II

103D CONGRESS

2D SESSION S. 2440

Entitled the ‘‘Prospective Payment System for Nursing Facilities’’.

IN THE SENATE OF THE UNITED STATES

SEPTEMBER 19 (legislative day, SEPTEMBER 12), 1994

Mr. PRYOR introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

Entitled the ‘‘Prospective Payment System for Nursing

Facilities’’.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 100. SHORT TITLE.

4 This Act may be cited as the ‘‘Prospective Payment

5 System for Nursing Facilities’’ and shall apply to the pay6 ment for services of nursing facilities under federally fund7 ed long-term care programs.

8 SEC. 101. DEFINITIONS.

9 (a) For purposes of this Act:

10 (1) ‘‘Acuity payment’’ refers to a fixed amount

11 that will be added to the facility-specific prices for
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1 certain resident classes designated by the Secretary

2 as requiring heavy care.

3 (2) ‘‘Administrative Procedure Act’’ refers to

4 section 551 et seq. of title 5, United States Code.

5 (3) ‘‘Aggregated resident invoice’’ refers to a

6 compilation of the per resident invoices of a nursing

7 facility which contain the number of resident days

8 for each resident and the resident class of each resi9 dent at the nursing facility during a particular

10 month.

11 (4) ‘‘Allowable costs’’ refer to costs which

12 HCFA has determined to be necessary for a nursing

13 facility to incur according to the Provider Reim14 bursement Manual (hereinafter ‘‘HCFA–Pub. 15’’).

15 (5) ‘‘Base year’’ refers to the most recent cost

16 reporting period (consisting of a period which is

17 twelve (12) months in length, except for facilities

18 with new owners, in which case the period is not less

19 than four (4) months nor more than thirteen (13)

20 months) for which cost data of nursing facilities is

21 available to be used for the determination of a pro22 spective rate.

23 (6) ‘‘Case mix weight’’ is the total case mix

24 score of a facility calculated by multiplying the resi25 dent days in each resident class by the relative
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1 weight assigned to each resident class, and summing

2 the resulting products across all resident classes.

3 (7) ‘‘Complex medical equipment’’ refers to

4 items such as ventilators, intermittent positive pres5 sure breathing (IPPB) machines, nebulizers, suction

6 pumps, continuous positive airway pressure (CPAP)

7 devices, and bead beds such as air fluidized beds.

8 (8) ‘‘Distinct part nursing facility’’ refers to an

9 institution which has a distinct part that is certified

10 under title XVIII of the Social Security Act and

11 meets the requirements of section 201.1 of the

12 Skilled Nursing Facility Manual published by HCFA

13 (hereinafter ‘‘HCFA–Pub. 12’’).

14 (9) ‘‘Efficiency incentive’’ refers to a payment

15 made to a nursing facility in recognition of incurring

16 costs below a prespecified level.

17 (10) ‘‘Fixed equipment’’ refers to equipment

18 which meets the definition of building equipment in

19 section 104.3 of HCFA–Pub. 15. Fixed equipment

20 includes, but is not limited to, attachments to build21 ings such as wiring, electrical fixtures, plumbing,

22 elevators, heating systems, and air-conditioning sys23 tems.

24 (11) ‘‘Geographic ceiling’’ refers to a limitation

25 on payments in any given cost center for nursing fa-
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1 cilities in one of no fewer than eight (8) geographic

2 regions, further subdivided into rural and urban

3 areas, as designated by the Secretary.

4 (12) ‘‘Heavy care’’ refers to an exceptionally

5 high level of care which the Secretary has deter6 mined is required for residents in certain resident

7 classes.

8 (13) ‘‘HCFA’’ refers to the Health Care Fi9 nancing Administration of the Department of Health

10 and Human Services.

11 (14) ‘‘Index[ed] forward’’ refers to an adjust12 ment made to a per diem rate to account for cost

13 increases due to inflation or other factors during an

14 intervening period following the base year and pro15 jecting such cost increases for a future period in

16 which the rate applies. Indexing forward under this

17 Act shall be determined from the midpoint of the

18 base year to the midpoint of the rate year.

19 (15) ‘‘Marshall-Swift segmented cost method’’

20 refers to an appraisal method published by the Mar21 shall-Swift Valuation Service.

22 (16) ‘‘Minimum Data Set’’ (hereinafter

23 ‘‘MDS’’) refers to a resident assessment instrument,

24 currently recognized by HCFA, in addition to any

25 extensions to MDS, such as MDS+, as well as any
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1 extensions to accommodate subacute care which con2 tain an appropriate core of assessment items with

3 definitions and coding categories needed to com4 prehensively assess a nursing facility resident.

5 (17) ‘‘Major movable equipment’’ refers to

6 equipment which meets the definition of major mov7 able equipment in section 104.4 of HCFA–Pub. 15.

8 Major movable equipment includes, but is not lim9 ited to, accounting machines, beds, wheelchairs,

10 desks, vehicles, and X-ray machines.

11 (18) ‘‘Nursing facility’’ refers to an institution

12 which meets the requirements of ‘‘skilled nursing fa13 cility’’ under section 1819(a) of title XVIII of the

14 Social Security Act and a ‘‘nursing facility’’ under

15 section 1919(a) of title XIX of the Social Security

16 Act.

17 (19) ‘‘Per bed limit’’ refers to a per bed ceiling

18 on the fair asset value of a nursing facility for one

19 of the geographic regions designated by the Sec20 retary.

21 (20) ‘‘Per diem rate’’ refers to a rate of pay22 ment for the costs of covered services for a resident

23 day.

24 (21) ‘‘Relative weight’’ is the index of the value

25 of the resources required for a given resident class
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1 relative to the value of resources of either a base

2 resident class or the average of all the resident

3 classes.

4 (22) ‘‘R. S. Means Index’’ refers to the index

5 of the R. S. Means Company, Inc., specific to com6 mercial/industrial institutionalized nursing facilities,

7 which is based upon a survey of prices of common

8 building materials and wage rates for nursing facil9 ity construction.

10 (23) ‘‘Rebase’’ refers to the process of updating

11 nursing facility cost data for a subsequent rate year

12 using a more recent base year.

13 (24) ‘‘Rental rate’’ refers to a percentage that

14 will be multiplied by the fair asset value of property

15 to determine the total annual rental payment in lieu

16 of property costs.

17 (25) ‘‘Resident classification system’’ refers to

18 a system which categorizes residents into different

19 resident classes according to similarity of their as20 sessed condition and required services.

21 (26) ‘‘Resident day’’ refers to the period of

22 services for one resident, regardless of payment

23 source, for one continuous twenty-four hours of serv24 ices. The day of admission of the resident con25 stitutes a resident day but the day of discharge does
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1 not constitute a resident day. Bed-hold days are not

2 to be considered resident days, and bed-hold day rev3 enues are not to be offset.

4 (27) ‘‘Resource Utilization Groups, Version III

5 (hereinafter ‘‘RUG–III’’)’’ refers to a category-based

6 resident classification system used to classify nurs7 ing facility residents into mutually exclusive RUG–

8 III groups. Residents in each RUG–III group utilize

9 similar quantities and patterns of resources.

10 (28) ‘‘Secretary’’ refers to the Secretary of the

11 Department of Health and Human Services.

12 SEC. 102. PAYMENT OBJECTIVES.

13 (a) Payment rates under the Prospective Payment

14 System for Nursing Facilities shall reflect the following

15 objectives:

16 (1) To maintain an equitable and fair balance

17 between cost containment and quality of care in

18 nursing facilities.

19 (2) To encourage nursing facilities to admit

20 residents without regard to their source of payment.

21 (3) To provide an incentive to nursing facilities

22 to admit and provide care to persons in need of com23 paratively greater care.

24 (4) To maintain administrative simplicity, for

25 both nursing facilities and the Secretary.
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1 (5) To encourage investment in buildings and

2 improvements to nursing facilities (capital forma3 tion) as necessary to maintain quality and access.

4 SEC. 103. POWERS AND DUTIES OF THE SECRETARY.

5 (a) The Secretary shall establish by regulation, in ac6 cordance with the Administrative Procedure Act, all rules

7 and regulations necessary for the implementation of this

8 Act. The rates determined under this Act shall reflect the

9 objectives in section 102 of this Act.

10 (b) The Secretary may require that each nursing fa11 cility file such data, statistics, schedules, or information

12 as required to enable the Secretary to implement this Act.

13 SEC 104. RELATIONSHIP TO TITLE XVIII OF THE SOCIAL

14 SECURITY ACT.

15 (a) No provision in this Act shall replace, or other16 wise affect, the skilled nursing facility benefit under title

17 XVIII of the Social Security Act.

18 (b) The provisions of HCFA–Pub. 15 shall apply to

19 the determination of allowable costs under this Act except

20 to the extent that they conflict with any other provision

21 in this Act.

22 SEC. 105. ESTABLISHMENT OF RESIDENT CLASSIFICATION

23 SYSTEM.

24 (a)(1) The Secretary shall establish a resident classi25 fication system which shall group residents into classes ac-
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1 cording to similarity of their assessed condition and re2 quired services.

3 (2) The resident classification system shall be mod4 eled after the RUG–III system and all updated versions

5 of that system.

6 (3) The resident classification system shall be reflec7 tive of the necessary professional and paraprofessional

8 nursing staff time and costs required to address the care

9 needs of nursing facility residents.

10 (b)(1) The Secretary shall assign a relative weight for

11 each resident class based on the relative value of the re12 sources required for each resident class. The assignment

13 of relative weights for resident classes shall be performed

14 for each geographic region as determined in accordance

15 with subsection (c) of this section.

16 (2) In assigning the relative weights of the resident

17 classes in a geographic region, the Secretary shall utilize

18 information derived from the most recent MDS’s of all of

19 the nursing facilities in a geographic region.

20 (3) The relative weights of the resident classes in

21 each geographic region shall be recalibrated every three

22 (3) years based on any changes in the cost or amount of

23 resources required for the care of a resident in the resident

24 class.
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1 (c)(1) The Secretary shall designate no fewer than

2 eight (8) geographic regions for the total United States.

3 Within each geographic region, the Secretary shall take

4 appropriate account of variations in cost between urban

5 and rural areas.

6 (2) There shall be no peer grouping of nursing facili7 ties (e.g., based on whether the nursing facilities are hos8 pital-based or not) other than peer-grouping by geographic

9 region.

10 SEC. 106. COST CENTERS FOR NURSING FACILITY PAY11 MENT.

12 (a) Consistent with the objectives established in sec13 tion 102 of this Act, the Secretary shall determine pay14 ment rates for nursing facilities using the following cost/

15 service groupings:

16 (1) NURSING SERVICE COSTS. The nursing serv17 ice cost center shall include salaries and wages for

18 the Director of Nursing, Quality Assurance Nurses,

19 registered nurses, licensed practical nurses, nurse

20 aides (including wages related to initial and on-going

21 nurse aide training and other on-going or periodic

22 training costs incurred by nursing personnel), con23 tract nursing, fringe benefits and payroll taxes asso24 ciated therewith, medical records, and nursing

25 supplies.
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1 (2) ADMINISTRATIVE AND GENERAL COSTS. The

2 administrative and general cost center shall include

3 all expenses (including salaries, benefits, and other

4 costs) related to administration, plant operation,

5 maintenance and repair, housekeeping, dietary (ex6 cluding raw food), central services and supply (ex7 cluding medical supplies), laundry, and social

8 services.

9 (3) FEE-FOR-SERVICE ANCILLARY SERVICES.

10 Ancillary services to be paid on a fee-for-service

11 basis shall include physical therapy, occupational

12 therapy, speech therapy, respiratory therapy,

13 hyperalimentation, and complex medical equipment

14 (CME). These fee-for-service ancillary service pay15 ments under part A of title XVIII of the Social Se16 curity Act shall not affect the reimbursement of an17 cillary services under part B of title XVIII of the

18 Social Security Act.

19 (4) SELECTED ANCILLARY SERVICES AND

20 OTHER COSTS. The cost center for selected ancillary

21 services and other costs shall include drugs, raw

22 food, medical supplies, IV therapy, X-ray services,

23 laboratory services, property tax, property insurance,

24 minor equipment, and all other costs not included in

25 the other four cost/service groupings.
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1 (5) PROPERTY COSTS. The property cost center

2 shall include depreciation on the building(s) and

3 fixed equipment, major movable equipment, motor

4 vehicle(s), land improvements, amortization of lease5 hold improvements, lease acquisition costs, and cap6 ital leases; interest on capital indebtedness; mort7 gage interest; lease costs; and equipment rental

8 expense.

9 (b) Nursing facilities shall be paid a prospective, fa10 cility-specific, per diem rate based on the sum of the per

11 diem rates established for the nursing service, administra12 tive and general, and property cost centers as determined

13 in accordance with sections 108, 109 and 112 of this Act.

14 (c) Nursing facilities shall be paid a facility-specific

15 prospective rate for each unit of the fee-for-service ancil16 lary services as determined in accordance with section 110

17 of this Act.

18 (d) Nursing facilities shall be reimbursed for selected

19 ancillary services and other costs on a retrospective basis

20 in accordance with section 111 of this Act.

21 SEC. 107. RESIDENT ASSESSMENT.

22 (a) The nursing facility shall perform a resident as23 sessment in accordance with section 1819(b)(3) of title

24 XVIII of the Social Security Act within fourteen (14) days
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1 of admission of the resident and at such other times as

2 required by that section.

3 (b) The resident assessment shall be used to deter4 mine the resident class of each resident in the nursing fa5 cility for purposes of determining the per diem rate for

6 the nursing service cost center in accordance with section

7 108.

8 SEC. 108. THE PER DIEM RATE FOR NURSING SERVICE

9 COSTS.

10 (a)(1) The nursing service cost center rate shall be

11 calculated using a prospective, facility-specific per diem

12 rate based on the nursing facility’s case-mix weight and

13 nursing service costs during the base year.

14 (2) The case-mix weight of a nursing facility shall

15 be obtained by multiplying the number of resident days

16 in each resident class at a nursing facility during the base

17 year by the relative weight assigned to each resident class

18 in the appropriate geographic region. Once this calculation

19 is performed for each resident class in the nursing facility,

20 the sum of these products shall constitute the case-mix

21 weight for the nursing facility.

22 (3) A facility nursing unit value for the nursing facil23 ity for the base year shall be obtained by dividing the nurs24 ing service costs for the base year, which shall be indexed

25 forward from the midpoint of the base period to the mid-
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1 point of the rate period using the DRI McGraw-Hill

2 HCFA Nursing Home Without Capital Market Basket, by

3 the case-mix weight of the nursing facility for the base

4 year.

5 (4) A facility-specific nursing services price for each

6 resident class shall be obtained by multiplying the lower

7 of the indexed facility unit value of the nursing facility

8 during the base year or the geographic ceiling, as deter9 mined in accordance with subsection (b) of this section,

10 by the relative weight of the resident class.

11 (5) The Secretary shall designate certain resident

12 classes as requiring heavy care. An acuity payment of

13 three (3) percent of the facility-specific nursing services

14 price shall be added on to the facility-specific price for

15 each resident class which the Secretary has designated as

16 requiring heavy care. The acuity payment is intended to

17 provide an incentive to nursing facilities to admit residents

18 requiring heavy care.

19 (6) The per diem rate for the nursing service cost

20 center for each resident in a resident class shall constitute

21 the facility-specific price, plus the acuity payment where

22 appropriate.

23 (7) The per diem rate for the nursing service cost

24 center, including the facility-specific price and the acuity

25 payment, shall be rebased annually.
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1 (8) To determine the payment amount to a nursing

2 facility for the nursing service cost center, the Secretary

3 shall multiply the per diem rate (including the acuity pay4 ment) for a resident class by the number of resident days

5 for each resident class based on aggregated resident in6 voices which each nursing facility shall submit on a month7 ly basis.

8 (b)(1) The facility unit value identified in subsection

9 (a)(3) of this section shall be subjected to geographic ceil10 ings established for the geographic regions designated by

11 the Secretary in section 105(c).

12 (2) The geographic ceiling shall be determined by

13 first creating an array of indexed facility unit values in

14 a geographic region from lowest to highest. Based on this

15 array, the Secretary shall identify a fixed proportion be16 tween the indexed facility unit value of the nursing facility

17 which contained the medianth resident day in the array

18 (except as provided in subsection (b)(4) of this section)

19 and the indexed facility unit value of the nursing facility

20 which contained the 95th percentile resident day in that

21 array during the first year of operation of the Prospective

22 Payment System for Nursing Facilities. The fixed propor23 tion (e.g., 1.1 times the median or 110 percent of the me24 dian) shall remain the same in subsequent years.
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1 (3) To obtain the geographic ceiling on the indexed

2 facility unit value for nursing facilities in a geographic re3 gion in each subsequent year, the fixed proportion identi4 fied pursuant to subsection (b)(2) of this section shall be

5 multiplied by the indexed facility unit value of the nursing

6 facility which contained the medianth resident day in the

7 array of facility unit values for the geographic region dur8 ing the base year.

9 (4) The Secretary shall exclude low volume and new

10 nursing facilities, as defined in subsections (a) and (b) of

11 section 113, respectively, for purposes of determining the

12 geographic ceiling for the nursing service cost center.

13 (c) The Secretary shall establish by regulation, in ac14 cordance with the Administrative Procedure Act, proce15 dures for allowing exceptions to the geographic ceiling im16 posed on the nursing service cost center. The procedure

17 shall permit exceptions based on the following factors:

18 (1) Local supply and/or labor shortages which

19 substantially increase costs to specific nursing facili20 ties.

21 (2) Higher per resident day usage of contract

22 nursing personnel, if utilization of contract nursing

23 personnel is warranted by local circumstances, and

24 the provider has taken all reasonable measures to

25 minimize contract personnel expense.
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1 (3) Extraordinarily low proportion of distinct

2 part nursing facilities in a geographic region result3 ing in a geographic ceiling which unfairly restricts

4 the reimbursement of distinct part facilities.

5 (4) Regulatory changes that increase costs to

6 only a subset of the nursing facility industry.

7 (5) The offering of a new institutional health

8 service or treatment program by a nursing facility

9 (in order to account for initial startup costs).

10 (6) Disproportionate usage of part-time employ11 ees, where adequate numbers of full-time employees

12 cannot reasonably be obtained.

13 (7) Other cost producing factors, to be specified

14 by the Secretary in regulations promulgated pursu15 ant to the Administrative Procedure Act, that are

16 specific to a subset of facilities in a geographic re17 gion (except case-mix variation).

18 SEC. 209. THE PER DIEM RATE FOR ADMINISTRATIVE AND

19 GENERAL COSTS.

20 (a)(1) Payment relative to the administrative and

21 general cost center shall be a facility-specific, prospective,

22 per diem rate.

23 (2) The Secretary shall assign a per diem rate to a

24 nursing facility by applying two standards which shall be

25 calculated as follows:
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1 (A) Standard A shall be derived for each geo2 graphic region by first creating an array of indexed

3 nursing facility administrative and general per diem

4 costs from lowest to highest. The Secretary shall

5 then identify a fixed proportion by dividing the in6 dexed administrative and general per diem costs of

7 the nursing facility which contained the medianth

8 resident day of the array (except as provided in sub9 section (a)(4) of this section) into the indexed ad10 ministrative and general per diem costs of the nurs11 ing facility which contained the 75th percentile resi12 dent day in that array. Standard A for each base

13 year shall constitute the product of this fixed pro14 portion (e.g., 1.1 times the median or 110 percent

15 of the median) and the administrative and general

16 indexed per diem costs of the nursing facility which

17 contained the medianth resident day in the array of

18 such costs during the base year.

19 (B) Standard B shall be derived using the same

20 calculation as in subsection (A) except that the fixed

21 proportion shall use the indexed administrative and

22 general costs of the nursing facility containing the

23 85th percentile, rather than the 75th percentile,

24 resident day in the array of such costs.
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1 (3) The Secretary shall use the geographic regions

2 identified in section 105(c) for purposes of determining

3 Standard A and Standard B.

4 (4) The Secretary shall exclude low volume and new

5 nursing facilities, as defined in subsections (a) and (b) of

6 section 113, respectively, for purposes of determining

7 Standard A and Standard B.

8 (5) To determine a nursing facility’s per diem rate

9 for the administrative and general cost center, Standard

10 A and Standard B shall be applied to a nursing facility’s

11 administrative and general per diem costs, indexed for12 ward using the DRI McGraw-Hill HCFA Nursing Home

13 Without Capital Market Basket, as follows:

14 (A) The nursing facilities having indexed costs

15 which fall below the median shall be assigned a rate

16 equal to their individual indexed costs plus an ‘‘effi17 ciency incentive’’ equal to one-half of the difference

18 between the median and Standard A.

19 (B) The nursing facilities having indexed costs

20 which fall below Standard A but at or above the me21 dian shall be assigned a per diem rate equal to their

22 individual indexed costs plus an ‘‘efficiency incen23 tive’’ equal to one-half of the difference between the

24 nursing facility’s indexed costs and Standard A.
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1 (C) The nursing facilities having indexed costs

2 which fall between Standard A and Standard B shall

3 be assigned a rate equal to Standard A plus one-half

4 of the difference between the nursing facility’s in5 dexed costs and Standard A.

6 (D) The nursing facilities having indexed costs

7 which exceed Standard B shall be assigned a rate as

8 if their costs equaled Standard B. These nursing fa9 cilities shall be assigned a per diem rate equal to

10 Standard A plus one-half of the difference between

11 Standard A and Standard B.

12 (E) For purposes of subsections (A)–(D) of sec13 tion (a)(5) of this section, the median represents the

14 indexed administrative and general per diem costs of

15 the nursing facility which contained the medianth

16 resident day in the array of such costs during the

17 base year in the geographic region.

18 (b) Rebasing of the payment rates for administrative

19 and general costs shall occur no less frequently than once

20 a year.

21 SEC. 110. PAYMENT FOR FEE-FOR-SERVICE ANCILLARY

22 SERVICES.

23 (a) Payment for each ancillary service enumerated in

24 section 106(a)(3), such as physical therapy, shall be cal25 culated and paid on a prospective fee-for-service basis.
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1 (b) The Secretary shall identify the fee for each of

2 the fee-for-service ancillary services for a particular nurs3 ing facility by dividing the nursing facility’s actual costs,

4 including overhead allocated through the cost-finding

5 process, of providing each particular service, indexed for6 ward using the DRI McGraw-Hill HCFA Nursing Home

7 Without Capital Market Basket, by the units of the par8 ticular service provided by the nursing facility during the

9 cost year.

10 (c) The fee for each of the fee-for-service ancillary

11 services shall be calculated at least once a year for each

12 facility and ancillary service.

13 SEC. 111. REIMBURSEMENT OF SELECTED ANCILLARY

14 SERVICES AND OTHER COSTS.

15 (a) Reimbursement of selected ancillary services and

16 other costs identified in section 106(a)(4), such as drugs

17 and medical supplies, shall be reimbursed on a retrospec18 tive basis as passthrough costs, including overhead allo19 cated through the cost-finding process.

20 (b) The Secretary shall set charge-based interim rates

21 for selected ancillary services and other costs for each

22 nursing facility providing such services. Any overpayments

23 or underpayments resulting from the difference between

24 the interim and final settlement rates shall be either re25 funded by the nursing facility or paid to the nursing facil-
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1 ity following submission of a timely-filed medicare cost

2 report.

3 SEC. 112. THE PER DIEM RATE FOR PROPERTY COSTS.

4 (a)(1) The basis for payment within the property cost

5 center for nursing facilities shall be calculated and paid

6 on a prospective (except as provided for newly constructed

7 facilities in subsection (d)(2) of this section), facility-spe8 cific, per resident day rate based on the fair asset value

9 of the property.

10 (2)(A) The fair asset value of the property shall con11 stitute the sum of the market value of the land (including

12 site preparation costs), a reconstruction cost appraised

13 value for the building(s) and fixed equipment, and the

14 product of the number of beds in the nursing facility and

15 a per bed allowance for major movable equipment.

16 (B) The land, building(s), and fixed equipment which

17 are included in determining the fair asset value must be

18 used in connection with the care of residents.

19 (C) Appraisals for the building(s) and fixed equip20 ment shall be performed using the Marshall-Swift seg21 mented cost method. A nursing facility shall be appraised

22 every four years.

23 (D) The Secretary shall utilize an annual allowance

24 of $3,500 per bed for major movable equipment for a

25 nursing facility. The Secretary shall review the annual al-
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1 lowance for major movable equipment every five (5) years

2 to determine its accuracy.

3 (E) If a nursing facility has commenced a renovation

4 to a building and fixed equipment between appraisals the

5 cost of which constitutes at least five (5) percent of the

6 total value of the existing building and the fixed equip7 ment, it may submit documentation as to the cost of the

8 renovation during the previous year. The Secretary shall

9 add the reasonable costs of the major renovation for the

10 previous year to the fair asset value of the facility. This

11 new asset value is to be the base for indexing until the

12 next full appraisal.

13 (F) The value of the assets is determined through

14 appraisals, indexing, and the application of allowances,

15 and is, therefore, unaffected by sales transactions, refi16 nancing, or other changes in financing. Accordingly, the

17 concept of recapture of depreciation is inapplicable to fa18 cilities whose payment is established under this chapter.

19 (3) The value of the land, building(s), and fixed

20 equipment shall be indexed annually between reappraisals

21 as follows:

22 (A) The land shall be indexed using the

23 Consumer Price Index Urban.

24 (B) The building(s) and fixed equipment shall

25 be indexed annually using the R. S. Means Index.
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1 (4) The annual allowance for major movable equip2 ment shall be indexed annually using the hospital equip3 ment index of the Marshall Swift Valuation Service.

4 (5) The Secretary shall adjust the indexes used for

5 the land, building(s) and fixed equipment, and major mov6 able equipment for the different geographic regions.

7 (b)(1) The Secretary shall establish a per bed limit

8 on the fair asset value of a nursing facility for each geo9 graphic region, as designated in section 105(c). The per

10 bed limit shall be equal to the average indexed costs in11 curred by all recently constructed nursing facilities in the

12 geographic region which have been designed and con13 structed in an efficient manner.

14 (2) The per bed limit on the fair asset value shall

15 be indexed annually using the R. S. Means Index.

16 (3) The per bed limit shall be recalculated every five

17 (5) years.

18 (c) The total annual rental shall constitute the prod19 uct of the lower of the indexed fair asset value or the in20 dexed per bed limit and a rental rate which shall be based

21 on the average yield for twenty (20) year United States

22 Treasury Bonds during the prior year plus a risk premium

23 of 3 percentage points.

24 (d)(1) The per resident day rental shall be obtained

25 by dividing the total annual rental by 90 percent of the
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1 annual licensed bed days. The per resident day rental shall

2 constitute the per diem rate attributable to the property

3 cost center.

4 (2) The per resident day rental rate for newly-con5 structed facilities during their first year of operation shall

6 be based on the total annual rental divided by the greater

7 of fifty (50) percent of available resident days or actual

8 annualized resident days up to 90 percent of annual li9 censed bed days during their first year of operation.

10 (e) Facilities in operation prior to the effective date

11 of this Act shall receive the per resident day rental or ac12 tual costs, as determined in accordance with HCFA–Pub.

13 15, whichever is greater, except that a nursing facility

14 shall be reimbursed the per resident day rental.

15 (1) Commencing with the date upon which the

16 nursing facility changes ownership; or

17 (2) After the nursing facility has accepted the

18 per resident day rental; or

19 (3) After renegotiation of the lease for the land

20 and/or building(s), not including the exercise of op21 tional extensions specifically included in the original

22 lease agreement or valid extensions thereof.

23 SEC. 112. MID-YEAR RATE ADJUSTMENTS.

24 (a)(1) The Secretary shall establish by regulation, in

25 accordance with the Administrative Procedure Act, a pro-
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1 cedure for granting midyear rate adjustments for the

2 nursing service, administrative and general, and fee-for3 service ancillary services cost centers.

4 (2) The mid-year rate adjustment procedure shall re5 quire the Secretary to grant adjustments on an industry6 wide basis, without the need for nursing facilities to apply

7 for such adjustments, based on the following cir8 cumstances:

9 (A) Statutory or regulatory changes affecting

10 nursing facilities (e.g., new staffing standards or ex11 panded services).

12 (B) Changes to the Federal minimum wage.

13 (C) General labor shortages with high regional

14 wage impacts.

15 (3) The midyear rate adjustment procedure shall per16 mit specific facilities or groups of facilities to apply for

17 an adjustment based on the following factors:

18 (A) Local labor shortages.

19 (B) Regulatory changes that apply to only a

20 subset of the nursing facility industry.

21 (C) Economic conditions created by natural dis22 asters or other events outside of the control of the

23 provider.

24 (D) Other cost producing factors, except case25 mix variation, to be specified by the Secretary in
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1 regulations promulgated pursuant to the Adminis2 trative Procedure Act.

3 (4)(A) A nursing facility which applies for a midyear

4 rate adjustment pursuant to subsection (a)(3) of this sec5 tion shall be required to show that the adjustment will

6 result in a greater than 2 percent deviation in the per diem

7 rate for any individual cost service center or a deviation

8 of greater than $5,000 in the total projected and indexed

9 costs for the rate year, whichever is less.

10 (B) A nursing facility application for a midyear rate

11 adjustment must be accompanied by recent cost experi12 ence data and/or budget projections.

13 SEC. 113. EXCEPTION TO PAYMENT METHODS FOR NEW

14 AND LOW VOLUME NURSING FACILITIES.

15 (a) A low volume nursing facility shall constitute a

16 nursing facility having fewer than 2,500 medicare part A

17 resident days per year.

18 (b) A new nursing facility shall constitute a newly

19 constructed, licensed, and certified nursing facility and/or

20 a nursing facility that is in its first three years of oper21 ation as a medicare part A provider. A nursing facility

22 that has operated for more than three years but has a

23 change of ownership shall not constitute a new facility.

24 (c) Low volume nursing facilities shall have the op25 tion of submitting a cost report to receive retrospective
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1 payment for all of the cost centers, other than the property

2 cost center, or accepting a per diem rate which shall be

3 based on the sum of—

4 (1) the median indexed resident day facility

5 unit value for the appropriate geographic region for

6 the nursing service cost center during the base year

7 as identified in section 108(b)(2);

8 (2) the median indexed resident day administra9 tive and general per diem costs of all nursing facili10 ties in the appropriate geographic region as identi11 fied in section 109(a)(5)(E);

12 (3) the median indexed resident day costs per

13 unit of service for fee-for-service ancillary services

14 which shall be obtained using the cost information

15 from the nursing facilities in the appropriate geo16 graphic region during the base year, excluding low

17 volume and new nursing facilities, and which shall

18 be based on an array of such costs from lowest to

19 highest; and

20 (4) The median indexed resident day per diem

21 costs for selected ancillary services and other costs

22 which shall be obtained using information from the

23 nursing facilities in the appropriate geographic re24 gion during the base year, excluding low volume and
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1 new nursing facilities, and which shall be based on

2 an array of such costs from lowest to highest.

3 (d) New nursing facilities shall have the option of

4 being paid on a retrospective cost passthrough basis for

5 all cost centers, or in accordance with section 113(c)(1)

6 through (4)—Low Volume Providers.

7 SEC. 114. APPEAL PROCEDURES.

8 (a)(1) Any person or legal entity aggrieved by a deci9 sion of the Secretary under this Act, and which results

10 in an amount in controversy of $10,000 or more, shall

11 have the right to appeal such decision directly to the Pro12 vider Reimbursement Review Board (hereinafter ‘‘the

13 Board’’) authorized under section 1878 of title XVIII of

14 the Social Security Act.

15 (2) The $10,000 amount in controversy shall be com16 puted in accordance with 42 C.F.R. § 405.1839.

17 (b) Hearings before the Board under this Act, and

18 any appeals thereto, shall follow the procedures under sec19 tion 1878 of title XVIII of the Social Security Act and

20 the regulations contained in 42 C.F.R. §§ 405.1841–1889,

21 except to the extent that they conflict with, or are inap22 plicable on account of, any other provision of this Act.

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