the 

nursing home industry aged forward 

using price changes. (The methodology 

we used to age the data involves 

applying the annual changes from the 

price proxies to the appropriate cost 

categories. We repeat this practice for 

each year.) The 1997-based SNF market 

basket used the U.S. Department of 

Commerce Bureau of Economic 

Analysis’ 1997 Annual Input-Output 

tables and the 1997 Business 

Expenditures Survey. The 1997 Annual 

I–O is an update of the 1992 Benchmark 

I–O data, while the 1997 Benchmark I–

O is based on a completely new set of 

data and, thus, is a more comprehensive 

and up-to-date data source for nursing 

home expenditure data. 

The capital-related portion of the 

proposed rebased and revised SNF PPS 

market basket employs the same overall 

methodology used to develop the 

capital-related portion of the 1992-based 

SNF market basket, described in the 

May 12, 1998 interim final rule (63 FR 

26289) and the 1997-based SNF market 

basket, described in the July 31, 2001 

final rule (66 FR 39582). It is also the 

same methodology used for the 

inpatient hospital capital input price 

index described in the May 31, 1996 

proposed rule (61 FR 27466), the August 

30, 1996 final rule (61 FR 46196), and 

the August 12, 2005 final rule (70 FR 

47407). The strength of this 

methodology is that it reflects the 

vintage nature of capital, which 

represents the acquisition and use of 

capital over time. We explain this 

methodology in more detail below. 

Our proposed rebasing and revising of 

the market basket index resulted in 23 

cost weights, a change from the current 

market basket. We are adding cost 

categories for postage and professional 

liability insurance (PLI), and have 

changed price proxies in several of the 

categories. We describe below the 

sources of the main category weights 

and their subcategories in the proposed 

2004-based SNF market basket. The 

proposed market basket contains 23 

detailed cost weights, two more cost 

weights than the 1997-based index. 

Wages and Salaries: We derived the 

wages and salaries cost category using 

the 2004 SNF Medicare Cost Reports. 

We determined the share using 

Medicare allowable wages and salaries 

from Worksheet S–3, part II and total 

expenses from Worksheet B, part I. 

Medicare allowable wages and salaries 

are equal to total wages and salaries 

minus excluded salaries from 

Worksheet S–3, part II, as well as 

nursing facility and non-reimbursable 

salaries from Worksheet A, lines 18, 34 

through 36, and 58 through 63. 

Medicare allowable total expenses are 

equal to total expenses from Worksheet 

B, lines 16, 21 through 30, 32, 33, 48, 

and 52 through 54. This share 

represents the wage and salary share of 

costs for employees for the SNF, and 

does not include the wages and salaries 

from contract labor, which are allocated 

to wages and salaries in a later step. 

Employee Benefits: We determined 

the weight for employee benefits using 

2004 SNF Medicare Cost Reports. We 

derived the share using Medicare 

allowable wage-related costs from 

Worksheet S–3, part II and total 

expenses from Worksheet B. Medicare 

allowable benefits are equal to total 

benefits from Worksheet S–3, part II, 

minus excluded (non-Medicare 

allowable) benefits. Non-Medicare 

allowable benefits are equal to the nonMedicare allowable salaries times the 

ratio of total benefit costs for the SNF to 

the total wage costs for the SNF. 

Contract Labor: We determined the 

weight for contract labor using 2004 

SNF Medicare Cost Reports. We derived 

the share using Medicare allowable 

wage-related costs from Worksheet S–3, 

part II line 17 minus Nursing Facility 

(NF) contract labor costs and Medicare 

allowable total costs from Worksheet B, 

part I. (Worksheet S–3, part II line 17 

only includes direct patient care 

contract labor attributable to SNF and 

NF services.) NF contract labor costs 

(which are not reimbursable under 

Medicare) are equal to total contract 

labor costs multiplied by the ratio of NF 

wages and salaries to the sum of NF and 

SNF wages and salaries. 

We then distributed contract labor 

costs between the wages and salaries 

and employee benefits cost categories, 

under the assumption that contract costs 

should move at the same rate as direct 

labor costs even though unit labor cost 

levels may be different. 

Pharmaceuticals: We derived the cost 

weight for pharmaceuticals from the 

2004 SNF Medicare Cost Reports. We 

calculated this share using non-salary 

costs from the Pharmacy cost center and 

the Drugs Charged to Patients’ cost 

center, both found on Worksheet B. 

Since these drug costs were attributable 

to the entire SNF and not limited to 

Medicare allowable services, we 

adjusted the drug costs by the ratio of 

Medicare allowable pharmacy total 

costs to total pharmacy costs from 

Worksheet B, part I, column 11. 

Worksheet B, part I allocates the general 

service cost centers, which are often 

referred to as ‘‘overhead costs’’ (in 

which pharmacy costs are included), to 

the Medicare allowable and nonMedicare allowable cost centers. This 

resulted in a drug cost weight (3.2 

percent) that was slightly higher than 

the drug cost weight would have been 

(2.7 percent) if no adjustment for 

Medicare allowable services had been 

made. We are proposing to use this 

methodology to derive the 

pharmaceutical cost weight. 

In addition to the Medicare allowable 

methodology, we also 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. Because these expenses are not 

reported directly, we were required to 


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estimate them using cost-to-charge 

ratios. Medicare drug costs can be 

calculated as the product of non-salary, 

non-overhead costs from the Drugs 

Charged to Patients cost center 

(including allocated costs from the 

Pharmacy cost center) from Worksheet 

B, part I and the cost-to-charge ratio 

from Worksheet D, part 1. We excluded 

salary and facility overhead costs from 

this weight, as these costs would be 

included in the other cost weights. 

Medicare total costs can be calculated as 

the sum of Medicare inpatient costs and 

Medicare ancillary costs, including 

Medicare drug costs. 

This methodology produced a cost 

weight that was nearly three times 

higher than the Medicare allowable drug 

cost weight. This considerably higher 

drug cost weight is primarily driven by 

the cost-to-charge ratio for the Drugs 

Charged to Patients cost center, which is 

0.8 on average based on the 2004 SNF 

Medicare cost reports. This ratio has 

been relatively consistent over the last 

five years. The Drugs Charged to Patient 

cost center is one of the ancillary cost 

centers on the Medicare cost report. The 

average cost-to-charge ratio for all 

ancillary cost centers is 0.65. 

Furthermore, the Medicare Drugs 

Charged to Patients cost-to-charge ratios 

for freestanding SNFs differ greatly from 

those of hospital-based SNFs. Hospitalbased SNFs report an average cost-tocharge ratio for the Drugs Charged to 

Patients cost center of 0.22. For 

sensitivity analysis we used the 

hospital-based ratio of 0.22 to estimate 

a freestanding SNF Medicare drug cost 

weight. The resulting weight was 3.3 

percent, which is close to the 3.2 

percent weight that was determined 

using the Medicare allowable 

methodology. Contrary to freestanding 

SNFs, the cost-to-charge ratio for the 

Drugs Charged to Patients cost center for 

hospital-based SNFs is below the 

average cost-to-charge ratio for all 

ancillary cost centers, which is 0.29. 

The large inconsistencies between 

freestanding and hospital-based SNFs, 

including the substantial difference in 

the drug cost-to-charge ratios, as well as 

the dissimilarity in the relationships of 

those ratios to the cost-to-charge ratios 

from all ancillary cost centers by SNF 

type, led us to believe this methodology 

was inappropriate to use in developing 

the proposed drug cost weight in the 

proposed 2004-based SNF market 

basket. In addition, as part of our 

sensitivity analysis, we estimated the 

impact that this alternative methodology 

would have on our proposed FY 2008 

update, and found that it was minimal. 

However, we are soliciting comments on 

this methodology. We also welcome any 

input, data, or documentation from the 

public that would help to clarify the 

discrepancies between freestanding and 

hospital-based facilities’ Medicare drug 

cost weights. Based on further internal 

analyses and any external data or 

documentation that we receive from the 

industry, we may still consider adoption 

of this Medicare drug cost weight 

methodology to derive the SNF market 

basket drug cost weight. 

Table 12 below shows the similarity 

between the SNF market basket percent 

changes using the drug cost weight 

calculated with the Medicare allowable 

methodology for drugs and the market 

basket percent changes using the 

alternative drug methodology described 

above. 

Malpractice: Unlike the 1997-based 

SNF market basket, the proposed 2004- 

based SNF market basket includes a 

separate cost category for professional 

liability insurance (PLI). The 2004 SNF 

Medicare cost reports include PLI as an 

entry, while in 1997 very few SNFs 

reported data for malpractice premiums, 

paid losses, or self-insurance on 

Worksheet S–2. In addition, the 1997 

Benchmark Input-Output table 

indicated that the general category for 

insurance carriers (which includes PLI 

as a subset) was a very small share of 

total SNF costs in 1997. In the past, it 


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has been our policy not to provide 

detailed breakouts of cost categories 

unless they represent a significant 

portion of providers’ costs. Recent 

indications are that PLI costs for SNFs 

are rising. 

We calculated the share using 

malpractice costs from Worksheet S–2 

of the Medicare Cost reports to develop 

a SNF total facility cost weight. Since 

these malpractice costs are attributable 

to the entire SNF and not just Medicare 

allowable services, we adjusted the 

malpractice costs by the ratio of 

Medicare allowable beds to total facility 

beds. We believe this is an appropriate 

adjustment as malpractice costs are 

often based on the number of facility 

beds. The proposed malpractice cost 

weight is slightly higher than the 2004- 

based SNF total facility market basket 

malpractice cost weight. 

In addition to the proposed 

adjustment, we also considered 

adjusting the total facility malpractice 

costs by the ratio of SNF inpatient days 

to total facility days and by the ratio of 

Medicare allowable costs to total facility 

costs. We note that these latter 

adjustment methodologies produced 

malpractice cost weights that were less 

than one-tenth of a percentage point 

different than the Medicare allowable 

cost weight determined using our 

proposed adjustment of Medicare 

allowable beds to total beds. Again, we 

believe using Medicare allowable beds 

to total beds is an appropriate 

adjustment to total facility malpractice 

costs as malpractice costs are often 

based on the number of facility beds. 

Due to a lack of data, the malpractice 

cost weight was not broken out 

separately in the 1997-based SNF 

market basket. 

Capital-Related: We derived the 

weight for overall capital-related 

expenses using the 2004 SNF Medicare 

cost reports. We calculated the Medicare 

allowable capital-related cost weight 

from Worksheet B, part II. In 

determining the subcategory weights for 

capital, we used information from the 

2004 SNF Medicare Cost Reports and 

the 2002 Bureau of Census’ Business 

Expenditure Survey (BES). We 

calculated the depreciation cost weight 

using depreciation costs from 

Worksheet S–2. Unlike the cost weights 

described above, we did not calculate 

the depreciation cost weight using 

Medicare allowable total costs. Rather, 

we used total facility costs under the 

assumption that the depreciation of an 

asset is not dependent upon whether the 

asset was used for Medicare or nonMedicare patients. 

We determined the distribution 

between building and fixed equipment 

and movable equipment from the 2004 

SNF Medicare Cost Reports. From these 

calculations, we estimated the 

depreciation expenses (that is, 

depreciation expenses excluding leasing 

costs) to be 32 percent of total capitalrelated expenditures in 2004. 

We also derived the interest expense 

share of capital-related expenses from 

Worksheet A for the same edited 2004 

SNF Medicare cost reports. Similar to 

the depreciation cost weight, we 

calculated the interest cost weight using 

total facility costs. For the current 

market basket, we determined the split 

of interest expense between for-profit 

and not-for-profit facilities based on the 

distribution of long-term debt 

outstanding by type of SNF (for-profit or 

not-for-profit) from the 2004 SNF 

Medicare cost reports. We estimated the 

interest expense (that is, interest 

expenses excluding leasing costs) to be 

34 percent of total capital-related 

expenditures in 2004. 

Because the data were not available in 

the Medicare cost reports, we used the 

most recent 2002 BES data to derive the 

capital-related expenses attributable to 

leasing and other capital-related 

expenses. We determined the leasing 

costs to be 21 percent of capital-related 

expenses in 2002, while we determined 

the other capital-related costs 

(insurance, taxes, licenses, other) to be 

13 percent of capital-related expenses. 

Lease expenses are not broken out as 

a separate cost category, but are 

distributed among the cost categories of 

depreciation, interest, and other, 

reflecting the assumption that the 

underlying cost structure of leases is 

similar to capital costs in general. As 

was done in previous rebasings, we 

assumed 10 percent of lease expenses 

are overhead and assigned them to the 

other capital expenses cost category as 

overhead. We distributed the remaining 

lease expenses to the three cost 

categories based on the proportion of 

depreciation, interest, and other capital 

expenses to total capital costs, 

excluding lease expenses. 

Table 13 shows the capital-related 

expense distribution (including 

expenses from leases) in the proposed 

2004-based SNF market basket and the 

1997-based SNF market basket. 

TABLE 13.—COMPARISON OF THE CAPITAL-RELATED EXPENSE DISTRIBUTION OF THE 2004-BASED SNF MARKET BASKET

AND THE 1997-BASED SNF MARKET BASKET

Cost category 

Proposed 2004- 

based SNF 

market basket 

1997-based SNF 

market basket 

Capital-related Expenses ............................................................................................................................. 7.518 8.602 

Total Depreciation ........................................................................................................................................ 2.981 5.266 

Total Interest ................................................................................................................................................ 3.168 3.852 

Other Capital-related Expenses .................................................................................................................. 1.369 0.760 

Our methodology for determining the 

price change of capital-related expenses 

accounts for the vintage nature of 

capital, which is the acquisition and use 

of capital over time. In order to capture 

this vintage nature, the price proxies 

must be vintage-weighted. The 

determination of these vintage weights 

occurs in two steps. First, we must 

determine the expected useful life of 

capital and debt instruments in SNFs. 

Second, we must identify the proportion 

of expenditures within a cost category 

that is attributable to each individual 

year over the useful life of the relevant 

capital assets, or the vintage weights. 

The data source that we previously used 

to develop the useful lives of capital is 

no longer available. We researched 

alternative data sources and found that 

the Bureau of Economic Analysis (BEA) 

provided enough data for us to derive 

the useful lives of both fixed and 

movable capital. 

Estimates of useful lives for movable 

and fixed assets are 9 and 22 years, 

respectively. These estimates are based 

on data from the BEA which publishes 

various useful life-related statistics, 

including asset service lives and average 

ages. We note, however, that these data 

in their published form are not directly 

applicable to SNFs. However, we can 

use the BEA data to produce our own 

useful life estimates for SNFs. 


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BEA service life data are published at 

a detailed asset level and not at an 

aggregate level, such as movable and 

fixed assets. There are 43 detailed 

movable assets in the BEA estimates. 

Some examples include computer 

software (34 months service life), 

electromedical equipment (9 years), 

medical instruments and related 

equipment (12 years), communication 

equipment (15 years), and office 

equipment (8 years). There are 23 

detailed fixed assets in the BEA 

estimates. Some examples of detailed 

fixed assets are medical office buildings 

(36 years), hospitals and special care 

buildings (48 years), lodging (32 years), 

and so on (Bureau of Economic 

Analysis, Fixed Assets and Consumer 

Durable Goods in the United States, 

1925–97, September 2003; Carol E. 

Moylan and Brooks B. Robinson, 

‘‘Preview of the 2003 Comprehensive 

Revision of the National Income and 

Product Accounts: Statistical Changes,’’

Survey of Current Business, Volume 83, 

No. 9 (September 2003), pp. 17–32). 

However, BEA also publishes average 

asset age estimates. Data are available 

(1) by detailed and aggregate asset levels 

and (2) by industry, and were last 

published in 2002. In these estimates, 

SNFs are included in the Standard 

Industrial Classification (SIC) ‘‘health 

services.’’ We recognize, though, that 

this industry classification encompasses 

far more than SNFs (that is, hospitals 

and other health-related facilities, 

physician and dental services, medical 

laboratories, home health services, 

kidney dialysis centers, and more). In 

2003, BEA changed their industry 

classification system to a North 

American Industrial Classification 

System (NAICS) basis. SNFs are now 

included in ‘‘nursing and residential 

care services,’’ a more relevant industry. 

Unfortunately, at the time of this 

analysis, BEA had not published 

average ages based on these new 

industry classifications. 

Nonetheless, we have approximated 

average movable and fixed asset ages for 

nursing and residential care services 

using other published BEA numbers 

such as those noted previously. At the 

time of our analysis, 2001 was the latest 

year of age estimates data. We took 

average ages for each asset and weighted 

them using stock levels for each of these 

assets in the nursing and residential 

care services industry. The stocks for 

each specific asset come from BEA’s 

Detailed Fixed Asset Tables (http:// 

www.bea.gov/national/FA2004/Details/ 

xls/detailnonres_stk1.xls). This 

produced average age data for movable 

and fixed assets of 4.3 and 11.2 years. 

As average asset ages stay relatively 

constant from one year to the next, we 

have assumed these results would 

remain the same for 2004. Further, as 

averages are measures of central 

tendency, we multiplied each of these 

estimates by two to produce estimates of 

useful lives of 8.6 and 22.4 years for 

movable and fixed assets, which we 

would round to 9 and 22 years, 

respectively. 

We are proposing to use this 

methodology to develop the vintage 

weights in the proposed 2004-based 

SNF market basket. We are proposing an 

interest vintage weight time span of 20 

years, obtained by weighting the 

movable and fixed vintage weights (9 

years and 22 years, respectively) by the 

moveable and fixed split (14 percent 

and 86 percent, respectively). We 

calculated the split between moveable 

and fixed capital expenses from 

Worksheet G of the 2004 SNF Medicare 

cost reports. 

Below is a table comparing the market 

basket percent changes using the 

proposed useful lives of 9 years for 

movable assets, 22 years for fixed assets, 

and 20 years for interest with the 1997- 

based useful lives of 10 years for 

movable assets, 23 years for fixed assets, 

and 23 years for interest. For both the 

historical and forecasted periods 

between FY 2002 and FY 2010, the 

difference between the two market 

baskets is minor. 


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In addition to the proposed 

methodology, we also researched 

alternative data sources, including the 

Medicare cost reports. An asset’s useful 

life can be determined by taking the 

current year’s depreciation costs 

divided by the depreciable assets. This 

methodology is used to derive the useful 

lives of fixed and movable assets in the 

2002-based Capital Input Price Index. 

However, unlike the hospital Medicare 

cost reports, the SNF Medicare cost 

reports do not provide depreciation 

costs for fixed and movable assets 

separately. We attempted to calculate 

the 2004 depreciation costs for fixed 

and movable equipment separately 

using the SNF Medicare cost reports. 

Specifically, we subtracted the 

accumulated depreciation for fixed and 

moveable assets separately for 2003 and 

2002, as reported in the balance sheet 

(Worksheet G), using a matched sample 

of SNFs with consecutive cost reporting 

periods. However, we were unable to 

use this methodology as less than 1,000 

SNF providers reported these data, 

while approximately 9,000 SNFs 

reported salary, benefit, and contract 

labor data. We are hopeful that at our 

next rebasing of the SNF market basket, 

there will be sufficient balance sheet 

data to calculate the useful lives of fixed 

and movable equipment. 

Given the expected useful life of 

capital and debt instruments, we must 

determine the proportion of capital 

expenditures attributable to each year of 

the expected useful life by cost category. 

These proportions represent the vintage 

weights. We were not able to find a 

historical time series of capital 

expenditures by SNFs. Therefore, we 

approximated the capital expenditure 

patterns of SNFs over time using 

alternative SNF data sources. For 

building and fixed equipment, we used 

the stock of beds in nursing homes from 

the CMS National Health Accounts for 

1962 through 1999. Due to a lack of data 

for 2000 through 2003, we extrapolated 

the 1999 bed data forward to 2004 using 

a 10-year moving average of bed growth. 

We then used the change in the stock of 

beds each year to approximate building 

and fixed equipment purchases for that 

year. This procedure assumes that bed 

growth reflects the growth in capitalrelated costs in SNFs for building and 

fixed equipment. We believe that this 

assumption is reasonable because the 

number of beds reflects the size of a 

SNF, and as a SNF adds beds, it also 

adds fixed capital. 

For movable equipment, we used 

available SNF data to capture the 

changes in intensity of SNF services that 

would cause SNFs to purchase movable 

equipment. We estimated the change in 

intensity as the change in the ratio of 

non-therapy ancillary costs to routine 

costs from 1989 through 2004 using 

Medicare cost reports. We estimated this 

ratio for 1962 through 1988 using 

regression analysis. The time series of 

the ratio of non-therapy ancillary costs 

to routine costs for SNFs measures 

changes in intensity in SNF services, 

which are assumed to be associated 

with movable equipment purchase 

patterns. The assumption here is that as 

non-therapy ancillary costs increase 

compared to routine costs, the SNF 

caseload becomes more complex and 

would require more movable 

equipment. Again, the lack of movable 

equipment purchase data for SNFs over 

time required us to use alternative SNF 

data sources. Although we are 

proposing to use the ratio of nontherapy ancillary costs to routine costs 

as the proxy for changes in the intensity 

of SNF services, we are also reviewing 

the possibility (and feasibility) of using 

the ratio of total ancillary costs 

(including therapy and non-therapy 

costs) to routine costs such as a proxy. 

We recognize that therapy utilization in 

SNFs has increased over the last decade 

and, therefore, the therapy equipment 

purchases have also likely increased, 

although perhaps at a different rate than 

those of non-therapy ancillary 

equipment. We plan to review this 

methodology between the publication of 

the proposed and final rules. We 

welcome any comments and/or 

equipment purchase data that would 

help enhance this review. Depending 

upon whether the latter methodology is 

appropriate and feasible, we may 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. The resulting two 

time series, determined from beds and 

the ratio of non-therapy ancillary to 

routine costs, would reflect real capital 

purchases of building and fixed 

equipment and movable equipment over 

time, respectively. 

To obtain nominal purchases, which 

are used to determine the vintage 

weights for interest, we converted the 

two real capital purchase series from 

1963 through 2004 determined above to 

nominal capital purchase series using 

their respective price proxies (the 

Boeckh Institutional Construction Index 

and the PPI for Machinery and 

Equipment). We then combined the two 

nominal series into one nominal capital 

purchase series for 1963 through 2004. 

Nominal capital purchases are needed 

for interest vintage weights to capture 

the value of debt instruments. 

Once we created these capital 

purchase time series for 1963 through 

2004, we averaged different periods to 

obtain an average capital purchase 

pattern over time. For building and 

fixed equipment we averaged twentyone 22-year periods, for movable 

equipment we averaged thirty-four 9- 

year periods, and for interest we 

averaged twenty-four 20-year periods. 

We calculate the vintage weight for a 

given year by dividing the capital 

purchase amount in any given year by 

the total amount of purchases during the 

expected useful life of the equipment or 

debt instrument. We described this 

methodology in the May 12, 1998 

interim final rule (63 FR 26252). Table 

15 shows the resulting vintage weights 

for each of these cost categories. 

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We divided the residual ‘‘all other’’

cost category into subcategories, using 

the BEA’s Benchmark Input-Output 

Tables for the nursing home industry 

aged to 2004 using relative price 

changes. (The methodology we used to 

age the data involves applying the 

annual price changes from the price 

proxies to the appropriate cost 

categories. We repeat this practice for 

each year.) Therefore, we derive 

approximately 80 percent of the 2004- 

based SNF market basket from FY 2004 

Medicare cost report data for 

freestanding SNFs. 

Below is a table comparing the 

proposed 2004-based SNF market basket 

using the proposed Medicare allowable 

methodology and the proposed 2004- 

based SNF market basket using the total 

facility methodology. 


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Using the Medicare allowable 

methodology does affect the individual 

cost weights of the SNF market basket. 

The compensation cost weight using the 

Medicare allowable methodology is 

higher than that calculated using the 

total facility methodology. This is 

primarily due to the exclusion of long 

term care hospital (LTCH) and 

nonreimbursable inpatient costs 

(including, but not limited to gift, 

flower, coffee, barber shops and 

physician private offices) from the 

Medicare allowable cost weight. In 

addition, LTCH and nonreimbursable 


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services tend to be less labor intensive; 

therefore, the exclusion of these costs 

from the Medicare allowable market 

basket results in a higher compensation 

weight than the compensation weight in 

the total facility market basket. 

The capital cost weight using the 

Medicare allowable methodology is 

slightly lower than the total facility 

methodology. This is also primarily due 

to the exclusion of LTCH and 

nonreimbursable inpatient costs. 

Below is a table comparing the 

proposed 2004-based SNF market basket 

with the currently used 1997-based SNF 

market basket. 

C. Price Proxies Used To Measure Cost 

Category Growth 

After developing the 23 cost weights 

for the proposed revised and rebased 

SNF market basket, we selected the 

most appropriate wage and price 

proxies currently available to monitor 

the rate of change for each expenditure 

category. With four exceptions (three for 

the capital-related expenses cost 

categories and one for PLI), we base the 

wage and price proxies on Bureau of 

Labor Statistics (BLS) data, and group 

them into one of the following BLS 

categories: 

• Employment Cost Indexes. 

Employment Cost Indexes (ECIs) 


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measure the rate of change in 

employment wage rates and employer 

costs for employee benefits per hour 

worked. These indexes are fixed-weight 

indexes and strictly measure the change 

in wage rates and employee benefits per 

hour. ECIs are superior to Average 

Hourly Earnings (AHE) as price proxies 

for input price indexes because they are 

not affected by shifts in occupation or 

industry mix, and because they measure 

pure price change and are available by 

both occupational group and by 

industry. ECIs were based on NAICS 

(North American Industrial 

Classification System) rather than SIC 

(Standard Industrial Classification) in 

April 2006 with the publication of 

March 2006 data. 

• Producer Price Indexes. Producer 

Price Indexes (PPIs) measure price 

changes for goods sold in markets other 

than retail markets. PPIs are used when 

the purchases of goods or services are 

made at the wholesale level. 

• Consumer Price Indexes. Consumer 

Price Indexes (CPIs) measure changes in 

the prices of final goods and services 

bought by consumers. CPIs are only 

used when the purchases are similar to 

those of retail consumers rather than 

purchases at the wholesale level, or if 

no appropriate PPI were available. 

We evaluated the price proxies using 

the criteria of reliability, timeliness, 

availability, and relevance. Reliability 

indicates that the index is based on 

valid statistical methods and has low 

sampling variability. Widely accepted 

statistical methods ensure that the data 

were collected and aggregated in a way 

that can be replicated. Low sampling 

variability is desirable because it 

indicates that the sample reflects the 

typical members of the population. 

(Sampling variability is variation that 

occurs by chance because only a sample 

was surveyed rather than the entire 

population.) Timeliness implies that the 

proxy is published regularly, preferably 

at least once a quarter. The market 

baskets are updated quarterly and, 

therefore, it is important for the 

underlying price proxies to be up-todate, reflecting the most recent data 

available. We believe that using proxies 

that are published regularly (at least 

quarterly, whenever possible) helps to 

ensure that we are using the most recent 

data available to update the market 

basket. We strive to use publications 

that are disseminated frequently, 

because we believe that this is an 

optimal way to stay abreast of the most 

current data available. Availability 

means that the proxy is publicly 

available. We prefer that our proxies are 

publicly available because this will help 

ensure that our market basket updates 

are as transparent to the public as 

possible. In addition, this enables the 

public to be able to obtain the price 

proxy data on a regular basis. Finally, 

relevance means that the proxy is 

applicable and representative of the cost 

category weight to which it is applied. 

The CPIs, PPIs, and ECIs that we have 

selected to propose in this regulation 

meet these criteria. Therefore, we 

believe that they continue to be the best 

measure of price changes for the cost 

categories to which they would be 

applied. 

Table 19 lists all price proxies for the 

proposed revised and rebased SNF 

market basket. Below is a detailed 

explanation of the price proxies used for 

each cost category weight. 

1. Wages and Salaries 

For measuring price growth in the 

wages and salaries cost component of 

the proposed 2004-based SNF market 

basket, we propose using the percentage 

change of a blended index based on 50 

percent of the ECI for wages and salaries 

for nursing and residential care facilities 

(NAICS 623) and 50 percent of the ECI 

for wages and salaries for hospital 

workers (NAICS 622). 

The 1997-based SNF market basket 

uses the ECI for nursing and residential 

care facilities as a proxy, which is based 

on the Standard Industrial Code (SIC) 

805. Beginning in April 2006 with the 

publication of March 2006 data, ECIs 

were converted from an SIC basis to an 

NAICS basis. The ECI for wages and 

salaries for nursing and residential care 

facilities was replaced with an index 

that was less representative of skilled 

nursing facilities, NAICS 623. NAICS 

623 represents facilities that provide 

residential care combined with nursing, 

supervisory, or other types of care. The 

care provided is a mix of health and 

social services with the health services 

being largely some level of nursing 

services. Within NAICS 623 is NAICS 

623100, nursing care facilities primarily 

engaged in providing inpatient nursing 

and rehabilitative services. These 

facilities, which are most comparable to 

Medicare-certified SNFs, provide skilled 

nursing and continuous personal care 

services for an extended period of time 

and therefore, have a permanent core 

staff of registered or licensed practical 

nurses. 

Employment in nursing care facilities 

(NAICS 623100) represents 

approximately 56 percent of 2003 and 

2004 employment in nursing and 

residential care (NAICS 623). The SICbased wage proxy, the ECI for nursing 

and personal care facilities based on SIC 

805, includes skilled nursing care 

facilities (SIC 8051), which accounts for 

approximately 75 percent of the 

employment. Therefore, the SIC based 

ECI is more representative of Medicarecertified skilled nursing facilities than 

the NAICS based ECI. 

BLS began publishing ECI data for the 

more detailed nursing care facilities 

(NAICS 623100) beginning with 2006, 

first quarter. However, given the lack of 

historical data, Global Insight Inc., the 

economic forecasting firm used to 

forecast the price proxies of the market 

basket, is unable to develop a 

forecasting model for this detailed 

NAICS ECI. In the future, when 

sufficient data are available to forecast 

the ECI for NAICS 623100, we will 

evaluate the use of this price proxy in 

the SNF market basket. For now, we 

have researched and developed several 

alternative wage and salary price 

proxies, which we describe in detail 

below. All of the five alternative wage 

and salary price proxies use the 

Occupational Employment Statistics 

(OES) survey published by BLS to 

develop occupational weights. The first 

four options use the OES data to create 

economy-wide occupational groups 

while the fifth option uses OES data to 

measure healthcare specific 

occupational groups. 

The first proxy (option 1) is a blended 

wage index composed of four 

occupational groups that appear in 

NAICS. The weights of the four 

economy-wide occupational groups 

(professional and technical, services, 

clerical, and managers) are equal to the 

shares of total payroll for NAICS 6231 

that each occupational group 

constitutes. We proxied each 

occupational group by a representative 

ECI to create a blended wage index. 

Therefore, the professional and 

technical (P&T) occupational group is a 

proxy to the ECI for professional and 

technical workers. The services 

occupational group is a proxy to the ECI 

for service workers. The clerical 

occupational group is a proxy to the ECI 

for clerical workers. The managers 

occupational group is a proxy to the ECI 

for executive, administrative, and 

managerial occupations. 

The second alternative index (option 

2) uses the same methodology as the 

option 1 wage proxy, except that we 

would base the occupational group 

weights on employment data rather than 

payroll data from the BLS OES. 

The third alternative index (option 3) 

again uses a methodology similar to 

options 1 and 2, but would increase the 

weight for P&T workers by one-half of 

the difference between the hospital P&T 

employment share and the nursing care 

facility P&T employment share. As the 

P&T share increases, the other weights 


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would be normalized and would 

decrease slightly so the weights for all 

occupational groups add to 1.0. 

The fourth alternative index (option 

4) increases the weight of P&T workers 

by one-third of the difference between 

the hospital P&T employment share and 

the nursing care facility P&T 

employment share. Again, as the P&T 

share increases, the weights of the other 

4 occupational groups would decrease 

through the normalization. 

The last proposed alternative index 

(option 5) is a blended wage index 

based on 50 percent of the ECI for 

hospital workers (NAICS 622) and 50 

percent of the ECI nursing and 

residential care facility (NAICS 623). We 

estimate the weights of 50 percent from 

BLS OES data, which show that the 

share of payroll attributable to registered 

nurses, licensed practical and licensed 

vocational nurses, and health care 

practitioners and technical occupations 

for nursing care facilities (NAICS 623) is 

50 percent of the share of payroll for the 

same occupations as for hospitals. 

We propose to use the option 5 index, 

because we believe that the new ECI for 

nursing and residential care facilities 

based on NAICS 623 will no longer 

accurately represent the skilled nursing 

and healthcare staff employed at 

Medicare-certified SNFs. Using a 

blended index of the ECI for nursing 

and residential care and the ECI for 

hospital workers gives more weight to 

the percent changes of wages and 

salaries for these skilled healthcare 

workers, who are also employed at 

hospitals. As the data indicate, the 

hospital industry occupational mix is 

more skilled than that of a Medicarecertified SNF, so we believe that a blend 

of the two indexes would be the best 

alternative given the data limitations. 

We believe the major drawback of 

options 1 through 4 is that while these 

indexes may reflect the use of more 

skilled healthcare staff, the types of P&T 

workers represented in the ECI for P&T 

workers are not heavily weighted 

toward healthcare professional and 

technical workers. 

2. Employee Benefits 

For measuring price growth in the 

benefit cost component of the 2004- 

based SNF market basket, we propose 

using the percentage change of a 

blended index based on 50 percent of 

the ECI for benefits for nursing and 

residential care facilities (NAICS 623) 

and 50 percent of the ECI for benefits for 

hospital workers (NAICS 622). For the 

same reasons noted above for the wages 

and salaries cost category, we believe 

this blended index is the best proxy for 

employee benefit price growth. 

Below is a table comparing the market 

basket percent changes using the 

proposed wage and benefit proxies and 

the alternative wage and benefit proxies 

(options 1 through 4). For the historical 

period between FY 2002 and FY 2006, 

the difference between the proposed 

market basket and the market baskets 

using the alternative compensation 

price proxies is significant. This is the 

result of the healthcare professional and 

technical occupations’ compensation 

increasing faster than overall 

professional and technical occupations. 

The largest difference occurred in FY 

2002, when the proposed market basket 

increased 3.7 percent compared to an 

increase in the alternative compensation 

market baskets of 2.5 percent. 

For the forecasted time period (FY 

2007 to FY 2010), the difference 

between the proposed market basket 

and the alternative compensation 

market baskets is less than the historical 

difference. This is a result of the 

expectation that compensation 

inflationary pressures in the healthcare 

industry will lessen and the price 

changes associated with healthcare 

professional and technical 

compensation will be comparable to the 

price changes associated with overall 

professional and technical 

compensation. As stated previously, we 

believe the blended index of the ECI for 

nursing and residential care and the ECI 

for hospital workers best reflects the 

occupational mix (specifically, skilled 

healthcare workers) of SNFs serving 

Medicare patients. 


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3. All Other Expenses 

• Nonmedical professional fees: We 

are proposing to use the ECI for 

compensation for Private Industry 

Professional, Technical, and Specialty 

Workers to measure price changes in 

nonmedical professional fees. We used 

the same index in the 1997-based SNF 

market basket. 

• Professional liability insurance: We 

were unable to find a price proxy that 

directly tracks the prices associated 

with SNF malpractice costs. Our desired 

price proxy would calculate the price 

changes for a fixed coverage of SNF 

general liability insurance (for example, 

$1 million/$3 million liability 

coverage). It would not, by definition of 

a fixed weight index, reflect the increase 

in costs associated with increases in 

coverage, because that is found in the 

malpractice cost weight. 

We have met with representatives for 

the SNF industry on this subject. We 

have also reviewed several studies on 

nursing home and long-term care 

liability insurance, all of which state 

that the cost of malpractice insurance 

has increased significantly over the last 

five years. Our own analysis of SNF 

malpractice costs, as reported on the 

Medicare cost reports, shows that from 

1999 to 2003, malpractice costs per bed 

have increased over 300 percent. This 

increase in costs is also seen in the 

malpractice cost weight, which has 

more than doubled over the same time 

period. 

The difficulties associated with 

pricing malpractice costs are 

experienced in all healthcare sectors, 

including hospitals and physicians. In 

addition to the lack of comprehensive 

data, the questions of how to proxy selfinsurance, how to allocate paid losses 

over time, and how to account for those 

providers who are unable to purchase 

the insurance, make the process of 

measuring price changes associated 

with malpractice insurance extremely 

difficult. We are currently researching 

alternative data sources, such as 

obtaining the data directly from the 

individual states’ Departments of 

Insurance. Given the lack of SNFspecific data, we are proposing to use 

the CMS Hospital Professional Liability 

Index, which tracks price changes for 

commercial insurance premiums for a 

fixed level of coverage, holding nonprice factors constant (such as a change 

in the level of coverage). 

• Electricity: For measuring price 

change in the electricity cost category, 

we are proposing to use the PPI for 

Commercial Electric Power. We used 

the same index in the 1997-based SNF 

market basket. 

• Fuels, nonhighway: For measuring 

price change in the Fuels, Nonhighway 

cost category, we are proposing to use 

the PPI for Commercial Natural Gas. We 

used the same index in the 1997-based 

SNF market basket. 

• Water and Sewerage: For measuring 

price change in the Water and Sewerage 

cost category, we are proposing to use 

the CPI-U (Consumer Price Index for All 

Urban Consumers) for Water and 

Sewerage. We used the same index in 

the 1997-based SNF market basket. 

• Food-wholesale purchases: For 

measuring price change in the Foodwholesale purchases cost category, we 

are proposing to use the PPI for 

Processed Foods. We used the same 

index in the 1997-based SNF market 

basket. 

• Food-retail purchases: For 

measuring price change in the Foodretail purchases cost category, we are 

proposing to use the CPI-U for Food 

Away From Home. This reflects the use 

of contract food service by some SNFs. 

We used the same index in the 1997- 

based SNF market basket. 

• Pharmaceuticals: For measuring 

price change in the Pharmaceuticals 

cost category, we are proposing to use 

the PPI for Prescription Drugs. We used 

the same index in the 1997-based SNF 

market basket. 

• Chemicals: For measuring price 

change in the Chemicals cost category, 

we are proposing to use a blended PPI 

composed of the PPIs for soap and other 

detergent manufacturing (NAICS 

325611), polish and other sanitation 

good manufacturing (NAICS 325612), 

and all other miscellaneous chemical 

product manufacturing (NAICS 325998). 

Using the 1997 Benchmark I-O data, we 

found that the latter NAICS industries 

accounted for approximately 65 percent 

of SNF chemical expenses. Therefore, 

we are proposing to use this index 

because we believe it better reflects 

purchasing patterns of SNFs than PPI 

for Industrial Chemicals, the proxy used 

in the 1997-based market basket. 

• Rubber and Plastics: For measuring 

price change in the Rubber and Plastics 

cost category, we are proposing to use 

the PPI for Rubber and Plastic Products. 

We used the same index in the 1997- 

based SNF market basket. 

• Paper Products: For measuring 

price change in the Paper Products cost 

category, we are proposing to use the 

PPI for Converted Paper and 

Paperboard. We used the same index in 

the 1997-based SNF market basket. 

• Miscellaneous Products: For 

measuring price change in the 

Miscellaneous Products cost category, 

we are proposing to use the PPI for 

Finished Goods less Food and Energy. 

Both food and energy are already 

adequately represented in separate cost 

categories and should not also be 

reflected in this cost category. We used 

the same index in the 1997-based SNF 

market basket. 

• Telephone Services: For measuring 

the price change in the telephone 

services, we are proposing to use the 

CPI-U applied to this component. We 

used the same index in the 1997-based 

SNF market basket. 

• Postage: For measuring the price 

change in postage costs, we are 

proposing to use the CPI for postage. 

The 1997-based index did not have a 

separate cost category for postage. 

• Labor-Intensive Services: For 

measuring price change in the LaborIntensive Services cost category, we are 

proposing to use the ECI for 

Compensation for Private Service 

Occupations. We used the same index 

in the 1997-based SNF market basket. 

• Non Labor-Intensive Services: For 

measuring price change in the Non 

Labor-Intensive Services cost category, 

we are proposing to use the CPI–U for 

All Items. We used the same index in 

the 1997-based SNF market basket. 

4. Capital-Related 

All capital-related expense categories 

have the same price proxies as those 

used in the 1992-based SNF PPS market 

basket described in the May 12, 1998 

interim final rule (63 FR 26252) and the 

1997-based SNF PPS market basket 

described in the July 31, 2001 final rule 

(66 FR 39581). We describe the price 

proxies for the SNF capital-related 

expenses below: 

• Depreciation—Building and Fixed 

Equipment: For measuring price change 

in this cost category, we are proposing 

to use the Boeckh Institutional 

Construction Index. 

• Depreciation—Movable Equipment: 

For measuring price change in this cost 

category, we are proposing to use the 

PPI for Machinery and Equipment. 

• Interest—Government and 

Nonprofit SNFs: For measuring price 

change in this cost category, we are 

proposing to use the Average Yield for 

Municipal Bonds from the Bond Buyer 

Index of 20 bonds. CMS input price 

indexes, including this rebased and 

revised SNF market basket, 

appropriately reflect the rate of change 

in the price proxy and not the level of 

the price proxy. While SNFs may face 

different interest rate levels than those 

included in the Bond Buyer Index, the 

rate of change between the two is not 

significantly different. 

• Interest—For-profit SNFs: For 

measuring price change in this cost 

category, we are proposing to use the 


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Average Yield for Moody’s AAA 

Corporate Bonds. Again, the proposed 

rebased SNF index focuses on the rate 

of change in this interest rate, not on the 

level of the interest rate. 

• Other Capital-related Expenses: For 

measuring price change in this cost 

category, we are proposing the CPI–U 

for Residential Rent. 

Below is a table showing the proposed 

price proxies for the FY 2004-based SNF 

Market Basket. 

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BILLING CODE 4210–01–C 

D. Proposed Market Basket Estimate for 

the FY 2008 SNF Update 

As discussed previously in this 

proposed rule, beginning with the FY 

2008 SNF PPS update, we are proposing 

to adopt the FY 2004-based SNF market 

basket as the appropriate market basket 

of goods and services for the SNF PPS. 

Based on Global Insight’s 1st quarter 

2007 forecast with history through the 

4th quarter of 2006, the most recent 

estimate of the proposed 2004-based 

SNF market basket for FY 2008 is 3.3 

percent. Global Insight, Inc. is a 

nationally recognized economic and 

financial forecasting firm that contracts 

with CMS to forecast the components of 

CMS’s market baskets. Based on Global 

Insight’s 1st quarter 2007 forecast with 

historical data through the 4th quarter of 

2006, the estimate of the current 1997- 

based SNF market basket for FY 2008 is 

3.5 percent. 

Table 20 compares the proposed FY 

2004-based SNF market basket and the 

FY 1997-based SNF market basket 

percent changes. For the historical 

period between FY 2002 and FY 2006, 

the average difference between the two 

market baskets is 0.3 percentage points. 

This is primarily the result of a higher 

compensation cost weight and higher 

compensation price increases in the 

2004-based market basket compared to 

the 1997-based SNF market basket. Also 

contributing is the separate cost 

category weight for malpractice in the 

2004-based SNF market basket and the 

relatively higher price increases. For the 

forecasted period between FY 2007 and 

FY 2010, the average difference in the 

market basket forecasts is minor. 

V. Consolidated Billing 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Consolidated Billing’’ at the 

beginning of your comments.] 

Section 4432(b) of the BBA 

established a consolidated billing 

requirement that 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. As noted previously 

in section I. of this proposed rule, 

subsequent legislation enacted a number 

of modifications in the consolidated 

billing provision. 

Specifically, section 103 of the BBRA 

amended this provision by further 

excluding a number of individual ‘‘highcost, low-probability’’ services, 

identified by the Healthcare Common 

Procedure Coding System (HCPCS) 

codes, within several broader categories 

(chemotherapy and its administration, 

radioisotope services, and customized 

prosthetic devices) that otherwise 

remained subject to the provision. We 

discuss this BBRA amendment in 

greater detail in the proposed and final 

rules for FY 2001 (65 FR 19231–19232, 

April 10, 2000, and 65 FR 46790–46795, 

July 31, 2000), as well as in Program 

Memorandum AB–00–18 (Change 

Request #1070), issued March 2000, 

which is available online at 

www.cms.hhs.gov/transmittals/ 

downloads/ab001860.pdf. 

Section 313 of the BIPA further 

amended this provision by repealing its 

Part B aspect; that is, its applicability to 

Part B services furnished to a resident 

during an SNF stay that Medicare Part 

A does not cover. However, physical, 

occupational, and speech-language 

therapy remain subject to consolidated 

billing, regardless of whether the 

resident who receives these services is 

in a covered Part A stay. We discuss this 

BIPA amendment in greater detail in the 

proposed and final rules for FY 2002 (66 

FR 24020–24021, May 10, 2001, and 66 

FR 39587–39588, July 31, 2001). 

In addition, section 410 of the MMA 

amended this provision by excluding 

certain practitioner and other services 

furnished to SNF residents by RHCs and 

FQHCs. We discuss this MMA 


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amendment in greater detail in the 

update notice for FY 2005 (69 FR 

45818–45819, July 30, 2004), as well as 

in Program Transmittal #390 (Change 

Request #3575), issued December 10, 

2004, which is available online at 

www.cms.hhs.gov/transmittals/ 

downloads/r390cp.pdf. 

To date, the Congress has enacted no 

further legislation affecting the 

consolidated billing provision. 

However, as noted above and explained 

in the proposed rule for FY 2001 (65 FR 

19232, April 10, 2000), the amendments 

enacted in section 103 of the BBRA not 

only identified for exclusion from this 

provision a number of particular service 

codes within four specified categories 

(that is, chemotherapy items, 

chemotherapy administration services, 

radioisotope services, and customized 

prosthetic devices), but also gave the 

Secretary ‘‘ * * * the authority to 

designate additional, individual services 

for exclusion within each of the 

specified service categories.’’ In the 

proposed rule for FY 2001, we also 

noted that the BBRA Conference report 

(H.R. Rep. No. 106–479 at 854 (1999) 

(Conf. Rep.)) characterizes the 

individual services that this legislation 

targets for exclusion as ‘‘ * * * highcost, 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 final 

rule for FY 2001 (65 FR 46790, July 31, 

2000), and as our longstanding policy, 

any additional service codes that we 

might designate for exclusion under our 

discretionary authority must meet the 

same 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 time that has 

elapsed since we last invited comments 

on this issue, we believe it is 

appropriate at this point once again to 

invite public comments that identify 

codes in any of these four service 

categories representing recent medical 

advances that might meet our criteria for 

exclusion from SNF consolidated 

billing. 

We note that the original BBRA 

legislation (as well as the implementing 

regulations) identified a set of excluded 

services by means of specifying HCPCS 

codes that were in effect as of a 

particular date (in that case, as of July 

1, 1999). Identifying the excluded 

services in this manner made it possible 

for us to utilize program issuances as 

the vehicle for accomplishing routine 

updates of the excluded codes, in order 

to reflect any minor revisions that might 

subsequently occur in the coding system 

itself (for example, the assignment of a 

different code number to the same 

service). Accordingly, in the event that 

we identify through the current 

rulemaking cycle any new services that 

would actually represent a substantive 

change in the scope of the exclusions 

from SNF consolidated billing, we 

would identify these additional 

excluded services by means of the 

HCPCS codes that are in effect as of a 

specific date (in this case, as of October 

1, 2007). By making any new exclusions 

in this manner, we could similarly 

accomplish routine future updates of 

these additional codes through the 

issuance of program instructions. 

VI. Application of the SNF PPS to SNF 

Services Furnished by Swing-Bed 

Hospitals 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Swing-Bed Hospitals’’ at the 

beginning of your comments.] 

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 previously indicated in sections I.A. 

and I.D. of this proposed 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 

earlier sections of this proposed 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 

website, www.cms.hhs.gov/snfpps. 

VII. Provisions of the Proposed Rule 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Provisions of the Proposed 

Rule’’ at the beginning of your 

comments.] 

We propose to update the payment 

rates used under the prospective 

payment system for SNFs for FY 2008. 

In addition, we propose to rebase the 

market basket to a base year of 2004 and 

propose the following market basket 

revisions: using Medicare allowable 

total cost data instead of facility total 

cost data to derive the SNF market 

basket cost weights; using new wage 

and salary, benefits and chemical price 

proxies; using new data to estimate 

useful lives for fixed and moveable 

equipment; and adding new cost 

categories for professional liability 

insurance and postage. Also, as 

discussed previously in sections I.F.2 

and III.B of this proposed rule, we are 

proposing to raise the current 0.25 

percentage point threshold for the 

forecast error adjustment under the SNF 

PPS to 0.5 percentage point, effective 

with FY 2008. 

VIII. Collection of Information 

Requirements 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Collection of Information’’ at 

the beginning of your comments.] 

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). 

IX. Regulatory Impact Analysis 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Impact Analysis’’ at the 

beginning of your comments.] 


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A. Overall Impact 

We have examined the impacts of this 

proposed 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 proposed 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 proposed update set forth in this 

proposed 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 proposed rule would update 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 20, 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 proposed rule is considered 

major, its overall impact is extremely 

small; that is, less than 3 percent of total 

SNF revenues from all payor sources. As 

the overall impact is positive on the 

industry as a whole, and on small 

entities specifically, it is not necessary 

to consider regulatory alternatives. 

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 

proposed increase in SNF payment rates 

set forth in this proposed rule also 

applies to rural non-CAH hospital 

swing-bed services, we believe that this 

proposed 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 

proposed 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 promulgates 

regulations that impose substantial 

direct requirement costs on State and 

local governments, preempts State law, 

or otherwise has Federalism 

implications. As stated above, this 

proposed rule would have no 

substantial effect on State and local 

governments. 

B. Anticipated Effects 

This proposed rule sets forth 

proposed 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 proposed 

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, 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. Our 

latest estimates indicate that there are 

less than 2,000 beneficiaries who 

qualify for the AIDS add-on payment. 

The impact to Medicare is included in 

the ‘‘total’’ column of Table 21. In 

proposing to update the rates for FY 

2008, we made a number of standard 

annual revisions and clarifications 

mentioned elsewhere in this proposed 

rule (for example, the update to the 

wage and market basket indexes used 

for adjusting the Federal rates). These 

revisions would increase payments to 

SNFs by approximately $690 million. 

The impacts are shown in Table 21. 

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 


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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-two 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 

experience a payment decrease of 0.5 

percent, some providers (such as those 

in the urban Outlying region) show a 

significant increase of 5.7 percent. 

Payment increases for facilities in the 

urban Outlying area of the country are 

the highest for any provider category. 

BILLING CODE 4210–01–P 


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BILLING CODE 4210–01–C 

C. Accounting Statement 

As required by OMB Circular A–4 

(available at www.whitehouse.gov/omb/ 

circulars/a004/a-4.pdf), in Table 22 

below, we have prepared an accounting 

statement showing the classification of 

the expenditures associated with the 

provisions of this proposed 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 proposed 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 22.—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 million. 

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

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. 

The proposed rule would raise 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 with FY 

2008. However, as discussed in sections 

I.F.2 and III.B of this proposed rule, we 

are considering a higher threshold for 

the forecast error adjustment, up to 1.0 

percentage point. We are also 

considering delaying implementation of 

this change until FY 2009. We 

specifically invite comments on 

increasing the forecast error adjustment 

threshold and the effective date. 

E. Conclusion 

This proposed rule does not propose 

to initiate any policy changes with 

regard to the SNF PPS; rather, it simply 

proposes an update to the rates for FY 

2008. Therefore, for the reasons set forth 

in the preceding discussion, we are not 

preparing analyses for either the RFA or 

section 1102(b) of the Act, because we 

have determined that this proposed rule 

would not have a significant economic 

impact on a substantial number of small 

entities or a significant impact on the 

operations of a substantial number of 

small rural hospitals. Also, an analysis 

as outlined in section 202 of the UMRA 

has not been completed because this 

proposed rule would not have a 

substantial effect on the governments 

mentioned, or on private sector costs. 

Finally, in accordance with the 

provisions of Executive Order 12866, 

this regulation was reviewed by the 

Office of Management and Budget. 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare-Hospital 

Insurance Program; and No. 93.774, 

Medicare-Supplementary Medical Insurance 

Program) 

Dated: March 8, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Dated: March 28, 2007. 

Michael O. Leavitt, 

Secretary. 

[Note: The following Addendum will not 

appear in the Code of Federal Regulations] 

Addendum—FY 2008 CBSA Wage Index 

Tables 

In this addendum, we provide Tables 8 and 

9 which indicate the CBSA-based wage index 

values for urban and rural providers. 


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[FR Doc. 07–2180 Filed 4–30–07; 4:00 pm] 

BILLING CODE 4120–01–C 


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