### 42886 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices

**DEPARTMENT OF HEALTH AND**
**HUMAN SERVICES**

**Centers for Medicare & Medicaid**
**Services**

**[CMS–1338–NC]**

**RIN 0938–AP87**

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

**FY 2011**

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

**ACTION :**  Notice with comment period.

**SUMMARY :**  This notice with comment period sets forth an update to the payment rates used under the prospective payment system for skilled nursing facilities for fiscal year 2011, and implements section 10325 of the
Patient Protection and Affordable Care

Act.

**DATES :**  Effective Date: The rate updates in this notice with comment period are effective on October 1, 2010.

Comment Date: To be assured consideration, comments must be
received at one of the addresses provided below, no later than 5 p.m. on September 20, 2010.

**ADDRESSES :**  In commenting, please refer
to file code CMS–1338–NC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX)

transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1. Electronically. You may submit electronic comments on this regulation

to http://www.regulations.gov. Follow
the instructions under the ‘‘ More Search Options ’’ tab.

2. By regular mail. You may mail written comments to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS–1338–NC, 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 to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS–1338–NC, 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 before the close of the comment period to either of the following addresses:

a. Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445–G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey 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.)

b. Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244–1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786– 7195 in advance to schedule your
arrival with one of our staff members.

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 clinical issues). Abby Ryan, (410) 786–4343 (for

information related to the development of the payment rates and case-mix indexes). Kia Sidbury, (410) 786–7816 (for

information related to the wage index). Bill Ullman, (410) 786–5667 (for

information related to level of care determinations, consolidated billing, and general information).

**SUPPLEMENTARY INFORMATION :** 

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.regulations.gov. Follow the search
instructions 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. The Patient Protection and Affordable

Care Act (ACA) G. Skilled Nursing Facility Prospective

Payment—General Overview 1. Payment Provisions—Federal Rate 2. FY 2011 Rate Updates Using the Skilled

Nursing Facility Market Basket Index II. FY 2011 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 Adjustments 1. Background 2. Parity Adjustment C. Wage Index Adjustment to Federal Rates D. Updates to Federal Rates E. Relationship of Case-Mix 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. Consolidated Billing V. Application of the SNF PPS to SNF Services Furnished by Swing-Bed Hospitals VI. Collection of Information Requirements VII. Response to Comments VIII. Regulatory Impact Analysis

A. Overall Impact B. Anticipated Effects
C. Alternatives Considered D. Accounting Statement
E. Conclusion


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IX. Waiver of Proposed Rulemaking
Addendum:

FY 2011 CBSA-Based Wage Index Tables

(Tables A & B)

Abbreviations

In addition, because of the many terms to which we refer by abbreviation in this notice, we are listing these abbreviations and their corresponding terms in alphabetical order below:

ACA Patient Protection and Affordable Care

Act, Public Law 111–148 AIDS Acquired Immune Deficiency

Syndrome
ARD Assessment Reference Date BBA Balanced Budget Act of 1997, Public

Law 105–33 BBRA Medicare, Medicaid, and SCHIP

Balanced Budget Refinement Act of 1999,
Public Law 106–113 BIPA Medicare, Medicaid, and SCHIP

Benefits Improvement and Protection Act of 2000, Public Law 106–554 CAH Critical Access Hospital
CBSA Core-Based Statistical Area CFR Code of Federal Regulations
CMI Case-Mix Index
CMS Centers for Medicare & Medicaid

Services FQHC Federally Qualified Health Center

FR Federal Register
FY Fiscal Year GAO Government Accountability Office
HCPCS Healthcare Common Procedure

Coding System HR–III Hybrid Resource Utilization Groups,

Version 3

MDS Minimum Data Set MMA Medicare Prescription Drug,

Improvement, and Modernization Act of 2003, Public Law 108–173 MMSEA Medicare, Medicaid, and SCHIP

Extension Act of 2007, Public Law 110–173 MSA Metropolitan Statistical Area OMB Office of Management and Budget OMRA Other Medicare Required

Assessment PPS Prospective Payment System
RAI Resident Assessment Instrument
RAVEN Resident Assessment Validation

Entry RFA Regulatory Flexibility Act, Public Law

96–354 RHC Rural Health Clinic RIA Regulatory Impact Analysis RUG–III Resource Utilization Groups,

Version 3 RUG–IV Resource Utilization Groups,

Version 4RUG–53 Refined 53-Group RUG–III CaseMix Classification System
SCHIP State Children’s Health Insurance

Program SNF Skilled Nursing Facility SOM State Operations Manual
STM Staff Time Measurement STRIVE Staff Time and Resource Intensity

Verification UMRA Unfunded Mandates Reform Act,

Public Law 104–4

I. Background

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, Pub. L. 105–33, enacted on August 5, 1997), and amended by the Medicare, Medicaid, and State Children’s Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106–113, enacted on November 29, 1999), the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L. 106–554, enacted December 21, 2000), and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, Pub. L. 108–173, enacted on December 8, 2003). Our most recent annual update occurred in a final rule (74 FR 40288, August 11, 2009) that set forth updates to the SNF PPS payment rates for fiscal year (FY) 2010. We subsequently published a correction notice (74 FR 48865, September 25, 2009) 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 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 notice, we update the per diem payment rates for SNFs for FY 2011. Major elements of the SNF PPS include:

• Rates. As discussed in section I.G.1. of this notice, we established per diem
Federal rates for urban and rural areas using allowable costs from FY 1995 cost reports. These rates also included a

‘‘ Part B add-on ’’ (an estimate of the cost of those services that, before July 1, 1998, were paid under Part B but
furnished to Medicare beneficiaries in a SNF during a Part A covered stay). We adjust the rates annually using a SNF market basket index, and we adjust them by the hospital inpatient wage index to account for geographic variation in wages. We also apply a case-mix adjustment to account for the
relative resource utilization of different patient types. As further discussed in section I.F, for FY 2011 this adjustment
will utilize a ‘‘ hybrid ’’ RUG–III system that incorporates the specific revisions relating to concurrent therapy and the look-back period that are components of the Resource Utilization Groups, version 4 (RUG–IV) case-mix classification system, and will use information obtained from the required resident assessments using version 3.0 of the Minimum Data Set (MDS 3.0). (The resident assessment is approved under OMB# 0938–0739.) Additionally, as noted in the final rule for FY 2006 (70 FR 45028, August 4, 2005), 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, theSNF PPS included an initial, threephase transition that blended a facilityspecific rate (reflecting the individual facility’s historical cost experience) with the Federal case-mix adjusted rate. The transition extended through the facility’s first three cost reporting periods under the PPS, up to and including the one that began in FY 2001. Thus, the SNF PPS is no longer operating under the transition, as all facilities have been paid at the full Federal rate effective with cost reporting periods beginning in FY 2002. As we now base payments entirely on the adjusted Federal per diem rates, we no longer include adjustment factors related to facility-specific rates for the coming FY.

• Coverage. The establishment of the SNF PPS did not change Medicare’s fundamental requirements for SNFcoverage. However, because the casemix classification is based, in part, on the beneficiary’s need for skilled nursing care and therapy, we have attempted, where possible, to coordinate claims review procedures with the existing resident assessment process and case-mix classification system. As further discussed in section II.E, in FY 2011, under the hybrid RUG–III system, this approach includes an administrative presumption that utilizes a beneficiary’s initial classification in one of the upper 35 RUGs of the 53- group RUG–III case-mix classification system (RUG–53) to assist in making
certain SNF level of care determinations. In the July 30, 1999 final rule (64 FR 41670), we indicated that we would announce any changes to the guidelines for Medicare level of care
determinations related to modifications
in the case-mix classification structure (see section II.E. of this notice for a more detailed discussion of the relationship
between the case-mix classification system and SNF level of care determinations).

• Consolidated Billing. The SNF PPS includes a consolidated billing provision that requires a SNF to submit
consolidated Medicare bills to its fiscal intermediary or Medicare


### 42888 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices

Administrative Contractor for almost all
of the services that its residents receive during the course of a covered Part A stay. In addition, this provision places with the SNF the Medicare billing responsibility for physical therapy,occupational therapy, and speechlanguage pathology services that the resident receives during a noncovered stay. The statute excludes a small list of services from the consolidated billing provision (primarily those of physicians and certain other types of practitioners), which remain separately billable under
Part B when furnished to a SNF’s Part
A resident. A more detailed discussion of this provision appears in section IV.
of this notice.

• 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 V. of this notice.

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

Section 1888(e)(4)(H) of the Act requires that we provide for publication annually in the Federal Register :

1. The unadjusted Federal per diem rates to be applied to days of covered SNF services furnished during the upcoming FY.

2. The case-mix classification system to be applied with respect to these services during the upcoming FY.

3. The factors to be applied in making the area wage adjustment with respect
to these services.

Along with other revisions discussed later in this preamble, this notice provides these required annual updates
to the Federal rates.

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

There were several provisions in the BBRA that resulted in adjustments to
the SNF PPS. We described these provisions in detail in the SNF PPS final rule for FY 2001 (65 FR 46770, July 31, 2000). In particular, section 101(a) of the BBRA provided for a temporary 20 percent increase in the per diem adjusted payment rates for 15 specified groups in the original, 44-group Resource Utilization Groups, version 3 (RUG–III) case-mix classification system. In accordance with section 101(c)(2) of the BBRA, this temporary payment adjustment expired on January 1, 2006, upon the implementation of a refined, 53-group version of the RUG–III system, RUG–53 (see section I.G.1. of this notice). 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 notice. Further, for swing-bed hospitals with more than 49 (but less than 100) beds, section 408 of the BBRA provided for the repeal of certain statutory restrictions on length of stay and aggregate payment for patient days, effective with the end of the SNF PPS transition period described in section 1888(e)(2)(E) of the Act. In the final rule for FY 2002 (66 FR 39562, July 31, 2001), we made conforming changes to the regulations at § 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 for FY 2002 (66 FR 39562, July 31, 2001). In particular:

• Section 203 of the BIPA exempted CAH swing beds from the SNF PPS. We
included further information on this provision in Program Memorandum A– 01–09 (Change Request #1509), issued January 16, 2001, which is available
online at http://www.cms.gov/ transmittals/downloads/a0109.pdf.

• Section 311 of the BIPA revised the statutory update formula for the SNF market basket, and also directed us to conduct a study of alternative case-mix classification systems for the SNF PPS. In 2006, we submitted a report to the Congress on this study, which is
available online at http://www.cms.gov/
SNFPPS/Downloads/RC

_ 2006

_ PC– PPSSNF.pdf.

• Section 312 of the BIPA provided for a temporary increase of 16.66 percent in the nursing component of the case-mix adjusted Federal rate for services furnished on or after April 1, 2001, and before October 1, 2002; accordingly, this add-on is no longer in
effect. This section also directed the Government Accountability Office (GAO) to conduct an audit of SNF nursing staff ratios and submit a report to the Congress on whether the temporary increase in the nursing component should be continued. The report (GAO–03–176), which GAO issued in November 2002, is available
online at http://www.gao.gov/ new.items/d03176.pdf.

• Section 313 of the BIPA repealed the consolidated billing requirement for services (other than physical therapy,occupational therapy, and speechlanguage pathology services) furnished to SNF residents during noncovered stays, effective January 1, 2001. (A more detailed discussion of this provision appears in section IV. of this notice.)

• Section 314 of the BIPA corrected an anomaly involving three of the RUGs that section 101(a) of the BBRA had designated to receive the temporary payment adjustment discussed above in section I.C. of this notice. (As noted previously, in accordance with section 101(c)(2) of the BBRA, this temporary payment adjustment expired upon the implementation of case-mix refinements on January 1, 2006.)

• Section 315 of the BIPA authorized us to establish a geographic reclassification procedure that is specific to SNFs, but only after collecting the data necessary to establish a SNF wage index that is based on wage data from nursing homes. To date, this has proven to be unfeasible due to the volatility of existing SNF wage data and the significant amount of resources that would be required to improve the quality of that data.

We included further information on several of the BIPA provisions in Program Memorandum A–01–08 (Change Request #1510), issued January 16, 2001, which is available online at http://www.cms.gov/transmittals/ downloads/a0108.pdf.

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

The MMA included a provision that resulted in a further adjustment to the SNF PPS. Specifically, section 511 of the MMA amended section 1888(e)(12) of the Act, to provide for a temporary increase of 128 percent in the PPS per diem payment for any SNF residents with Acquired Immune Deficiency Syndrome (AIDS), effective with services furnished on or after October 1, 2004. This special AIDS add-on was to
remain in effect until ‘‘ * * * the


### 42889 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices

Secretary certifies that there is an appropriate adjustment in the case mix * * * to compensate for the increased costs associated with [such] residents

* * * ’’ The AIDS add-on is also discussed in Program Transmittal #160 (Change Request #3291), issued on April 30, 2004, which is available online at http://www.cms.gov/transmittals/ downloads/r160cp.pdf . In the SNF PPS final rule for FY 2010 (74 FR 40288, August 11, 2009), we did not address
the certification of the AIDS add-on in that final rule’s implementation of the case-mix refinements for RUG–IV, thus allowing the temporary add-on payment created by section 511 of the MMA to
remain in effect.

For the limited number of SNFresidents that qualify for the AIDS addon, implementation of this provision results in a significant increase in payment. For example, using FY 2008 data, we identified less than 3,300 SNF residents with a diagnosis code of 042 (Human Immunodeficiency Virus (HIV) Infection). For FY 2011, an urban facility with a resident with AIDS in hybrid RUG–III (HR–III) group ‘‘ SSB ’’ would have a case-mix adjusted payment of $318.73 (see Table 4B) 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 $726.70. Similarly, an urban facility with a resident with AIDS in RUG–IV group ‘‘ HC2 ’’ would have a case-mix adjusted payment of $394.48 (see Table 4A) 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 $899.41.

In addition, section 410 of the MMA contained a provision that excluded from consolidated billing certain services furnished to SNF residents by rural health clinics (RHCs) and Federally Qualified Health Centers (FQHCs). (Further information on this provision appears in section IV. of this notice.)

F. The Patient Protection and Affordable Care Act (ACA)

Section 10325 of the ACA (Pub. L. 111–148, enacted on March 23, 2010) includes a self-implementing provision involving the SNF PPS. Section 10325 postpones the implementation of the RUG–IV case-mix classification system published in the FY 2010 SNF PPS final rule (74 FR 40288, August 11, 2009), requiring that the Secretary not implement the RUG–IV case-mix classification system before October 1, 2011. Notwithstanding this postponement of overall RUG–IV implementation, section 10325 further specifies that the Secretary is required to implement, effective October 1 2010, the changes related to concurrent therapy and the look-back period that were finalized as components of RUG– IV (see 74 FR 40315–19, 40322–24). Because these changes were already subject to notice and public comment
and finalized in the FY 2010 SNF PPS final rule, we believe that this ACArequirement is largely selfimplementing and requires no substantive exercise of discretion by the Secretary. In addition, section 10325 of the ACA specifies that version 3.0 of the Minimum Data Set (MDS 3.0) shall proceed as planned, with an implementation date of October 1, 2010 (see 74 FR 40342–43). The MDS is approved under OMB# 0938–0872. The
MDS 3.0 RAI Manual and MDS 3.0 Item Set are scheduled to be published on the CMS Web site, http://www.cms.gov , in
October 2010.

The statutory mandate to adopt RUG– IV’s concurrent therapy and look-back revisions (along with MDS 3.0) prior to implementing the overall RUG–IV system itself will necessitate implementing those particular revisions within the framework of the existing RUG–53 case-mix classification system. While there is currently an existing grouper (the software program that uses assessment data to assign each SNF resident to the appropriate RUG) that utilizes RUG–53 and the MDS 2.0, as well as a revised grouper that utilizes RUG–IV and the MDS 3.0, no grouper currently exists that incorporates the particular combination of features mandated by the statute: The use of the

new RUG–IV revisions on concurrent therapy and the look-back period as well as the MDS 3.0, but within the overall context of the existing RUG–53 system. Moreover, attempting to develop and implement such a modified grouper within the short timeframe available before the ACA provision’s October 1, 2010 effective date would potentially cause significant disruption to providers, suppliers, and State agencies.

Accordingly, as we continue to build the payment infrastructure needed to incorporate the combination of features mandated by section 10325 of the ACA for FY 2011, we will apply, effective October 1, 2010, interim payment rates that reflect not only the use of MDS 3.0 but also the new RUG–IV system in its entirety as finalized in the FY 2010 SNF PPS final rule (74 FR 40288, August 11, 2009). As discussed above, the only grouper that currently exists that utilizes MDS 3.0 is the RUG–IV grouper. Once the necessary infrastructure is in place, we will then retroactively adjust claims to reflect a hybrid RUG–III (HR– III) system which incorporates RUG– IV’s specific revisions on concurrent therapy and the look-back period within the framework of the existing RUG–53 system, along with the use of MDS 3.0.
Tables 4 and 5 set forth both the RUG–
IV rates that will be used on an interim basis effective October 1, 2010 and the HR–III rates that will apply once we build the infrastructure necessary to support this system. The FY 2011 rates
will be based on the rates that were finalized for FY 2010, as modified to reflect the market basket adjustment, the forecast error adjustment, the applicable case-mix adjustment, and the parity adjustment (as discussed below).

We note that a parity adjustment was applied to the RUG–53 nursing case-mix weights when the RUG–III system was initially refined in 2006, in order to ensure that the implementation of the refinements would not cause any change in overall payment levels (70 FR 45031, August 4, 2005). A detailed discussion of the parity adjustment in the specific context of the RUG–IV payment rates appears in the FY 2010 SNF PPS proposed rule (74 FR 22236– 38, May 12, 2009) and final rule (74 FR 40338–39, August 11, 2009). Consistent with our policy set forth in the FY 2006 SNF PPS final rule (70 FR 45031) when
we transitioned from the RUG–III 44 group model to the RUG–53 model, and in the FY 2010 SNF PPS final rule (74 FR 40338–39) when we finalized the transition from RUG–53 to RUG–IV, in calculating the rates under the HR–III model, we will apply a parity adjustment to the nursing case-mix weights under the HR–III system to ensure parity between overall payments under the RUG–53 model currently in effect and anticipated payments under the HR–III system required by the ACA.
As discussed in section II.B.2 of this notice, we are calculating and applying this parity adjustment using the same methodology finalized in both the FY
2006 SNF PPS final rule and the FY
2010 SNF PPS final rule.

Accordingly, as discussed above, effective October 1, 2010, on an interim basis, we will implement and pay claims under the RUG–IV system that
was finalized in the FY 2010 SNF PPS final rule, until we build the payment infrastructure necessary to support the HR–III system required by the ACA. Once that infrastructure is in place, we will then retroactively adjust claims back to October 1, 2010 as necessary to implement the rates effective under HR– III. In this notice, we also invite public comment on our implementation of
section 10325 of the ACA.


### 42890 Federal Register / Vol. 75, No. 140 / Thursday, July 22, 2010 / Notices

As discussed above, we will implement the MDS 3.0 (including the MDS 3.0 swing bed assessment (see 74 FR 40356–57)) effective October 1, 2010 as specified in the FY 2010 SNF PPS final rule. We will also implementeffective October 1, 2010, all other nonRUG–IV changes finalized in the FY
2010 SNF PPS final rule for implementation effective FY 2011, including without limitation revisions to certain therapy reporting and assessment procedures effective with the MDS 3.0 (74 FR 40346–49) (that is,updated reporting procedures for shortstay patients, implementation of an optional, abbreviated start-of-therapy OMRA, a revised Assessment ReferenceDate (ARD) requirement for the end-oftherapy OMRA, and an abbreviated endof-therapy OMRA).

G. Skilled Nursing Facility Prospective Payment—General Overview

We implemented the Medicare SNF PPS effective with cost reporting periods beginning on or after July 1, 1998. This methodology uses prospective, case-mix adjusted per diem payment rates applicable to all covered SNF services. These payment rates cover all costs of furnishing covered skilled nursing services (routine, ancillary, and capital-related costs)
other than costs associated with approved educational activities and bad
debts. Covered SNF services include post-hospital services for which benefits are provided under Part A, as well as those items and services (other than physician and certain other services specifically excluded under the BBA) which, before July 1, 1998, had been paid under Part B but furnished to Medicare beneficiaries in an SNF during a covered Part A stay. A comprehensive discussion of these provisions appears in the May 12, 1998 interim final rule (63 FR 26252).

1. Payment Provisions—Federal Rate

The PPS uses per diem Federal payment rates based on mean SNF costs in a base year (FY 1995) updated for inflation to the first effective period of the PPS. We developed the Federal payment rates using allowable costs from hospital-based and freestanding SNF cost reports for reporting periods beginning in FY 1995. The data used in developing the Federal rates also incorporated an estimate of the amounts that would be payable under Part B for
covered SNF services furnished to individuals during the course of a covered Part A stay in an 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 an 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 incorporatesadjustments to account for facility casemix, using a classification system that
accounts for the relative resource utilization of different patient types. The RUG–IV classification system uses beneficiary assessment data from the MDS 3.0 completed by SNFs to assign
beneficiaries to one of 66 RUG–IV groups. The original RUG–III case-mix classification system used beneficiary assessment data from the MDS, version 2.0 (MDS 2.0) completed by SNFs to assign beneficiaries to one of 44 RUG– III groups. Then, under incremental
refinements that became effective on January 1, 2006, we added nine new groups—comprising a new Rehabilitation plus Extensive Services category—at the top of the RUG–III hierarchy. The May 12, 1998 interim final rule (63 FR 26252) included a detailed description of the original 44- group RUG–III case-mix classification system. A comprehensive description of the refined RUG–53 system appeared in the proposed and final rules for FY 2006 (70 FR 29070, May 19, 2005, and 70 FR 45026, August 4, 2005), and a detailed description of the 66-group RUG–IV system appeared in the proposed and final rules for FY 2010 (74 FR 22208, May 12, 2009, and 74 FR 40288, August 11, 2009).

Further, in accordance with section 1888(e)(4)(E)(ii)(IV) of the Act, the
Federal rates in this notice reflect an update to the rates that we published in the final rule for FY 2010 (74 FR 40288, August 11, 2009) and the associated correction notice (74 FR 48865, September 25, 2009), equal to the full change in the SNF market basket index, adjusted by the forecast error correction. A more detailed discussion of the SNF
market basket index and related issues appears in sections I.F.2. and III. of this

notice.

2. FY 2011 Rate Updates Using the Skilled Nursing Facility Market Basket
Index

Section 1888(e)(5) of the Act requires
us to establish a SNF market basket index that reflects changes over time in the prices of an appropriate mix of goods and services included in covered
SNF services. We use the SNF market basket index to update the Federal rates
on an annual basis. In the SNF PPS final rule for FY 2008 (72 FR 43425 through 43430, August 3, 2007), we revised and rebased the market basket, which included updating the base year from FY 1997 to FY 2004. The proposed FY
2011 market basket increase is 2.3 percent, which is based on IHS Global Insight, Inc. second quarter 2010 forecast with historical data through first quarter 2010.

In addition, as explained in the final rule for FY 2004 (66 FR 46058, August 4, 2003) and in section III.B. of this notice, the annual update of the payment rates includes, as appropriate, an adjustment to account for market
basket forecast error. As described in the final rule for FY 2008, the threshold percentage that serves to trigger an adjustment to account for market basket forecast error is 0.5 percentage point effective for FY 2008 and subsequent years. This adjustment takes into
account the forecast error from the most recently available FY for which there is final data, and applies whenever the
difference between the forecasted and actual change in the market basket exceeds a 0.5 percentage point threshold. For FY 2009 (the most recently available FY for which there is final data), the estimated increase in the market basket index was 3.4 percentage points, while the actual increase was 2.8 percentage points, resulting in the actual increase being 0.6 percentage point lower than the estimated increase. Accordingly, as the difference between
the estimated and actual amount of change exceeds the 0.5 percentage point threshold, the payment rates for FY 2011 include a negative 0.6 percentage point forecast error adjustment. As we
stated in the final rule for FY 2004 that first promulgated the forecast error adjustment (68 FR 46058, August 4, 2003), the adjustment will ‘‘ * * * reflect both upward and downward adjustments, as appropriate. ’’ Table 1
shows the forecasted and actual market
basket amounts for FY 2009.


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II. FY 2011 Annual Update of Payment Rates Under the Prospective Payment System for Skilled Nursing Facilities

A. Federal Prospective Payment System

This notice sets forth a schedule of Federal prospective payment rates applicable to Medicare Part A SNF services beginning October 1, 2010. The schedule incorporates per diem Federal rates that provide Part A payment for
almost all costs of services furnished to a beneficiary in a SNF during a Medicare-covered stay.

1. Costs and Services Covered by the
Federal Rates

In accordance with section 1888(e)(2)(B) of the Act, the Federal rates apply to all costs (routine, ancillary, and capital-related) of covered
SNF services other than costs associated with approved educational activities as defined in § 413.85. Under section 1888(e)(2)(A)(i) of the Act, covered SNF services include post-hospital SNF services for which benefits are provided under Part A (the hospital insurance program), as well as 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 through 26297)).

2. Methodology Used for the Calculation
of the Federal Rates

The FY 2011 rates reflect an update using the latest market basket index, and adjusting for the FY 2009 forecast
error correction. The FY 2011 market basket increase factor is 2.3 percent which, when combined with a negative 0.6 percentage point forecast error adjustment for FY 2009, results in a net FY 2011 update of 1.7 percent. A complete description of the multi-step process used to calculate Federal rates initially appeared in the May 12, 1998 interim final rule (63 FR 26252), as further revised in subsequent rules. As explained above in section I.C of this notice, under 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 FY beginning October 1, 2009, and ending September 30, 2010, and the midpoint of the Federal FY beginning October 1, 2010, and ending September 30, 2011, 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 2011 by a factor equal to the full market basket index percentage increase. As explained in section I.G.2 of this notice, we adjust the market basket index by the forecast error from the most recently available
FY for which there is final data and apply this adjustment whenever the
difference between the forecasted and actual change in the market basket exceeds a 0.5 percentage point threshold. 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 2011, prior to adjustment for case-mix.


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B. Case-Mix Adjustments

1. Background

Section 1888(e)(4)(G)(i) of the Act requires the Secretary to make an adjustment to account for case-mix. The statute specifies that the adjustment is
to reflect both a resident classification system that the Secretary establishes to
account for the relative resource use of different patient types, as well as
resident assessment and other data that the Secretary considers appropriate. In first implementing the SNF PPS (63 FR 26252, May 12, 1998), we developed the RUG–III case-mix classification system, which tied the amount of payment to
resident resource use in combination
with resident characteristic information. Staff time measurement (STM) studies conducted in 1990, 1995, and 1997 provided information on resource use (time spent by staff members on residents) and resident characteristics that enabled us not only to establish RUG–III, but also to create case-mix indexes (CMIs).

Although the establishment of the SNF PPS did not change Medicare’s fundamental requirements for SNF coverage, there is a correlation between level of care and provider payment. One of the elements affecting the SNF PPS per diem rates is the case-mix adjustment derived from a classification system based on comprehensive resident assessments using the MDS. Case-mix classification is based, in part, on the beneficiary’s need for skilled nursing care and therapy. The case-mix classification system uses clinical data from the MDS, and wage-adjusted stafftime measurement data, to assign a casemix group to each patient record that is then used to calculate a per diem payment under the SNF PPS. The original RUG–III grouper logic was based on clinical data collected in 1990, 1995, and 1997. As discussed in the SNF PPS proposed rule for FY 2010 (74 FR 22208, May 12, 2009), we subsequently conducted a multi-year data collection and analysis under the Staff Time and Resource Intensity Verification (STRIVE) project to update the case-mix classification system forFY 2011. The resulting RUG–IV casemix classification system reflected the data collected in 2006–2007 during the STRIVE project, and was finalized in the FY 2010 SNF PPS final rule (74 FR 40288, August 11, 2009) to take effect in FY 2011 concurrently with an updated new resident assessment instrument, the MDS 3.0, which collects the clinical
data used for case-mix classification
under RUG–IV.

Under the BBA, each update of the SNF PPS payment rates must include the case-mix classification methodology applicable for the coming Federal FY. As indicated in section I.F of this notice, the payment rates set forth herein reflect
the use of the HR–III case-mix classification system from October 1, 2010 through September 30, 2011. However, due to time constraints in preparing the HR–III grouper, the 66- group RUG–IV case-mix classification system that we discussed in detail in the proposed and final rules for FY 2010 will be used beginning October 1, 2010. Once the HR–III Grouper is ready for implementation, payments will be retroactively adjusted to the October 1,
2010 date.

2. Parity Adjustment

Consistent with the policy finalized in the FY 2010 SNF PPS final rule (74 FR 40338–39), the updated RUG–IV rates
set forth in Tables 4A and 5A reflect an upward adjustment to the nursing CMIs to achieve parity in overall payments between the existing RUG—53 model and the RUG–IV model. As explained in the FY 2010 SNF PPS final rule, we applied an upward adjustment of 59.4 percent to the RUG–IV nursing CMIs to achieve parity between the RUG–53 and RUG–IV models, based on an analysis using FY 2008 claims data. However,
after the FY 2010 SNF PPS final rule was published, final FY 2009 claims
data became available. As we stated in the FY 2010 SNF PPS final rule (74 FR 40339), in the absence of actual RUG– IV utilization data, we believe the most
recent final claims data are the best
source available to estimate RUG–IV utilization for FY 2011, as they are closest to the FY 2011 timeframe. Thus, we updated our analysis described in the FY 2010 SNF PPS proposed and final rules using final FY 2009 claims data to enhance the accuracy of our calculation of the adjustment necessary to achieve parity between the RUG–53 model and the RUG–IV model. Using the methodology finalized in the FY 2010 SNF PPS final rule with updated FY 2009 claims data, the adjustment to the RUG–IV nursing CMIs necessary to achieve parity is an upward adjustment of 61 percent.

Consistent with this policy, and using the same methodology finalized in the
FY 2006 SNF PPS final rule and the FY 2010 SNF PPS final rule, we have calculated and applied a parity adjustment to the HR–III nursing CMIs so that overall payments under the HR–III case-mix classification system maintain parity with overall payments under the existing RUG–53 model. We used FY 2009 claims data, the most recent final claims data available, to compare the distribution of payment days by RUG category in the RUG–53 model with anticipated payments by RUG category in the new HR–III model. Our projections of future utilization patterns under the HR–III system indicated that the HR–III system would


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produce lower overall payments than under the RUG–53 model. Therefore, consistent with our policy in place
when we transitioned to the RUG–53 model in FY 2006, and our policy in FY
2010 when we finalized the transition
from the RUG–53 model to the RUG–IV model, we are providing for an adjustment to the nursing CMIs under the HR–III system that would achieve

‘‘ parity ’’ between the RUG–53 and the HR–III models (that is, would not cause any change in overall payment levels). Based on our analysis of the FY 2009 claims data, the adjustment to the nursing CMIs under the HR–III model necessary to achieve ‘‘ parity ’’ is an upward adjustment of 34.2 percent. Our calculation of the parity adjustment uses

the most recent data available to

estimate HR–III utilization for FY 2011.

In the absence of actual HR–III utilization data, we believe the most recent data are the best source available, as they are closest to the FY 2011

timeframe. As actual HR–III utilization becomes available, we intend to assess the effectiveness of the parity adjustment in maintaining budget neutrality and, if necessary, to recalibrate the adjustment in the future. We list the case-mix adjusted RUG–IV payment rates separately for urban and rural SNFs in Tables 4A and 5A, with the corresponding case-mix values which reflect the parity adjustment discussed above. Similarly, the HR–III case-mix adjusted payment rates (reflecting the parity adjustment) are

listed on Tables 4B and 5B. 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).

**BILLING CODE 4120–01–P**


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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 are maintaining that practice for FY 2011,
as we continue to believe that in the absence of SNF-specific wage data, using the hospital inpatient wage index is appropriate and reasonable for the SNF PPS. As explained in the update notice for FY 2005 (69 FR 45786, July 30, 2004), the SNF PPS does not use the hospital area wage index’s occupational mix adjustment, as this adjustment serves specifically to define the occupational categories more clearly in a hospital setting; moreover, the collection of the occupational wage data also excludes any wage data related to SNFs. Therefore, we believe that using the updated wage data exclusive of the occupational mix adjustment continues to be appropriate for SNF payments.

Finally, we continue to use the same methodology discussed in the SNF PPS final rule for FY 2008 (72 FR 43423) to address those geographic areas in which there are no hospitals and, thus, no hospital wage index data on which to
base the calculation of the FY 2011 SNF PPS wage index. For rural geographic areas that do not have hospitals and, therefore, lack hospital wage data on which to base an area wage adjustment, we use the average wage index from all contiguous Core-Based Statistical Areas (CBSAs) as a reasonable proxy. This methodology is used to construct the wage index for rural Massachusetts. However, we do not apply this methodology to rural Puerto Rico due to
the distinct economic circumstances that exist there, but instead continue using the most recent wage index previously available for that area. For urban areas without specific hospital wage index data, we use the average wage indexes of all of the urban areas


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within the State to serve as a reasonable proxy for the wage index of that urban CBSA. The only urban area without wage index data available is CBSA 25980, Hinesville-Fort Stewart, GA.

To calculate the SNF PPS wage index adjustment, we apply the wage index adjustment to the labor-related portion of the Federal rate, which is 69.311 percent of the total rate. This percentage
reflects the labor-related relative importance for FY 2011, using the
revised and rebased FY 2004-based
market basket. The labor-related relative importance for FY 2010 was 69.840, as
shown in Table 9. We calculate the labor-related relative importance from the SNF market basket, and it approximates the labor-related portion of the total costs after taking into account historical and projected price changes between the base year and FY 2011. 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 2011 than the base year weights
from the SNF market basket.

We calculate the labor-related relative importance for FY 2011 in four steps. First, we compute the FY 2011 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 2011 price index level for that cost category by the total market basket price index level. Third, we determine the FY 2011 relative importance for each cost category by multiplying this ratio by the base year (FY 2004) weight. Finally, we add the FY 2011 relative importance for each of the labor-related cost categories (wages and salaries, employee benefits,non-medical professional fees, laborintensive services, and a portion of capital-related expenses) to produce the
FY 2011 labor-related relative importance. Tables 6A and 7A below show the Federal rates for RUG–IV by
labor-related and non-labor-related components. Similarly, Tables 6B and
7B show the Federal rates for HR–III.

**BILLING CODE 4120–01–P**


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**BILLING CODE 4120–01–C**

Section 1888(e)(4)(G)(ii) of the Act also requires that we apply this wage

index in a manner that does not result in aggregate payments that are greater or

less than would otherwise be made in the absence of the wage adjustment. For FY 2011 (Federal rates effective October 1, 2010), we apply an adjustment to fulfill the budget neutrality requirement. We meet this requirement by multiplying each of the components of the unadjusted Federal rates by a budget neutrality factor equal to the ratio of the weighted average wage adjustment factor for FY 2010 to the weighted average wage adjustment factor for FY 2011. For this calculation, we use the

same 2009 claims utilization data for

both the numerator and denominator of this ratio. We define the wage adjustment factor used in this

calculation as the labor share of the rate component multiplied by the wage index plus the non-labor share of the rate component. The budget neutrality factor for this year is 0.9997. The wage index applicable to FY 2011 is set forth in Tables A and B, which appear in the
Addendum of this notice.

In the SNF PPS final rule for FY 2006 (70 FR 45026, August 4, 2005), we adopted the changes discussed in the Office of Management and Budget (OMB) Bulletin No. 03–04 (June 6, 2003), available online at http:// www.whitehouse.gov/omb/bulletins/ b03-04.html, which announced revised definitions for Metropolitan Statistical Areas (MSAs), and the creation of Micropolitan Statistical Areas and Combined Statistical Areas. In addition, OMB published subsequent bulletins regarding CBSA changes, including changes in CBSA numbers and titles. As
indicated in the FY 2008 SNF PPS final rule (72 FR 43423, August 3, 2007), this and all subsequent SNF PPS rules and notices are considered to incorporate the CBSA changes published in the most recent OMB bulletin that applies to the hospital wage data used to determine the current SNF PPS wage index. The OMB bulletins may be
accessed online at http:// www.whitehouse.gov/omb/bulletins/
index.html. In adopting the OMB Core-Based Statistical Area (CBSA) geographic designations, we provided for a 1-year transition with a blended wage index for all providers. For FY 2006, the wage index for each provider consisted of a blend of 50 percent of the FY 2006 MSA-based wage index and 50 percent of the FY 2006 CBSA-based wage index (both using FY 2002 hospital data). We referred to the blended wage index as the FY 2006 SNF PPS transition wage
index. As discussed in the SNF PPS final rule for FY 2006 (70 FR 45041), subsequent to the expiration of this 1- year transition on September 30, 2006, we used the full CBSA-based wage index values, as now presented in
Tables A and B in the Addendum of this

notice.

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 payment rates in this notice reflect an update equal to the full SNF market basket, estimated at 2.3 percentage points. In addition, as discussed in sections I.G.2


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and III. of this notice, the annual update includes a negative 0.6 percentage point adjustment to account for market basket forecast error, for a net update of 1.7 percent for FY 2011. We 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 FY.

E. Relationship of RUG–IV and HR–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. As set forth in the FY 2010 SNF PPS final rule (74 FR 40341, August 11, 2009), this designation reflects an administrative presumption under the 66-group RUG– IV system that beneficiaries who are correctly assigned to one of the upper 52 RUG–IV groups on the initial 5-day, Medicare-required assessment are automatically classified as meeting the SNF level of care definition up to and including the assessment reference date on the 5-day Medicare required

assessment. A beneficiary assigned to any of the lower 14 RUG–IV groups is not automatically classified as either meeting or not meeting the definition,
but instead receives an individual level of care determination using the existing
administrative criteria. This presumption recognizes the strong likelihood that beneficiaries assigned to one of the upper 52 RUG–IV groups during the immediate post-hospital period require a covered level of care, which would be less likely for those beneficiaries assigned to one of the lower 14 RUG–IV groups.

In this notice, we designate the upper 52 RUG–IV groups for purposes of this administrative presumption, consisting of all groups encompassed by the following RUG–IV categories:

• Rehabilitation plus Extensive Services;

• Ultra High Rehabilitation;

• Very High Rehabilitation;

• High Rehabilitation;

• Medium Rehabilitation;

• Low Rehabilitation;

• Extensive Services;

• Special Care High;

• Special Care Low; and,

• Clinically Complex. By contrast, under the HR–III system discussed in section I.F of this notice, we will revert to the 53-group classification structure of the previous, RUG–53 case-mix classification system. Under that structure, as discussed in
section III.B.5 of the FY 2010 SNF PPS final rule (74 FR 40304, August 11, 2009), the administrative level-of-care presumption applies to the upper 35 groups (as encompassed by the Rehabilitation plus Extensive Services, Ultra High Rehabilitation, Very High Rehabilitation, High Rehabilitation, Medium Rehabilitation, Low Rehabilitation, Extensive Services, Special Care, and Clinically Complex categories), while it does not apply to the lower 18 groups.

F. Example of Computation of Adjusted PPS Rates and SNF Payment

Using the hypothetical SNF XYZ described in Tables 8A and 8B below, the following shows the adjustments made to the Federal per diem rate to compute the provider’s actual per diem PPS payment, for RUG–IV and HR–III, respectively. SNF XYZ’s 12-month cost reporting period begins October 1, 2010. SNF XYZ’s total PPS payment would equal $41,979 for RUG–IV and $36,517 for HR–III, respectively. We derive the
Labor and Non-labor columns from
Table 6A for RUG–IV and Table 6B for

HR–III.


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III. The Skilled Nursing Facility Market

Basket Index

Section 1888(e)(5)(A) of the Act requires us to establish a SNF market basket index (input price index), that reflects changes over time in the prices of an appropriate mix of goods and services included in the SNF PPS. This notice incorporates the latest available projections of the SNF market basket index. Accordingly, we have developed

a SNF market basket index that encompasses the most commonly used cost categories for SNF routine services, ancillary services, and capital-related

expenses.

Each year, we calculate a revised
labor-related share based on the relative importance of labor-related cost categories in the input price index. Table 9 below summarizes the updated
labor-related share for FY 2011.


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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 from the average of the previous FY to the average of the current FY. For the Federal rates established in this notice, we use the percentage increase in the SNF market basket index to compute the update factor for FY 2011. This is based on the IHS Global Insight, Inc. (formerly DRI–WEFA) second quarter 2010 forecast (with historical data through the first quarter 2010) of the FY 2011 percentage increase in the FY 2004-
based SNF market basket index for routine, ancillary, and capital-related expenses, to compute the update factor in this notice. Finally, as discussed in section I.A. of this notice, we no longer compute update factors to adjust a facility-specific portion of the SNF PPS rates, because the initial three-phase transition period from facility-specific
to full Federal rates that started with cost reporting periods beginning in July 1998 has expired.

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 46057–59), the regulations at § 413.337(d)(2) provide for an adjustment to account for market
basket forecast error. The initial adjustment applied to the update of the FY 2003 rate for FY 2004, and took into
account the cumulative forecast error for the period from FY 2000 through FY 2002, resulting in an increase of 3.26 percent. Subsequent adjustments in succeeding FYs take into account the forecast error from the most recently available FY for which there is final data, and apply whenever the difference
between the forecasted and actual change in the market basket exceeds a specified threshold. We originally used a 0.25 percentage point threshold for this purpose; however, for the reasons specified in the FY 2008 SNF PPS final rule (72 FR 43425, August 3, 2007), we adopted a 0.5 percentage point
threshold effective with FY 2008. As discussed previously in section I.G.2. of this notice, as the difference between
the estimated and actual amounts of
increase in the market basket index for FY 2009 (the most recently available FY for which there is final data) exceeds the 0.5 percentage point threshold, the payment rates for FY 2011 include a forecast error adjustment.

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 2011 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, 2009 through September 30, 2010 to the average market basket level for the period of October 1, 2010 through September 30, 2011. Using this process, the market basket update factor for FY 2011 SNF PPS Federal rates is 2.3 percent, adjusted by the negative 0.6 percentage point forecast error adjustment, for a net update of 1.7 percent for FY 2011. We used this update factor to compute the
SNF PPS rate shown in Tables 2 and 3.

IV. Consolidated Billing

Section 4432(b) of the BBA established a consolidated billing requirement that places the Medicare billing responsibility for virtually all of
the services that the SNF’s residents receive with the SNF, except for a small
number of services that the statute specifically identifies as being excluded from this provision. As noted previously in section I. of this notice, 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 through 19232, April 10, 2000, and 65 FR 46790 through 46795, July 31, 2000), as well as in Program Memorandum AB–00–18 (Change Request #1070), issued March 2000, which is available online at http://www.cms.gov/transmittals/ downloads/ab001860.pdf.

Section 313 of the BIPA further amended this provision by repealing its Part B aspect; that is, its applicability to services furnished to a resident during a SNF stay that Medicare Part A does not cover. (However, physical therapy,occupational therapy, and speechlanguage pathology services remain subject to consolidated billing, regardless of whether the resident who
receives these services is in a covered Part A stay.) We discuss this BIPA amendment in greater detail in the proposed and final rules for FY 2002 (66 FR 24020 through 24021, May 10, 2001,


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and 66 FR 39587 through 39588, July 31, 2001).

In addition, section 410 of the MMA amended this provision by excluding certain practitioner and other services furnished to SNF residents by RHCs and FQHCs. We discuss this MMA amendment in greater detail in the update notice for FY 2005 (69 FR 45818 through 45819, July 30, 2004), as well as in Program Transmittal #390 (Change Request #3575), issued December 10, 2004, which is available online at http://www.cms.gov/transmittals/ downloads/r390cp.pdf.

Further, while not substantively revising the consolidated billing requirement itself, a related provision
was enacted in the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA, Pub. L. 110–275). Specifically, section 149 of
MIPPA amended section 1834(m)(4)(C)(ii) of the Act to add subclause (VII), which adds SNFs (as defined in section 1819(a) of the Act) to
the list of entities that can serve as a
telehealth ‘‘ originating site ’’ (that is, the location at which an eligible individual can receive, via a telecommunications system, services of a physician or other practitioner who is located elsewhere at

a ‘‘ distant site ’’ ).

As explained in the Medicare Physician Fee Schedule (PFS) final rule for Calendar Year (CY) 2009 (73 FR 69726, 69879, November 19, 2008), a telehealth originating site receives a facility fee which is always separately payable under Part B outside of any other payment methodology. Section 149(b) of MIPPA amended section 1888(e)(2)(A)(ii) of the Act to exclude
telehealth services furnished under section 1834(m)(4)(C)(ii)(VII) of the Act
from the definition of ‘‘ covered skilled nursing facility services ’’ that are paid under the SNF PPS. Thus, a SNF ‘‘ * * * can receive separate payment for a telehealth originating site facility fee
even in those instances where it also receives a bundled per diem payment
under the SNF PPS for a resident’s covered Part A stay ’’ (73 FR 69881). By contrast, under section 1834(m)(2)(A) of the Act, a telehealth distant site service is payable under Part B to an eligible physician or practitioner only to the
same extent that it would have been so payable if furnished without the use of a telecommunications system. Thus, as explained in the CY 2009 Physician Fee Schedule final rule (73 FR 69726), eligible distant site physicians or practitioners can receive payment for a telehealth service that they furnish—

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

This means that in those situations
where a SNF serves as the telehealth originating site, the distant site professional services would be separately payable under Part B only to the extent that they are not already included in the SNF PPS bundled per diem payment and subject to consolidated billing. Thus, for a type of practitioner whose services are not
otherwise excluded from consolidatedbilling when furnished during a face-toface encounter, the use of a telehealth
distant site would not serve to unbundle those services. In fact, consolidated billing does exclude the professional services of physicians, along with those of most of the other types of telehealth practitioners that the law specifies at section 1842(b)(18)(C) of the Act, that is, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, certified nurse midwives, and clinical psychologists (see section 1888(e)(2)(A)(ii) of the Act and 42 CFR 411.15(p)(2)). However, the services of clinical social workers, registered dietitians and nutrition professionals remain subject to consolidated billing
when furnished to a SNF’s Part A resident and, thus, cannot qualify for separate Part B payment as telehealth
distant site services in this situation.
Additional information on this provision appears in Program Transmittal #1635 (Change Request #6215), issued November 14, 2008,
which is available online at http:// www.cms.gov/transmittals/downloads/ R1635CP.pdf. To date, the Congress has enacted no further legislation affecting the consolidated billing provision.

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

In accordance with section 1888(e)(7) of the Act, as amended by section 203 of the BIPA, Part A pays CAHs on a
reasonable cost basis for SNF services furnished under a swing-bed agreement. However, effective with cost reporting periods beginning on or after July 1,2002, the swing-bed services of nonCAH rural hospitals are paid under the SNF PPS. As explained in the final rule for FY 2002 (66 FR 39562, July 31, 2001), we selected this effective date consistent with the statutory provision to integrate swing-bed rural hospitals into the SNF PPS by the end of the SNF transition period, June 30, 2002.

Accordingly, all non-CAH swing-bed rural hospitals have come under the SNF PPS as of June 30, 2003. Therefore, all rates and wage indexes outlined in
earlier sections of this notice for the SNF PPS also apply to all non-CAH swing-bed rural hospitals. A complete discussion of assessment schedules, the
MDS and the transmission software (RAVEN–SB for Swing Beds) appears in the final rule for FY 2002 (66 FR 39562, July 31, 2001) and in the final rule for FY 2010 (74 FR 40288, August 11, 2009). As finalized in the FY 2010 SNF PPS final rule (74 FR 40356–57), effective October 1, 2010, non-CAH swing-bed rural hospitals will berequired to complete an MDS 3.0 swingbed assessment which is limited to the required demographic, payment, and quality items. The latest changes in the MDS for swing-bed rural hospitals appear on the SNF PPS Web site, www.cms.gov/snfpps.

VI. Collection of Information Requirements

The information collection requirements referenced in this notice with comment period are approved
under OMB#’s 0938–0739 and 0938–

0872.

VII. Response to Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the **DATES** section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

VIII. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this notice as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), the Regulatory Flexibility Act (September 19, 1980, RFA, Pub. L. 96–354), section 1102(b) of the Social Security Act,
section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA, Pub. L. 104–4), Executive Order 13132 on Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)).

Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize


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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 1 year). This notice is an economically significant rule under Executive Order 12866, because we estimate the FY 2011 impact of the standard update will be to increase payments to SNFs by approximately $542 million. As discussed in the final rule for FY 2010 (74 FR 40358, August 11, 2009), we estimate that there will be no aggregate impact on payments as a result of the implementation of the RUG–IV model, which is introduced on a budget neutral basis. Similarly, there would be no impact with HR–III, as we are introducing this on a budget neutral basis. Furthermore, we are also considering this a major rule as defined in the Congressional Review Act (5 U.S.C. 804(2)).

The update set forth in this notice applies to payments in FY 2011. Accordingly, the analysis that follows describes the impact of each system on
an annual basis. 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 entities, if a rule has a significant impact
on a substantial number of small entities. For purposes of the RFA, small
entities as that term is used in the RFA includes small businesses, nonprofit organizations, and small government jurisdictions. Most SNFs and most other providers and suppliers are small entities, either by their nonprofit status or by having revenues of $13.5 million or less in any 1 year. For purposes of the RFA, approximately 51 percent of SNFs
are considered small businesses according to the Small Business Administration’s latest size standards, with total revenues of $13.5 million or less in any 1 year. (For details, see the
Small Business Administration’s final
rule that sets forth standards for health care industries, at 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 notice updates the SNF PPS rates published in the final rule for FY 2010 (74 FR 40288, August 11, 2009) and the associated correction notice (74 FR 48865, September 25, 2009), thereby increasing net payments by an estimated $542 million. As indicated in Tables 10A and 10B, the effect on facilities will be an aggregate positive impact of 1.7 percent. We note that some individual providers may experience larger increases in payments than others due to the distributional impact of the FY 2011 wage indexes and the degree of
Medicare utilization.

Guidance issued by the Department of
Health and Human Services on the proper assessment of the impact on small entities in rulemakings, utilizes a revenue impact of 3 to 5 percent as a significance threshold under the RFA.
While this notice is considered economically significant, its relative impact on SNFs overall is small because Medicare is a relatively minor payer source for nursing home care. We
estimate that Medicare covers approximately 10 percent of service days, and approximately 20 percent of payments. However, the distribution of days and payments is highly variable, with the majority of SNFs having significantly lower Medicare utilization. As indicated in Tables 10A and 10B, the effect on facilities is projected to be an aggregate positive impact of 1.7 percent. As the overall impact is positive on the industry as a whole, and on small entities specifically, the Secretary has
determined that this notice would not have a significant impact on a
substantial number of small entities. Therefore, in view of the positive economic impact on small entities, 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 604 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. The notice will affect small rural hospitals that (a) furnish SNF services under a swing-bed agreement or (b) have a hospital-based SNF. We anticipate that the impact on small rural hospitals will be similar to the impact on SNF providers overall. Therefore, the Secretary has determined
that this notice will not have a significant impact on the operations of
a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2010, that threshold is approximately $135 million. This notice would not impose spending costs on State, local, or tribal governments in the aggregate, or by the private sector, of $135 million.

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. This notice would have no
substantial direct effect on State and local governments, preempt State law,
or otherwise have Federalism implications.

B. Anticipated Effects

This notice sets forth updates of the
SNF PPS rates contained in the final rule for FY 2010 (74 FR 40288, August 11, 2009) and the associated correction notice (74 FR 48865, September 25, 2009). Based on the above, we estimate the FY 2011 impact would be a net increase of $542 million on payments to SNFs. The impact analysis of this notice represents the projected effects of the changes in the SNF PPS from FY 2010 to FY 2011. We assess the effects by estimating payments while holding all other payment-related variables constant. Although the best data available is utilized, there is no attempt to predict behavioral responses to these changes, or to make adjustments for future changes in such variables as days

or case-mix.

Certain events may occur to limit the scope or accuracy of our impactanalysis, as this analysis is futureoriented and, thus, very susceptible to forecasting errors due to certain events that may occur within the assessed impact time period. Some examples of possible events may include newly legislated general Medicare program funding changes by the Congress, or changes specifically related to SNFs. In addition, changes to the Medicare program may continue to be made as a result of previously enacted legislation, or new statutory provisions. Although these changes may not be specific to the SNF PPS, the nature of the Medicare program is that the changes may interact and, thus, the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon SNFs.

In accordance with section 1888(e)(4)(E) of the Act, we update the payment rates for FY 2010 by a factor equal to the full market basket index percentage increase adjusted by the FY 2009 forecast error adjustment to


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determine the payment rates for FY 2011. 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 3,300 beneficiaries who qualify for the AIDS add-on payment. The impact to Medicare is included in
the ‘‘ total ’’ column of Tables 10A and 10B. In updating the rates for FY 2011,
we made a number of standard annual
revisions and clarifications mentioned elsewhere in this notice (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 $542 million.

The FY 2011 impacts appear in Tables
10A and 10B. The breakdown of the various categories of data in the table
follows.

The first column shows the breakdown of all SNFs by urban or rural status, hospital-based or freestanding status, and census region.

The first row of figures in the first
column describes the estimated effects of the various changes on all facilities.
The next six rows show the effects on facilities split by hospital-based, freestanding, urban, and rural categories. The urban and rural designations are based on the location of the facility under the CBSA designation. The next twenty-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
distributional effect due to the RUG–IV and HR–III classification systems. Though the aggregate impact shows no change in total payments, it is estimated that some facilities will experience payment increases while others experience payment decreases due to
Medicare utilization under RUG–IV in Table 10A, and in HR–III in Table 10B. For example, in Table 10A under RUG– IV, providers in the urban Pacific region only show increases of 0.1 percent, while providers in the urban Mountain region show a decrease of 0.8 percent. Similarly, in Table 10B under HR–III, providers in the urban East South Central region only show increases of 0.3 percent, while providers in the urban South Atlantic region show a decrease of 0.9 percent.

The fifth column shows the effect of all of the changes on the FY 2011 payments. The update of 1.7 percent, consisting of the market basket increase of 2.3 percentage points, adjusted by the negative 0.6 percentage point forecast error adjustment 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 1.7 percent, assuming facilities do not change their care delivery and billing practices in

response.

As can be seen from Tables 10A and 10B, the combined effects of all of the changes vary by specific types of providers and by location. For example, nearly all facilities would experience payment increases in FY 2011 total payments under RUG–IV, ranging from 5.2 percent in urban Outlying regions to 0.5 percent in the rural Pacific region. Of those facilities showing decreases under RUG–IV, facilities in the rural South Atlantic area of the country show the smallest decrease of 0.1 percent and
facilities in the rural East North Central area show the largest decrease of 0.4
percent.


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C. 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 (for example, 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 FY through the Federal Register , and to do so before the August 1 that precedes the start of the new FY. Accordingly, we are not pursuing alternatives with respect to the payment methodology as discussed
above. D. Accounting Statement

As required by OMB Circular A–4 (available at http:// www.whitehouse.gov/omb/circulars/ a004/a-4.pdf ), in Table 11 below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this update notice. This table provides our best estimate of the change in Medicare payments under the SNF PPS as a result of the policies in this update notice based on the data for 15,307 SNFs in our database. All expenditures are classified as transfers to Medicare providers (that is, SNFs).

E. Conclusion

Overall estimated payments for SNFs in FY 2011 are projected to increase by $542 million, or 1.7 percent, compared
with those in FY 2010. We estimate that under RUG–IV, SNFs in urban and rural areas would experience a 1.9 and 0.7 percent increase, respectively, in estimated payments compared with FY
2010. Providers in the urban New England region would show an increase in payments of 2.0 percent. We estimate that under HR–III, SNFs in urban and rural areas would experience a 1.8 and 1.5 percent increase in estimated payments, respectively, compared with

FY 2010. Providers in the rural Pacific region and the East South Central region would both show increases in payments of 1.5 percent. Finally, in accordance with the provisions of Executive Order 12866, this notice was reviewed by the Office of Management and Budget.

IX. Waiver of Proposed Rulemaking

We would ordinarily publish a notice of proposed rulemaking in the Federal Register to provide a period for public comment before the provisions of a notice such as this take effect. However,


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we can waive this procedure if we find good cause that a notice and comment procedure is impracticable, unnecessary, or contrary to the public interest and incorporate a statement of the finding and its reasons in the notice
issued.

We believe it is unnecessary to
undertake notice and comment rulemaking in this instance, as the statute requires annual updates to the SNF PPS rates, and the methodologies used to update the rates and the policies
initiated in this notice have been previously subject to public comment
and finalized.

As discussed in section I.F, section 10325 of the ACA requires that the Secretary postpone implementation of
the RUG–IV case-mix classification system. Notwithstanding this postponement, section 10325 further specifies that the Secretary is required to implement certain components of RUG–IV effective October 1, 2010 (that is, the changes relating to concurrent therapy and the lookback period). Because the concurrent therapy and look back period changes were already subject to notice and public comment
and finalized in the FY 2010 SNF PPS final rule (74 FR 40288, August 11, 2009), we believe that these ACArequirements are largely selfimplementing and require no substantive exercise of discretion by the Secretary. In addition, section 10325 of the ACA specifies that the implementation of the MDS 3.0 shall proceed as planned (see 74 FR 40342 through 40343), with an effective date of October 1, 2010. Similarly, we believe this provision is self-implementing and does not require the exercise of discretion. Thus, we find that notice and comment procedures are

unnecessary.

However, as discussed in section I.F, there are some operational issues that arise in connection with the implementation of section 10325 of the ACA in the context of the existing RUG– III case-mix classification system. Thus, we are providing a 60-day comment period for public comment.

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

Dated: May 19, 2010.
Marilyn Tavenner,
Acting Administrator and Chief Operating Officer, Centers for Medicare & Medicaid

Services.

Approved: July 14, 2010.

Kathleen Sebelius,

Secretary.

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

**BILLING CODE 4120–01–P**


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[FR Doc. 2010–17628 Filed 7–16–10; 4:15 pm]

**BILLING CODE 4120–01–C**